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Evan,

Implied in your piece above is that house prices rises are in some way 'good'. Will you please explain why you believe that inflation in house prices is a good thing under any circumstances?

Then you remark on your lack of comprehension of the rise in commodity prices. The credit crunch was created by excess money supply being created through the construction of synthetic financial instruments (CDOs etc.) This money is still sloshing around the markets and is in the hand of speculators. Speculators do what they do speculate - hence the huge rise in commodity prices. The fact is that the World's economy has not yet reduced its consumption of commodities as the result of the increase in price as the adjustment is somewhat inelastic (once you have a gas guzzler you take time to swap it for a more efficient vehicle etc.)

You are however quite correct in my view about the imported deflation caused by the expansion of Chinese manufacture and the lack of an associated rise in the Yuan. Our inflation statistics have been 'fiddled' by the agents of the Treasury in full knowledge of what they are doing. Leaving out the cost of housing and adjusting the make up of the index so that it looks good. This in turn 'forced' the Band of England to keep interest rates too low for a decade or so, devalued savings at the expense of borrowing and amplified the credit crunch.

No matter how many times reasoned economic studies were presented (by me and many others) to the Bank and the Treasury they fell of deaf ears for political reasons and led to the artificial Brown boom the bust of which is just starting.

You are right to note that there should be a large fall in commodity prices before the present bust reaches bottom and then (perhaps) a decade long recovery.

The kiddies in the City will all be long gone before the next bunch make the same mistakes again! The Yuan will need to rise from the 15 or so that it is today to 2 to 4 before Europe's (and the UK's) manufacturing industry can be competitive and that will take a decade or more.

One this that we must learn is that we cannot live on the Financial Services Industry alone- we must make things too!

Evan

Please can we resolve this time before we start thinking of the next time?

I appreciate the `new' paradigm is now the old paradigm but we don't really know where we are at the moment to even conceptualise the future paradigm. I would even suggest that perhaps we would be better off without pardigms all together.

John of Hendon raises an interesting point about the revaluation of the Yuan. I think that it is unlikely that a revalued Yuan will mean a return to productive employment in the UK and Europe on its own. There are other countries with burgeoning populations willing and able to take on production at low wages; Vietnam, Indonesia, and Malaysia immediately spring to mind. There are many others.

What we need to find is a new industry whose technology we can develop and then sell on to others. Carbon cleaning technology and fuel technology are obvious choices for a start. We need a new USP other than financial services.

Evan - A good way to create more space in Britain's prisons is to take the beds out and put straw down.

A possible reason for the sudden increase of commodity prices while actual demand remains flat: people fleeing sub-prime mortgage investment and property speculation, as well as the ancillary economy that depends on these, need somewhere reliable to dump their money. What could be more reliable than something we can't do without, like food, and minerals?

One thing we need to remember that may underpin everything for Western economies, is the fact that little of our economies is now dedicated to actual wealth creation, but more service industry and financial "skimming." Our economies are bound to be much less stable, with less actual wealth to underpin the money that is flying around.

The Credit Cruch: Where has the money gone - follow the money trail? The crunch was caused by defaults on subprime mortgages in the USA and the fact that banks around the world bought some of this mortgage business from US banks. The US banks lent money to Americans who in turn used the money to buy houses from US building firms. They in turn bought land from US land owners and made profits for their owners. Am wrong or have banks in the US around the world just lost billions of dollars to private US land owners and building developers? Should there not be more comment about this and possibly a search for compensation.

Evan

I always assume that if someone has lost a lot of money then someone else has gained. If you're gambling and you lose - the House or the Bookie gets the money. With all these big big and massively wealthy banks going bust I assume someone else has their money. Who is the bookie?
A bloke in my office who claims to understand economics says the money never existed in the first place and has basically evaporated. I suggested he was an idiot - am I correct?

This comment was removed because the moderators found it broke the house rules. Explain.

WHERE HAS ALL THE MONEY ACTUALLY GONE?

In all the talk over the past few months no commentator, economist, banker or politician has actually explained where the billions now being replaced by governments have actually gone. Money just circulates around, doesn鈥檛 it? So how come billions seem to have disappeared into thin air?

The answer is that it isn鈥檛 there because most of it never actually existed in the first place. People have forgotten that money is a measure of wealth created by human effort, not just abstract numbers in computer files. Bankers have made billions out of nothing. Here鈥檚 how.

I take 拢1000 of my hard-earned cash to the bank and put it in my savings account. The bank lends it to someone to buy a house. The 拢1000 is passed three or four times from buyer to seller in the house chain until the last seller, who is not buying (perhaps they inherited the house from their parents who have died), takes the money and puts it in his savings account with the bank.

The bank lends the same 拢1000 again to somebody else and the cycle repeats. The same 拢1000 repeatedly cycles through the economy without 鈥� and this is the crucial point 鈥� without anybody lifting a finger to create any wealth to enable it to legitimately enter its next cycle. In its second and subsequent cycles the money is not hard-earned; it is merely a number in a computer file and nothing more.

So the 拢1000 has been lent repeatedly and if the system wobbles, such as one of the borrowers losing his job, my original 拢1000, which may have been lent ten times or maybe a hundred times, cannot possibly be repaid. In fact it is impossible to say where it is (but see below) because, of the total amount lent, only a fraction has ever actually existed. A wobble could also be caused by a general slowing of the economy or a decline in the savings rate in which people save less and want their money out of the bank.

It should at least be obvious by this stage that the orphan and I cannot both get our 拢1000 back since there isn鈥檛 拢2000 there.

Each time the 拢1000 cycles round the bankers take a percentage even though no wealth has been created. If it goes round often enough they get it all, hence their billions of dollars in bonuses and my 拢1000 disappears into thin air. (It must be thin air since the Large Hadron Collider has not yet created any black holes.)

Furthermore, each time the 拢1000 has been lent the borrower has promised to repay it from his earnings over the next twenty years. The money to repay cannot possibly be found now because the borrowers cannot suddenly put in 20 years of work instantly to create the wealth to earn the money to repay the loans.

Contrast this with spending the money in the supermarket. Again the money repeatedly cycles round the economy but there is a difference. In this case the 拢1 you spend on a loaf of bread, for example, goes to pay the wages of the farmer, the baker, the driver who takes the bread to the supermarket, the oil worker who makes the diesel for the van and the checkout girl who puts it through the scanner. All these people have done useful work to the value of their wages and between them created 拢1鈥檚 worth of wealth to justify the 拢1 entering its next cycle through the economy.

This example is simple, yet it explains why all the money seems to have disappeared into a black hole 鈥� sorry, thin air. Fancy 鈥渇inancial instruments鈥� and practices like CDOs, leveraged this and that, hedge funds and short selling, which I don鈥檛 begin to understand, are doubtless clever devices which manage to turn money over even faster without creating a penny of wealth.

It should have been obvious to the politicians that there was something wrong when bankers could pay themselves hundreds of billions 鈥� yes hundreds of billions 鈥� of dollars over the last decade in salaries and bonuses without doing anything more than moving numbers from one computer file to another. Why they didn鈥檛 realise or why they didn鈥檛 do anything about it is for them to explain. Over to you.

BAIL OUT

It has been reported that US Treasury Secretary Henry Paulson is worth about 拢700 million. Perhaps somebody should ask him how he managed to do $700 million worth of work in just 50 or 60 years.

Presumably most of his money came fro his job at Goldman Sachs. He should ask 1000 of his friends to bail out the banks instead of the taxpayer having to do it.

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