by frog
It has come to my attention that Treasury is not really interested in making an effort to forecast oil prices, despite the fact that the rest of New Zealand places huge faith in the Budget Economic Forecast Update, or BEFU. Historically I have been reluctant to make any forecasts, but today, I am going to predict what Treasury is going to predict tomorrow. The reason I can be so cheeky is because it only took me twenty minutes to work up the forecast, (copying the data from the NYMEX futures site), and that appears to be about all the effort our Treasury puts into forecasting one of our most important economic inputs.
Frog’s BEFU, the new trendline on a chart that many readers will now be familiar with, may in fact be a little high on the graph, as I suspect that printing deadlines mean that Treasury had to use futures data from a few weeks ago. Nevertheless, the shape of the curve will likely be about the same. You see, the futures market just cannot get its head around the idea of peak oil, so whatever today’s price is, is pretty much what the futures market says will be the price for the next five years. (a flat line) This trendline uses yesterday’s data, which has already been superceded by today’s high of US$129/bbl.
Some in the MSM have accused the Greens of being gleeful whenever the price of oil surges. While there is a gleam in my eye with every new high, I assure you that it is one of horror. No one can say that oil production has peaked until after the event. However, there is lots of evidence that we are now at or very near the peak, and this rally of oil prices feeds that fear. Why the fear? Because we are so woefully unprepared for a life of limited cheap energy. The consequences of our denial could be quite severe. I pray that the peak is really a long undulating plateau and that we get our house in order fast. It is beyond urgent.
Published in Campaign | Economy, Work, & Welfare | Environment & Resource Management by frog on Wed, May 21st, 2008
on the trolls and those who are unable to keep on topic
frog,
Its not really cut and dry to forecast oil futures as there are many variables to take into account.
A lot of recent continued price increases is the result of speculation being shifted from the real estate market after the subprime collapse and US Treasury Bills into tangible assets including gold, silver, ag commodities, and above all oil. Not to mention that new of the POTENTIAL of Peak Oil has been covered extensively in the MSM so no doubt thats influenced market sentiment.
Don’t forget that the value of market transactions are predicated on the subjective theory of value, that being the cost is determined by what the market is willing and most importantly able to pay.
Consumers up til now have signalled that they’re willing AND able to pay, but a threshold may soon be reached beyond which consumers are no longer either willing or able to pay. Prices will soon have to reflect that or else traders may find that they’ve bought futures at a price that no one is willing to pay for. That would be monumentally stupid and he will lose dearly and traders don’t like losing I’m sure.
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SleepyTreeHugger – I agree that oil forecasting is not cut and dry. That is the point of my post. This most important asset to our economy has it’s forecast based on a twenty minute cut and paste from a futures site. Disgusting! This is more of a piss take than anything else. We are basing our economic future on what speculators in another country are ruminating on. We could do better by examining the entrails of a New Zealand ruminant, based on Treasury’s past success!
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lol
Fair enough frog.
I guess its due to the facts since ’98, with a blip in ’01 its been reasonably easy to forecast how the economy is going to perform until the United States invaded Iraq whether you measure currencies, the stockmarket, consumer spending, trade, commodities and generally the trend was only up. Now EVERYTHING is massively volatile and expected only to get worse.
I guess Treasury and the Resere Bank have gotten too complacent and put their faith in their textbooks too much. The economics discipline is way too fragmented and so an economist doesn’t have the breadth of knowledge to take into account all variables that affect his area of interest.
Not to mention the fact that hes not personally affected by the outcome of his advice. The economists who advocate that the Reserve Bank is hard on inflation is a good example of this.
“How does this let us be hawkish? Well if the RBNZ’s mandate is to truly control inflation, then it must be willing to look past the temporary supply shocks and to take into account any permanent ones. If we believe the labour market data is telling us that labour supply is falling – then it is evidence that the Bank must be stronger on inflation, not weaker.”
http://tvhe.wordpress.com/2008/05/12/how-to-stay-hawkish-in-new-zealand/
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Here’s a different perspective, based on a longer view of history and the plight of declining ‘civilisations’.
For more than a thousand years, the world has been dominated by a series of ‘superpowers’. If you just look at history from the Roman Empire through to the British Empire, (encompassing the Dutch, Spanish and Portugese regimes and more,) they all have one thing in common – the lost their position of dominance!!
They also all fell at the end, despite many decades of warning, because of an over dependence on financial services. They have been succeeded, in every case, by a country with an economic base that was growing based on manufacturing revenue and high domestic consumption. In fact, when the GDP contribution of financial servioces outgrew that of manufacturing, the writing was clearly on the wall.
The first thing that happened when the fallc ame was the currency which had been the mainstay of global trade started to lose value against basic imports. Is this starting to sound familiar from a ‘modern history’ perspective?
The global trade in commodities is all done in US dollars. Many countries’ majority income in denominated in US dollars (especially that of the OPEC countries.) THe US dollar is tumbling against all traded currencies. The price of globally traded goods is rising at an exponential rate.
In this economic profile, the betting has to put China in the favorite’s position for next “Super Power” with india not a distant second. The USA will, in abouty 20 years, be in the same position as Briton was in the late 50s early 60s; as the new dominant power is flexing its muscles and starting to exert its influence.
New Zealand will be in a familiar favorable position with China – the same as it was with Briton in the early part of the 20th century – due to the recent FTA and so has the potential to come through reasonably unscathed. Countries that have aligned themselves economically and politically with the US will find themselves being asked to either help reduce the USA National debt (currently US$9 Trillion at the Federal Government level, US$12 trillion at state and local governmant level and the balance – US$57 trillion – at the commercial level) or become self sufficient as ‘foreign aid’ dries up. Paying off the national debt will be familiar to the Great Grandparent generation of Britons who will remember the effect of lend lease on their economy; the end of Aid will be familiar to the same generation of ‘commonwealth’ countries, who were ‘granted’ independence so that the ‘motherland’ didn’t have to keep supporting them through a colonial structure. (1948 was such a big year for independence as a click on google will show.)
Wjhat does that really mean for us here in God’s Zone? Well, a US$200 barrel of oil is easily in sight in the next 24 months (and that’s being generous) as the ‘net profit’ countries (think of Saudi Arabia, China, Kuwait, etc.,) need more and more US dollars to lend to the US so they can stay solvent! (A nice little money go around that’s currently seeing the US Federal Government alone need $1 billion per day in new borrowing and circa $1.25 billion per day in interest payments – in other words, they need to borrow over TWO BILLION DOLLARS PER DAY just to stay the way they are. The upside is that the producing countries may shift quickly to a more stable currency (the Euro or Youn) and so reduce the escallation in Kiwi Dollars that is on its way.
I’m far from the left in my political views, but I do believe that a accellerated investment in Fibre to the home, so that the many ‘knowledge workers’ of New Zealand can cease travelling to and from offices and tele-commute, is a VERY necessary thing, and that a tarif of 100% of landed cost on ANY non-freight or public transport vehicle that delivers less than 10k/litre of fuel (ANY fuel) will do wonders for the national economy.
So, just a lay-person’s views, but a very frightened one. The economic environment of the last 60 years has run its course, and I don’t want to use a wheel-barrow to pay for the odd latte!
(PS, yes, I’m dyslexic, so please forgive any spelling errors, there’s no spell check available on the machine I’m using.
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Nice post Strings you hit the nail on the head very well.
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Strings
A very insightful and unfortunately accurate analysis of the issues we face. Thanks for the post. Unfortunately it wouldn’t make it into the MSM so most people here would remain oblivious to the potential crisis that we face until the sh*t hits the fan.
The only person amongst the candidates for the U.S. election was Ron Paul and the MSM was conspicious for their failing to cover his campaign. hmm wonder why? Guess which organisations are the largest single contributers to the campaigns of all three frontrunners? Yep those companies that are complicit in the crisis that the United States economy is mired in, Merrill Lynch, Citigroup, Goldman Sachs, Morgan Stanley, JPMorgan Chase & Co, Credit Suisse Group, and the Lehman Brothers,
The only complaint I have is your idea that workers in the future will be able to depend on broad band to allow them to commute. Thats unlikely, because multinationals will realise that any jobs that can be done through telecommuniting can just as easily be done from Bangalore or Shanghai for much less and will be outsourced quick smart.
Fingers crossed it doesn’t get as bad as that.
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where can we find some detailed reading material on this?
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I read an interesting article that suggested the empires collapse a few decades after their employment balance tilts from production to service.
It may not be correct but it certainly seems to have been true for most empires. The crux seems to be that empires become too dependent on imports, wealth becomes concentrated in the hands of the merchants and traders and everybdy else becomes poor servants who eventually can’t afford to buy from the merchants and traders. It doesn’t help that the foreign suppliers have a habit of spending your money preparing to invade your country, militarily in the past but economically will probably be just as effective in the future.
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Andrew
I wish I could give you a specific reference, but unfortunately it’s a long time since I mixed history and economics (about 40 years,) so I don’t have the books any more. If there’s a student around younger then me perhaps they might be able to find something through their resources.
Or perhaps Kevyn might provide the source of the articel he referred to.
Happy daze
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ST
a good point, but will they have the “knowledge” needed to be ‘value for money’ productive this deep in the South Pacific. I know I wouldn’t be able to advise a company in India on how to restructure for high value as I don’t understand the cultural mores of the country well enough to add value. I think the same would apply the other way around.
Imagine a telecommuter in Colombo, Sri Lanka, trying to develop a policy for alignment of social expectations in New Zealand with the approach to use of fixed education assets. Somehow I don’t think it would succeed, as the approaches to education in the two countries are so radically different.
THank goodness.
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“Its not really cut and dry to forecast oil futures as there are many variables to take into account.”
That the little NZ Treasury is claiming to be better at predicting future oil prices than the oil market is remarkably odd: if the guys working at the Treasury are smarter than the markets then why the hell are they working at Treasury instead of being ultra-rich?
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Kevyn,
But switching your employment balance from production to service is not necessarily the same as increasing your imports. It could just mean more efficiency in the manufacturing sector – ie building just as much but needing less people so more people move into services instead.
Nor do service industries historically create inequalities of wealth any more than manufacturing or agriculture. Serfs, Victorian work-houses, Nike factories in Burma – these are not service industries. Manufacturing requires a concentration of capital more than most service industries do.
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“They also all fell at the end, despite many decades of warning, because of an over dependence on financial services. They have been succeeded, in every case, by a country with an economic base that was growing based on manufacturing revenue and high domestic consumption. In fact, when the GDP contribution of financial servioces outgrew that of manufacturing, the writing was clearly on the wall.”
I cannot imagine how you can claim that was true of the Roman Empire. Or the Portuguese trading empire – destroyed largely by the Lisbon earthquake? Or the Spanish?
Financial services outgrew manufacturing? WTF?
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I think you’ll see that the Romans stopped manufacturing war goods, because such manual labour was beneath the dignity of a citizen of Rome. In the same way, the physical collapse of Lisbon resulted in a loss of financial knowledge which led to their supply chains being taken over by, mainly, the Pohms (correct spelling).
As for the export of capital to establish manufacturing assets in low-cost labour locations, the capital cost of a factory in, say Sri Lanka, (where my wife is from) is a small decimal of that required in the United States, as is all construction. A real example is that our house there (350 sq mtrs) cost us NZ$60k, including all fittings and fixtures; it would sell in Karori for about $1 million including land.
While I agree that switching your balance to services from manufacturing does not NECESSARILY increase you imports, it does shift your economy from Creating Wealth to Clipping the Wealth Ticket. As an example, many millionaires were made by the bundling of residential mortgages that caused the dredic collapse recently, but NO NEW VALUE OF WEALTH was created, what already existed was simply redistributed. This is the way to perdition, as Charles Dickens illustrated.
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Its more than that Strings: The only wealth creation happens through (specific parts of) governments, through their money minting programme. Everyone else (including the bulk of governments) just shifts money around. We tend to sulk when governments redistribute wealth, yet be impressed when corporations do exactly the same thing.
Its all just redistribution, some piles of dosh get bigger, some get smaller.
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Mr. Buckley
I wish that were true, as it was in the days of species based currency and fixed exchange rates. However, in today’s world, the amount of ‘currency’ in circulation is nowhere close to the amount of ‘money’ in circulation. I know because I haven’t had any currency in my possession for over a month, but I’ve spent a lot on money. The days of ‘minting’ being the limitation of wealth have alas gone. I can sit here in Wellington, do work for a company in Australia through telecommuting, and be paid by an American Bank in the Bahamas, and none of us touch any currency, but in local terms I have created income and contributed to GDP and export statistics.
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You’ve “created” income, but you’ve not done what my post was aimed at, you’ve not “made” money. Theres a lot of prattle about “making money” and it simply isn’t the case, money gets redistributed.
I wasn’t even getting to the point of getting to Fiat-ism
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Ah, the practicalities and intrigue of wordsmithing.
In which case, the NZ government does not “make money” either. That is done by one of several private companies around the world which are ‘mints’. New Zealand does not have one, so our “money” is, by definition, an import!
Sad, but true.
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“wealth creation” isn’t the same as “money creation” let alone minting or printing money.
anyone who takes one thing (or set of things) and turns it into another thing (or set of things) of greater value has created wealth – and anyone providing a service which renders people able to afford a better lifestyle with their existing supply of money has created wealth.
this includes the providers of financial services, since this can help individuals & the overall economy to use money more efficiently.
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Erm, I’m lost there Andrew.
Someone takes my money and says they will make me wealthier by managing it better than me (who just leaves it on deposit in the bank). They put it into a financial instrument, the characteristics of which are that it pays for mortgages that already exist and are being sold on at a discount. In a vast break from North American tradition (which has 30 year fixed home mortgages) the mortgages I have invested in are short term, and are increased because the people at the front of the chain wants to make more money having discounted what they were making to my ‘wealth creator’. THe house buyer doesn’t have sufficient income to pay the increased mortgage and so has to sell the property. There are many people in the same situation, and so there is a glut of homes for sale on the market. The house buyer has to sell below the mortgage value or not sell at all; if he sells below value he hass to pay the lender the balance of the mortgage amount. Rather than take the loss, the (now) house vendor and mortgage defaulter walks away from the house, handing the keys in to the mortgage issuer. The mortgage holder tells the manager of my money that the mortgage loss is now mine and that’s the reality of the market – sorry but what the heck, they got theirs, and my money manager got his fees up front and the only one that lost was little me and I’m not in the business so its my own fault for being greedy and wanting more bang for my buck and taking the risk.
So, if I got it right, the position is …
The family who baught the house paid a pile of fees to the lendor who got wealthy on it.
The original lendor sold the mortgage at a 50 basis points discount, and so instead of making 300 points only made 250 gross profit.
The lot that got me to give them my money to manage took a setup fee from me, a monthly management fee for looking after my money and a transaction fee on the purchase of the discounted mortgage.
I got back (after fees, taxes, and deduction of losses,) 70% of what I gave to be managed.
So
The original lender got wealthier,
My salesman got wealthier,
The people who work for the company who managed my money got wealthier
The family that bought the house lost wealth and credit rating
I lost wealth.
THat to me seems more like wealth redistribution than wealth creation, in exactly the same way as the Millionaire Factory in Australia redistributes wealth into its emploees pockets.
I think I’ll stick to putting my money into government bonds, where there is at least the long term potential of solvency, and leave the risk taking to the bankers.
As you say, “providers of financial services ……use money more efficiently” FOR THEMSELVES, they don’t actually create any wealth.
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you sure are lol
i think what your lengthy scenario was supposed to be saying is that sometimes in a financial services environment a bad decision & a bad investment can be made.
well so it can in the absence of financial services too. nevertheless the existence of financial services improves the overall running of the economy & hence contributes to wealth creation – for the overall economy.
making a choice between different financial service providers is up to you of course, so you can find the one you consider most suitable, whether it be for the risk you’ve assessed to be involved, or the potential returns or other reasons, & you’ve made a quite valid choice to use the government as your financial services provider. good for you.
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I still don’t see how clipping the ticket creates wealth, as opposed to redistributes it, but hey, it’s another day, have a good one
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it is another day, strings, & furthermore, it’s the day on which i’m going to show you how financial services create wealth!
suppose you have a sum of money, & an investment opportunity which will yield you a return of $x.
now suppose another person has no money, but they have an investment opportunity which would yield them a return of $(x + |d|) on that sum of money if they had it.
clearly there’s an opportunity for you to lend the money to that person for an interest payment of $(x + (|n|1)
if y > r we have a problem – a trade would result in an increase in overall value, but you are not going to relinquish your item because you consider it worth more than my item which i would trade for it, even though we still each consider the other person’s item worth more than its current owner considers it!
maybe i could rummage through my belongings finding other stuff i could give up to induce you into the trade, or maybe we could both go off trying to find other people who can trade your item for other things they have which we both want, allowing you to use some of them to buy my item & to keep the rest to make up the difference in values!
this could get very complicated given a whole lot of permutations of various items & various people with different assessments of their value.
then someone comes along & supplies us all with….
a currency!
that’s a financial service & it facilitates all kinds of beneficial, wealth creating trade!
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huh, i guess there’s a length limit or something. ignore that last post because it cuts out the middle portion of what i wrote.
read from hereon:
suppose you have a sum of money, & an investment opportunity which will yield you a return of $x.
now suppose another person has no money, but they have an investment opportunity which would yield them a return of $(x + |d|) on that sum of money if they had it.
clearly there’s an opportunity for you to lend the money to that person for an interest payment of $(x + (|n|<|d|)) & you’re both better off, you are better off by $|n| & the other person is better off by $|d – n|.
you are each providing the other a financial service: you are providing liquidity for their investment, they are providing you lucrative storage for your money.
as you see wealth has been created – you’re both better off – so perhaps you wish to argue that while financial services create wealth, an intermediary in the supply of financial services merely skims off a portion of that wealth for itself.
in fact the intermediary (a financial institution) brings the two parties together when they might never have heard of each other.
the intermediary also facilitates the pooling of funds from numerous investors, and it facilitates the spreading of the investments across numerous investments. investors & investees are able to choose from a range of options optimizing their risk/return profile to their particular wants & needs, they are able to lend & borrow for different terms because of the pooling of the funds.
if you did not believe that the intermediary can do the job of providing financial services more efficiently (create wealth) than you and the other parties to the transaction could, you would not use the intermediary – you can still seek out your own private individual borrowers or lenders.
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if a telephone company laid a new cable or launched a new sattelite, you would admit that wealth had been created, because you could point to the physical, material asset. yet a telephone company is merely an intermediary to the communications between two or more other parties, who are better off by being able to come together efficiently.
if you build a human network of finance professionals, you have still created wealth, allowing those in need of financial services to come together efficiently.
this is an apposite analogy given the convergence between the telecommunications & financial industries – eftpos, telephone & internet banking, the use of 0900 numbers to make donations, direct credits & debits- a significant volume of telecommunications traffic is financial transactions.
if you had to travel around the countryside, stopping at farms & cottages for your food & manufactures, this would be very inefficient, & if someone built a market place, this would create wealth by increasing the efficiency of the trade process. again you could point to the cobbles in the market square, the benches here & there for dickering to take place at & contracts to be drawn up, the booths for refreshment vendors & the stables for the dray animals when they come to market & you could say that there are physical assets involved in this wealth creation, but this is what financial services institutions do, they create a market place.
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we can think even more fundamentally than the lending and borrowing of money.
if i have an item which i value a little & you value a lot, while you have one i value a lot & you value a little, a trade will make us better off!
you might like to think that the items are things valued by the coveting parties because they match their particular skill sets to be able to make something new out of them so that you can point to an act of work – of making something more valueable out of something less valuable – as underlying the wealth creation (e.g. i have some clay & you’re a better modeller than me, while you have some wood & i’m a better carpenter than you) but this is not a necessary factor, since strictly speaking, any transaction resulting in both parties being better off has created wealth, hence any voluntary trade is wealth creation regardless of whether the parties do any work on the stuff they acquired by trade.
now suppose i have something which i value at $x & you value it at $xr
meanwhile you have something which you value at $xy and i value it at $xyr (assume y & r >1)
if y > r we have a problem – a trade would result in an increase in overall value, but you are not going to relinquish your item because you consider it worth more than my item which i would trade for it, even though we still each consider the other person’s item worth more than its current owner considers it!
maybe i could rummage through my belongings finding other stuff i could give up to induce you into the trade, or maybe we could both go off trying to find other people who can trade your item for other things they have which we both want, allowing you to use some of them to buy my item & to keep the rest to make up the difference in values!
this could get very complicated given a whole lot of permutations of various items & various people with different assessments of their value.
then someone comes along & supplies us all with….
a currency!
that’s a financial service & it facilitates all kinds of beneficial, wealth creating trade!
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“have an investment opportunity which would yield them a return”
an interesting concept is in the word “would”
This suggests an absence of risk. The more correct term would be “might”, at that point I want to know the risk of might not, and to see what premium I will receive for taking that risk.
The point (as I see it) is that ‘money managers’ do not take risks, they clip the ticket irrespective of the result and don’t even say thank you.
Many ‘advisors’ are, in fact, agents for money managers, and are compensated for the amount of money they give to the money maker, not the amount the ‘customer’ gets back.
Similarly, the actual money managers are paid based on the amount of money they make FOR THEIR EMPLOYER, not for the customer. Hence, these people are less than adventurous in what they do. Particularly in this country, there are almost no VC funds. There are Angels, who take their own money and help innovators get their ideas off the ground, and few angels will put money in a money manager’s hands.
Finally, currency, an interesting and changing specie. It used to be that ‘currency’ was a promisory note, today it’s not, it is just a way of counting value for exchange. (As you brilliantly illustrated.) WHich is why, whenever there is a danger of major disruption peopole go out and take currency and exchange it for THINGS that have real value, like gold, diamonds, oil, water, food, etc. As the Germans learned at the end of the second world war, if you’ve got chocolate it’s worth as many wheelbarrow loads of currency as you want.
Happy daze
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I find it strange that you can measure wealth using fiat currency since the real value of the currency is zero. Under a fractional reserve lending system the money you hold is someone else’s debt obligation.
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“I find it strange that you can measure wealth using fiat currency since the real value of the currency is zero. Under a fractional reserve lending system the money you hold is someone else’s debt obligation.”
Thats precisely why the world is in such a perilous state. The fact that people measure wealth in mere objects. It happens irrespective of what the medium of exchange is. People will hold anything as a store of value as long as it is perceived to be more valuable relative to other comparable commodies that others want. The advantage of money is that it has low carrying costs and can earn a return due to interest charges on loans. When you deposit money in a bank you’re effectively buying someones debt obligations as you rightly pointed out.
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yes strings there is always risk in any investment opportunity but you do not have any reason to suppose that the more lucrative investment in my hypothetical example was more risky than the less lucrative one.
as with your previous hypothetical example you’ve chosen to depict only the environment with a financial sector as one in which an investment can go wrong or perform below expectation, but there’s no basis for this.
i’m going to go with another analogy, hold tight…
you have a sum to invest & decide to put it into pumpkin growing. you assess all the market gardens you can reach with a reasonable amount of travel, namely all those around your locality, & invest in the one you consider to have the best production opportunities. then a drought wipes out the entire national pumpkin crop & you lose your money.
meanwhile your doppelganger lives in a universe where a telecommunications network exists. this person assesses not only gardens in their locality, but those far away, & invests in a more distant one with better soil. then a drought destroys the national pumpkin crop & the doppelganger loses their money.
now who lost the most money? whose investment was the most risky?
the answer is neither. the only difference is that the telecommunications network created a more efficient market allowing investment in an enterprise with higher expected return. investment was shifted from low productivity areas to high productivity areas – creating wealth.
that is also what a financial services industry does.
you are probably aware that there is said to be a correlation between risk & expected return for investments, and that might be why you are imputing higher risk to the better opportunities in my hypothetical examples. that correlation only applies in an efficient market. it doesn’t apply to the new & better investment opportunities becoming available as market efficiency improves.
money managers do take risks – loan defaults occur, and this usually comes out of the pockets of the owners of the financial institutions – unless things get so bad that they can’t meet all their own obligations to those who lent them money.
so the borrower bears some risk, the institution bears some, and the lender bears some. the intermediary has actually taken some of the risk from the lender & borrower (& some of the return on investment).
there’s no need for them to say thank you, as they are providing a service. if the borrower & lender don’t like it, they can try to find each other without the institution’s help (which does still occur).
i accept your argument that there are some questionable practices within some institutions, but i expect this could happen in any industry. you can no more say that the provision of a financial service is in general not a wealth-creating transaction just because some of them aren’t, than you could say that the supply of automobiles is not wealth creating in general because some people sell stolen cars.
yes the currency market can go wrong too, but this only underlines how the provision of a sound currency is a valuable service! again, things can go wrong in markets for other commodities too.
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Andrew you are right that the finance idustry does facilitate the creation of wealth through providing an indirect good that everyone will accept, confidant that they’ll be able to exchange it for something that they desire, but the unfortunate thing is that the fiat based fractional reserve banking system is fraudulent where the State has usurped the sovereinty of its people by providing a de jure exclusive monopoly to create credit (money) to the private banking industry. The Reserve Bank has admited that only 3% of the money supply is in the form of tangible currency (coins and notes) and the rest in composed of debt to private banking enterprises.
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Oh dear Andrew. Here we go again. You’re trying to convert a capitalist to capitalism using all the wrong examples.
Lets start with your end point! ….
“the provision of a sound currency is a valuable service”
Can you point me to a sound currency please? As far as I can see, there hasn’t been a ‘sound’ currency since the promissory note was removed from specie. Certainly it was believed for years that the US dollar was a ‘sound’ currency, but we can all see the folly in that. To a currency market trader, ‘sound’ is something that might, at best, last a day or two, but only if it is to their advantage.
Now lest’s revisit the concept of financial services creating value, and take, as a for instance, the currency futures market. In this bastion of financial services, people make bets on what the future value of a currency will be; even better, they use no ‘money’ to do it, as the trade, the premium and the ‘transaction’ value are all settled at a future date.
The stated purpose of futures markets is to enable businesses to lock in the price in local currency of international trade at the time the trade is entered into. (see the charter of the Chicago FM.) There are, however, many people whose only ‘job’ is to trade in that market on a minute by minute basis to make profits for their employers. Again, they create no wealth, nor overall value, as they are, again, just clipping tickets and hoping it all comes out on the plus side in the end and gets them their million dollar bonus. That transfers wealth to them, and their employer, but doesn’t create anything in sum of all wealth.
In your pumpkin patch analogy there is something of a flaw again. If, as you would (I think) suggest, I placed the investment (doesn’t matter where) through an “Investment Manager”, they would have clipped the tickety as the money passed through their hands from me to the farmer. Then, low and behold, I lose the money (again, it doesn’t matter which one I invested in); yes, the investment manager is richer, I am poorer. Hmmmmmm. maybe I’d better buy the farm instead, that way I have a capital asset, as opposed to a cashflow risk, in my portfolio.
Speaking of assets and cash-flow. I was invited, together with my partners in a major accounting firm, to invest in a forrest development back in 1992. The offer made to us was that we pay out, on a phased basis over 22 years, to develop from scratch a forrest in the Hawkes Bay area. After pouring over the ‘offer’ document, we found that the land was going to be bought by the ‘wealth management’ company that was proposing the deal to us, and we would rent it at a variable annual cost fixed every three years as well as pay a management company to look after the planting, pruning and general husbandry of the forrest. There was a high annual cost in the early years, as the land was stripped of existing foliage, fenced, roaded, planeted, etc. We decided that we should ignore the offer of the wealth manager, and went to our bank to arrange a mortgage ourselves. We then went to a forrestry management company in Gisborne and asked if they knew of any land for sale that could be turned into a forrest under their management. They came up with a sizable section, and we proceeded to do a deal with them and the bank. So far, we have made more out of the land that we expect to make out of the wood, with more to come. The bottom line, we have created wealth for ourselves through adding more value to the land that the cost of management, raw materials and husbandry. We have husbanded wealth for our children (pet rocks, whatevers) through buying rather than renting the land (funnily enough, the cost of buying has been much less than the cost of renting so we’ve also saved cash-flow). I say husbanding because the replacement cost is the same as the selling price, so no value or wealth has actually been created by what we have done unless the land is sold and no similar investment made; however, the next generation, if they don’t sell, will be able top create more wealth from forrestry than we hacve because they will own the capital asset, the cleared, roaded and fenced land.
Bottom line of my real example. The ‘wealth manager’ wanted to take our money and make himself wealthy with it by having us pay for land to which he would acquire the title. Again, I prefer elimination of the leech (middleman) who adds no value and creates no wealth, but clips as big a chunk of the ticket as they can.
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STH
THank you
S
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strings even before the switch to fiat currency there was not a “sound” currency if your standard is perfection. most currencies are sound enough & the evidence is that they’ve worked extremely well for the most part.
you might point to specific services or practices within the financial services industry as not wealth-creating, but the point remains that financial services can be wealth creating. as i said above, you could point to any other industry as including some practices which don’t enhance our collective welfare but that doesn’t mean all the activities represented by that industry are worthless. take manufacturing. since some businesses manufacture weapons which kill or maim people are you going to say that manufacturing doesn’t & can’t create wealth?
having said that, your specific example – currency futures, is another example of a financial service which does create wealth in general. as you point out, individual businesses can enhance the security of their returns, & the fact that most of them choose to do it through financial service providers (fsp) as intermediaries instead of trying to locate counterparts in the other countries who want to engage in the reciprocal bet, which is still entirely their option, suggests that they get the job done more efficiently through the fsp.
in my pumpkin analogy i didn’t suggest you went through a money manager, but if you had, it would have been your choice to do so because of what they could add in value to the transaction. alternatively your doppelganger might have travelled to the distant location carrying the investment funds with you. when the investment failed, the train driver who carried you would still keep their money that you paid when you got on the train. or if you had sent a courier, they would already be paid regardless of the future success or failure of your investment. or if you had bought some stationery with which to run your business & your business then failed, the stationery would stay paid-for. the fact that you don’t always spread your risks out to all your suppliers is a feature of any industry you might deal with, not just the fsp industry.
and it is not just in a business transaction that this applies. you might send a couple of $100 notes back home to your dear old mum, then she gets mugged & the money stolen – you don’t then get a refund from the post office for the money you spent on stamps!
if on the other hand you had not paid a fsp to simply transfer your money to a specific recipient but had pooled your money in the fsp along with other investors (e.g. put it in an account) & they had lent money to the pumpkin farm, there is a sharing of risk in that transaction.
as for the issue of buying vs renting, & selection of contractors etc etc, that’s neither here nor there in a debate about the ability of the financial services industry to contribute to wealth creation.
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wrt currency futures you will notice from above that my preference is for a global currency, that would be even better than different currencies supported by a currency futures market
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Ouch
Andrew
I did noptice that, and tried to ignore it.
You see, such an approach would take at least two generations to achieve, as the propensity for politicians to want to ‘control’ their economies by manipulation of economic levers is well known, and that couldn’t be allowed in a global currency environment.
Imagine a situation where there was no reserve bank and the government couldn’t manipulate interest rates; wouldn’t that be an interesting world.
Hey, they’re trying to do that in Europe aren’t they? Didn’t I see though that there are some members of the EU that refuse to give up control of their currency, and so still have all the fun of the market?
What the heck. Let’s go for it. What do you propose as the structure and constitutional ‘must haves’ of the new World Bank. (Clearly the old one would have to go as it is a manifestation of the American Empire, which is about to collapse).
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FINALLY Andrew
Your logic fails, in that your comment . . . .
“if on the other hand you had not paid a fsp to simply transfer your money to a specific recipient but had pooled your money in the fsp along with other investors (e.g. put it in an account) & they had lent money to the pumpkin farm, there is a sharing of risk in that transaction.”
does nopt hold water. The money lent to the pumpkin farm would ALL have gone, and we would all have lost money – though the manager would have made even higher fees.
Now. Just for fun. Give me a real example where the Wealth Manager actually creates wealth, as opposed to being an intermediary, through delivery of a financial, as opposed to agency, service.
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“Hey, they’re trying to do that in Europe aren’t they? Didn’t I see though that there are some members of the EU that refuse to give up control of their currency, and so still have all the fun of the market?”
Instead its a group of unelected and unaccountable bankers that are manipuhttp://www.rcci.net/globalizacion/2002/fg261.htmlating the monetary system, in the interests of the capitalist class.
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“What do you propose as the structure and constitutional ‘must haves’ of the new World Bank. (Clearly the old one would have to go as it is a manifestation of the American Empire, which is about to collapse).”
If I were to favour a world trading currency, I’d take inspiration from John Maynard Keynes and his ingenious proposal during the Bretton Woods Conference in 1944 where the Allies met to discuss the design of the new economic order after the War.
His solution was the ICU, a new central bank of central banks, which would issue the bancor currency to be used for trade.
Its no wonder that the United States favoured the option of the dollar being the reserve currency for the world.
“Assume an enterprise within a poor country borrows $100 million short-term from a U.S. bank, paying 20 percent interest. Following the prudential guideline that countries should maintain reserves equal to the short-term dollar denominated debt, the government then -if it doesn’t want to face the threat of an imminent crisis-must add $100 million to its reserves by buying $100 million worth of T-bills, paying 5 percent interest. There is, in fact, no net flow of funds from the United States to the developing country as a result of the loan; it is simply a wash. But the U.S. bank charges much more for the $100 million it sends than the U.S. government gives for the $100 million it receives. There is a net transfer of $15 million transfer to the United States. ”
Joseph Stigliz “Making Globalisation Work”.
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your use of the word “manager” suggests to me you are still fixating on the idea of an agent who merely passes on the investment money from the lender to the borrower & takes a handling fee. although i did deal with that situation & showed that this too could be a wealth-creating activity, i had explicitly moved on from that scenario when i talked about pooling your money.
if you and other investors open accounts in the fsp, leaving lending decisions up to the fsp, it then lends money from the overall pool in a variety of enterprises, including the pumpkin farm. if the pumpkin farm loses money but the other investements pay off well, the fsp may lose some money but
a. it is likely to take a hit to its profit without passing off the loss to the investors and
b. even in the worse case scenario where the losses by the fsp are so great that the investors suffer, this loss is spread around all the investors
so you can see that the fsp is taking some of the risk for you, and also gives you the advantage of sharing your risk with the other investors.
indeed in one of my first examples i pointed out that financial services can be provided with no agency whatsoever.
i pointed out that any voluntary trade increases wealth & it is the case with money too: if you lend some of your money (directly, no agent) to someone with a sharper preference than yourself for money now rather than money later, they can pay you some interest in the future & you’re both better off.
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