Does anyone else wonder how money, which is really nothing but a convenient abstraction facilitating the orderly exchange of goods, services, labor and resources, have so much impact on the real world?

Here we go again, into a global recession, for no real reason at all, except that the money sloshing back and forth has failed to do the job we intended it to do.

So we all stop, paralyzed, as if something like Katrina had happened to the entire world, wrecked all our buildings and equipment, flooded the land with tsunami after tsunami, slaughtered millions of people and heaped waste upon devastation over the land and seas.

But nothing like that has happened. The gambling casinos we call "markets" have simply imploded. The real world hasn't changed at all. But we act as if it has, and are helpless to dig our way out of an imaginary crisis.

So we put millions out of work, even though there's plenty of work to be done, and sit home waiting for something to happen, when all it really takes is for us to get up and go back to work.

How can human beings get to the moon, but be so helpless when money, which doesn't have any tangible existence, runs dry?

Why can't we just print some up and go back to work?

The progressive knows when he is at the bottom, for the progressive will be explaining to the worker why his 20 pension plan cannot be guaranteed, after 20 years of promises

The smartest guys in the icebox...

This is a man-made disaster and worse still, one made by a small group of Icelanders who set off to conquer the financial world, only to return defeated and humiliated.

I know this is outside the purview of Hilzoy's post and the finacial-techno argot of her various links...
But, for shame me:
I'd really like to know where these blokes got their financial degrees from.
There is something chillingly familiar about their core values...

"Why can't we just print some up and go back to work?"

It certainly worked for Zimbabwe, after all.

This isn't over by a longshot for the US of A, and no amount of wishful thinking will make it end. Paulson & Bernanke are running out of bullets and they know it. The scale of leverage that has been used by the Masters of the Universe, the amount of toxic debt that has accumulated, is still unknown. What we do know is that these markets are opaque by design, and that they dwarf the total valuations of the stock market. How else could ALL of the US investment banks simply implode in a matter of months?

Iceland is a speedbump compared to what's coming down the road, but the result will be the same.

Here's one of the best overviews of the whole fiasco, that I've read recently:
http://tinyurl.com/64mm8l

Didn't some libertarians hold out Iceland as an example of a relaxed government and economy, very "free" as they put it albeit with what the rest of us call a "normal" safety net?

To judge by the stock market, a lot of people seem to think that we are at, or past, the worst of this crisis. I don't think so.

Not even close.

(a) In the US, the scariest loans - options ARMS (pay less than monthly interest; remainder is added to your principal) - have not reset yet. These reset in mass in 2010.

(b) As bad as the US is screwed, Europe - and especially the UK - are much, much worse. And their housing market has only started the correction process. They are well over a year behind the US in this process.

(c) Given today's retail numbers Christmas is going to be brutal. Retail needs holiday shopping to go into the black. You are going to see quite a few stores throw in the towel come January.

This is going to get much, much worse before it gets better.

To judge by the stock market, a lot of people seem to think that we are at, or past, the worst of this crisis. I don't think so.
—Hilzoy 7:46 PM
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

I don't think so either. I don't see optimism in the stock market, either, considering that stock prices are bouncing back & forth at record or near record rates while hovering between 8000 & 9000 on the Dow over the past couple weeks. Commodity prices are down across the board, while last month the cost of living (inflation) went into negative territory. And the list goes on.

As for Iceland, what happened there is a crime, & also a warning for the rest of us. The krona would still be viable if the govt had not insured the deposits in the banks. I think we really need to examine the situation where the banks actually control the world's currencies & what would happen if there was a world wide bank collapse. Think it can't happen? Few believed the Great Depression could happen either, but it did.

Nobody seems to know exactly what went wrong or how to make it right. We live in interesting times. I'm glad I have no debts & than my small income is guaranteed. Most people I know will be in for a rough ride.

On the subject of Iceland, if you care to understand this place look at this http://nobelprize.org/nobel_prizes/literature/laureates/1955/laxness-bio.html the story is here. Salka Valka and Icelands Bell...worth the effort.

Worst? I live in Washington State and we have seen nothing yet. I think the problem is that most of those who make a living commenting on the economy or stock market always think it is time to buy.

The philosophy is called market timing. The problem with the theory is that it is constructed after the fact, after everyone knows when things hit bottom. A good analogy is the movie depiction of "The Titanic". At the time you hear lots of rational sounding calming talk because it is nearly impossible to face the abyss. Anyone running around sounding the alarm looks like Chicken Little.

But the alarm bells have been going off for years, the house is now fully engulfed in flames and the delusional home-owner is talking to the 9-1-1 operator about redecorating.

Very soon the 9-1-1 operator will be too busy with other fires and the deluded masses will have resort to complaining about the government.

Here are some alarm bells I heard:
* general love of asset inflation (things cost more!)
* belief that 2nd mortgages are good (you own less, owe more!)
* buy a house and pay only interest (risk without ownership)
* buy a house and pay less than the interest (increasing risk without ownership)
* flip this house. (confuses asset inflation with value added remodel)
* WaMu offering high interest checking (so they can use your money to gamble)

How do we convince ourselves that these things are good?

Hark,

Does anyone else wonder how money, which is really nothing but a convenient abstraction facilitating the orderly exchange of goods, services, labor and resources, have so much impact on the real world?

Money is a substitute for the direct exchange of goods and services in barter. When you accept money, you are getting a promise that others will exchange goods and services for that money, but it is only as good as the willingness of others to accept the money for their goods and services.

Most of the time that money IS accepted by others. As long as it is, we can hold onto that money and investigate what we want to buy and what price we want to pay for it. The term for that period between selling something and buying something else with the money is called money as a store of value.

These days money takes a lot of forms. Currency, credit/Debit cards, bank accounts, money market accounts and a lot of other things. What happens if you put the value of your services or something you sell into a form of money that suddenly no one will accept?

There's a bit more than that, but that's essentially what is happening right now. We have entire businesses built around complicated forms of debt - buy now but promise to pay later. That's another form of money. What has happened is that a large number of people suddenly no longer trust that promise to pay later, and the businesses built on credit (that's most of them - working capital is usually based on credit) have come to a halt. A business that builds its product now, pays its workers now, and collects later when it sells the product is totally dependent on credit to pay its workers.

That's what's happening. The money based on credit that provides the grease that lets businesses pay workers now and collect from customers later has disappeared. The workers and suppliers can't wait for the sale to get paid, yet the law required they be paid, so instead they are laid off and what they were to do is not done.

From an investment standpoint, the stock market has already made much of the correction already. The Dow was at 14,000 in October of 2007. It's in the 8000s now.

Investors vaguely know that the economy is bad and more bad news will continue coming in for some time. That's what speculation is.

So yes, I agree that the worst is yet to come in terms of effects on actual people (unemployment, etc.), but the market has already guessed that the value of everything is around 40% less than it was just over a year ago.

Again, this is from a cold-blooded investment viewpoint. The market is likely to continue doing what it has been doing for the past month: wild swings, but hovering in the general area probably 7000-9000 for awhile. When the news hopefully starts to brighten up in a year (unemployment past its peak, consumer confidence returning, etc.), it will climb accordingly.

The first poster "hark" makes interesting observations. While some amount of wealth has "disappeared" (the wealth of holding bad mortgages really never existed), nothing much has really changed. The houses are still there, people still want to live in them. It's just a math game that has resulted in this mess.

When we issue our first foreign-currency Treasury bond (and we will, probably in '10), then it's our turn.

Adam's Smith's fabled invisible hand seems to be based on the assumption that players in the market had a stake in whether their decisions won or lost and their judgement would be guided by a very carrot-and-stick approach. Adam Smith never counted on golden parachutes. That fact that the engineers of the financial meltdown secured themselves from the pain of their foibles means that they bore none of the risk in their decisions and others suffer the pain while not understanding their risk. The market can never be a good citizen in society if the risk - reward/pain stimulus is turned off for those in control.

q. what's the capital of iceland?

a. about $20.

I was in Iceland the week it all melted down and they froze the krona. According to folks I talked to, what caused much of the damage was a government that instituted Reagonomics, de-regulated, and let the financial pirates who always lurk in the shadows take over.
I was quite surprised, though, at how sanguine most Icelanders seemed - kind of, "We're Icelanders; we've met challenges before; we'll get through this, too." And they seem the sort of folk who will. They WERE p*ssed, though, that Brown's government invoked the terrorism laws against them.

Good points made by both Hark and Franklin. While we seem to be past the worst of the credit squeeze, the effects on the real economy are just beginning to be felt. By the way, what happened to Kevin D.?

For a good European group blog from a mildly to moderately left of center (in Euro terms) perspective, I heartily recommend A Fistful of Euros (http://afoe.com)

“For some, the success of their Viking Raiders, buying up the British high street, one even acquiring that most treasured bauble of all, a Premier League football club, marked the arrival of a golden era.�

Barclays Bank the third largest bank in England has to take a hit too, with Iceland seems they are part of the label along with Budweiser part of some scheme that McCain is in the middle with his wife, that beer deal little talked about . . . Wriggly in it too, here begs the question why is their jewel in cubs park on the sale block? The question is what kind and how big is all this stuff?

Consider this, DHL the German owned company in Ohio, tens of thousands of road trucks not flowing. Money not moving in the toll system, late payments hitting the already shallow mortgage market. This is suggested, because of the global deals done, like foreign interests buying huge highways in America then the revenue stops. All this starts to bounce back and forth like the stock market swings.

An interest thing to ponder on and very scary, even Mayor Daily of Chicago “The Power� dealer of the Midwest is considering leasing out Midway Air port. The amount to me seems very puny compared to the Common wealth investment already made. Daily used the “D� word the other day, depression and we are all in it.

But, here, the curious thing is the economics placed into so called land deals like this where American governors or mayors at will are making money deals that have had long term tax payer equity through decades of money applied to roads or facilities, then judged by one person an elected official, or the combined city council is not a fair market deal compared to the billions likely invested over the years to simply hand ownership over for a hundred years to someone on the other side of the planet.

For me, the real impact on the market was the Asian Jewel, Hong Kong, handed back to the Chinese. Ladies and gentlemen of America if there was any land exchanged that was huge and shoved under the radar that was it. A Race was on to supplant that cash cow with something new world wide. Perhaps American home industry greed and corruption just floated over from those forces in Asia.

Bush’s war was a good option, you with Bush or against Bush. Well looky, looky there about twenty bigies getting in what appears to be a money summit of who is getting the shaft. The real funny part was how the new media is left with the conscious dilemma as how to suppress this stuff, because they are not only in it big time but know the electorate need money to buy their commercial products or they are out on the streets too. Chris Mathews is dancing around this very smoothly and worried. Using a characterization that Bush is tuned out of all this, when in fact Bush does not have the slightest ideal how to tune into it. For the Bush’s “Banks are their Business� and screwing it up is their history going back to Prescott Bush, and huge corporate interests using the American federal reserve board to bail them out. Free money from an ignorant tax payer is the greatest deal to screw up our economy. In hind sight Karol Rove and friends along with Newts Contract with America is so screwed up it is bouncing around fourth like over heated molecules in the new unification of Quantum Gravity blending with Einstein’s Relativity, now called string theory? WOW.

The other day CNN let out a leak that trillions of tax payer dollars have already been loaned out secretly in Bush Federal Reserve term with out public knowledge. Here, CNN is telling the truth…Their new intermission song is going to be Simon and Garfunkel’s, Money’s or Monkey’s in the zoo, I do believe its true oh, oh, oh I do believe it’s true.

By the way, what happened to Kevin D.?

You mean the guy that wrote about the dangers of the housing bubble even as it occurred?

[I bet those threads would make a fun reread.]

"But nothing like that has happened [to change economic fundamentals]. "

No, something big happened in technology, specifically our ability to measure goods flow over time using low cost digital technology.

We have just had a quantum leap in inventory management, a leap that took the computer revolution a big step forward. The consumer, today, can track a purchase from the Chinese fatory floor to the retail distribution xenter with up to the second information about quantity, quality, and position of that good.

Even with the personal computer of ten years ago, we still had a week of uncertainty. But low cost digital technology allows us to put pagers and measurers on goods flow for up to the second tracking.

The result has been to put a whole generation of financial analysts out of business, and to reset capital values.

GM is a classic case of inventory control leaving the hands of GM executives and being placed in the hands of the end consumer. Hence, distributed manufacturing is the norm, and GM has not adjusted.

Kevin Drum's over at Mother Jones now.

I'd really like to know where these blokes got their financial degrees from.
There is something chillingly familiar about their core values...

According to folks I talked to, what caused much of the damage was a government that instituted Reagonomics, de-regulated, and let the financial pirates who always lurk in the shadows take over.

I vaguely remember libertarians crowing about how the wise Icelanders had freed themselves from socialism. Someone should dig those pieces up.

The Iceland Economic Miracle: Old, embarrassing pieces by free-marketers.

Includes a link to the archive of a 2005 Mount Pelerin Society conference in Iceland. I'd love to get into it but I can't. Maybe someone else can.

That took one hour and 16 minutes, including of formatting. Praise Google!

"Why can't we just print some (money) up and go back to work?"
posted by hark

This poster seems to have a grasp of the nature of money comparable to most politicians. Debt, regardless of the medium of exchange, is vital to the economic system that we now "enjoy". With the taking on of debt comes the necessity of paying it back lest you alienate your creditors. Inflating your way out of the trap by printing money puts the screws to creditors in the same way as default or devaluation.

The solution of course is less debt. With this comes slower economic growth and a threat to capitalism itself. I think it is important to distinguish the difference between capitalism and markets. Markets have been in existence for all of human history, and have been key to human achievement and development. Capitalism is a much more recent invention, who's implications are far less benign. It relies on the concept of perpetual growth. Therefore it's very essence is in contradiction to the concept of sustainability, as we live in a world of finite resources. While the short-term benefits have been substantial, the long-term costs have yet to be fully realized. By discounting the future with excessive debt we are merely bringing forward that day of reckoning. The coming shakeout will be brutal beyond all expectations but, as with all crisis's, comes with opportunity. We must seize it and re-imagine our financial, manufacturing, and political systems.

Re: JC Foot
I made this same argument on the Carpet Bagger Three years ago. I might have suggested that inflation was four percent in general. No one would debate the the inflation part. they just beat me up on the four percent. The results are here. A million dollars paid two percent in interst this week. That is in the safest place you can put it. This system is going to fail if one fundamental rule keeps being ignored. You can't borrow your way to prosperity. This government is printing and giving money away by the dump truck load.You want to tease me out of burying my money. Make it worth somthing. The taxes on seven percent money would be exponetial. We are rewarding sloth and incouraging waste. The welfare state was an ear mark compared to the robbery that is occuring now.

Two words: Peter Schiff.