So where has all the money gone?

[Bugsy2]

I just don't get it & I need someone within an economics sort of mind to explain - please!
We live on planet earth, there are currencies circulating all around the world, people buy & sell things. How can it be that 10 years ago the economic outlook was good & certainly in the West most people were buying houses, getting more wealthy & everything was fine & dandy. Now, it is all doom & gloom, countries are going bust, people are losing their homes & its all going tits up. So where has the money gone? Who has it, where was it, where did it go to?

Niceguy -
the Tea party are ALL for tax cuts - that is why they like New Hampshire - no state income tax or sales tax
the Tea party are absolutely clueless and in no way dominate the Republicans
the BIG problem in the US is the fact that there is a Democrat president and a Republican house
AND the biggest expenditure by far far far is the Military
The underclass of unemployed, uninsured and the fact that tens of thousands of the poor are in jail is a huge drain on the economy
the US is a two worlds country - one secular, one religious and they do not like or understand each other

Interesting thread. Another of Galbraith's books is about the 1930 recession and the South Pacific crash before that, and there are lots of analogies with the 2007/8 crash.

Reading this thread over, the interdependence of China and the US is emerging as an interesting development. I'm dubious. I'm off to invest in India.

What I wonder is what happened to all the 'silent earth' stuff and warnings from the seventies about when the oil and natural resources of the earth were going to run out. Is it just that actually the oil etc is running out just like they said it would only no one will now admit it. Should I quickly go for solar panels etc in order to survive the next decade?

Incidentally the other thought which comes to mind is that if a government wanted to make draconian cuts and keep the masses quiet then they might plant a thread like this, which explains to the masses that if cuts aren't made, the credit of the nation in the IMF might be affected. In short, putting up with cuts to welfare is in some way serving the nation.

Funnyperson
the book I linked to covers from Tulipomania up to Sheikh Yamani
Peak oil - oil reserves have been diminshing for years
the REAL problem is Water. THe crash of 2008 deferred the collapse of China's waterways by a couple of years, but it will come
China has very little "internal" market relative to its external one (and of course no free health care suppressesdomestic demand)
but once it does, the western world will become irrelevant to them, they'lllet the Yuan appreciate and sell of our debt
at that time I'll be in my veg garden working hard!

THe cuts are not needed - we could always up taxes by 5% - take your pick

Sorry talkin, i meant raise taxes! Doh!

I wouldn't worry too much about China.

The strength of a planned economy is that, well, they can plan. For the LOOOOONNNG term. Unlike a democratic system, which is hamstrung by popularism and what will make voters happy on a four-year horizon (which you can see by the examples on this thread has already thrown up huge problems in the UK - that PFI hospital project mentioned before is a stark example; the US; and Greece, with its absurdly generous level of public spending).

China is making colossal investments in things such as public transport, solar and desalination technologies. Unlike anyone else, they're planning for when the oil has run out.

Re China, the planned economy is both a good and a bad thing. As ninedragons says, it means that they plan for things that they can predict- such as the fact they have very few natural resources (oil, iron ore etc) and make themselves self sufficient in things they need a lot of (steel). In 2008 China made c.45% of global steel production and consumed around the same. However, the planned economy can also make them quite inefficient. Governments don't usually allocate resources as well as markets so in certain commodities they've basically ended up producing too much basic grade material (e.g. aluminium) that actually requires huge energy input. There's also a lot of corruption at local party level, and the further you get from Beijing, the less the letter of Beijing's will is applied because it might not be in the interests of the local government to close a steel mill which employs half the town, even though Beijing have ordered it to be closed because it's too small/inefficient/polluting.

The really interesting thing though is the demand side. As the population grows richer, the demand for consumer goods will be phenomenal. In the west, much demand is replacement (eg most people have a fridge. Fridge breaks. Buy another one). Companies have to spend a lot of time/money convincing consumers that they don't just need any old fridge, they need SMEG American style one with icemaker. In China, most people dont have a fridge, and when they can afford one, they'll get one. They wont need convincing. You get much better growth potential in that sort of economy than a saturated economy like the west.

The scary thing is what this means for energy/natural resource demand.

Indeed. The thing is that the Central Committee says right, here is our 12th Five-Year Plan. We will be focusing on railways, economic development in X, Y and Z provinces, low-income housing and healthcare. Any dissent, and you can talk to the hand.

In a western democracy, governments tend to say hey, voters, here are our priorities until the next election: cakes and circuses! And some extra tax cuts for our good friends and party donors!

At least for as long as they can get away with it....

Won't the Chinese internal market be saturated at some point? What then?

Not for a very long time. We are still talking about 1.3bn people who are, by western standards, incredibly poor.

We used to live in Shanghai, in the poshest neighbourhood. DH was quite chummy with the family who lived upstairs (old building - our landlord was private but most people in there rented from the govt). When we left, we asked them to come and have a look at the household stuff we couldn't be bothered to ship. They were chuffed to take our curtains, because they couldn't afford any and had been living with bare windows. Their daughter was thrilled with our stereo - she was a music student and again, hadn't been able to afford anything to listen to her music on. Chinese demand is starting from an extremely low base.

Sorry, that was to funnyperson. Cross-posted

Really interesting to hear about China. Keep thinking that DS & DD should be learning Mandarin instead of French at school! Sounds like their could be a bit of a shift in where the economic power lies going forward. I wonder if the totalitarian /communist regime in China will last, in the face of increased communications and outside influence?

Mandarin lessons are certainly going to open up more options for workers in the future. I don't know about 'going forward', the economic shift is already happening. The Chinese regime appears to have found a way to make rampant capitalism work without introducing democracy to go with it. I've done business in Shanghai and, aside from complaining that they can't read certain things on the internet, the people I traded with were no different to their equivalents in London. Expect political reform will happen, just very very slowly.

To answer Bugsy's question about why the Greeks are so angry about the economic mismanagement - it is because they feel the government has broken a specific bargain with the electroate. I lived and worked in Athens doing Olympic Delivery project work in a financial sector during the transition from Drachma to Euro in 2001, so have a fair idea of Greek economics and politics.

To explain (sort of) - Greece is a young (if we ignore Ancient Greece!) democracy with weak institutions and fiscal controls - people do not trust the government and the country has flirted with miltary dictatorships, communism and monarchy throughout the 20th century, so the people have always been a bit radical. Don't however think the Greeks are just a nation of relaxed taverna owners - they have a very highly educated and ambitious middle class of professionals, but who were largely educated and work outside Greece. Your local hospital will have a lot of excellent Greek doctors, I'd bet.

The bargain that the peopkle struck with the government was the policiticians promising ever more jobs/money/good standards of living to the huge numbers public sector workers is the only way to get elected and for politicians retain power and influence. Greece is a small country in population terms, and like Ireland and Iceland, where financial regulation and lending is largely about who you know and not tight lending criteria, so it forms a web of influence based on patronage.

Public sector institutions are huge and massively over-manned, with far too many people doing very little and it's grindingly burocratic. Until this year, it was a given in Greece that public sector workers would get a months salary as a bonus (totally unrelated to performance) at Christmas and Easter every year. Gold plated final salary pensions are the norm with returement at 55 or less. This was usually for a day of working until 2pm.

To improve efficiency, save wages the government deperately needed to modernise and get rid of hundreds of thousands of pointless public sector jobs. BUT making people redundant would mean mean the government breaks The Bargain, the people riot and the government do not get re-elected. So the government stuck their head in the sand and borrowed and borrowed to cover the costs. As Greece was in the Euro Zone, together with AAA+ rated Germany disguising Greece's lack of credit worthiness, they were able to borrow and issue Bonds like confetti.

The government always realised that it couldn't afford all the public sector pensions etc, but rather than break the bargain and risk civil unrest, they kept borrowing to cover it.

Greeks really do not trust their government or politicians, who are some of the worst tax evaders - they never did. When I worked there, most Greek business people wanted their Greek financial deals governed by English law and their money lent by English and German banks which are percieved to be safer. From a Greek person's point of view, their distrust in the government has been vindicated by the Euro crisis.

Áwesome thread.

I think those who speak Mandarin in say 10-15 years time could do very well career wise. China still regulates how foreigners come in and do business there and I think it will take at least that long for them to open up their markets properly to the outside world. That's why the US get so angry with China - because its all one way traffic. China now own a large percentage of financial institutions which makes the US nervous but won't allow proper access to its own financial services markets, or other industries.

YokoOhNo, great insight. And an abject lesson on the fact it's better to do the right thing early on rather than borrow money when you dont have any and stick your head in the sand and hope it all goes away.

I also read somewhere about how there was this lake in Greece where the planners all for some reason got gold plated pensions. But worse than that, when they died, the pension passes down to the eldest daughter who can keep claiming. The icing on the bizzaro cake is said lake dried up decades ago.

Also I've read that there is/was mass tax evasion. On another post its claimed the Greek government collect around 50% of the tax due. So I do find it a little disingenuous that the Greek people feel so aggrieved when they on masse feel it's right to avoid paying tax.

Haven't read the whole thread just part of it, very informative. What would you people in the know recommend for money invested on the stock market atm. Take the hit and get it out or sit tight?

It's all scary stuff isn't it? Greece et al should be strict in raising taxes and cutting back but people are up in arms about it, as they would be anywhere.

Perhaps Greece have been trying to penalise the easy targets, hardworking tax paying/and or the vulnerable who rely on them rather than going after the tax evaders. Hang on this sound familiar.

@adamschic. Stock market tips, eh? I cashed up a few months ago because I didn't like the way things were going and couldn't stand the excitement! I'm now buying back shares in solid companies which are only cheap because the market's down, not because of any problems with their balance sheets or anything more fundamental. Long-term steady rather than fast buck.

I used to feel I understood this stuff, but have not been following the news much in the past year (new baby) and getting back to it now, find it very confusing!

One question on this thread has been, why did investors/countries buy Greek debt when it was actually quite clear that it was bad debt?
I think the present situation shows that actually, it was always a good call from the risk perspective. Because, even though Greece is at rock bottom, everyone is doing whatever they can to stop them from defaulting. It's like the 'too big to fail'. Of course it's bad debt, but it's virtually risk free as it won't be allowed to fail. Or so they thought. And they might yet be proved right. Though they are very worried at the moment.

Why won't Greece be allowed to default? Is another question that has been raised.
IMO it's a bit like with Lehman brothers but on a bigger scale.
One reason is that many within and outside of the Eurozone are massively invested in Greece - it has such a lot of debt, nearly everybody is owed by Greece. So lots of people/companies/banks/countries would prefer Greece to repay their debts, eventually, rather than default.
Another reason is that Greek spending - for instance on military - is shoring up other countries' economies, for instance France's. They sell military planes and tanks to Greece. Military industry is a major part of French economy. (As is in Britain, as witnessed by the pain caused by recent layoffs at military plane factory). So in effect, France gives (loans) Greece money so that Greece can give the money back to France (while keeping the debt of course) in exchange for planes. If Greece where to default, they couldn't buy French planes anymore, the French factory would close, the repercussions for French economy would be enormous. So the French would really prefer Greece to keep going.
And a third reason is that if Greece is allowed to default, that immediately erodes confidence in other nations. Like, when Lehman brothers went down, suddenly people lost confidence that no bank would ever be allowed to fail, rather they would be bailed out. If Lehman brothers was allowed to fail, who would be next? So as long as no country in the Eurozone is allowed to default, everyone can have some confidence that investments in any country are basically safe. If Greece defaults, the rule is not true anymore, and any investments in dodgy Eurozone countries are at risk. Investors will want their money back, trust/confidence erodes, nobody trusts anyone else with their money anymore, it's like the banking crisis all over again just on the level of nations rather than banks. Massive problem for all involved, so lets rather stop it in the beginning and not allow Greece to default.

The international perspectives on this thread are one of the best bits!

To pick up on JJKM's earlier points - there was not really economic stability in the 1980's etc
I have clients still paying off their negative equity from the property crash of 1991

What changed in 1995 was electronic (rather than paper) share trading
It became possible to trade in several places at once
and then use the computers to invent new ways to trade
and then like Nick Leeson use that knowledge to get around the system.

The heads of all the banks and trading firms have ABSOLUTELY NO IDEA how their chaps actually generate the revenues, they just like the up front commission.
The proposed Tobin tax in the EU will hurt the City of London but it might go a step towards saving the rest of us.

Meita

Corporate financing
Lend people more than they can afford to repay at a reasonable interest rate - say 2% for a year
When the year comes up, tell them repay or refinance at 4%
If they are a government they will refinance rather than default
The money on debt is the interest not the capital

Play with the numbers in the spreadsheet I linked to above - you will see that the capital on a loan is a sideline to the interest
and the arrangement fees

Cogito, I didn't like the way it was going either so cashed a bit in before the dip and used it efficiently to get completely debt free. I'm not really savvy about it but am getting scared that leaving it might result in it being wiped out. Was listening to that hoaxer interviewed by the BBC.

It's not a fortune and would be guaranteed if it was in a bank. Hmm think I should have it out.