Cynicus Economicus - Latest Comments in Economic Reality - The World Got Tougher

Re: Economic Reality - The World Got Tougher

Gregg — Mon, 13 Jul 2009 18:18:11 -0000

I think you’d hard pressed to find anyone with a solid understanding of economics and market behavior ready to say we’ve seen the bottom. As it was pointed out, nobody wants to get involved with acquiring a bank and finding themselves under the restrictions that trap money brings. Not to mention the new capital and holding time requirements being proposed.

http://www.beaconintegratio...

Re: Economic Reality - The World Got Tougher

zqa395 — Thu, 09 Jul 2009 02:26:48 -0000

Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression

http://www.rollingstone.com...

Re: Economic Reality - The World Got Tougher

Steve Tierney — Tue, 07 Jul 2009 17:44:39 -0000

I hate to say this because Im sure you like the new comment system, having implemented it, but - while i'm having no problem with it displaying, I don't really like it as much as the old one. There was something enjoyable about its simplicity.

This might just be because I'm a conservative and as everybody knows we are resistant to change... -grin- Do feel free to ignore. Its certainly not a big deal and wont stop me enjoying your blog at all.

Re: Economic Reality - The World Got Tougher

cynicus — Tue, 07 Jul 2009 17:29:43 -0000

Thanks for the feedback. From my point of view it is a little more difficult for administration, which is a negative. On the other hand, it does have a better potential for discussion.

Are others having problems? Feedback will be appreciated, as I do not want to see commentators having difficulties unless the system has significant advantages. In the interim, apologies pocmloc for the problems.

Re: Economic Reality - The World Got Tougher

pocmloc — Tue, 07 Jul 2009 17:18:43 -0000

Just to let you know that we are having trouble with your new comment system - it is completely failing to appear on one of our main computers which is pretty irritating. I think it is because there is no 'plain text' equivalent, it is all packaged up in fancy scripts etc. which don't work on older or plainer computers.

Re: Economic Reality - The World Got Tougher

czecho — Tue, 07 Jul 2009 13:26:55 -0000

....They are hungry for success and willing to compete with us.
The real question that is not being raised is this; are we willing to compete with them?....

Not only hungry and willing but also ready to steal our latest technology by any means. As long as I know their miraculous economic growth is the result of the creative genius of the West , their only contribution is the hardworking labour. So I think the question is how far we are going to go in allowing transfer of our intellectual treasures either through our politicians who kneel at the feet of their corporate masters or industrial espionage. Let us not forget that it is the West that hols the keys to wealth. It only depends how many of them are handed over to the East at our expense, and to the detriment of our security.
As for the lifting of the poor out of poverty point. The idea is noble but before pursuing noble ideas to their desctructive end, we should put them into practical context.50 years ago the combined population of Asia and Africa was 1,6 billion. In a few years time they are going to hit 8 billion. Well that is good news for corporations since bigger labour supply will mean even cheaper input for their businesses which in turn will automatically take care of even 'bigger levelling' globally(West included!). For the western taxpayers it will mean just more weight to lift out of powerty, which I am afraid instead of lifting it we are going to be crushed by it.
As one commentator noted the issues are so blindingly obvious that there must be a conspiracy of silence in the circles of the power elite.
The crisis is of human not economic nature.

Re: Economic Reality - The World Got Tougher

Josiah Stamp's Ghost — Tue, 07 Jul 2009 10:34:10 -0000

Good article here:

http://www.ritholtz.com/blo...

Re: Economic Reality - The World Got Tougher

Lord Sidcup — Tue, 07 Jul 2009 05:14:13 -0000

CE
You mentioned a few weeks ago that you might respond to my bafflement at your statement that 'the underlying is system is fine

That looks to me a pretty shaky, non-robust system. A healthy framework would have mechanisms to identify and cope with the flows of money the system allows. " The majority of governments and financial institutions have failed to identify (never mind cope with) what most on this blog would agree is 'reality'.

USELESS EATER
Is that Jared Diamond you've read?

I don't buy all of his arguments but Nassim Taleb makes very credible points about our collective inability to deal with the complexities we have created in our environment in Fooled by Randomness and The Black Swan.

In his previous post CE wrote " I do not think I have the right, or anyone else, to restrict where people move their money. It is, after all, their own money. How they utilise it, short of crime, is their own business."

Hard to disagree with that, but in it's simplicity does not address the core of our ongoing crisis : which is not due to mis-regulution of what people do with their own money, but misuse of other people's money by governments and institutions. The current systems rewards and incentives this. The complexity of current financial mechanisms and products baffles most people (even many experts) and makes efforts towards transparency etc largely irrelevant. For the last 30 years or so successive UK, Irish and US governments have been impoverishing future generations of their citizens. We simply cannot trust our governments (or the large financial institutions that have captured them) to make competent or reality-based decisions with taxpayers or investors money.
This is systemic, rather not a function of the personalities or political beliefs of those involved. But is perhaps a discussion for elsewhere. What is clear is that politicians (winners of popularity contests) should be very restricted from having influence over fiscal policy.

BOB
I would say that while CE’s comments are excellent and insightful, his focus is narrowly defined, and certainly not holistic in any sense Doubt he himself would claim or desire it.

In response to LK's comment CE wrote:
('suppresses labour rights, has low work and safety conditions, ignores the environmental effects of industrialization, subsidizes industry'
CE wrote:
I do not much care for these. However, it seems that these are only an issue where we are losing the competition.

These are issues for a great many people. I first read CE’s comments on the Guardian site where these things have been discussed ad nauseum (though whether as anything more than lip-service is arguable).

There were comments a few weeks about dismissing the work of quants. Why stop there? A good outcome of this crisis might be a general collapse in faith in economic models that are meant to explain / predict outcomes and behaviors’ in reality. We have never had stable socialist or truly free-markets. Human's will never be as rational as we would like to be. (There is a whole lotta human irrationality going on that in my view CE fails to take account of. )

Discussions of Peak Oil / Climate Change etc they are having increasing influence on public opinion, gov policy and market behavior.

So even if they are 100% factually wrong (and there is indeed nothing to worry about), they are changing markets and show that economic theory isolated from questions of human psychology and sustainability etc will be blinkered and fail.

RAS
This is a good point.

It seems to me that people can not see that free-markets can have both destructive as well constructive phases. Rather than being simply “good” (right wing PoV) or “bad” (left wing PoV). It seems that supporters of both right and left wing economic models might get what they want. Globally,wealth is being consolidated, away from the poor/middle classes. So there is going to be a lot more equality, but unfortunately near the bottom of the economic pile. As the Western middle class gets eviscerated. While the diminishing number of people with access to money and power will be free to do whatever they like in the market.

Re: Economic Reality - The World Got Tougher

sobers — Mon, 06 Jul 2009 20:01:19 -0000

I visited both China and India a few years ago, and was struck by both the poverty, the incredible hard work, and the potential for massive wealth creation, that was visible there. It occurred to me then that we assume in the West that we 'deserve' our comfortable lifestyles, whereas it seemed to me that they were working far harder than we are, on an individual basis. What gives us the right to assume that we can afford our universal generous benefits and healthcare when people in India die on the streets? I saw with my own eyes a (presumably) dead body on the side of the road in Nagpur, India, of a man who had obviously broken his arm (the bone was sticking out of the skin). He had laid down and died there because there was no one to take care of him after his accident. That is the current 'cost' of our cheap imports from the Far East. Human suffering. It will not continue thus indefinitely. They will eventually spend their earnings on themselves instead of recycling it back to the West for us to borrow to buy more crap we don't need, or to spend on paying people not to work.

The wealth we generate in the West is not sufficient to maintain our current lifestyle without large amounts of borrowing from abroad, which is unsustainable in the long run. Eventually there will be a levelling of global wealth, away from the lazy West, towards the hardworking East. We will have to work harder for a lesser standard of living, and they will work less for higher living standards. Neither will reach the levels of comfort we see now in the West.

When will this happen? And how long will it take? It could start very soon, and it could be a sudden event rather than a gradual change. If the pound were to devalue drastically against other currencies, our income would overnight reduce in buying power. All the goods that are imported, or set in price in relation to international prices, would rocket in price. Food and fuel would increase first, followed by goods and services as the effects worked through the system. If we continue down the road we are on, that point will come fairly quickly, within a year or two.

Re: Economic Reality - The World Got Tougher

Useless Eater — Mon, 06 Jul 2009 13:41:07 -0000

I've been reading a little bit about how complex societies always collapse.

I think this is what is happening to our world, complexity has gone past the point of no return.

Re: Economic Reality - The World Got Tougher

Lord Keynes — Mon, 06 Jul 2009 09:59:55 -0000

(1) The financial centres of our planet are London and New York, so East Asia had little choice but to send the money there anyway, if they wanted to take advantage of the services offered by large financial institutions.

(2) Sterilizing current account surpluses by investing them overseas is not inevitable, as some countries chose to recycle them into their own economies.

(3) The logic of investment opportunities you describe may make sense under neoliberalism, but the rejection of those policies is precisely what is needed to enable new ways of dealing with foreign money.

(4) I chose the wrong words when I said " finding better sources of investment overseas". I should have said "find alternative ways of investing the money overseas or even domestically". A US government uncontrained by the policy shackles of neoliberalism might have used regulations to prevent the asset bubbles and use the government power to do something socially responsible with the money, like fund badly needed public works programs or large-scale scientific programs in biotechnology, physics, genetics, medicine, engineering etc. If the East Asian governments didn't like this, they can take there money back or take it to Europe.

I should have phrased my post better: I should have said

Re: Economic Reality - The World Got Tougher

Bob — Mon, 06 Jul 2009 09:48:47 -0000

I have been reading your blog for nigh on a year now and it's the best holistic view of events anywhere. I look around and I'm sure my grandparents would've likened it to the 'phoney war' of 39/40'.

But we know the bombs are gonna drop; a relentless wave after wave of economic crisis fall-out for years to come. And as you so eloquently say, it's now the mandarins (civil servants) drawing up plans as the politicians naval gaze. It's come to this. Gawd help us.

Re: Economic Reality - The World Got Tougher

ras — Mon, 06 Jul 2009 09:37:02 -0000

"You have still not dealt with how any regime might have coped with the influx of money from the East ... The only way to prevent this would be to restrict capital inflows."
"No, it would be to invest or loan the money outside the US and the West, just as petrodollars were. If governments can regulate banks, they can reduce potentially destabilising and large capital flows into Western countries by finding better sources of investment overseas."

In the first place, money was flowing from East to West because East could not find better sources of investment elsewhere. They would not be so stupid to invest in the West if they could find better places for investment. They projected their own greed into Western economies and these projections drove cashflow into Western economies. The West could neither invest the money within the West nor outside the West. Why? Reasons are very simple. The purpose of investing money in any sector of economy is that you expect higher added value from this sector. The globalization,or in other words technology and production transfer, is based on reduction that value by moving the whole productive sector to a cheaper place. So how could West invest money when there was no place left in the world where the value of labour and industries were not destroyed? The only option left was to put money into consumption and enjoy the ride.

Re: Economic Reality - The World Got Tougher

Steve Tierney — Sun, 05 Jul 2009 15:53:33 -0000

I agree with pretty much everything you say. I do feel Britain (at least) has the ability to compete. But that ability is smothered at present by over-regulation, a predatory and malicious welfare state and a government desperate to keep the true economic situation hidden. When the dam breaks, we'll cope as a nation and we'll cope well (despite copious moaning.)

All this borrowing is really just to keep the wolves from the door. They know the state of things but they want to buy their way out of blame until government changes hands. Scorched Earth style.

The same can't be said for the States since Obama has only recently been elected. Sadly, I can only draw the conclusion that Obama is way, way out of his depth. Which, I suspect, is a situation that can only end in tears.

Re: Economic Reality - The World Got Tougher

Malike — Sun, 05 Jul 2009 13:24:41 -0000

Whilst it's true that Asians were saving a lot you need to consider that Americans and Europeans saved a lot less at the same time.

American GDP 12-14tr
Chinese GDP 3-4 trillion at the time

40% (1,2tr-1,6tr) savings rate in China is equal to about a 10% savings rate in America which is far from unhealthy.
If you take into account that the American savings rate was around zero percent there is no way Chinese savings can lead to overinvestment. Japanese savings went down (they didn't really increase treasury holdings for years), South Koreans are heavily indebted and all other Asian economies are too small to have a substantial impact.
Now where's that 'Asian savings glut'?

Re: Economic Reality - The World Got Tougher

cynicus — Sun, 05 Jul 2009 11:45:47 -0000

Lord Keynes:

I think I owe you an apology. On reviewing my replies to your comments, I note an element of impatience in my replies. Your contribution to the comments section is appreciated, and it is always good to have an alternative point of view on the blog.

I hope that you will appreciate that my impatience is not because you disagree, but rather it is the combination of breadth and volume of the comments. In many of your comments you bring in history, as well as a broad range of theorists, which is to your credit. However, this means that each comment and point deserves an essay in response. Furthermore, if I do write a response, it meets a further response requiring a further response from me.

I hope that you will sympathise that I just can not respond to such volume. In order to write my posts I read about 20+ economic news articles a day, occasionally add reading on theory, and many of the posts demand considerable time. I also read all the comments and try to respond to other commentators.

As such, I would like to extend a second opportunity for you to write a post. In this way, you can outline your argument and approach, and this may simplify the process of commenting. If in the future you feel that you need to update any points significantly, then I will be pleased to extend further opportunities. You may want to take the opportunity to pull all of your critiques together, and make a general critique of the underlying ideas in the blog. As before, however, it will be free of any editing, and the scope and choice of subject is your own.

Alternatively, if you do not take the option of a further post, if you could just pull back on the volume and breadth, where I have time, I will try to respond.

Re: Economic Reality - The World Got Tougher

Charles Edward Frith — Sun, 05 Jul 2009 10:45:37 -0000

I'm just gobsmacked that printing money and ignorance based optimism have kept the whole show rolling on. It's almost a philosophical exercise in value, expectations and hope. I anticipate the fundamentals being enforced when China plucks up the courage to reengineer what they stand for because regardless of business acumen the mission statement is missing. Money for money's sake has never worked. Chinese demographics are at best a 2 decade golden era. Three day working week makes a lot of sense all round.

They're relaxing.

Re: Economic Reality - The World Got Tougher

Alex — Sun, 05 Jul 2009 07:14:09 -0000

In general your analysis makes sense. My feeling, however, is that things will not play out as you suggest. We live in an unsustainable system. The pressures you discuss are just part of the tensions that have begun to pull things apart. The human system has grown too big and is going too fast for it to be sustained anymore. That term “sustainability” doesn’t relate to issues at some future time. We have started to see the breakdown.

Yes, there are imbalances that are going to hit the West, but no part of the world will be immune from the combined onslaught of resource shortages and environmental degradation that will gather pace over the next decade.

It is not feasible that the world’s trade, political and security structures will make it through the next decade without radical restructuring. My guess is that a number of “givens” will soon the challenged - for example, I can’t see free trade surviving in a world where scarcity begins to bite. One thing that will soon begin to undermine free trade is the inflationary pressure that will accelerate as resources become scarcer.

There will be huge tensions at the national and international level. Social upheaval will be massive and discontent with the political classes will grow. There will be a growing risk to the liberal Western values that have created so much of the texture of the current landscape.

There are two broad routes the world system can take. One involves disintegration, chaos and increasing human suffering. The other involves a revolution in the way humans structure their relationship with the world. The first of these outcomes is by far the most likely. The real shame is that China and India decided to enter a game that was doomed and didn’t pioneer a new way.

Yes, we in the West will become poorer. Yes, bringing China and India into the game has accelerated that impoverishment. But, in this unstable situation, logical predictions based on extrapolations that assume there will be stability in the underlying system are unlikely to come to pass.

The real tragedy is not that we are messing up the management of plan A. It is that there is no sign of a plan B. Plan A is dead whatever we do.

I am not a conspiracist and was talking these issues over with friends a few days ago. Their, feeling was that the problems are so blindingly obvious that there must be a “conspiracy of silence” pushing a wider airing of the issues out of much of the mainstream media?

Re: Economic Reality - The World Got Tougher

Lord Keynes — Sun, 05 Jul 2009 06:42:53 -0000

The point is that the money coming from the East created a circumstance that was entirely novel in the West

But there is an obvious historical parallel: the petrodollars that started flooding into London and New York banks from 1973-1974 and 1979 after the surge in oil prices. They were prevented from causing massive and destructive asset bubbles in Western economies, because of effective financial regulation. Instead, they were lent to Third World countries partly to finance the increased price oil and to build up foreign exchange reserves.

How can you stop the banks from accepting the flood of money? It is the flood of money that is the root of the crisis. Under the systems up to now the money would have arrived in the economy, and bubbles would appear.

The key is what they do with it, not the flood of money itself. I have already listed a vast range of regulations that would have prevented the stock market and real estate bubbles, both in the last post and one below.

If you want an example of an effectively regulated banking system, just look at Canada:

http://www.brookings.edu/pa...

Unlike Europe, the US, and the UK, no bailouts were needed there: an incredible empirical confirmation of the success of financial regulation.

You have still not dealt with how any regime might have coped with the influx of money from the East ... The only way to prevent this would be to restrict capital inflows.

No, it would be to invest or loan the money outside the US and the West, just as petrodollars were. If governments can regulate banks, they can reduce potentially destabilising and large capital flows into Western countries by finding better sources of investment overseas.

The regulators will still believe that they can recognise risk, even though history shows that they can not.

I disagree. The history of Bretton Woods shows exactly the reverse: the proof is that there was only one serious banking crisis in that era.

As a note, you consistently miss the significant contribution of the Central Banks to this crisis. These are looking like the regulators of the future. Do you really think that those who have got so much so fundamentally wrong should be dictating the future structure of finance?

In my system, these people would be utterly purged from the system. As I have said below:

As Joseph E. Stiglitz (“Capitalist Fools” Vanity Fair, January 2009) explains, idiots like Greenspan were free market ideologues who did not believe in regulation to begin with, and held the mistaken “rational expectations” hypothesis about financial markets. Financial experts who actually believe in proper regulation should be placed in charge of new regulatory agencies

Re: Economic Reality - The World Got Tougher

Lord Keynes — Sun, 05 Jul 2009 05:55:37 -0000

Reply 1

I have always believed that globalisation is a way of lifting people out of poverty ... However, I also believe that China, once opened, provided with capital, and access to markets would in any case grow as a competitor to the West.

I disagree that "globalisation" or "neoliberalism" or the "Washington Consensus" has been, on the whole, beneficial for the Third World.
For much of the Third World, it has been a disaster.

Joseph E. Stiglitz (Globalization and its Discontents, New York, 2002) shows how globalisation, through its excessive financial liberalization, caused severe problems to developing countries.

Furthermore, you cannot point to China, South Korea, Japan or Taiwan as examples of the success of globalisation, because these are precisely the countries that have repeatedly and significantly violated the rules and orthodox policy presciptions of neoliberalism.

South Korea and Japan, whose rise started well before globalisation, are actually good examples of infant industry protectionism and the developmental state.

In a world of regulated finance, flexible monetary and fiscal polices, Keyesnianism, and industry policy, there is a major role for international trade, just as there was in the Bretton Woods era. China could do just as well in this world, and still have access to long -term FDI, and external trade, with causing severe trade imbalances.

Re: Economic Reality - The World Got Tougher

mismo — Sun, 05 Jul 2009 05:46:46 -0000

http://business.timesonline...

Times economics editor spun this. Maybe he doesn't realize that 50 - o.3 = 49.7 He calls this renewed expansion.

Is it part of someones plan to plant some illusionary green shoots?

Re: Economic Reality - The World Got Tougher

Useless Eater — Sun, 05 Jul 2009 05:34:54 -0000

".....We are moving into Phase II of the Great Unwinding. It may be time to put away our texts of Keynes, Friedman, and Fisher, so useful for Phase 1, and start studying what happened to society when global unemployment went haywire in 1932...."

From Ambrose Evans-Pritchard Telegraph. 04.07.2009

http://www.telegraph.co.uk/...

Cynicus. Great to have live links

Re: Economic Reality - The World Got Tougher

cynicus — Sun, 05 Jul 2009 05:29:29 -0000

I am glad that the underlying message is reaching an audience. Life has become more competitive. A profound change is on its way, and we can either bury our heads in the sand, or confront the change.

Re: Economic Reality - The World Got Tougher

cynicus — Sun, 05 Jul 2009 05:27:30 -0000

I agree that it will only help up to a point, as China already has many advantages. However, it would be a start. I also believe that intellectual property law enforcement is a priority for redressing the balance (I note Lord Keynes did not mention this in his list of ills, even though it is an important dimension of China's success).

The problem is that, the US and the West need the Chinese money, and are now letting China call the tune. The West needs to gather itself into unity and finally confront China. Inaction is not going to help in the long run....

Re: Economic Reality - The World Got Tougher

cynicus — Sun, 05 Jul 2009 05:20:39 -0000

You have still not dealt with how any regime might have coped with the influx of money from the East. The point is that the money coming from the East created a circumstance that was entirely novel in the West. Citing past situations still does not hold that the same thing would have worked in the circumstances of now.

I repeat my question. How can you stop the banks from accepting the flood of money? It is the flood of money that is the root of the crisis. Under the systems up to now the money would have arrived in the economy, and bubbles would appear. The only way to prevent this would be to restrict capital inflows. I am not aware that past banking regulation would have achieved this.

You say:

Restoration of effective financial regulation is hardly “tinkering here and there”: it would be a fundamental structural change in financial markets.

My answer is simple. There will still be guarantees on the banks too big to fail, those banks are now consolidating, creating ever more too big to fail banks. The regulators will still believe that they can recognise risk, even though history shows that they can not. Even assuming a happy ending to this mess (unlikely) risks will one day arise in unexpected places, and a similar crisis will eventually happen.

I have detailed my banking reforms and these are to remove this regulatory mess. Instead, I propose a simplified system that treats people as grown ups and removes the asymmetry of information.

Perhaps you might read it, as it shows the problems that are inherent in atttempts at regulation of risk.

http://cynicuseconomicus.bl...