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The velocity of money ... | 59 comments | Create New Account
Comments belong to whoever posts them. Please notify us of inappropriate comments.
How does a market in decline, fix an over supply? When facing a better competitor?
Authored by: Anonymous on Friday, August 17 2012 @ 08:57 AM EDT
How does a market in decline, fix an over supply? When facing a better
competitor?

Well, the treat to local and national economies (other than machinery replacing
workers)... is, a more competative economy somewhere else - spelling out the
end of the local economic (agriculture, manufacturing, mining) employment
oppurtunities (for local folks). Then, the over supply of money in the local
economy, is magnified and is a worse problem (as it causes even more inflation
if the money supply is not reduced fast enough)... making the local economy even
less competitive with economies somewhere else where the value of money is
"KEPT" at a far lower value (by design).

China is an example - see this slashdot post:

http://apple.slashdot.org/story/12/01/22/0445233/how-the-us-lost-out-on-iphone-w
ork

Quotes:

"Rather, Apple's executives believe the vast scale of overseas factories as
well as the flexibility, diligence and industrial skills of foreign workers have
outpaced their American counterparts".

"A foreman immediately roused 8,000 workers inside the company's
dormitories, and then each employee was given a biscuit and a cup of tea, guided
to a workstation and within half an hour started a 12-hour shift fitting glass
screens into beveled frames. Within 96 hours, the plant was producing over
10,000 iPhones a day. The speed and flexibility is breathtaking,' says one
Apple executive. 'There's no American plant that can match that'...".

So, there is a world-wide dynamic in play. The enemie in the EU and US, is the
oversupply of money, where the costs of labor (due to inflation) vs China, is
more than a long term problem... it is real today.

[ Reply to This | Parent | # ]

Inflation, or the growth of money supply - in declining populations/markets is a HUGE problem.
Authored by: Anonymous on Friday, August 17 2012 @ 10:21 AM EDT
I'm not an economist, but I suspect that life is a bit
complicated. There are a couple of relevant factors:
1. Labor adjusts poorly to wage decreases. Therefore, if
'real wages' in one nation decrease owing to a cheap labor
pool elsewhere, the amount paid per worker is pretty
inflexible - instead you end up firing people, decreasing
your consumer market, and then firing more people.
Inflation helps. There's also a benefit - because only poor
people lose value in inflation - rich people have
investments/property.
2. Capital sinks can distort markets. Eg., China buying up
massive amounts of US debt. In this case, the 'normal
reaction', where US currency devalues sufficiently to adjust
the export rate doesn't happen.
3. Politicians/economists aren't all idiots. The massive
printing spree in the US may have been a clear signal to
China along the lines of...
'Y'know, we understand that you'd like to keep up your
growth rate and build industry. That's fine. But, we're
having some problems keeping our labor markets happy. So,
y'know all those 30 year bonds you're saving up...expect us
to pay them back in paper unless you start buying stuff from
us. Really, think about telling your entire nation that you
busted your hump for absolutely nothing.'

Remarkably quickly, after that episode, the Chinese export
rate decreased.

--Erwin

[ Reply to This | Parent | # ]

The velocity of money ...
Authored by: Wol on Friday, August 17 2012 @ 11:19 AM EDT
You miss another problem, which the banks dumped us in ...

Let's say the capital adequacy rules say "20%" - for every £1M the
banks have in loans, they must have £200K in assets. Fair enough. They talk the
regulator into halving that figure, and all of a sudden they can double their
lending - their assets remain at £200K and that allows £2M lending. Except that
the increase in money supply inflated the value of the assets so now they're
worth £300K, and they can lend £3M. Nice. Now they talk the regulator into
halving the adequacy to 5% ...

Now we all know about systemic risk and those loans going bad ... suddenly the
assets are FALLING in value, the regulator is panicking and upping the
percentage, and the banks are bankrupt!

The old UK mutual sector was, in part, immune to this. They took deposits, they
lent it out again, and I think it was something like "assets == loans"
- they basically took a turn on the interest rate.

I think the most sensible way out of this (if EU regs don't get into the way) is
for local councils to set up Municipal Mortgage Corporations. They pay housing
assistance to householders in financial straights anyways, so if they simply
created bonds and bought those mortgages off the banks, it would cost them less
in bond interest than they're paying the banks. The banks could use those bonds
at face value to repay the Bank of England all those bail-out loans.

Okay, it would shrink the size of the banks, and take them partially out of the
housing market, but it would also have the necessary effect of recapitalising
them quite strongly. Then the MMC's get spun off as mutual Building Societies
:-)

Pull the same stunt with business loans and Credit Unions. Let accountancy firms
whose clients have say, joint loans over £1M spill them off into a Credit Union
on the same basis - the Union issues bonds to capitalise itself, which the bank
pays the Central Bank back with.

So - we now have smaller, better capitalised banks. We have a lot of small
Building Societies and Credit Unions which are 100% capitalised with loans from
the Central Bank. And the credit crunch is - sort of - under control. At least
we've stopped the whirlpool of money - which has been pumped in to assist the
economy - being mopped up by the banks trying to recapitalise.

Then we put strict controls on taking over all these new Societies. Not saying
banks can't do it, but all these bonds become immediately redeemable if they do.
So as the economy picks up and the money supply eases, if the banks do decide to
start mopping up these societies then the act of doing so makes the money
they're using to do it disappear.

And if the societies don't get mopped up and the central bank wants to tighten
money supply, it can simply require that the societies spend a certain fraction
of turnover on redeeming the bonds. They shrink a bit, the money supply
contracts a bit, and we don't get runaway inflation :-)

Cheers,
Wol

[ Reply to This | Parent | # ]

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