What is the limiting factor?

[Corella]

Contents of contracts potentially are real values, equivalent to physical resources or production. Since this is a virtual thing in its origin, it seems somehow appropriate to represent this by fiat money. Boon and bane at close quarters...

Problem is: quantifying! I don´t think it possible to guess future scenarios because effects how sufficient coming up crisis will be organized have overwhelming effects in all directions.

[AgentR11]

The first (trading commodities) is most certainly a yardstick; however, some might dislike what it reveals.

If you are going to claim its "obvious" then prove it. I get decent insight on price valuations by observing the changing cost of things over time in relation to the changing cost of various commodities.

How can it not be possible to measure the changing value of item type A as stated in the same-value quantity of item type B.

At any point in time, I can draw a point that is defined as the ratio between the cost of A and the cost of B as stated in any fiat currency of choice. Stating a function as that ratio over time, yields a curve that represents the value of A as stated in units of B.

[Corella]

@Agent: you certainly gain precise figures But whenever you try to put these on real things there is bias, and: volatility, psychology, circumstances, coincidence...
But i actually did not try mention that, there are more decisive issues. In Germany all discountings on conventional power stations currently fail systemic, because of mandatory regulation due to fluent wind- and solar power, as a very simple example. Less simple: try find out about an investment into social projects here and now and its gains 15 years later, or opposite, the cost if you don´t. The money within this example is of a dimension of an average national debt amount, if you consider a longer perspective!

And once we touch ecological issues: can you calculate whether or not Amazon rain forests will be cut down or not and its consequences? Will nations together find a solution to solve overfishing or not? Still simple examples...

[ralfy]

Contents of contracts potentially are real values, equivalent to physical resources or production. Since this is a virtual thing in its origin, it seems somehow appropriate to represent this by fiat money. Boon and bane at close quarters...

Problem is: quantifying! I don´t think it possible to guess future scenarios because effects how sufficient coming up crisis will be organized have overwhelming effects in all directions.

Given the liquidity chart in this site:

http://www.greatcreditcontraction.com/

one can argue that the total worth of "physical resources or production" is perhaps hundreds of trillions of dollars, but non-monetary commodities and precious metals might be valued at around $10 trillion or so.

The catch is that total money supply is a lot larger, with contracts like "shadow" derivatives at almost a quadrillion dollars.

[ralfy]

The first (trading commodities) is most certainly a yardstick; however, some might dislike what it reveals.

Not by a long shot!

If you are going to claim its "obvious" then prove it. I get decent insight on price valuations by observing the changing cost of things over time in relation to the changing cost of various commodities.

See the chart presented in the link given to Corella. The amounts involved in financial instruments, especially derivatives, are far larger than the value of non-monetary commodities, precious metals, physical assets, and "power money" combined.

How can it not be possible to measure the changing value of item type A as stated in the same-value quantity of item type B.

When Type B is increased many times over.

At any point in time, I can draw a point that is defined as the ratio between the cost of A and the cost of B as stated in any fiat currency of choice. Stating a function as that ratio over time, yields a curve that represents the value of A as stated in units of B.

That's because total money supply doesn't consist wholly of fiat currency.

[ralfy]

@Agent: you certainly gain precise figures But whenever you try to put these on real things there is bias, and: volatility, psychology, circumstances, coincidence...
But i actually did not try mention that, there are more decisive issues. In Germany all discountings on conventional power stations currently fail systemic, because of mandatory regulation due to fluent wind- and solar power, as a very simple example. Less simple: try find out about an investment into social projects here and now and its gains 15 years later, or opposite, the cost if you don´t. The money within this example is of a dimension of an average national debt amount, if you consider a longer perspective!

And once we touch ecological issues: can you calculate whether or not Amazon rain forests will be cut down or not and its consequences? Will nations together find a solution to solve overfishing or not? Still simple examples...

Not even bias, as total money supply can be (and has been) increased faster than production from physical resources.

And the problem with using renewable energy to meet declines in oil and other resources is that they usually have much lower energy returns.

[AgentR11]

How can it not be possible to measure the changing value of item type A as stated in the same-value quantity of item type B.

When Type B is increased many times over.

And thus... measured. Its perfectly fine for B to increase at any finite rate, 2x / yr or 2,000,000x / yr; works perfectly fine.

I think however, its clear we are arguing about two completely unrelated concepts and mixing their points, as well as not getting the other's point.

Feel free to close the argument as you wish.

[ralfy]

And thus... measured. Its perfectly fine for B to increase at any finite rate, 2x / yr or 2,000,000x / yr; works perfectly fine.

Something that increases 2,000,000 times a year compared to what it is measuring is definitely not a "good yardstick" when compared to something that increases by 2 times compared to the same!

I think however, its clear we are arguing about two completely unrelated concepts and mixing their points, as well as not getting the other's point.

We are actually talking about the same thing. The problem is that you think most money consists of fiat currency. That is not the case at all.

Feel free to close the argument as you wish.

I go back to the first message that I posted in this thread. Thanks.

[evilgenius]

An issue here, begging to be brought up, is the impact of the change over to a service economy over that of an industrial economy. I would argue that given the prevalence of the dollar and the imperial relationship of the US to the rest of the world that the service economy is the right choice for the US. The real issue with those blathering on about how we have lost our industrial base and now we don't make anything concrete that we can sell is not as obvious as the emotions brought into the frame suggest. The issue is, why can't your average American keep up when it comes to what the service economy requires in terms of innovation and technical skills? That seems accusatory, but what I am getting at has to do with slices of the pie (kind of what the other arguments on this thread are talking about too). Hasn't the US, by allowing too much concentration at the top, done something to the relationship which ought to exist between the average man in a service economy and the average amount of opportunity? Doesn't this show up in the bailing out of the banks in that they got the capital instead of the average middle class person? I'm not against the banks getting what they needed to stay solvent, mind you, but I am against the attitude that money can only come from one direction, top down.

[AgentR11]

The real issue with those blathering on about how we have lost our industrial base and now we don't make anything concrete that we can sell is not as obvious as the emotions brought into the frame suggest.

On the contrary, we make tons of stuff, we even export tons of stuff. We import more than we export of course, which is kinda what's required of the keeper of the global currency, and maintainer of the global police force. A lot of people think that if we shed those two rolls, all manner of calamity will befall the US; but I just don't buy it. Things would be *different*, and some people would suffer some discomfort across the discontinuity, but in the end, the wheat will still grow, the cows will still moo, millions of barrels of oil will be pumped from US natural reserves, BTU-galore of natural gas too.

The issue is, why can't your average American keep up when it comes to what the service economy requires

But are you sure this is really the case? Those average Americans are do substantially better than your average Chinese or Indian. So much better, that those average Chinese don't even factor into the discussion. Instead, the average American is being compared against a 140 IQ Indian in an outsourcing shop, whose manged to sorta learn multiple human languages along with their own personal, technical area of expertise. Of course they get blown out of the water. The average Indian is mucking in the dirt, selling hand wrapped street food, and scrubbing shoes for a bare, subsistence living.

the average man in a service economy and the average amount of opportunity?

The average man is unable to provide the value required to bring the average amount of opportunity to fruition. Its simply beyond them.

but I am against the attitude that money can only come from one direction, top down.

Don't track money, track value. Money is an arbitrary creation, value is real.

[evilgenius]

I'm not arguing that the US doesn't make stuff. I agree it does. What I am addressing is the emotional point made in that argument which exists in society, that it isn't necessarily as valid as it sounds on the surface and that it is a sort of red herring hiding something far more important.

Neither am I comparing the American worker to workers in other countries. If you think about it, neither are the people who make the aforementioned emotional argument. They gripe like they do but really they are comparing themselves to those they see everyday for whom they harbor envy, the idle rich and the corporate elite. In their comparisons to them they see themselves deficient in liberty, wealth, clout, you name it. They are trying as hard as they can. What they aren't seeing is that opportunity in the form of capital available at the middle class level, readily enough such that failure is a consideration, has come into short supply. It is precisely their inability to take on productive debt which saddles them with despair. Fewer people are able to take chances now. Fewer people are able to incur risk which may or may not return reward.

[SeaGypsy]

I think the 'magic' of American capitalism originated in a spirit of cooperation between classes, coupled with the oil/ industrial/ ag bonanza. Resentment between power groups (left right/ union capital/ black white etc.) undermines a collective in every way. The requirement is to balance interests, which is best done through fostering good will, primarily rather than mandatory redistribution as a means. The big problem is lack of goodwill, then the lack of cooperative ability therefore, to do anything like what seems mandatory for a sane outcome for the USA as a nation or a collective. Thrift is what is most needed and least likely to arise in the current and emerging American climate.

[ralfy]

The US requires a JIT system with significant resource requirements to keep its economy running, leading to only around seven to ten days' supply of food and fuel for various cities and towns. Around 70 pct of its economy is significantly influenced by consumer spending, and around 60 pct of that on overvalued homes, in turn dependent on increasing debt. This is part of around $60 trillion or more of total debt, increasing to over $200 trillion if future liabilities are considered. With that, some report that Russia has let go of much of its dollar reserves, with China now joining it.

Health-wise, various issues have been raised about obesity and various ailments, with one report indicating that its own military found something like three-quarters of youth affected by obesity and various illnesses (about a third), and the rest by problems including drug or alcohol abuse, criminal records and unwanted pregnancies, etc. The military itself requires something like 40 pct of its war costs funded through foreign loans, with the interest alone on those loans impossible to pay.

Ecology and infrastructure-wise, we've seen a significant drop in water levels for the Ogallala aquifer and much of U.S. infrastructure graded by its own regulators and industry experts a "D."

In terms of preparation, most US citizens have been so much used to a middle class lifestyle that they've been significantly dependent on government and business to rescue them in times of trouble. They will likely find it very difficult when a JIT system on which they depend starts falling apart.

In terms of law, the government continues to be increasingly edgy towards its treatment of citizens, with police becoming more stringent in fining or arresting not just citizens but even children for various offenses, and the military contributing to increased collateral damage as corporations (mostly multinational with US investors) profiting from occupation while the unwitting sheeple foot the bill.

The same problems are taking place in other rich countries, but to a lesser extent due to more stringent banking regulations, less emphasis on consumer spending, and other factors. But what is affecting the U.S. will take place in them eventually for the reasons I gave earlier.

Finally, most of these points were raised several times in this forum, so what was just said should not be new to most members.

[evilgenius]

I would say that it is the inability of the middle class to take on productive debt which is the limiting factor. Overall, instruments like derivatives function to direct investment into large scale systems of opportunity (whole industries or investment sectors such as green energy), at least they are supposed to. In reality this intention becomes distorted by tax dodging. So, the derivative universe provides the opportunity, but the middle class has to be able to take advantage of that opportunity or it will come to nothing. Derivatives don't operate the same way to create money as the exchange of money, making profit for those incurring investment debt, does within the middle class portion of an economy. I would actually say that if the middle class does not become involved the derivative bubble is bound to shrink.

That being said the current mess is due to middle class over investment in non-asset class investments. The housing market is a fine place for a lot of money, but not for so much money that it distorts the opportunity picture available in terms of return on real assets. The whole action became self-reinforcing when both the derivative overstructure and the tipping point of middle class over investment went after the same housing panacea. Propping up the banks is not going to do it on its own. Money has to make it to the middle class in such a way that market mechanisms can decide which assets are more favorable and which are less so (this is where natural resource shortages come into play). As long as the middle class is saddled with the current state of sunk money in the underwater home situation the movement is not going to come from them, not in a meaningful way. The attempt to drive recovery by means of inflating the derivative overstructure is now faltering without that middle class movement. Oh, sure, you can be a stock picker and win by guessing which companies will get the seats in a shrinking money supply game of musical chairs, but that won't help people get jobs.

[AgentR11]

That being said the current mess is due to middle class over investment in non-asset class investments. The housing market is a fine place for a lot of money, but not for so much money that it distorts the opportunity picture available in terms of return on real assets.

AMEN! A house is supposed to be a place to live, a tool. They have become massive anchors completely overwhelming the financial means of the middle class residents that live in them.

If your home comprises the largest portion of your net worth... you're doin it wrong.

Unfortunately, in the course of doing it wrong, many think the massive house proves they've "made it".

Oh, sure, you can be a stock picker and win by guessing which companies will get the seats in a shrinking money supply game of musical chairs, but that won't help people get jobs.

This is kinda what many are limited too though. A middle class person creating a manufacturing business is exceptionally unlikely; even if they have capital available, they'll usually choose either investment (stock/fund pickers) or *might* build a services company; which is basically an extension of the original concept of selling one's labor for wages. The barrier to entry in creating real wealth is enormous nowdays. (not that there aren't exceptions to the rule of course)..

I wonder if the ease of entry into the stock-picking world now abates the profit seeking urge amongst upper middle class folks who might otherwise, in a more difficult to enter market, be more inclined to build a shop, open a store, or otherwise become a direct economic participant. Now you just electronically fund the trading account, electronically buy and sell, electronically draft, and electronically pay for your pizza. Sheesh and minimal fees too. And as long as you don't obey the commentators wanting you to sell low and buy high....

[pstarr]

Actually those who invested in the housing bubble were correct, given the data and conventional paradigm at the time. It was widely assumed that 'god only makes so much real estate', and so it made sense to buy into the limited supply (of developed land) at any cost.

Folks rightly assumed the cost of oil/gasoline/their-daily-commute would always be a minor cost of doing their life/business. Few folks questioned the conventional wisdom at the time (many here PO.com) that houses would always be worth more, would always increase in value relative to other things. They always had. For generations. But then something unexpected happened; the rising cost of transport in an ICE-dependent world ate into discretionary and then retail income. (This has been measured by the Oil Expense Indicator) That is why the housing bubble first popped in the new remote PUDs and developments in the Inland Empire and Exurbias. So to answer the question 'What is the limiting factor?' It's oil, or more specifically, oil to move the stuff of suburban life around.

[evilgenius]

Actually those who invested in the housing bubble were correct, given the data and conventional paradigm at the time. It was widely assumed that 'god only makes so much real estate', and so it made sense to buy into the limited supply (of developed land) at any cost.

Except that you could rent and put the difference you weren't paying toward a mortgage into an asset that paid a return which was derived from economic activity. During the housing spike saving in the US actually reached a level of zero. People were taking all of their money and putting it into a thing which when they got out of it they would have no profit because they would only have to buy another one. You have to live somewhere. In that sense it never made any sense to buy into the property ladder, unless you could be the landlord.

[SeaGypsy]

Even less so when borrowing with a 200%+ lifetime cost of debt.

[ralfy]

We're looking at more than a quadrillion dollars of total money supply vs. physical assets of a tenth of that. Something like a trillion dollars for the former triggered a credit crisis leading to over $30 trillion vaporizing worldwide. ZH states at least for the Eurozone we're looking at over $700 trillion that needs to be covered, but the amount that can be used for bailouts has been only around a tenth of that.

Thus, moving from one investment to another will not matter in the long run because all of them are part of the same financial market that requires more resources to keep a global capitalist system going. As I pointed out earlier, such a system requires increasing production and consumption of resources needed for more profits, with the former requiring more credit for increasing manufacturing and spending and the latter needed to feed returns on investment. Add to that financial speculation, including real estate bubbles and various forms of derivatives, and one should not be surprised if more credit crises takes place, and with that unemployment problems and high food and oil prices, all of which are taking place right now.

And when oil production starts dropping, that will make all of the other problems mentioned above look like a walk in the park. Couple that with the effects of increasing resource consumption, including both ecological damage and global warming....

[radon]

We're looking at more than a quadrillion dollars of total money supply vs. physical assets of a tenth of that. Something like a trillion dollars for the former triggered a credit crisis leading to over $30 trillion vaporizing worldwide.

Can you give a specific example where writing/issuing a derivative contract leads to additional money supply on a permanent basis?