my small analysis

geordief

Does this hold up?

1:The Western economies made their wealth from manufacturing.

2: As services seemed to offer a better return manufacturing was allowed to pass to the 3rd world.

3: By printing money (done effectively by the financial services sector without need of government involvement) the dead end that the Western economies were going into was hidden for so long as this continued.

4:Now it is revealed that without a strong manufacturing sector the economy has no heart.

5: This is actually a good thing since it has allowed wealth to be distributed to the third world (global growth is still high)

cavedave

Hasn't this happened several times in the past? Recently when the automation of farms meant that people had to shift to manufacturing.

By 1931 unemployment was already around 16 percent, and it reached 23 percent in 1932. Shantytown “Hoovervilles” were springing up everywhere. The underlying cause was a structural change in the real economy: the widespread decline in agricultural prices and incomes, caused by what is ordinarily a “good thing”—greater productivity.

I do think allowing the third world to grow its way out of extreme poverty is a very good thing.

Making food is important. Just not many of us now need to do it now. Making stuff is important. Just not many of us now need to do it now and in Ireland not that many ever did. Making services is increasingly important and hopefully more of us will be doing it in the near future.

geordief

what about my idea that the financial services industry effectively printed money for itself ?

Is that contentious or is it received wisdom?

hmmm

Where to begin.

geordief

well if it true how big an effect would it have had?

We all know (now) about the dangers of banks going bust but did the financial services create an economy within the economy-like a cyst ?

How big would this cyst ,say, be in comparison to the body of the economy?

If the proportion was small then my idea breaks down.

cavedave

geordief

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what about my idea that the financial services industry effectively printed money for itself ?

Is that contentious or is it received wisdom?

I believe it does in that fractional reserve banking allows banks to create a multiple of the money deposited with them in loans. And further that in recent times the leverage ratio allowed by banks has increased.

Back on the services topic. My belief is that we can move to a mainly services based economy. In the way efficiency has always improved the standard of living in the past in spite of what the luddites claimed. "if, in like manner, the shuttle would weave and the plectrum touch the lyre without a hand to guide them, chief workmen would not want servants, nor masters slaves." Aristotle wrote in Politics which says that smarter machines will free us from servitude. So far this has been the case but will that continue?

In the coming decades structural unemployment caused by increasing sophistication of robots will happen. For example nearly 10% of people currently work in transport, with driverless cars, like googles , that number could drop rapidly. Where will the new jobs come from? I'm not sure.

Voltex

OP...I think you may have summed up the Law of Comparative Advantage in your opening example.

geordief

well thanks for introducing me to that idea (I have now googled it).

I have zero economic education but I think I can grasp the underlying maths in that.
But the idea that I thought was interesting was the part where I said that maybe financial entities printed *money* equally as effectively as States or Central Banks.

I,like most people I imagine ,had never heard of Quantative Easing before the last few years but I am starting to think it had been going on in the background in that (financial services) sector of the economy all the time because there was noone to refuse the wage demands at the top of the wage chain (they were pushing at an open door)

I just wonder if this bubble (like a cyst in the body) represented a significant proportion of the economy as a whole (1%? 10%?)

Sleepy

I think the problem we face is more one of distribution.

Not everyone in Ireland (or the rest of the world) has the mental capacity or aptitude to work in services or high-tech R&D etc. We have thousands of people on our live register who, despite having the best intentions to support themselves, simply aren't capable of being re-trained to work in the IT, Pharmaceutical or Financial Services sectors that are still doing relatively well here.

Sure, if those of us that do have that capability manage to drive some growth in our GDP these people will find work washing our cars; building, maintaining and cleaning our houses or stacking the shelves in the shops we spend our income in, there's only so many of those positions that can ever exist short of another property bubble.

Through a mis-direction of human capital we've condemned a large proportion of a generation to life on welfare, in menial jobs or of crime.

maninasia

geordief wrote: »

well thanks for introducing me to that idea (I have now googled it).

I have zero economic education but I think I can grasp the underlying maths in that.
But the idea that I thought was interesting was the part where I said that maybe financial entities printed *money* equally as effectively as States or Central Banks.

I,like most people I imagine ,had never heard of Quantative Easing before the last few years but I am starting to think it had been going on in the background in that (financial services) sector of the economy all the time because there was noone to refuse the wage demands at the top of the wage chain (they were pushing at an open door)

I just wonder if this bubble (like a cyst in the body) represented a significant proportion of the economy as a whole (1%? 10%?)

From my amateur viewpoint record low interest rates were a form of quantitative easing. Other ways they made the financial pie bigger was the 'Steagal-Glass Act' (probably spelled wrong) where they allowed investment banks to take both sides of a trade i.e. act as IPO agents and brokers for others AND trade in stocks at the same time. Information is power and they had information from both sides. How do you lose? Check the history of Goldman-Sachs.

The derivative market was opened up by Alan Greenspan in the 1990s which was effectively multiplying the amount of financial instruments and money that Wall Street could play with (Alan Greenspan was a follower of Ayn Rand, market fundamentalism is king and the market would self regulate).

Take a bunch of mortgages, package them into a financial instrument and use that instrument to increase the amount of dodgy mortgages you can sell AND sell insurance and funds against this new financial instrument. It was in effect creating multiplying the money floating through the system and creating new products to excite investors and the ability to sell riskier assets at the same time. Make the cake bigger and spongier and eat the cream off the top!

Wall Street works off %s, they get paid bonuses on trades and growth. Even if there is no growth they still get huge salaries, management fees and make money on transaction fees. It was easy to boost growth though when interest rates were so low that it was almost free to borrow money and speculate. Every market needs supply and demand. In the money market the US Fed and the Chinese and Japanese central bank created the supply and the derivatives market in particular created the demand. The Chinese did their bit too by continually reinvesting their balance of trade back into US bonds thus continuing the cycle.

As for your 10% idea, let looks at derivatives. The global derivative market is estimated at 600 trillion USD!
http://www.slate.com/articles/news_and_politics/explainer/2008/10/596_trillion.html

Global fixed assets and stocks are estimated at 164 trillion USD. This clearly illustrates the key role the derivative market had in the financialisation of the US economy in particular and why Wall Street was so eager to push derivatives. US GDP is 14.6 trillion USD.

The relative demise of manufacturing in Western countries definitely had a part to play too. I agree with you though that overall this whole cycle has boosted the fortunes of developing countries worldwide. It is ironic that free trade has far and away boosted the fortunes of other countries more than the US, at least until now.