In May 2003 I visited Brazil and was astonished when the street kids, out to make a buck from the foolish tourist, were unwilling, unlike any of my other trips to developing countries, to take the US dollar. I'd being travelling for many years in South East Asia and all people ever wanted was the dollar so I was stunned to suddenly find this shift. They had noticed the downward trend in the dollar and were sure it was going to continue for long enough to make the euro the rational choice. The market may be difficult to grasp in its entirety but the action of its participants is the only way to grab a foothold of understanding. What I had felt, I was positive, was a tremor which could only herald some big event that was sure to come. As I watched the dollar decline over the next few years I wondered how these children, with less access to information or financial training could have known what was to come. Though in a way it is clear for they are at the coal face and part of the front line of the results that happen from the ivory towers of economic policy making. It takes a long time before a central banker gets the data or is affected by the big decisions and in many ways with their government paychecks they may never feel the results at first hand.
More and more tremors have come and debate has raged if they were the totality or worse was to come. The economists have taken action over the past few years to avert a disaster and save us from recession and have even denied that there were any problem beyond a few sectors. However, despite all of this people can now see the tsunami offshore as it is prepared to strike. As it has become closer more and more damage is being wrought throughout the economy but it is unclear how much damage will be done when it finally hits shore. The hope is that the massive monetary and fiscal policy will be enough to prevent landfall and a serious fallout but there is no proof that this barrier wall be enough. It is here that the natural disaster analogy fails because these policies, particularly the monetary pumping, have actually been the cause of the tsunami in the first place. So it looks like a flame thrower in the hands of an arsonist is being used to put out a fire that was caused by an arsonist with a flame thrower. The story has always been, particularly by economists who are keen to sell their services, that the lack of remedial government economic policy was what caused the 1929 downturn turn into the great depression. Now as the central bankers kick into action with the full backing of world governments and their flame throwers on their backs, which we know they will only used more and more if things get worse (a problem in itself for predictable human action is incorporated by the market) we will just have to hope that a fire can be used to put out a fire.
Tuesday, December 23, 2008
Tuesday, December 16, 2008
Artificial World vs the Market
Look at the trouble Alan Greenspan caused by keeping interest rates too low for too long to prevent a deflation in asset prices after the technology bubble burst. Type A, 'must achieve' financiers, armed to the teeth with computers, algorithms and theories that markets are always correct (and when they aren't knowing the fed would bail them out) took all that cheap money and put it into projects that would not have existed if the cheap money had not been there in the first place. Artificial money found its artificial home. In this artificial world buyers who would normally not have had the demand or the money to buy the new output had to be given both. New valuations justifying entry and reentry into this market were easily churned out by the computers.
The only down side to an efficiently operating artificial market is the real market where goods and services that should have been produced but weren't because of this misdirection, begins to contract. So as the notional wealth continues to expand at exponential rates the real wealth starts to disappear. The notional wealth for many assets moves far beyond what people can afford to borrow in a world of contracting real wealth so demand for these overproduced artificial products starts to fall leading to deflation.
This really is troublesome for the Fed chairman Ben Bernanke. He and the financial authorities are determined to stop all this reckless lending and fraudulent valuation practices that Wall St got involved in because of all the cheap money they had to lend out to prevent the 2002 deflation threat. At the same time he has to cut interest rates even lower (now that making up valuations and fraudulent practices are off limits) to fix this 2008 deflation problem and keep the asset prices up to the levels that were made up in the fraudulent artificial world. He must prevent market's annoying tendency of trying to correctly value assets downwards to levels affordable by humans with a normal life span, who are just a little bit less keen to borrow as they seem to remember the foolishness of paying too much with Alan Greenspan's cheap money. If they won't take the money and indebt themselves even further he'll have to force them to take the money by printing so much of it that it will be impossible for them to say no. He's studied for this moment all his life and he knows all the tricks – he can post them more cheques in the post, drop it out of the sky in helicopters or give tons of it to the government as he can be sure they'll spend it. Whatever happens he will prevent those high assets prices from Greenspan's first bubble from dropping. It's lucky we have someone like that at the helm of the US Federal Reserve who not only understands the market but is constantly there to stand in the way of the market trying to revalue the Fed and Wall Street's artificial world.
The only down side to an efficiently operating artificial market is the real market where goods and services that should have been produced but weren't because of this misdirection, begins to contract. So as the notional wealth continues to expand at exponential rates the real wealth starts to disappear. The notional wealth for many assets moves far beyond what people can afford to borrow in a world of contracting real wealth so demand for these overproduced artificial products starts to fall leading to deflation.
This really is troublesome for the Fed chairman Ben Bernanke. He and the financial authorities are determined to stop all this reckless lending and fraudulent valuation practices that Wall St got involved in because of all the cheap money they had to lend out to prevent the 2002 deflation threat. At the same time he has to cut interest rates even lower (now that making up valuations and fraudulent practices are off limits) to fix this 2008 deflation problem and keep the asset prices up to the levels that were made up in the fraudulent artificial world. He must prevent market's annoying tendency of trying to correctly value assets downwards to levels affordable by humans with a normal life span, who are just a little bit less keen to borrow as they seem to remember the foolishness of paying too much with Alan Greenspan's cheap money. If they won't take the money and indebt themselves even further he'll have to force them to take the money by printing so much of it that it will be impossible for them to say no. He's studied for this moment all his life and he knows all the tricks – he can post them more cheques in the post, drop it out of the sky in helicopters or give tons of it to the government as he can be sure they'll spend it. Whatever happens he will prevent those high assets prices from Greenspan's first bubble from dropping. It's lucky we have someone like that at the helm of the US Federal Reserve who not only understands the market but is constantly there to stand in the way of the market trying to revalue the Fed and Wall Street's artificial world.
Friday, December 5, 2008
What Else Can Happen?
The world economic situation keeps getting worse with commentators and people in compromised positions claiming that 'no one could have foreseen this!'. However, there were some who pointed out that the world was heading toward a financial disaster due to loose credit driven over-investment and a semi deregulated environment where financial recklessness and malfeasance were never punished by the market as bailouts from the government were guaranteed as soon an organisation became too big to fail.
With hindsight vision it is relatively easy for most people to see that the warnings and actions were quite obvious. So the world has arrived at an expected bad place as the logical result of previous actions. So from where we are now what other malignant events could occur to shake an already fragile system.
The obvious candidates, outside of some planetary external such as a large asteroid hitting at speed, that have to be considered are (and I try to put an order on this):
1) India and Pakistan. There are calls on the streets of India now to wipe out Pakistan. As an Indian colleague of mine said about the sentiment “Pakistan must be taught a fitting lesson – a nuclear strike and it will be a desert in minutes”
2) Related to 1) of course – with capitalism on its knees, it must be clear to any fundamentalist opponents, that now is a good time for terrorist strikes at key economic targets.
3) China. Peasant risings in times of economic hardship have happened before and with calamitous results. With urban joblessness in China already at 12% there is already a high risk. In the non technological past China was not part of the global economic system and did not have a ton of nuclear weapons so this time around the negative outcomes come could be far more severe.
4) Russia – with the cheap money from oil that allowed Putin paper over cracks now gone he’ll be looking for new wall paper and nationalism is the usual paper of choice.
5) Environmental tensions – in an ever more populated high consumption world, technology appears to be demanding more from the environment than it is saving through new efficient and clean innovations. A collapse in the environment would surely lead to some dystopian hell.
The other consideration to all of this is completely unforeseen events. Something positive (or mainly positive depending on how you view it) could happen like the invention of the Internet browser that happened in the early 1990s at the CERN institute which spawned the technology boom. However, some negative, completely unforeseen, event can happen which could have an incredibly disruptive effect. The best bet about what could happen can only relate to the area (the problem with things that are completely unexpected!) and for me that has to be something to do with some cultural shift on account of the break down in the capitalist grand narrative intermingled with economic hardship.
With hindsight vision it is relatively easy for most people to see that the warnings and actions were quite obvious. So the world has arrived at an expected bad place as the logical result of previous actions. So from where we are now what other malignant events could occur to shake an already fragile system.
The obvious candidates, outside of some planetary external such as a large asteroid hitting at speed, that have to be considered are (and I try to put an order on this):
1) India and Pakistan. There are calls on the streets of India now to wipe out Pakistan. As an Indian colleague of mine said about the sentiment “Pakistan must be taught a fitting lesson – a nuclear strike and it will be a desert in minutes”
2) Related to 1) of course – with capitalism on its knees, it must be clear to any fundamentalist opponents, that now is a good time for terrorist strikes at key economic targets.
3) China. Peasant risings in times of economic hardship have happened before and with calamitous results. With urban joblessness in China already at 12% there is already a high risk. In the non technological past China was not part of the global economic system and did not have a ton of nuclear weapons so this time around the negative outcomes come could be far more severe.
4) Russia – with the cheap money from oil that allowed Putin paper over cracks now gone he’ll be looking for new wall paper and nationalism is the usual paper of choice.
5) Environmental tensions – in an ever more populated high consumption world, technology appears to be demanding more from the environment than it is saving through new efficient and clean innovations. A collapse in the environment would surely lead to some dystopian hell.
The other consideration to all of this is completely unforeseen events. Something positive (or mainly positive depending on how you view it) could happen like the invention of the Internet browser that happened in the early 1990s at the CERN institute which spawned the technology boom. However, some negative, completely unforeseen, event can happen which could have an incredibly disruptive effect. The best bet about what could happen can only relate to the area (the problem with things that are completely unexpected!) and for me that has to be something to do with some cultural shift on account of the break down in the capitalist grand narrative intermingled with economic hardship.
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