The original Cap'n Crunch (John Draper) was basically gaming
the system, playing with a system in ways that were not envisaged
by the original designers of that system.
For those that don't remember, Draper and his friend
discovered that a toy whistle in a cereal box could be made to
produce a 2.6 kHz tone, which was used by the phone system as a
system command code.
The point about this that is important is this, once such a
method of gaming a system has been discovered, you cannot fix it
at the system level... you have to throw away the whole system
and implement something entirely new, and hope that the same
thing doesn't happen again.
Fiat economies are another system.
Fiat economies are basically me contracting various other people
such as you readers, to perform various tasks for me according to
your abilities.
By way of compensation I do not offer you singularly valuable
tangibles, such as Baronetcy and plots of land and rights to live
within my Kingdom. Nor do I offer you commodity tangibles that
you could then trade with others in barter, such as bushels of
grain, barrels of oil, or cattle.
I used to offer you "paper" notes that said "I
promise to pay the bearer, on demand..." which could be
traded for any of the singularly valuable or commodity tangibles
mentioned above, because these paper promissory notes themselves
were backed by a single valuable commodity tangible, such as
Gold.
The promise to pay the bearer was backed by the stock of Gold I
held, and while the valuation of the Gold might fluctuate from
day to day, this stock imposed a direct limit upon the amount of
promissory notes that I could issue.
The moment that confidence was lost that I could redeem every
single promissory note issued for its face value in Gold, I was
finished, a rush on my "bank" of people cashing in, and
I am left holding a lot of paper money and no Gold to back it up.
In the Fiat economy I do not require Gold, the promissory note is
not backed up by Gold, if it is backed up by anything it is the
commonly held belief amongst the people holding my paper currency
that EVERYONE ELSE holding my paper currency places the same
value upon it.
This belief is an intangible thing, and easy to shake.
If people start suspecting that I just decided to give myself
anything I desire for free, simply by printing more of my Fiat
paper money, faith in the value of that money drops. The only way
to increase the perceived value of my intangible Fiat currency is
to increase people's faith in its value.
I cannot simply amass more gold, either from my privately owned
mines, or by invasion, because my Fiat currency isn't backed
by gold in the first place, it isn't backed by anything
tangible.
Eventually human nature will ensure that certain commonly traded
items that are always in steady demand will become the frame of
reference for the common valuation of my currency, so my currency
ends up being worth so many barrels of oil, bushels of grain, or
whatever it is that civilization is trading.
The Chinese experimented with Fiat currencies a thousand years
ago, and faced many of the problems that we have faced in the
past 30 odd years since the major currencies de-coupled
themselves from the Gold Standard and the genuine promise to pay
the bearer on demand.
Decoupling the currency had much the same effect as changing the
phone system to work on audio tones, it opens up new avenues of
gaming the system, and since nature abhors a vacuum, all new
avenues eventually get exploited, it is a question of
"when" and not "if".
Once the major currencies were decoupled, lots of organisations
and individuals found new ways to game the system and garner ever
greater amounts of currency under their control.
BCCI was a classic example, and the response was as classic, the
"old guard" of financial institutions were wary, so new
institutions were created, and the "currency" was
simply repackaged, rebranded, and spead over the marked via
intensive webs of diversification.
Before long, debt started going through this metamorphosis, and
became re-packaged and re-sold as an asset, not a liability.
We have just about come full circle, to the point where the shift
from the currency being backed by the tangible gold I hold, to
the currency being backed by the intangible faith that the
holders at large have in it, except now we move from the currency
being backed by the intangible faith that the holders at large
have in it, to the ephemeral apparent value it has when you
create iniquitous webs of liabilities being re-packaged and
re-sold as assets.
The Emperor does not merely lack any clothing, he is the drooling
village idiot.
So we come to the situation we have now, where central banks
response to a loss of faith in the intangible value of a Fiat
currency, is "remedied" by promising to create an
unlimited amount of further Fiat currency, for the SOLE PURPOSE
of ensuring that nobody playing at the new ephemeral currency
table finds themselves without a pile of chips in front of them.
The new delusion is that our, as in yours and mine, faith in the
Fiat currency to continue to be acceptable to be used to buy
barrels of oil with, is no longer the issue, now, we must place
all our faith in the financial institutions themselves, and since
this faith would be ruined by said financial institutions finding
themselves bankrupt, they respond in the only way they can, by
creating more currency out of this air.
The sub-prime problem is nothing more than the catalyst that
renders the opaque waters pellucid, so that everyone can see what
many of the more prudent of us have been claiming for years, that
the recent trends have been not merely unsustainable, but
irresponsible in the extreme and doomed to come crashing down
around our ears.
We are now missing only one more step before currency is sent
back to the first phase of the cycle, where it is backed by a
tangible asset. Who knows what this tangible asset is, it may be
gold again, it may be oil, it may be energy as in MWh capacity,
but it will come.
The phase between then and now is the crash. The great depression
of the thirties had a lot to teach us, actual physical hardship
in the local community took between two and three years to work
its way through to appearing, after the financial crash that
prompted it.
Perhaps this time with the greater pace of life, electronic
everything and outsourced and offshored everything the period
before the wave breaks will be shorter.
The best guesses at the moment are that October 2007 looks to be
about the time when the wheels finally fall off the wagon, people
genuinely lose faith, and the stock market collapse PROPER starts
(these are just pre-tremors now) and maybe up to 2 or 3 years
after that, so 2009 - 2010 before it decimates communities and
society.
At the same time this proper crash in society of course paves the
way for the rise of the despot proper, except this time it will
be about chasing resources that we know for a fact are only going
to become more scarce as time passes.
We do not really have a fiat based currency. Of course we don't have a gold based currency either. Rather, we have something far more sensible.....
Gold is a dumb idea because it's a relatively unimportant industrial input, in any kind of quantity. It was purely gold's preciousness and fetish value that made it a base currency of choice at one time. By the time we get to Nixon, in some secured basement of N.Y., international balances were being settled by the amazingly pointless excercise of, nightly, moving bullion from one vault to another, down the hall: gold had become just an abacus.
What we have now, instead, is de facto an international currency system that is backed by the current supply of fungible productivity growth -- mostly, therefore, by the current supply of fungible energy, but also in some sense a measure of the value of labor and the rate of innovation.
In shifting from gold to productivity as the basis of currencies, we went from a measure of currency that had nothing to do with primary industrial inputs to a measure that has everything to do with primary industrial inputs. Anyone can be amazingly productive without actually needing to use much gold for anything -- so the redemption value of a gold-backed currency is useless. Nobody can make advances in productivity without raw materials like energy, labor, and innovation -- so a productivity-backed currency is spot on the market: an accurate measure of what you can do with the redemption value.
If you're looking for "John Draper"-esque hacks that find weaknesses in the system, you have to look to the derivitives markets. That's where you find people issuing fiat currencies. In particular....
Today's private currencies -- financial papers -- are where there are problems. They have a theoretical value (today's price x shares held) that is hard to relate to real currencies. The theoretical value isn't redeemable, except at the margins, because if you try to redeem (dump your shares) the price goes down and your theoretical value immediately evaporates. The problem arises when lots of private concerns each, on their own, try to guess and act upon a kind of discount rate -- try to figure out the real value of an instrument, given its theoretical value. People make those guess, of course, but then they take further action in using their guessed, discounted values as (in essence) collatoral. So, for example, someone might buy up a lot of sub-prime loans knowing that, well, they aren't worth their theoretical value but they will hold real value and fluctuate for a long time, so they can be used as a hedge -- a place to cash out little bits here and there to cover debts elsewhere and as a last-resort pile of last-dimes. Only, socially, in the short term, players have plenty of incentive to make bad guesses that overestimate the real value of these papers (because, if enough people are still buying those overestimates, the papers remain a good hedge). If bad guessing of that sort becomes too wide-spread, the papers turn into a ponzi scheme, and you get bubbles and bursts, spikes and crashes.
The ripple effects in the real world when these highfalutin derivitives fail can be quite profound. For example, faith in the (ridiculously overestimated) value of sub-prime loan papers led to them being used as hedges. That faith crashes and now everyone wants to rescue their "last dimes". And that means a lot of top-down pressure to do foreclosures, as quickly as possible. So a million individual families get horked. And the housing glut they create hurts millions more families. So real productivity growth takes a hit.
And that's why you see the fed saying, sure, they'll throw a little bit cash on a few fires here and there but, no, screaming of fund managers aside, they aren't anxious to turn on the currency spiggots in a way that would outpace real growth.
Doesn't that make a lot more sense than if the fed were saying "Well, productivity would clearly benefit from more cash to measure the growth its undergoing but, sorry, we just don't have enough gold!"
(And, do you see how China fits in here? By keeping the Yuan cheap, they are selling Chinese productivity growth at what others reckon is below cost. Any retailer can tell you that, when bills are due, and you need *cash* right away, a below cost sale is a viable strategy: you've already paid for your "inventory," whatever form it might have -- that's a sunk cost -- but you're cash-poor so a below-cost sale gets you lots of cash in the short term. A retailer can also tell you that that strategy is a good way to ruin your business because, though you make your bills, now you don't have enough cash to replace the inventory you just sold. Can it still work, as a strategy? Sure: suppose one of the bill's you just paid with all this cash was to buy a new machine so you can make your replacement inventory at half the cost of before -- now maybe you do have enough money to keep going. Are the other nations right to raise eyebrows? Sure. It's supposed to be the other way around: first, you pay for the new machine, then you dump your old inventory. If you don't have a plausible promise of this new machine, then all you're doing is using the market as your personal gambling parlor, much to the harm of others. China's growth investments come under suspician for everything from the many, many food quality questions, to the environmental concerns, to (ironically enough) the labor justice concerns --- they haven't obviously got that new machine and so, in dumping, they're just behaving irresponsibly.)
I have some public responses that most likely won't bias further posts so...
Gold is a dumb idea because it's a relatively unimportant industrial input, in any kind of quantity.
Usage isn't important in a currency, the fact that its valued by others is what really matters. If you have a substance that is easily carried, can be easily subdivided and is relatively rare you have a good candidate. Humans adopted gold and silver for this purpose thousands of years ago for whatever reason but industrial input wasn't one of them.
What we have now, instead, is de facto an international currency system that is backed by the current supply of fungible productivity growth -- mostly, therefore, by the current supply of fungible energy, but also in some sense a measure of the value of labor and the rate of innovation.
So what you're saying is the Fed looks at the GDP, energy use, labor values and current new technologies before doing all the trickery that increases the money supply and causes inflation? I would really like to see some supporting evidence for that.
How it really works is the Fed aims for 2% inflation and manipulates the markets to hit that goal. Your theory doesn't explain how we can have things that were impossible with a commodity backed currency like inflation during a recession. When the major driving force behind growth *is* the Fed injecting currency then you get booms and busts but not economy wide.
I was reading about all the central banks injecting money into the economy the other day...missed the big technological breakthrough that prompted this action.
In shifting from gold to productivity as the basis of currencies, we went from a measure of currency that had nothing to do with primary industrial inputs to a measure that has everything to do with primary industrial inputs. Anyone can be amazingly productive without actually needing to use much gold for anything -- so the redemption value of a gold-backed currency is useless. Nobody can make advances in productivity without raw materials like energy, labor, and innovation -- so a productivity-backed currency is spot on the market: an accurate measure of what you can do with the redemption value.
One of the *major* reasons for government backed inflation was because of the power the labor unions used to have. They would use their coercive market powers to get wages way above market rates and the powers that be would use inflation to bring their wage value down to match the market rate. Big game of cat and mouse with everyone suffering because one group had an excess of government granted power. Unions lost most of their power and inflation went way down, funny how that worked out.
The ripple effects in the real world when these highfalutin derivitives fail can be quite profound. For example, faith in the (ridiculously overestimated) value of sub-prime loan papers led to them being used as hedges. That faith crashes and now everyone wants to rescue their "last dimes". And that means a lot of top-down pressure to do foreclosures, as quickly as possible. So a million individual families get horked. And the housing glut they create hurts millions more families. So real productivity growth takes a hit.
I think you're getting cause and effect reversed here. All these people bought homes when the Fed had the rate set at 1% which also coincided with The American Dream of Home Ownership 'bread and circus' plan from the administration. So the federal government pumped all this cheap money into the housing industry who in turn loaned it to individuals who had no hope of owning a home absent government intervention. When you talk about variable interest rates and interest only loans with payments based on artificially low interest rates, thanks to government intervention, then once the rates increase you might run into a few problems. Its not a top down big fish eating the little fish pressure to foreclose but merely people not being able to make the payments when interest rates rose. Wouldn't have been a problem if people with modest means bought modest homes but people gorged themselves on cheap credit. 120% mortgage loans to buy the Hummer and the swimming pool, stuff like that. The mortgage companies that didn't do any real checking on the ability of people to pay in the future are now going bankrupt and their assets are being sold off, any person able to make their payments is in no danger but those who might be having a little trouble are going to get no slack.
And that's why you see the fed saying, sure, they'll throw a little bit cash on a few fires here and there but, no, screaming of fund managers aside, they aren't anxious to turn on the currency spiggots in a way that would outpace real growth.
Doesn't that make a lot more sense than if the fed were saying "Well, productivity would clearly benefit from more cash to measure the growth its undergoing but, sorry, we just don't have enough gold!"
Capital (money) is a commodity. This is the same as the them manipulating the grain market or the oil market. It might be 'acceptable' to magically produce new money but it only hurts everyone in the long run. Wonder why Americans have minuscule savings, government backed inflation eats away at their future spending power so they spend today. This isn't an accident either. What is the prime mover of today's economy, consumer spending. What would happen to the economy if people could put their savings into a 19% CD and buy a much better car in two years? Come crashing down that's what.
Without a *true* fiat currency none of this is possible unless they go out and dig up some more gold. Lose the fiat, lose the power to manipulate the economy.
By keeping the Yuan cheap, they are selling Chinese productivity growth at what others reckon is below cost.
I still disagree with the Chinese currency manipulation charges. If they have it pegged to a basket of currencies then how are they setting the price of their currency? The *problem* the US has is they can't deflate the dollar to help US exports in the European market without causing the Yuan to also deflate. With all this 'liquidity injection' going on the Yuan should take a nice fall. You can still buy just as much as you could before on the local Chinese market because this didn't introduce inflation there but internationally Chinese goods (or labor) are that much cheaper.
You raise a number of questions. Here are the answers, in the order you raise them.
Gold, in pre-history, was very much an industrially vital precious metal.
The Fed does look at growth factors to determine money supply rates -- they want rates of productivy growth and rates of money supply to match. Read their minutes.
Core inflation can happen anytime, under any currency system, as a side effect of core commodity volatility. Core commodity volatility is currently the case in the US because regional industry is largely rust-bucketed and supply chains to US consumers are far too long.
The banks aren't injecting all that much money, really. That's their main point. These are tactical moves, not money supply policy shifts.
Unions didn't cause inflation -- a drop in balance of trade caused inflation. The drop in balance of trade was caused by poor management of hard capital (factories, farms, etc.). The price of US labor in many sectors dropped because it was stuck operating inefficient machines. The price of US labor in a few sectors did swell (e.g., biotech recently) as industrial investment introduced a new round of viable exports. Yet, the problem overlooked by the elites is that their labor costs are subject to volatility in core commodity prices so it isn't enough just to build a big biotech factory -- you better have, around it, local agriculture and local manufacturing -- otherwise, your labor costs are subject to random thrashing.
Chinese tying of the price of a Yuan to a basket of currencies counts as currency manipulation because it means they're manipulating both supply and price. Central banks are supposed to manipulate supply while supply and demand determine price. They're supposed to manipulate the supply of new Yuan by estimating the rate of economic growth that their indegenous borrowers can produce, and then test that estimate by letting the currency price float in the global exchange markets.
The Fed does look at growth factors to determine money supply rates -- they want rates of productivy growth and rates of money supply to match. Read their minutes.
That's their public face. Their closed door, no public records or minutes Working Group is most likely where the real decision making is done. No real evidence of this since they quit publishing the M3 money measure and are a secret group.
Core inflation can happen anytime, under any currency system, as a side effect of core commodity volatility. Core commodity volatility is currently the case in the US because regional industry is largely rust-bucketed and supply chains to US consumers are far too long.
Wikipedia claims Core inflation is a measure of inflation which excludes certain items that face volatile price movements. Not doubting what you're saying just so we're talking about the same thing.
You take out food and energy and are left with stable products. Wouldn't this be a measure of government meddling since in our current system's inflation is controlled by the Fed's policies? Or perhaps transportation and inefficient production are causing the inflation and the Fed's policies aren't successful in keeping it within the 'range' they shoot for. Any way you look at it if you look at *real* inflation, not the watered down core version the average citizen is taking a big hit from mostly oil prices. Wages aren't keeping up and the only way to keep the consumer spending economy going is to inject cheap money into the mix.
The banks aren't injecting all that much money, really. That's their main point. These are tactical moves, not money supply policy shifts.
Without the M3 there is no way to accurately gauge exactly how much money they pump into the system. They claim it is too much trouble and too expensive to keep track of this data but what government agency in the history of man has ever not taken an opportunity to expand their budget.
Unions didn't cause inflation -- a drop in balance of trade caused inflation.
I'll let Ron Paul answer that since he seems to know a lot more than me and its his job:
There is a lot of concern about real wages versus nominal wages, but I think it is a characteristic of an economy that is based on fiat currency that is just losing its value that it is inevitable that the real labor goes down. As a matter of fact, Keynes advocated it. He realized that in a slump, that real wages had to go down; and he believed that you could get real wages down by inflation, that the nominal wage doesn’t come on and keep the nominal wage up, have the real wage come down and sort of deceive the working man. But it really doesn’t work because ultimately the working man knows he is losing, and he demands cost of living increases.
I really don't just make this stuff up...Here's a chart just cause I like charts.
Chinese tying of the price of a Yuan to a basket of currencies counts as currency manipulation because it means they're manipulating both supply and price. Central banks are supposed to manipulate supply while supply and demand determine price. They're supposed to manipulate the supply of new Yuan by estimating the rate of economic growth that their indegenous borrowers can produce, and then test that estimate by letting the currency price float in the global exchange markets.
Here's a fairly unbiased article discussing the causes and possible outcomes of The China Problem. I especially like: The ensuing depreciation of the US dollar might price oil out of the reach of the American economy, causing stagflation, a collapse of US oil dependant industries, massive unemployment and other dire economic consequences. That would fit in with the forward thinking policies coming out of Washington these days...
That's [the Fed's] public face. [They're] closed door, [....]
That comes to close to a conspiracy theory for my tastes.
You take out food and energy and are left with stable products. Wouldn't this be a measure of government meddling since in our current system's inflation is controlled by the Fed's policies? Or perhaps transportation and inefficient production are causing the inflation and the Fed's policies aren't successful in keeping it within the 'range' they shoot for. Any way you look at it if you look at *real* inflation, not the watered down core version the average citizen is taking a big hit from mostly oil prices. Wages aren't keeping up and the only way to keep the consumer spending economy going is to inject cheap money into the mix.
That's kinda close. Core inflation measure are there to tune out impersistant fluctuations. For example, we might think that the price of milk is an essential measure of how the consumer is doing but, if we're looking at 3 month windows, a little bit of drought or a little bit of over-production and the price of milk can jump around a lot. The farms are still the same. Nothing really changed. The average price of milk over a year is the same -- but you don't want that spike in your short-term snapshots of inflation.
Fine -- but now the source of volatility in essentials like food and fuel are long, energy-sensitive production and delivery pipelines, not a random fluctuation in crop quality. That volatility eventually makes it into pricing of other manufactured good which, meanwhile, also get volatility from their long, energy-intensive, balance-of-trade sensitive production pipelines.
So, in some sense, to measure inflation meaningfully, you want some some weighted average of consumer and core measures, weighing consumer spending measures of inflation more heavily. Is consumer spending volatility because half the strawberry crop failed randomly this season? Ok, ignore that. Is consumer spending volatility because a huge percentage of all that consumer's food is suddenly being shipped over much greater distances? You can't ignore that latter volatility because, unlike the occaisional crop failure or crop boom, it's a persistant and nagging volatility.
Did the fed try to fix things by dumping cash on consumers? No, I don't think so: I think that was a side effect. In the aggregate, US productivity was still growing (still is, I gather). That growth needs industrial spending -- hence liquidity. It makes sense to fuel that growth, even if it isn't perfect. The consumer credit problem occured because of another I.T. innovation in retail: financial instruments representing aggregated loans to low-rated borrowers. That retail innovation (plus the inherently black hearted nature of humans :-) created a cottage industry out of writing bad loans to people bound to get hurt by them. That drove up housing prices which, in a world of core measures that filter out "the wrong kind of volatility to be filtering out", looks officially like solid growth (even thought the Fed was warning about this for some time). Higher housing prices raise the availability of consumer credit generally, even where it's not a good idea (that black heart, again) and, yes, that did prop up consumer confidence/spending.
Don't blame the Fed that when a lot of money was floating around to fuel industrial growth and unscrupulous lot made usurious loans out of it. To fix that, turn to your regulators and your public educators. It takes three fools to make such problems: loan writers, market makers (regulators), and willing buyers (a financially unsophisticated public).
Ron Paul is reciting his narrative -- I'm not going to take him on by proxy here. I'll just say that the global value of US labor is determined by the system of farms, factories, labs, stores, and offices where it is deployed. For example, car manufacturers were (for no financial reason at all -- not even union demands) just too late to the party of modernizing auto plants. The capitalists were lazy and shat where they eat in putting so much to rust and, as a result, labor in a lot of US sectors just found itself with nothing to do. Right there is the origins of your "slump" (for US workers) even while the capitalists are profitting from productivity growth that largely occurs abroad.
Here's a fairly unbiased article discussing the causes and possible outcomes of The China Problem. I especially like: The ensuing depreciation of the US dollar might price oil out of the reach of the American economy, causing stagflation, a collapse of US oil dependant industries, massive unemployment and other dire economic consequences. That would fit in with the forward thinking policies coming out of Washington these days...
(Since it isn't clear the way you quoted it, "The ensuing depreciation..." is based on a prediction that were the Yuan to float, it would float up, US bond prices would fall, US growth would stagflate because with the relatively lowered dollar we'd have trouble buying enough, for example, oil.)
It's exactly the pent up possiblity of that kind of problem which is why the Yuan should float. There are a lot of feedback mechanisms in free-er markets. For example, as the Yuan floated up -- given how much of the US's industrial sector basically lies fallow -- there would be buyers and sellers of the credit needed to rebuild that sector.
Don't blame the Fed that when a lot of money was floating around to fuel industrial growth and unscrupulous lot made usurious loans out of it. To fix that, turn to your regulators and your public educators. It takes three fools to make such problems: loan writers, market makers (regulators), and willing buyers (a financially unsophisticated public).
Who should we blame for keeping interest rates artificially low? True the loan writers didn't do their job in full but the administration specifically targeted the housing industry through Fannie Mae and the other pseudo-private mortgage underwriters for their cash injections. If you inject a whole lot of cash into one aspect of the economy you engineer a bubble. Eventually this bubble will fall in upon itself which brings us to today.
Its not like the Fed makes new money and just says 'come and get it'. They place it specifically where they want it to effect the economy in order to manipulate the markets. If this wasn't the case all the ships would rise at once instead of boom and bust cycles being seen in certain sectors.
It's exactly the pent up possiblity of that kind of problem which is why the Yuan should float. There are a lot of feedback mechanisms in free-er markets. For example, as the Yuan floated up -- given how much of the US's industrial sector basically lies fallow -- there would be buyers and sellers of the credit needed to rebuild that sector.
Maybe. Or maybe all these pent up possibilities are merely engineered government manipulations on the currency markets. No one knows because 'floating currencies' are a relatively new phenomena. The non-floating Yuan made it immune to the Asian currency crisis in the late 90s.
By all (non White House) accounts we're in for a rough time for the next few years(decades?). Our floating currency is on more of a sinking path which couldn't happen if it were commodity backed. I don't think it will take a wheelbarrow full of dollars to buy a loaf of bread but we most likely won't be Top Dog any more after all this shakes itself out of the free-er markets.
What lesson can we learn from this? Perhaps a central bank injecting fiat money into the economy for 30+ years with no *real* economic growth isn't the best way to enact 'economic reform'. Or perhaps there is a very good reason that currency has always been tied to a commodity, the ancient peoples weren't a dumb as us moderns like to make them out to be. *We* certainly don't learn the lessons of the past and continuously repeat the same mistakes. Or maybe we just need a good swift kick to the balls to jump start the economy. Who knows...
Try this chart - the Yuan has been slowly deflating for the past two years, by design, as it's allowed to move 0.3% each day. Although it's been stable for the past month. Against other currencies there's been a fair bit of volatility, but no overall trend. So China is ever so slowly devaluing its US dollars to avoid a panic.
Upthread it was noted that Americans have very low savings levels. Australia on the other hand has legislated a compulsory 9% contributions to a managed fund meaning that Australian workers provide real capital for investment, and reap the average 11% return generated. Man, I feel slightly nostalgic for Keating. I do wonder what Rudd will be like as PM though.
Upthread it was noted that Americans have very low savings levels. Australia on the other hand has legislated a compulsory 9% contributions to a managed fund meaning that Australian workers provide real capital for investment, and reap the average 11% return generated.
We have Social Security which is 15% of income and who knows if there is any real return. It looks like your scheme is immune from political 'withdrawals' to balance the budget and things like that unlike Social Security. Our SS 'investments' and 'withdrawals' are tax free I believe unlike 15% for investing, earnings and withdrawals, ouch... I'm pretty sure private retirement investments are tax free also but you get taxed on disbursements.
Social Security is a total and complete Ponzi scheme as opposed to an investment fund built on real economic principals. Which system is better had been a running debate for around 70 years now with 'status quo' being intentionally built into the current system to prevent it from ever being dismantled for good or evil.
I also don't believe they count pensions or SS when they calculate savings. No idea how they calculate it to tell you the truth.
Yeah, it's immune from withdrawals as the money isn't held by the government at all - commonly it's paid to a third party fund, but there's also the possibility of a "self-managed super fund" where you control the investment profile. The law was recently changed so that there's no tax on withdrawals if you're over 60, and there's various tax credits on the investment income so the real rate of tax is 6.5% on average.
Thomas Lord, in support of one of your points, the U. S. federal government today has a strong tendency to spend to (over)build some infrastructure, but not ongoing use of that infrastructure. At the same time, they have underfunded a lot of other infrastructure, as the general public is starting to see..
Examples are supplying X-ray and MRI equipment to build up local hospitals and leaving local governments or businesses to fund techs to operate them - most people would not believe how much of this equipment is still in crates. Same goes with a lot of the emergency generators and pumps FEMA has been involved in distributing recently. People have generally pointed to FEMAs trailer purchases in the wake of NO as an example of a capital waste, but there's a dozen other programs like it that have been ongoing rather than a one time spike in expenditures, that have come to more actual funds wasted.
Federal subsidies for airlines have been roughly 10 times the total for railroads (even with the railroads much longer history). (Granted, that doesn't completely take inflation into account - when we measure back to the 1850's real debates over just how much inflation has occurred always come up among economists, so there's people who would argue that the airline subsidies are only 3 or 4 times railroads and a few who would go much higher than 10x ). One thing that didn't officially count as a subsidy to the airlines was all the pilot training the U. S. Airforce once did for them - notice that that has been greatly reduced in the late 80's and ever since, as many more commercial pilots have been forced to pay for all their own flight education. Again, that's a shift to funding more of the airline's and airport's infrastructures, but avoiding funding either labor or employee training to go along with it. The public perception is still most frequently that the railroads got the largest subsidies of anybody, ever, and that much of it was to prop up what are referred to as 'featherbedding' union personnel.
All of this is exactly what you're calling poor management of hard capital. A typical business, putting new equipment into use, assumes some funding for training will be needed, and a good business doesn't proceed unless they know that training is also in their budget even if other factors come up during the training period. That's really just thinking a couple of years ahead and not just next quarter. A really well run business recognizes that a highly skilled workforce will expect to be compensated above a less skilled one. In the real world, corporate issues with unions are more likely to be over seniority rules and overly rigid skill categories than over anything that could remotely affect inflation .
Sometimes I like to run a problem from the opposite end to see what it throws up.
Imagine you have a fixed amount of currency in circulation, even if you have a fixed population and fixed production, all it takes is ONE person to start lending money and charging interest, then it only becomes a question of time before they amass enough currency that some others have zero left.
capitalism claims this won't happen, those who amass more will spend more, but that doesn't happen, what happens is those who amass most end up influencing and then controlling the currency... why not, who is going to stop them?
so increased populations mean less money in circulation per capita, or inflation.
increased production means you get more for your buck, so deflation.
money lending and transfers and other financial operations shift "production" from production of tangible physical assets like tons of high grade steel, to production of profits from messing around with money, so inflation.
Here's the one I learned years ago, then forgot when I got into the rat race, and only recently re-discovered.
Back when I was 17 and knew bugger all, I got an evening job as bar tender at the pub at the bottom of the hill, for one hours labour I was paid £1 (UK pound) at first, then after 3 months £1.25 an hour.
That hours labour for an unskilled 17 year old bought 3 pints of beer, or 4 packs (of 20) cigarettes, or a gallon and a half of petrol, so skip forward to the present, 3 pints of beer is about £7.50, 4 packs of cigarettes is about £12, and a gallon and a half of petrol is about £7.50
So today's 17 year old finds his labour worth, in tangible commodities, about half of what it used to be 30 years ago, but wait, it gets worse...
A brand new Mini then was £2,000 on the road, or 40 weeks of 40 hours per week labour for that 17 year old. Today a new Mini is about £14,000, or about 106 weeks work for today's 17 year old.
The actual house, a 2 bedroom bungalow, that my parents paid £3,500 for in 1975, just sold last year for £178,000, and increase of 5,000%
Just about when the 3 day week and "winter of discontent" hit, I was offered a loan by Forward Trust, a branch of the Midland Bank, over 3 years to buy a Kawasaki motorcycle, the actual APR was 32%, and I was made to feel like I had been offered a great privilege, or they attempted to make me feel that way... that was probably when I learned the Golden Rule, he who has the Gold makes the Rules, the only way to beat the game is refuse to participate, I made do with the old BSAs for a few more years.
Sure, today there is a wealth of trinkets you can buy for bugger all, mp3 players and such, that were science fiction back then, but the stuff you need to buy to live and maintain a degree of independence has gone through the roof in terms of average costs in terms of hours worked.
Take a look at this.
http://tinyurl.com/3y7yrv
The cheapest one on offer at the moment in this City, and it just happens to be exactly the gross annual pay I now make in my new stress free job as a van driver, working a full 5 day week.
(Don't get me wrong, I'm not whining about the salary, I live totally debt and credit free)
So to me, this is the real underlying issue, you only have so many productive hours of labour to offer per week, and the value of each of those hours has dropped markedly when buying the basics of life, and remarkably when buying the luxuries of life, and once you get conned into servicing debt then you have essentially indentured yourself for life, your future working capacity becomes an intangible that is listed as an asset in the books of financial institutions and traded along with your pension plan and savings.
Let's say for just a minute that we still had a *real* commodity backed currency. To lend this you actually have to have the money in your hand and physically hand it over to another person. They take the money and return it to you after the agreed amount of time plus a 'fee' for the use of this money. The person who loaned it in the first place is that much poorer for this time while the loanee is that much richer. A simple system where it would be extremely difficult for ane person to accumulate a serious amount of wealth.
Let's add a bank. People put their gold in the bank and get a certificate of deposit in return. For this service they charge a 'warehousing' fee. The people can use the deposit slips as a proxy for the actual gold so now we have paper money. Still have to have money in your hand to loan to another person and collect interest.
After a while people get used to this system and the people running the bank start looking at all that gold just sitting there doing nothing. They do some calculations and see that people don't really withdrawal the gold that often so 'what would it hurt if we printed up a few extra deposit certificates and collect interest on those, nobody needs to know'. They start doing this in secret and all goes well so they run up the printing press and start making some serious money off interest.
Every thing's going well in mythical bank land until people start doing the math and start to suspect there might not be enough gold in the bank to back all this paper money so they lose confidence in the bank and withdrawal their gold en masse. The bankers don't have enough gold so have to declare bankruptcy and quite a few people lose out.
Fast forward to the 1929. People rush the bank after the stock market crashes and the government says 'enough is enough'. Uncle Sam confiscates all the private gold and gives people paper money in return and says 'deal with it, bitches'. The dollar is still backed by gold on the international market as is all other currencies under a system of treaties. Banks can print all the money they want because the people can't trade it for gold and everything is good in the world. Government places restrictions on the printing presses as a condition for guaranteeing their deposits and as a means to control the economy.
Fast forward to 1971. The international treaty of gold backing has been taken over by the US bullion stores and due to inflation of the dollar gold bullion is leaving the US at an alarming rate. Nixon looks at this and surprises everyone by removing the US from the gold standard while simultaneously saying 'deal with it, bitches'. Pretty much every other country follows suit which brings in the age of the global fiat currency.
The last hurdle to running the printing presses at full steam has been removed so the central banks and government start in with 'economic reform' programs.
This brings us to today and the end of our little history lesson. How it all turn out is still in the future since there is no historical parallel to the economy of today.
Back before the central banks and fractional reserve banking there was no inflation like we know it today. Prices would stay steady across generations. There was also no problem with someone cornering the 'money market' without coercion, theft or fraud. When money became tight the price to borrow it went up and when there was an excess the price went down -- just like any other commodity. When the price went up people had incentive to save(loan) and when the price was low is the time to spend. Supply and demand. There were always people out digging up gold or silver so there wasn't a problem with not enough currency for an expanding population.
The problem as you describe it is directly related to fractional reserve banking. If I put a chair in a warehouse they just hold my chair but if I put money in a bank they loan it out like they own it. Depending on the reserve amount they keep in the bank they actually produce *new* money in the process. This is how money gets concentrated into the hands of a few which incidentally is also the root cause of much of the historical antisemitism since Christians were banned from money lending by 'law'.
Removing the central banks is only one step. The other is the conditioning of society to remove ownership completely.
The Average American buys a new car every 4-5 years, right at the end of both the manufacturer's warranty and their loan. Most people never actually own a car, the bank owns it and they get to make payments on it. This also takes into account those that lease cars.
How about a home? Take all the people that lease or rent, then add to that all the people who never get to pay off a mortgage. Lending companies here have recently introduced 30- and 50-year mortgages. In Japan, a 100-year mortgage isn't unheard of. The latest fad was "interest only" mortgages, where you NEVER own a piece of the house. The idea is to flip it in a couple years and make a profit.
Student loans in the tens or hundreds of thousands of dollars. Credit card debt that approaches 10x years worth of salary for some people. Music, movies, television, books, games and the like that you "license for personal use" and disappear as soon as you can't make a payment.
We're going to have an entire world economy that resides totally in RAM and on a spreadsheet.
How do we fix it? In general, we can't. Too many people like the system, because it gives them hope to get all those shiny new toys.
Personally, the fix is simple. Live debt free. If you can't afford to pay cash, you can't afford it. Never buy a new car, even if you can afford it (average depreciation is 12% in the first year). Buy real estate. Spend your money on tangible goods, not perishables or items that will fall apart or be of no use in 2-3 years time.
Green ink on linen only has value as long people play the game. The game could be over internationally if the U.S. is believed to be creating too much money (or even cheating by not accounting for all money created) , giving too easy credit (or having too much defaulting on same).
The point about this that is important is this, once such a method of gaming a system has been discovered, you cannot fix it at the system level... you have to throw away the whole system and implement something entirely new, and hope that the same thing doesn't happen again.
er, what? you got that from the Cap'n Crunch example how, exactly? the telephone network certainly wasn't thrown out wholesale once the problem was discovered by the folks running it. what's important to recognize about how that was fixed is this:
it was fixed a bit at a time. there was no "flag day" where it was broken before and fixed after. individual switches were upgraded, mostly as the economics dictated.
notice: individual switches were upgraded. transmission lines were not replaced; the technologies were not changed (not to fix this, anyway, although telcos took the opportunity to replace lots of older generation tech), and the design and architecture of the overall system stayed the same.
there's no sense in which Cap'n Crunch caused the whole system to be scrapped. similarly, while i think you accurately identify several problems with our current economic setup, there's no reason why we'd have to throw away the system to fix them. even a return to a gold (or other commodity) standard would leave most of our existing structures in place, although it would certainly be a more dramatic system-architecture level change. solving most of the problems you note can be done with less dramatic means (as can other issues, like our massive trade imbalance and being owned by China), if we decide it's now worth the costs. and until we make that decision, no amount of system redesign will help.
also, i'm interested in why you distinguish between feudal-style grant-based economies and fiat economies. in my reading, that's nearly the definition: there's nothing "real" behind a grant of title or similar arbitrary declaration other than the speaker's strength.
also, i'm interested in why you distinguish between feudal-style grant-based economies and fiat economies. in my reading, that's nearly the definition: there's nothing "real" behind a grant of title or similar arbitrary declaration other than the speaker's strength.
Frustratingly, Technocrat neither allows private messaging nor contacting by email, I have responses to these points and those raised by Thomas, but I don't want to post them publically (yet) and possibly taint further responses.
The problem is clearly this. Before the "global information network", you guys would have had this discussion at the local bar, over beers. Now, the discussion is done over the web. Everybody gets to sound like an economics professor without the tedious work of having to cite their sources or provide references to backup their assertions.
Question: Where do you come up with October 2007? And how did you figure out that it takes 3 years to wash out?
I come up with October 2007 from reading a lot and forming a sort of unofficial consensus of the opinions and data that I have read, there's lots of factors in there, from the Ghawar water cut breaking the 55% barrier through resetting of loans through commodity (copper, nickel etc) prices and production.
Figuring it takes 2 to 3 years from a major stock market crash to a community level wash out is just an observation from history, it took about that long last time for the last big crash to work its way through the locals courts system foreclosing on people, personal family oral history etc, the following is copy / pasted text from the Dr Housing Bubble blog.... a letter written from a lawyer from Mason City, Iowa in the Corn Belt recounting the impact of the Great Depression on his town. It is a poignant and somewhat eerie story to read considering the date of writing is 1933
“The boom period of the last years of the World War and the extremely inflationary period of 1919 and 1920 were like the Mississippi Bubble and the Tulip Craze in Holland in their effect upon the general public. Farm prices shot sky high almost over night. The town barber and the small-town merchant bought and sold options until every town square was a real estate exchange. Bankers and lawyers, doctors and ministers left their offices and clients and drove pell mell over the country to procure options and contracts upon this farm and that, paying a few hundred dollars down and expecting to sell the rights before the following March brought settlement day. Not to be in the game marked one as an old fogy, while paper profits were pyramided and Cadillac cars and pleasure trips to the cities took the place of Fords and Sunday afternoon picnics. Everyone then maintained that there was only a little land as fertile as the fields of Iowa, Illinois, and Minnesota, and everyone sought to get his part before it was all gone. Like gold, it was limited in extent and of great potential value. Prices skyrocketed from $100 to $250 and $400 per acre without regard to the producing power of the land.”
“During this period insurance companies were bidding against one another for the privilege of making loans on Iowa farms at $90 or $100 or $150 per acre. Prices of products were soaring. Everyone was on the highroad not only to comfort, but to wealth and luxury. Second, third, and fourth mortgages were considered just as good as government bonds. Money was easy, and every bank was ready and anxious to loan money to any Tom, Dick, or Harry on the possibility that he would make enough in these trades to repay the loans almost before the day was over. Every country bank and every county-seat town was a replica in miniature of brisk day on the board of trade.”
“The drastic deflation of Iowa loans under the orders from the Federal Reserve Board, upon which Smith Wildman Brookhart, depression Senator from Iowa, poured forth his venom, definitely marked the downward turn in the mythical prosperity of boom days. Despite our hopes for the better, conditions have grown steadily worse.”
“During the year after the great debacle of 1929 the flood of foreclosure actions did not reach any great peak, but in the years 1931 and 1932 the tidal wave was upon us. Insurance companies and large investors had not as yet realized (and in some instances do not yet realize) that, with the low price of farm commodities and the gradual exhaustion of savings and reserves, the formerly safe and sane investments in farm mortgages could not be worked out, taxes and interest could not be paid, and liquidation could not be made. With an utter disregard of the possibilities of payment or refinancing, the large loan companies plunged ahead to make the Iowa farmer pay his loans in full or turn over the real estate to the mortgage holder. Deficiency judgments and the resultant receivership were the clubs they used to make the honest but indigent farm owners yield immediate possession of the farms.”
“Men who had sunk every dollar they possessed in the purchase, upkeep, and improvement of their home places were turned out with small amounts of personal property as their only assets. Landowners who regarded farm land as the ultimate in safety, after using their outside resources in vain attempts to hold their lands, saw these assets go under the sheriff’s hammer on the courthouse steps.”
“During the two-year period of 1931-32, in this formerly prosperous Iowa county, twelve and a half per cent of farms went under the hammer, and almost twenty-five per cent of the mortgaged farm real estate was foreclosed. And the conditions in my home county have been substantially duplicated in every one of the ninety-nine counties of Iowa and in those of the surrounding states.”
”We lawyers of the Corn Belt have had to develop a new type of practice, for in pre-war days foreclosure litigation amounted to but a small part of the general practice. In these years of the depression almost one-third of the cases filed have to do with the situation. Our courts are clogged with such matters.”
“Gone, too, is that pride of ownership which made possible the development of stock and dairy farms with their herds of fat cattle and hogs, their Jersey cows, their well-kept groves and buildings which beautified and developed the countryside. The former owners were willing to use a large part of receipts from a farm’s income to increase its value and appearance but the present absentee owner regards it only as a source of possible dividends.”
“From a lawyer’s point of view, one of the most serious effects of the economics crisis lies in the rapid and permanent disintegration of established estates throughout the Corn Belt. Families of moderate means as well as those of considerable fortunes who have been clients of my particular office for three to four generations in many instances have lost their savings, their investments, and their homes; while their business, which for many years has been a continuous source of income, has become merely an additional responsibility as we strive to protect them from foreclosures, judicial receivership, deficiency judgments, and probably bankruptcy.”
“The old maxim of three generations between shirt sleeves and shirt sleeves is finding a new meaning out here in the Corn Belt, when return to very limited means in a formerly prosperous population is the result not of high living and spending, but of high taxes, high dollars, and radically reduced income from the sale of basic products.”
“George Warner, aged seventy-four, who had for years operated one hundred and sixty acres in the northeast corner of the county and in the early boom days had purchased an additional quarter section, is typical of hundreds in the Corn Belt. He had retired and with his wife was living comfortably in his square white house in town a few blocks from my home. Sober, industrious, pillars of the church and active in good works, he and his wife may well be considered typical retired farmers. Their three boys wanted to get started in business after they were graduated from high school, and George, to finance their endeavors, put a mortgage, reasonable in amount, on his two places. Last fall a son out of a job brought his family and came home to live with the old people. The tenants on the farms could not pay their rent, and George could not pay interest and taxes. George’s land was sold at tax sale and a foreclosure action was brought against the farms by the insurance company which held the mortgage. I did the best I could for him in the settlement, but to escape a deficiency judgment he surrendered the places beginning in March 1st of this year, and a few days ago I saw a mortgage recorded on his home in town. As he told me of it, the next day, tears came to his eyes and his lips trembled and he and I both thought of the years he had spent in building up the estate and making those acres bear fruit abundantly. Like another Job, he murmured “The Lord gave and the Lord hath taken away”; but I wondered if it was proper to place the responsibility for the breakdown of a faulty human economic system on the shoulders of the Lord.”
“When my friend George passes over the Jordan and I have to turn over to his wife the little that is left in accordance with the terms of his will drawn in more prosperous days, I presume I shall send his widow a receipted bill for services rendered during many years, and gaze again on the wreckage of a ruined estate.”
“I have represented bankrupt farmers and holders of claims for rent, notes, and mortgages against such farmers in dozens of bankruptcy hearings and court actions, and the most discouraging, disheartening experiences of my legal life have occurred when men of middle age, with families, go out of the bankruptcy court with furniture, team of horses and wagon, and a little stock as all that is left from twenty-five years of work, to try once more – not to build an estate – for that is usually impossible – but to provide clothing and food and shelter for the wife and children. And the powers that be seem to demand that these not only accept this situation but shall like it.”
I've seen some dire predictions of impending crash from some economists, but whether this year or this decade the important point is that a huge amounted of assumed increased profitability, sales, tax revenue, debt repayment etc. that *must* happen for the economy not to collapse.
Consider a number of very plausible events that could send the markets into cascading failures and ruin. Mideast oil supply constriction by either war or embargo, U.S. dollar sell-off, large terrorist attack, drought, superbug, drop in real in
Captain Credit Crunch and the Fiat Economy.
The original Cap'n Crunch (John Draper) was basically gaming the system, playing with a system in ways that were not envisaged by the original designers of that system.
For those that don't remember, Draper and his friend discovered that a toy whistle in a cereal box could be made to produce a 2.6 kHz tone, which was used by the phone system as a system command code.
The point about this that is important is this, once such a method of gaming a system has been discovered, you cannot fix it at the system level... you have to throw away the whole system and implement something entirely new, and hope that the same thing doesn't happen again.
Fiat economies are another system.
Fiat economies are basically me contracting various other people such as you readers, to perform various tasks for me according to your abilities.
By way of compensation I do not offer you singularly valuable tangibles, such as Baronetcy and plots of land and rights to live within my Kingdom. Nor do I offer you commodity tangibles that you could then trade with others in barter, such as bushels of grain, barrels of oil, or cattle.
I used to offer you "paper" notes that said "I promise to pay the bearer, on demand..." which could be traded for any of the singularly valuable or commodity tangibles mentioned above, because these paper promissory notes themselves were backed by a single valuable commodity tangible, such as Gold.
The promise to pay the bearer was backed by the stock of Gold I held, and while the valuation of the Gold might fluctuate from day to day, this stock imposed a direct limit upon the amount of promissory notes that I could issue.
The moment that confidence was lost that I could redeem every single promissory note issued for its face value in Gold, I was finished, a rush on my "bank" of people cashing in, and I am left holding a lot of paper money and no Gold to back it up.
In the Fiat economy I do not require Gold, the promissory note is not backed up by Gold, if it is backed up by anything it is the commonly held belief amongst the people holding my paper currency that EVERYONE ELSE holding my paper currency places the same value upon it.
This belief is an intangible thing, and easy to shake.
If people start suspecting that I just decided to give myself anything I desire for free, simply by printing more of my Fiat paper money, faith in the value of that money drops. The only way to increase the perceived value of my intangible Fiat currency is to increase people's faith in its value.
I cannot simply amass more gold, either from my privately owned mines, or by invasion, because my Fiat currency isn't backed by gold in the first place, it isn't backed by anything tangible.
Eventually human nature will ensure that certain commonly traded items that are always in steady demand will become the frame of reference for the common valuation of my currency, so my currency ends up being worth so many barrels of oil, bushels of grain, or whatever it is that civilization is trading.
The Chinese experimented with Fiat currencies a thousand years ago, and faced many of the problems that we have faced in the past 30 odd years since the major currencies de-coupled themselves from the Gold Standard and the genuine promise to pay the bearer on demand.
Decoupling the currency had much the same effect as changing the phone system to work on audio tones, it opens up new avenues of gaming the system, and since nature abhors a vacuum, all new avenues eventually get exploited, it is a question of "when" and not "if".
Once the major currencies were decoupled, lots of organisations and individuals found new ways to game the system and garner ever greater amounts of currency under their control.
BCCI was a classic example, and the response was as classic, the "old guard" of financial institutions were wary, so new institutions were created, and the "currency" was simply repackaged, rebranded, and spead over the marked via intensive webs of diversification.
Before long, debt started going through this metamorphosis, and became re-packaged and re-sold as an asset, not a liability.
We have just about come full circle, to the point where the shift from the currency being backed by the tangible gold I hold, to the currency being backed by the intangible faith that the holders at large have in it, except now we move from the currency being backed by the intangible faith that the holders at large have in it, to the ephemeral apparent value it has when you create iniquitous webs of liabilities being re-packaged and re-sold as assets.
The Emperor does not merely lack any clothing, he is the drooling village idiot.
So we come to the situation we have now, where central banks response to a loss of faith in the intangible value of a Fiat currency, is "remedied" by promising to create an unlimited amount of further Fiat currency, for the SOLE PURPOSE of ensuring that nobody playing at the new ephemeral currency table finds themselves without a pile of chips in front of them.
The new delusion is that our, as in yours and mine, faith in the Fiat currency to continue to be acceptable to be used to buy barrels of oil with, is no longer the issue, now, we must place all our faith in the financial institutions themselves, and since this faith would be ruined by said financial institutions finding themselves bankrupt, they respond in the only way they can, by creating more currency out of this air.
The sub-prime problem is nothing more than the catalyst that renders the opaque waters pellucid, so that everyone can see what many of the more prudent of us have been claiming for years, that the recent trends have been not merely unsustainable, but irresponsible in the extreme and doomed to come crashing down around our ears.
We are now missing only one more step before currency is sent back to the first phase of the cycle, where it is backed by a tangible asset. Who knows what this tangible asset is, it may be gold again, it may be oil, it may be energy as in MWh capacity, but it will come.
The phase between then and now is the crash. The great depression of the thirties had a lot to teach us, actual physical hardship in the local community took between two and three years to work its way through to appearing, after the financial crash that prompted it.
Perhaps this time with the greater pace of life, electronic everything and outsourced and offshored everything the period before the wave breaks will be shorter.
The best guesses at the moment are that October 2007 looks to be about the time when the wheels finally fall off the wagon, people genuinely lose faith, and the stock market collapse PROPER starts (these are just pre-tremors now) and maybe up to 2 or 3 years after that, so 2009 - 2010 before it decimates communities and society.
At the same time this proper crash in society of course paves the way for the rise of the despot proper, except this time it will be about chasing resources that we know for a fact are only going to become more scarce as time passes.
Surviving it all will be interesting times...