Adam Smith and the economics of the last 19 years

[Duty Honor Country]

The educational side of me has decided to discard politics and dive into reading some of Adam Smith's the Wealth of Nations. Under Book 5 Chapter 3: of Public Debt, I have found a lot of material that relates to the United States since 1990. My copy of the book is from the Bantam Classics and all references will be to my edition.

In a time of peace, a country will spend as much as it earns (p1155). Smith uses costly trinkets and frivolous passions in this section..classic if I must say. The 1990's after the Gulf War was a definite time of "costly trinkets and frivolous passions" The American savings rate during this time bombed to almost nothing and the budget of the government was balanced.

In a time of War, a country contracts debt (p1156).Take the Cold War, the Gulf War and the current war and this holds true. I might add that will all debts will come the payment of those debts and high taxes.

A government will start saving when it can no longer borrow (p1158-59). In Smith's time, borrowing was limited to a country's subjects. Today borrowing is world wide. For the moment, there are those still willing to lend money to the USA. The latest news reports that the personal savings rate in the USA jumped from a -1.2% to over 3%. Since Americans can no longer borrow like they once did, they must save.

Annual taxes are always anticipated (p1161). President Obama's recent nominees need to follow that passage. Sorry, I could not help myself from making that comment.

Borrowing rather than large tax increases enables the people of great empires who live away from the action to feel no inconvenience from the war and allows them the amusement of reading the exploits of their own armies and fleets in the newspaper (p1171).If this does not explain the war on terror than I don't what does. People who are not affiliated with the military have not felt the burdens of the current war.

Tax Burdens are not reduced when peace is made (p1171). Taxes must be levied to pay off debts. Be warned Americans! The interest of debt is a ...

The opinion that national debt is an additional capitol is altogether erroneous (p1177) There is no such thing as free money and the stimulus packages are no exception. Those checks in the mail will be paid back (with interest)

Raising the coin has been a way of disguising bankruptcy and it has more dire consequences than open bankruptcy (p1185) Raising the coin means devaluing currency. Before the gold Standard was lifted, raising the coin was done by making gold coins less gold. Smith details Rome's raising the coin. The right has accused the current stimulus as printing money. If the full amount of borrowing was not done by lending, then the government would be printing money like the Russians did...which caused huge inflation and long lines for bread.

There was a part where Smith compared borrowing to diverting capitol from productive to unproductive labor but I could not fully understand it.

Happy readings from a book that was published in 1776

 

[perseus]

Duty Honor Country

You may be better of reading Keynes, the man who taught governments to spend their way out of an economic crisis in 1929. He said spending less would lead to more businesses going bust and more people losing their jobs. Keynes said governments should pump cash into big public works and building schemes. Jobs would be saved so people would feel more confident and spend more.

Here is a right wing columnist’s view of Keynes

Keynes’ view to seven essential propositions.
1. The economic system is naturally prone to periods of depression.
2. When one occurs, the system is not necessarily self-correcting.
3. Such depressions are not the result of individual choice. On the contrary, individuals en masse can become trapped in a depression which is in no one’s interest but which, as individuals, no one can counter-act.
4. This represents pure waste. Unemployed workers want to work, and businesses want to use their productive capacity. If they did, then the things they produced would be available for all to buy, and the incomes they received would enable them to purchase the products of others.
5. For individuals it may be appropriate to react to difficult times by saving more. Yet collectively this is a disaster. One man’s saving is another man’s reduced income. Extra borrowing by the Government, if it encourages more output, can be self-financing.
6. The key is aggregate demand. In normal circumstances it is possible to influence this by changes in interest rates. But there is a level below which interest rates cannot go and at that point conventional monetary policy is powerless. Moreover, even if interest rates can be lowered this may have no effect if people cannot or will not borrow.
7. At this point, aggregate demand can only be boosted by the Government borrowing more, either to spend directly or to give to others to spend via tax cuts or the like.
This Keynesian view first hit the world like a bombshell, then became accepted as commonplace to the point of banality, and subsequently was dismissed as irrelevant or dangerous. What went wrong?

Two things. First, although the Keynesian framework is a useful way of thinking about all economic conditions, it is both valid and truly radical only in depression conditions.

Second, the Keynesians went too far. Keynes’ treatment of inflation was sketchy at best. Understandably. In the Great Depression, inflation was scarcely public enemy number one. But the Keynesians took this a stage further. Some said inflation did not matter. Others felt that even though it did matter they would be able to control it through prices and incomes policies.

The result was that under Keynesian management the economy was operated at too a high a level of aggregate demand for too long and inflation was let loose.
They also underplayed the role of monetary factors, in stark contrast to the work of the master himself, much of whose writing concerned them. And they underplayed the adverse long-run consequences of public deficits. Advocacy of public borrowing to help get an economy out of depression became a relaxed attitude to public deficits in general.

They also overestimated the state’s ability successfully to manage aggregate demand, believing they would be able to fine-tune the economy. In the event, our poor ability to forecast, and the unpredictable nature of policy changes, meant that often actions designed to stabilise the economy in fact destabilised it.

http://www.telegraph.co.uk/finance/...tions-and-need-truly-Keynesian-solutions.html

 

[Duty Honor Country]

My beef with Keynes is spending. Spending is how we got ourselves into this mess. Cheap credit to everyone allowed both consumers and the government to spend like there was no tomorrow. I say again when the Great Depression first hit there was little government debt. President Hoover's mistake was to do the exact opposite and cut government spending even more. That caused the economy to retract more.

Moving to today, the government is busting with debt. I know without a doubt that the banks and auto industry will come for more money. What happens of we throw another trillion or two and nothing happens? What happens when the interest on the national debt nears $1 trillion a year.

Mark my words when US treasury notes go from AAA to AA you know it is serious.

For the record, I am against the bailout policy and am supplying other input. As a history major, something has to be said for a book to be published in 1776 and still relevant today.

 

[Partisan]

Mark my words when US treasury notes go from AAA to AA you know it is serious.

I can't pretend to understand all the theory, but here is my 2 pennies worth.

1. The assets of all companies are valued at a theoretical value, ie they should be worth this, this includes the value of the brand? As well as the capital assets.

2. This theoretical value is assigned by people invested in making these companies look good. A company which looks good will see it's share price rise, pay more dividends and yield more money to those who said that the company is not only doing well, but its assets are in the trillions? How can this be when it only cash flow of millions? But by then sensible options of risk have been bypassed in the gallop for more money (my bonus could be $5 million bigger if I get this right, if I don't - NOT MY MONEY, I'm alright Jack!!)

3. This theoretical value then becomes the quoted value of the company, AA, AAA or A+, because it includes the intangibles. This then keeps rising until suddenly the intangibles aren't worth as much, 'cos there's somethething newer and shinier on the street, or it is found out when someone has an attack of conscience.

Either way the sh!##y end of the stick gets handed to the investors. We're now paying the bill for a 25 year long party - unsurprisingly the tab is high, and no one wants to pay it.

The true miscreants are the auditors, who have constantly overinflated the value of companies, based on future income projections and have not realistically assessed the risk, only their reward.

At the end of the day the amount of money in the world hasn't changed, in fact there has been more made - it is only the percieved value and the number of people who are getting it which has changed, less people getting money, means less capital goods bought - how many new cars do you really need in 1 year?

Tough times but I think that they will come around, when inventory has been driven down, the weak and badly run companies have gone to the wall and when people cars start to break down (in about 3 years, give or take).

Straight from the heart, non wrapped in financial bs, nor necessarily economically sound theory, but that is way I see things.

 

[Donkey]

If in one year after spending what now 1.6 trillion and counting on "stimulus" packages nothing has changed; well it will not be a pretty day for anyone.

DHC, you have got me interested in reading more about Adam Smith, thanks

 

[perseus]

Spending is how we got ourselves into this mess. Cheap credit to everyone allowed both consumers and the government to spend like there was no tomorrow.

Yes I agree, perhaps we are only in a relative depression, relative to an unsustainable lifestyle and we need to stop being obsessed with the need for growth.

I also agree with the point that companies perceived value was overinflated. I have often compared stock-market valuations to a pyramid scheme, albeit with a small base of real value.

I think what is necessary is security. One needs confidence that you are not going to lose your job, be thrown onto the street and that you can afford basic medical treatment.

If the work was distributed fairly rather than forcing less people to work longer hours this would help to minimise the pain. It is easier for companies to labour all the work on a few loyal types rather than manage the many.

 

[Donkey]

Yes I agree, perhaps we are only in a relative depression, relative to an unsustainable lifestyle and we need to stop being obsessed with the need for growth.

I also agree with the point that companies perceived value was overinflated. I have often compared stock-market valuations to a pyramid scheme, albeit with a small base of real value.

I think what is necessary is security. One needs confidence that you are not going to lose your job, be thrown onto the street and that you can afford basic medical treatment.

If the work was distributed fairly rather than forcing less people to work longer hours this would help to minimise the pain. It is easier for companies to labour all the work on a few loyal types rather than manage the many.

While I understand were you are coming from and being one of working long, very long hours (as in stayed in the office 30hrs straight sleep 15 and repeat or sleeping on the office couch all done within the past month alone) I also disagree...

Capatialisim much like how the current hominain speceis of homo sapien hsd come to be the last one standing, I say let nature take its course. Though in this day and age it is tough to define nature, since we have become capable of modifying nature.

I see the problem as this, and working on a daily basis with the dealings of corporate america I base my claims, the US of A has been run by a bunch (mind you I am generalizing) of mister/misses MBAs that no shat about shat yet make the decisions of what gets done, why, and how.

For example Microsofts Windows Vista an obviously rushed product and one I am sure the engineers and designers said was not ready and needed more time to complet. Hence the sudden onslaught of Windows 7 and the recent news of Microsoft announcing the ywill be opening stores to regain the Windows supremecy (as seen in this TIME article http://www.time.com/time/business/article/0,8599,1879368,00.html ). I can almost garuntee you that while the Es and Ds said no the bean counters said go now.

That is the basic or as I have witnessed mantality of coporate America. Thus a main reason I belive we are in the situation we are in today. The bottom line has become nothing more than a monatary issue and not sometehing of longevity, stability, or future growth of a system but more so of how much money it will require for input versus output.

My thoughts in regards to the coporate world apply as well to the vurrent governments of the world.

Something is seriously wrong. Think about this the US of A has been fighting a drug war in South America for many decades yet the flow of cocaine has been so great that the world first Narco state in Africa (Guinea-Bissau) has formed not from a unability to move product but because the North American market is so flooded that they are looking towards Europe. And for the first time that drug has become previlent in the UK.

If that doesnt make you think WTF I dont know what would....

A link in regards to the afrorementioned, but just google "worlds first narco state"

http://www.guardian.co.uk/world/2008/mar/09/drugstrade

In closing the last time I check history a socialistic form of government never succeded.

 

[perseus]

Unfortunately, unbridled free market capitalism as preached by Adam Smith and instigated by Reagan and Thatcher got us into this mess. Banks under pressure from shareholders to produce short term profits borrowed heavily, lent heavily and relied on an unsustainable growth in the housing sector as collateral. I'm no expert financier but have been waiting for the housing bubble to burst for 5 years now.

What this has proven to me is that the private sector cannot be relied upon to run the banks. The only ones in the UK which are now financially viable are those called building societies which ironically were set up to lend money to Joe public to buy property, but they are owned by their customers and have similar savings to their borrowings, don't meddle in complex toxic debt instruments, and are governed by strict rules. One of these backwaters which became a expanding dynamic shareholding bank had a run on it last year, the first for century in the UK and had to be Nationalised.

 

[Duty Honor Country]

oh the private sector is not 100% to blame. I have listened to conservative radio hosts and did some research. Here goes.

Depository Institutions Deregulatory and Monetary Control Act of 1980 eliminated rate caps and made subprime lending more feasible for lenders. This was government deregulation.

Tax Reform Act of 1986 eliminated interest deductions on consumer and auto loans while allowing interest deductions on mortgage debt. Again government action made the market more friendly to banks and people alike to borrow borrow borrow.

Lower interest rates from the highs of the Carter Admin to the historic lows of the 1990's motivated people and banks to make loans.

From 1993 to 1997 the number of sub prime lenders tippled from 70 to 210. Rising interest rates in the 1990s made it more appealing to get ARMs and interest only loans while investors were willing to take the risk of such loans. The blame here lies with business.

In 1994, sub prime loans accounted for 5% of all loans while today they account for 23%. So there was a lot of massive growth in sub prime loans via the business sector
http://www.allbusiness.com/finance/3596857-1.html
________________________________________

The report linked below supports the Depository Institutions Deregulatory and Monetary Control Act of 1980 being a cause of the rise of the sub prime loans as well as the tax reform act of 1986. These are found on page 36.

This report says there was a rise in delinquent payments on sub prime loans in 1998 and it seems the growth of sub prime loans was stunted for a bit.

The report details the difference in credit scores in relation to prime vs sub prime loans. We all know lower credit scores were linked to bad loans.

On page 48 the report details how lower down payments are linked to the sub prime loans. Got to love those no money down deals.

http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf
________________________________________

Here is some more food for thought. It seems that President Clinton and President Bush have to share blame too due to the policies of The Department of Housing and Urban Development. It seems that the Department of HUB was pressured to get more low income families into homes and the sub prime loans where the engine for that push. Fannie and Freddie were allowed to use subprime loans to increase home ownership. I remember both Presidents thumping their chests at getting more low income families into homes. Once again it was government who had a hand in the current mess.
http://www.washingtonpost.com/wp-dyn/content/article/2008/06/09/AR2008060902626.html
___________________________________________

In conclusion of my opinion, everyone is to blame. The government created the environment for sub prime loans to happen. Banks and businesses embraced sub prime loans. And yes people were stupid and bought into such loans abandoning the common sense of our parents who put down 20% and got fixed rate loans.

My solution: let bad businesses fail and then step in. I cannot believe that the government would give money to the people who were partly to blame for this. By letting the business fail, the message is sent to businesses throughout that bad business decisions will not go un punished. When the bank fails, then the government can step in, fire every :cen::cen::cen: who ran that company and then restructure the bank and insure the assets.

 

[perseus]

My solution: let bad businesses fail and then step in. I cannot believe that the government would give money to the people who were partly to blame for this. By letting the business fail, the message is sent to businesses throughout that bad business decisions will not go un punished. When the bank fails, then the government can step in, fire every :cen::cen::cen: who ran that company and then restructure the bank and insure the assets.

It certainly would have been better for the taxpayer to purchase the banks and perhaps other businesses at zero value. However, how do you prevent a run on all banks (good and bad), the countries currency and the entire collapse of the international financial system in the meantime? I think there is a globalisation problem here, since everything is interconnected nowadays. Failure in one sector could bring the world economy tumbling down and confidence is critical.

 

[Ted]

My beef with Keynes is spending. Spending is how we got ourselves into this mess.

My beef is with unwise, short term spendings. When I look around in Europe the countries that do well have a spending government. But they make a fair job of it when you look at Scandinavia or The Netherlands.

Yes I agree, perhaps we are only in a relative depression, relative to an unsustainable lifestyle and we need to stop being obsessed with the need for growth.

I think we need to stop being obsessed with our need to consume. Why do we always need newer things which aren't necessarily better? There is nothing wrong with spending when it is done sustainable. But this proves a whole lot harder then just dropping a big bag full of dimes.

 

[Partisan]

It certainly would have been better for the taxpayer to purchase the banks and perhaps other businesses at zero value. However, how do you prevent a run on all banks (good and bad), the countries currency and the entire collapse of the international financial system in the meantime? I think there is a globalisation problem here, since everything is interconnected nowadays. Failure in one sector could bring the world economy tumbling down and confidence is critical.

To my mind, that is exactly what has happened. There haven't quite been runs on all the banks, but there has been a complete loss of confidence in a system which was based upon profit and the next report, rather than long term viability.

So now people won't spend, because they don't know if this is their last pay cheque, this means retailers can't sell etc, we all know the cycle.

It is all well and good for governments to say to the people - "go out and spend, support your economy", but until there is proof that families will have a steady income, they will hoard against the possible bad times. Which means that we will now have to suffer the hangover from the last decade of excess, hopefully we will all come out of it stronger and wiser - but I doubt it, as rises and falls are part of a cycle.

At the end of the day the safest job is that of a politician, not seen any of them laid off, only sacked and not necessarily for being incompetent.

 

[ArtS]

(quoting)

Here is some more food for thought. It seems that President Clinton and President Bush have to share blame

In conclusion of my opinion, everyone is to blame.

My solution: let bad businesses fail and then step in.

//

new guy here. You got me to sign up with this thread.
1. YES the blame must not be assigned to any one political party nor any one administration.

2. Yeah probably everyone is to blame... but blame is not the required response. What is required is a solution that works. The problem, I think, is that we lack such a solution.

3. Oh, no, you can't just let the decline continue! From memory, from a book by Leuchtenburg: Somebody once asked Keynes if anything like the Great Depression had happened before; Keynes replied Yes, it was the Dark Ages and it lasted 400 years.