How does our current economy model work?

wobbles-grogan · 01-12-2011 11:09AM #1

Can some explain to me how our current system of economy works? Not just Irelands, but the west world as a whole.

To me it seems like a carefully (or not so carefully as the case may be) balanced pyramid scheme.

Take an example.

Ireland borrows €10 Billion from the ECB in year 0 at a rate of 1% interest, to be paid back in 10 years.
In year 10, ireland pays back the €10,100,000,000.

So during those 10 years, Ireland had to profit €100,000,000 (€1 hundred million) (and still have access to €10 billion) to be able to pay back its loans.

Thats all fine and dandy as long as Ireland is able to make that €100 million, but as these things go, Ireland wont always be able to make €100 million every 10 years. Once ireland fails to make the €100 million profit, it will need to borrow €10,100,000,000 at (say) 1.1% interest over 10 years. Then, Ireland uses that loan to pay the old one back. I say 1.1% now as 'market confidence' (whatever that is) sees that Ireland couldnt pay its last loan back, and so demands higher interest.

Now, in 10 years time, Ireland has to profit by €111,100,000 to pay back its loans.

As making €111 million euro is even harder than €100 million, chances are Ireland wont be able pay that back come 10 years time. Prompting the interest rate to rise even further, and Ireland borrowings to go through the roof.

Surely this means that our current model will always blow up in our face at some point down the line. Its a guarantee that it will fail at some point in time.

Also, I made a few assumptions in the above, namely that Ireland will only borrow once every 10 years. In practice Ireland borrows continuously to pay back its debts at any point in time.

Am I correct in thinking that? Im not sure I have it right tbh. Could someone explain it to me?

I think its clear from the above that I didnt study economics. This is just what I'm gathering from reading newspapers/articles/web sites. Would like someone to explain it properly to me!

Cheers!

Raskolnikov · 01-12-2011 11:15AM

It's actually quite simple.

We spend more money than we currently have by borrowing it. The whole show is kept on the road by virtue of the expectation that the economy can grow larger than the debt. The whole scheme collapses though when debts rise faster than economy is growing. That is the current situation we find ourselves in.

wobbles-grogan · 01-12-2011 11:17AM

Raskolnikov wrote: »

It's actually quite simple.

We spend more money than we currently have by borrowing it. The whole show is kept on the road by virtue of the expectation that the economy can grow larger than the debt. The whole scheme collapses though when debts rise faster than economy is growing. That is the current situation we find ourselves in.

So essentially the term Ponzi scheme fits the economy model?
A ponzi scheme needs to grow faster than the amount it has to pay out, to be able to keep the scheme alive. Seems to fit to me...

Hayte · 01-12-2011 11:22AM

Basically yes. Raskolnikov, thats a really good succinct explanation. I like it.

Maura74 · 01-12-2011 11:37AM

The bank of Engand says that we are heading for another recession and hard times ahead

http://www.bbc.co.uk/news/business-15984291

RichardAnd · 01-12-2011 11:46AM

Maura74 wrote: »

The bank of Engand says that we are heading for another recession and hard times ahead

http://www.bbc.co.uk/news/business-15984291

I wasn't aware we'd left the current one.

Maura74 · 01-12-2011 11:50AM

RichardAnd wrote: »

I wasn't aware we'd left the current one.

Very true....but I think what he is saying it going to get worse. perhaps I am reading it wrong....

RichardAnd · 01-12-2011 12:40PM

Maura74 wrote: »

Very true....but I think what he is saying it going to get worse. perhaps I am reading it wrong....

I think that in technical terms, we're not in a recession so he probably means we're going to go back into a recession in the textbook sense of the term. However, pragmatically, we've never come out of the dip.

wobbles-grogan · 01-12-2011 01:57PM

Yep, I think a lot of dark days for the euro/europe are to come. Personally I cant see the euro being alive in 6 months time.

I think something must be done to change the current system of borrowing to pay back borrowings. Clearly its not working. We should probably all stop borrowing and just live within our means. i.e. Spend ONLY the money we have. I say 'we', but I mean the country...

_Kaiser_ · 01-12-2011 02:22PM

wobbles-grogan wrote: »

Yep, I think a lot of dark days for the euro/europe are to come. Personally I cant see the euro being alive in 6 months time.

One can only hope.... (yes I say that knowing full well the turmoil it'll cause but I still think we'll emerge better and faster from it than this "death by a thousand cuts" and paying EVERYONE's debts/gambling losses malarky we've endured for the last few years)

I think something must be done to change the current system of borrowing to pay back borrowings. Clearly its not working. We should probably all stop borrowing and just live within our means. i.e. Spend ONLY the money we have. I say 'we', but I mean the country...

There's nothing wrong with credit/debt as long as it's kept to manageable levels and within ability to repay (which is where we went wrong what with "free" money, 110% mortgages for people on €30k and so on)

Insustry and small business would be unable to function without credit/debt - which is why so many of them are closing/have closed down now.

deisedude · 01-12-2011 02:25PM

wobbles-grogan wrote: »

Can some explain to me how our current system of economy works? Not just Irelands, but the west world as a whole.

It doesn't work! :pac:

wobbles-grogan · 01-12-2011 02:34PM

Kaiser2000 wrote: »

There's nothing wrong with credit/debt as long as it's kept to manageable levels and within ability to repay (which is where we went wrong what with "free" money, 110% mortgages for people on €30k and so on)

Insustry and small business would be unable to function without credit/debt - which is why so many of them are closing/have closed down now.

Im not talking about credit/debt to industry and private business. I agree, that needs to exist. Im saying that the countries debt, the public debt, shouldnt exist.

Maybe set up controls where the country ONLY borrows to pay for large capital expenditures (public transport for example), any spending we need to make on a day to day basis, wages and the like, should only be paid for by money that the government actually has in tax revenue.

andrew · 01-12-2011 02:48PM

The general rule is that as long as the interest rate on our debt exceeds the growth rate of the economy, then unless the government runs a surplus with which to pay down the debt, the debt to GDP ratio will keep getting bigger.

pacquiao · 01-12-2011 03:18PM

andrew wrote: »

The general rule is that as long as the interest rate on our debt exceeds the growth rate of the economy, then unless the government runs a surplus with which to pay down the debt, the debt to GDP ratio will keep getting bigger.

Quick question. Did you study economics?

Geuze · 01-12-2011 03:30PM

Wobbles,

Governments don't borrow from the ECB. It's not allowed.

Banks borrow from the ECB, short-term loans, typically up to a year.

Governments usually borrow in the bond markets.

Most Govts do not repay their debts, they simply rollover their debts.

wobbles-grogan · 01-12-2011 03:37PM

Geuze wrote: »

Wobbles,

Governments don't borrow from the ECB. It's not allowed.

Banks borrow from the ECB, short-term loans, typically up to a year.

Governments usually borrow in the bond markets.

Most Govts do not repay their debts, they simply rollover their debts.

Ok, and how does rolling over their debts work? When do the bond holders get paid etc?

The governement still needs to make €x+€x(y%) to pay the bond holder of €x, no?

Geuze · 01-12-2011 03:42PM

See www.ntma.ie for details on bonds.

Bonds are issued for different periods, e.g. 2yr, 5yr, 10yr, etc.

Govt issues 10yr bond in 2007, borrows 5bn. Pays interest each year.

In 2017 they pay back the 5bn by borrowing another 5bn, they issue a new bond.

UK or US govt may have hundreds of bonds issued.

Govts also borrow short-term, like overdrafts, to cover day-to-day cashflow issues.

wobbles-grogan · 01-12-2011 03:49PM

Ah ok. So its much more fluid than I thought it was.

Thanks, that makes more sense now.

It still sounds like we shouldnt be issuing bonds if we could get out of it at all though, as we still need to make profit in that time to get away with not having to get a bigger bond next time round to pay off the initial bond+interest.

robd · 01-12-2011 03:53PM

I kind of like this guys videos for explaining the basis for our current banking and economic system.

http://www.chrismartenson.com/crashcourse

Takes a while to go through all the videos.

A ponzi scheme is illegal, while our current money system is not. That's essentially the difference.

Remember we arrived at this money system cause the previous system also did not work. So essentially the solution was to privatize the creation of money. What we're now discovering is that the market is equally as untrustworthy at this task as a single government.

Looks like the pieces are falling into place for the next system. i.e. Some kind of autocratic monetary and fiscal system. Of course this system will probably break too. The worrying thing is that each new system or tweaking of the current system seems to take an ever decreasing amount of time to break. And each time it breaks the problems it creates seem to be exponentially bigger than the last.

robd · 01-12-2011 04:01PM

wobbles-grogan wrote: »

Ok, and how does rolling over their debts work? When do the bond holders get paid etc?

The governement still needs to make €x+€x(y%) to pay the bond holder of €x, no?

Remember the debt never really gets paid back in the case of western economics. The markets are only interested in the total debt and the ratio of debt to gdp or gnp in Ireland's case. This ratio shows whether the position is sustainable or not.

In Irelands's case gnp plummeted and new borrowings skyrocketed due to tax take plummeting as a result of recession (negative gdp growth) and bad tax base (mainly income and consumption based - builders income tax, stamp duty, vat).

The solution of removing circa 4 billion per annum to fix deficit deflates the economy of course which means you get negative growth and hence your ability to sustain position spirals downwards. Market then stops lending. Then country goes bust as happened when IMF were called into Ireland and will likely happen again sometime over the next 36 months as solution is to deflate which doesn't work cause of spiral stated above.

andrew · 01-12-2011 04:28PM

pacquiao wrote: »

Quick question. Did you study economics?

Yes, I'm currently studying economics.

wobbles-grogan · 01-12-2011 11:35PM

robd wrote: »

I kind of like this guys videos for explaining the basis for our current banking and economic system.

http://www.chrismartenson.com/crashcourse

<snip>

Those videos are excellent. Really interesting and actually kinda scary in a way. Real eye openers though. I've looked at ~half of them now, will look at the rest over the weekend.

If you havent, you have to look at them!

andrew · 02-12-2011 12:56AM

wobbles-grogan wrote: »

Those videos are excellent. Really interesting and actually kinda scary in a way. Real eye openers though. I've looked at ~half of them now, will look at the rest over the weekend.

If you havent, you have to look at them!

Do take 'em with a pinch of salt though, I havn't looked at many, be he does seem to be putting a weird spin on things.

wobbles-grogan · 02-12-2011 09:21AM

andrew wrote: »

Do take 'em with a pinch of salt though, I havn't looked at many, be he does seem to be putting a weird spin on things.

Yeah. Picked up on that alright. It feels like hes trying to sell me something, which is wierd considering the content

nesf · 02-12-2011 11:53AM

wobbles-grogan wrote: »

It feels like hes trying to sell me something, which is wierd considering the content

A lot of the time it's an ideology being sold when you have Youtube videos or similar explaining something complex.

easychair · 02-12-2011 11:58AM

nesf wrote: »

A lot of the time it's an ideology being sold when you have Youtube videos or similar explaining something complex.

If there were no ideologies being "sold" then we will not progress. Part of the failure in Ireland, and western economies, in recent years has been a noticeable lack of ideas, with most if not all mainstream political parties pretty much in agreement about the main policies.

We really have to learn so many lessons from this, yet I fear will will just muddle through and not learn the lessons we need, as a society and scoieties, to learn.

nesf · 02-12-2011 12:01PM

easychair wrote: »

If there were no ideologies being "sold" then we will not progress. Part of the failure in Ireland, and western economies, in recent years has been a noticeable lack of ideas, with most if not all mainstream political parties pretty much in agreement about the main policies.

We really have to learn so many lessons from this, yet I fear will will just muddle through and not learn the lessons we need, as a society and scoieties, to learn.

I'm just drawing a distinction between the truth and an ideology's version of the truth.

easychair · 02-12-2011 12:12PM

nesf wrote: »

I'm just drawing a distinction between the truth and an ideology's version of the truth.

The problem with that is that there are so many versions of the truth. The truth for Mrs thatcher was not the same as the truth for Arthur Scargill, and so it is for all of us. I am sure any ideologue's version from the truth differs from another ideologue's and also from us all.

nesf · 02-12-2011 12:14PM

easychair wrote: »

The problem with that is that there are so many versions of the truth. The truth for Mrs thatcher was not the same as the truth for Arthur Scargill, and so it is for all of us. I am sure any ideologue's version from the truth differs from another ideologue's and also from us all.

Yup and it's important to recognise this and not fall into the trap of thinking whichever ideology you prefer has the one and only Truth.

simplistic2 · 02-12-2011 12:44PM

wobbles-grogan wrote: »

So essentially the term Ponzi scheme fits the economy model?
A ponzi scheme needs to grow faster than the amount it has to pay out, to be able to keep the scheme alive. Seems to fit to me...

Calling what is going on a ponzi scheme is an insult to the word ponzi scheme.

A ponzi scheme is something you enter into voluntarily, motivated by either greed or stupidity.

Each month, that chunk taken from your wages to feed the government's binge, is taken under threat of force.

At least you can stop paying into a ponzi scheme, if you refuse to pay the individuals that work for the state you'll find yourself in prison, if you defend yourself, you'll be murdered.

easychair · 02-12-2011 02:54PM

simplistic2 wrote: »

Calling what is going on a ponzi scheme is an insult to the word ponzi scheme.

A ponzi scheme is something you enter into voluntarily, motivated by either greed or stupidity.

Each month, that chunk taken from your wages to feed the government's binge, is taken under threat of force.

At least you can stop paying into a ponzi scheme, if you refuse to pay the individuals that work for the state you'll find yourself in prison, if you defend yourself, you'll be murdered.

I think you have chosen your boards name very wisely.

I am not aware of anyone who has refused to pay tax being murdered as a result of defending him or her self?

How does our current economy model work?

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