2nd Anniversary Issue…
Why Did I See it Coming and “They” Didn’t?
The financial crisis is widely accepted as having started in August 9 2007, with the BNP’s announcement that it was suspending redemptions from three of its funds that were heavily exposed to the US securitisation market (click here for the BNP August 9 2007 press release).
Just three months beforehand, the OECD released its 2007 World Economic Outlook, in which it commented that:
“In its Economic Outlook last Autumn, the OECD took the view that the US slowdown was not heralding a period of worldwide economic weakness, unlike, for instance, in 2001. Rather, a “ smooth” rebalancing was to be expected, with Europe taking over the baton from the United States in driving OECD growth.
Recent developments have broadly confirmed this prognosis. Indeed, the current economic situation is in many ways better than what we have experienced in years. Against that background, we have stuck to the rebalancing scenario. Our central forecast remains indeed quite benign: a soft landing in the United States, a strong and sustained recovery in Europe, a solid trajectory in Japan and buoyant activity in China and India. In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (OECD World Economic Outlook Vol 81 p. 7; emphases added)
Similarly, Reserve Banks around the world had set interest rates to relatively high levels to restrain rising inflation, which was then seen as the main threat to continued economic prosperity. Our own RBA increased rates when the crisis began, and three more times since. And it was not alone: the European Central Bank also raised rates after the crisis (see Figure One) .
Figure One
Reserve Interest Rates
In December 2005, almost two years before the crisis hit, I realised that a serious financial crisis was approaching. I was so worried about its probable severity–and the lack of awareness about it amongst policy makers–that I took the risk (for an academic) of going very public about my views. I began commenting on economic policy in the media, started the DebtWatch Report (the first was published two years ago in November 2006), registered a webpage with the apt name of www.debtdeflation.com, and established the blog Steve Keen’s Oz Debtwatch.
How come I got it right, and “they”–the official economic managers–got it so wrong?
It’s not because I’m any brighter than they are–there are plenty of highly intelligent people in those organisations. Instead, it’s because they follow mainstream views in economics, and I follow a minority perspective. The economic history we are currently living through is proof that the mainstream is fundamentally wrong about the nature of the economy, while my minority perspective is at least partially right.
This is not something one should be able to say about a science, and there lies the rub: economics is not even close to qualifying as a science. A better model for economics is a group of warring religions–or science, such as it was, before Galileo’s empirical revolution, when what mattered to scientists was not empirical relevance, but conformity to with the Bible.
Forty years ago, Keynes was The Messiah, and his General Theory was the Bible. But the “stagflation” episode of the 1970s allowed a new Messiah to arise: Milton Friedman, with his doctrine of Monetarism. Though Monetarism itself is no longer espoused, the economic religion that Friedman represented–known as “Neoclassical Economics”–supplanted the previous Keynesian orthodoxy. Today, the majority of economists know of no other way to think about the economy–and they run Central Banks and Treasuries throughout the world, and dominate tuition in universities.
They also develop mathematical models of the economy, which are in turn used to guage its health, and to advise politicians about policy challenges in the near future. According to these models, just over a year ago the economy was in fine shape, and the main policy challenge was to avoid overheating that would lead to rising inflation.
Well inflation did rise. But simultaneously the global economy was falling into a serious recession driven by a global financial meltdown that these economists and their models completely failed to anticipate. Rarely in human history have policy makers been so badly misled by the so-called experts.
The three key aspects of Neoclassical economics that led to its wildly inaccurate forecasts are the beliefs that:
- A market economy always tends towards equilibrium;
- Money impacts “nominal” variables like the rate of inflation, but has no long term impact on “real” variables like employment and GDP growth; and
- Finance markets are rational; in particular, the level of private debt reflects rational calculations about future income, and can therefore be ignored by policy-makers.
The key aspects of the approach that I take (the “Financial Instability Hypothesis” developed by Hyman Minsky) that alerted me to the approaching danger are the propositions that:
- A market economy is inherently cyclical;
- Money is fundamentally credit-driven, and has impacts on real variables as well as nominal ones in the short and long term; and
- Finance markets destabilise the real economy, because they are prone to bouts of euphoric expectations that lead to debt-financed speculative bubbles.
These very different perspectives have two key effects on the economists who hold them:
- they focus attention on very different sets of economic data; and
- they inspire mathematical models of the economy that are very, very different.
What is “a beautiful set of numbers” lies in the eyes of the beholder
Neoclassical economists focus upon three numbers:
- The rate of economic growth (preferably above 3% per year);
- Unemployment (which they prefer to be low, but not “too low”–the moving target for which in Australia was 4.5% until recently); and
- The rate of inflation (which they prefer to be as low as possible, and certainly below 3%).
On all three fronts, from the vantage point of 2006, 2007 looked like being a vintage year–except that the first number was so high that the second was tending too low, which could mean that the third could start to rise. Hence the economic focus was on reducing growth via higher interest rates, to increase unemployment slightly and thus reduce the rate of inflation (see Figure Two).
Figure Two
Australian Growth, Unemployment and Inflation
The RBA’s policy response to this was immediate and decisive. Having already raised rates in 0.25% increments five times since 2002, it accelerated its inflation-control program with three more increases in 2006, two in 2007 –the first of these coming just before the crisis broke, and the other famously during the 2007 election campaign–and two more during early 2008.
Figure Three
Movements in Australian Reserve Interest Rates
Unfortunately, the RBA’s response was also the wrong one. While inflation did rise, it was not the main problem facing the economy. Trying to control the inflation rate by raising interest rates at that time was a bit like trying to control a patient’s blood pressure when he was dying of cancer. That cancer, as is now widely acknowledged, was private debt. The economic variable that their Neoclassical training led them to ignore, the ratio of private debt to GDP, was now indisputably the most important number of all.
Economists who are influenced by Hyman Minsky–broadly known as “Post Keynesians”, since Minsky was a follower of Keynes–focus precisely on that datum. This ratio of a stock (outstanding debt at a point in time) to a flow (the annual output of goods and services) tells you how many years of income it would take to reduce debt to zero. It therefore measures the degree of pressure that finance is imposing on the real economy.
A certain amount of debt is vital to the proper functioning of a market economy, since most companies need flexible working capital to be able to operate, and overdraft facilities and lines of credit provide that flexibility. But too high a debt to GDP ratio means that the financial burden of debt repayment on the economy is excessive, and Minsky’s theory implies that there is a tendency for the debt to GDP ratio to ratchet up over a series of booms and busts, resulting eventually to a Depression.
I did not see the data in Figure Three until December 2005, since my “day job” is as an academic rather than an economic policy maker. I had signed a contract to produce a book on financial instability as long ago as 1998, but the unexpected success of Debunking Economics, and the follow-on debate that engendered amongst academic economists, forced me to delay commencing that task.
As soon as I did see the data–in December 2005, when preparing an Expert Witness report for a court case (the “Cooks Case”)–my Minskian eyes told me that a serious crisis was on its way. Given that the debt to GDP ratio was far higher than during either major post-WWII crisis (1973 and 1989), it appeared obvious that Australia was about to experience its most severe economic crisis since the Great Depression.
Because I knew that neoclassical economists would not realise this was about to happen, were likely to make things worse by increasing interest rates as the crisis approached, and would probably mis-diagnose the cause once it occurred–as they had during the Great Depression–I decided to go public with my analysis via the media, a regular commentary timed to coincide with the RBA meeting (DebtWatch), and eventually a blog (www.debtdeflation.com/blogs).
Figure Four
Australia's Debt to GDP Ratio 1955-Now
Minsky’s hypothesis warns that a crisis begins with the faltering of an asset price bubble. That not one but two bubbles were in progress was obvious in both Australian and American stock market and housing data.
Minsky argues that there are two price levels in a market economy–one for commodities set largely by the costs of production and financed largely from income, and the other for assets, set largely by people’s expectations of future gain, and financed mainly by debt. The ratio of one price level to another thus gives an indication of whether the economy is in a bubble, or a bust.
There are curly issues in the ratio of share prices to the CPI–the reinvestment of retained earnings give shares an upward trend over time compared to the CPI, while the index itself overstates share returns due to survivor bias. But the relatively rapid movement in share prices, versus the slower changes in consumer prices, means that a blowout in the ratio is a good indicator of a bubble. On that basis, Australia’s market had clearly entered a bubble in early 2003, while the USA’s began in 1995 (and had already burst in 2000, only to restart in 2003).
Figure Five
No such curly issues apply with the house price to CPI ratio. Especially when dealing with established houses, there is no long term trend, as the Herengracht Canal index establishes. In a real price series going back over 300 years, house prices have risen and fallen compared to consumer prices, but there is clearly no rising trend (see Figure Five).
Figure Six
CPI-Deflated Price Index for Amsterdam's Herengracht Canal
On this basis, both Australian and US house markets were clearly in bubbles, and the US bubble was unprecedented in its history.
Figure Seven
USA and Australian House Price Indices
The final piece of evidence that pushed me from expecting a serious recession to quite possibly a Depression was provided by the RBA in September 2007–a month after the crisis began–with a chart showing Australia’s private debt to GDP ratio going back till 1860.
Even after I augmented it to include an estimate for non-bank debt prior to 1953 (which made current data look less extreme compared to historical data), it implied that our debt crisis was more than twice as severe as the one that caused the Great Depression. When the Great Depression began at the end of 1929, Australia’s debt to GDP ratio was 65 percent. It has now reached a peak of 165 percent.
Figure Eight
Australia's Debt to GDP Ratio from 1860-Now
That impression was confirmed when I later saw the US data–courtesy of Gerard Minack and the availability online of US Census reports. Its debt to GDP ratio was 150 percent at the end of 1929 (and subsequently blew out to 215 percent as prices and GDP collapsed in the first 3 years of the Depression).
With financial sector debt included, the USA reached that peak again in 1987–the year Greenspan, despite his “Austrian” approach to economics that decried government intervention of any sort, performed his first “successful” rescue during the Stock Market Crash in October.
That rescue worked, not by overcoming the problem of excessive debt-financed speculation, but by re-igniting so that it reached even higher levels. Though borrowing slumped after the Savings and Loans collapse in 1989/90–falling from 170 to 165 percent of GDP–the bubble began once more in 1994. It then rocketed on through the Dotcom Bubble, and didn’t even draw breath then since there were now two asset market bubbles feeding off each other–the Subprime Bubble’s expansion more than counteracted the Dotcom Bubble’s collpase, until finally there were two debt-financed asset bubbles running at once–an unprecedented event in America’s financial history.
By 2004, even non-financial private debt had exceeded the level that triggered the Great Depression, while total private sector debt reached a staggering 290 percent of GDP (without including the impact of financial derivatives, another form of debt that did not exist in the 1920s).
Figure Nine
USA's Long Term Debt to GDP Ratio 1920-Now
The RBA data in Figure Eight was first published in a speech by Deputy RBA Governor Ric Battellino (“Some Observations on Financial Trends“). I found his interpretation of the chart both stunning, and predictable:
“The factors that have facilitated the rise in debt over the past couple of decades – the stability in economic conditions and the continued flow of innovations coming from a competitive and dynamic financial system – remain in place. While ever this is the case, households are likely to continue to take advantage of unused capacity to increase debt. This is not to say that there won’ t be cycles when credit grows slowly for a time, or even falls, but these cycles are likely to take place around a rising trend. Eventually, household debt will reach a point where it is in some form of equilibrium relative to GDP or income, but the evidence suggests that this point is higher than current levels.” (emphasis added)
This was stunning, because the previous two peaks in the debt to GDP ratio were followed by Depressions, and yet they were far lower than the current level. Even the most anecdotal approach to history would imply that all might not be well at present.
It was predictable, because it was consistent with the mindset that has dominated economics for three decades now, ever since Friedman’s counter-revolution against Keynesian economics in the 1970s. Whereas the once-dominant Keynesian approach saw the economy as potentially unstable, Friedman’s revived “Neoclassical” approach presumed that the economy was self-equilibrating. Thus data which an engineer would see as indicating an approaching breakdown was interpreted by an economist as indicating an approaching equilibrium.
This belief in a tendency to equilibrium is built into the models of the economy that neoclassical economists construct–which is why these models gave no warning of the approaching crisis, and why economists were the last ones to realise that a crisis was actually happening. I’ll discuss their models–and the Minskian alternative–in next month’s Debtwatch.
Australian Private Aggregate Debt Table
Australia's Private Debt Table Disaggregated
When I read this stuff it makes me think the $US will probably do the opposite and rally to new highs. The market usually does the opposite of what the papers think it will.
Don’t forget that China holds billions or is that trillions in US currency. They have just made a packet on their reserves in the last two months.
It’s always hard to predict the future.
Steve
Thanks for laying out your arguments, presumably again, since I expect you’ve done so a number of times.
Please tell me, regarding your financial modelling, do you utilise models in continuous time or only discrete time ? Or do you consider there to be little to no difference between the approaches ??
Also, within the Minsky approach, once a Minsky moment has occurred, is there any possibility that the downward spiral can occur ? Alternatively put, should an Australian version of the Greenspan / Bernanke put be made what level of interest rates would be enough to stop the slide in house prices (nominal terms) ?? Debt is already around 25% cheaper now than it was two months ago…
What role does currency play in Minsky’s model? Our houses are already worth 2/3rd’s the value of six months ago, in USD.
When considering the likelihood of a particular system, how do you determine which parameters apply ? It is easy to cause many apparently stable systems to instability by changing key parameters in those systems. Given the essential difficulty in anything approach controlled datasets within economics (so different to the physical sciences), what tests and methodologies can be applied to sort possible framework from probable frameworks ?
Do you have any models / papers that show what sort of financial systems would have a higher degree of intrinsic stability. For example, when a Tobin tax is applied to transactions?
In your opinion: Is “efficiency” of financial markets intrinsically related to market instability ?
Any pointers you have time or inclination to provide would be appreciated.
With Thanks
Furball.
David,
I think you misunderstand my point. The Austrians in particularly are fond of saying if only we had stuck to the gold standard all this would never have happened. I’m skeptical, precisely because I think fractional reserve banking arose spontaneously. We need some sort of controls and I guess the argument is that the inflation target has proved not to be enough.
P.S. I think we are on the same side, I’m keen on Hermann Daly’s ideas as well.
Reason,
Yes I think we are on the same side and given the consequence of these issues, make point like I’m sure many here, in the hope it is useful conjecture (no guarantee of that) and at risk of mush, realizing there is at the end of the day only one side, the human race may be where solutions will be found to these “significant problems”. The goldsmiths were the original fractional reserve bankers handing out many more gold interest loan claim checks than the gold they had stored. I’d put then, they are the thin end of the wedge of the debt expansion system. There was a time when I would have thought private entities creating money from nothing could only be called counterfeiting and of course we are horrified by the instability cheating counterfeiters may cause.
This might be of interest: Paul Grignon’s animated presentation of “Money as Debt” tells in very simple and effective graphic terms what money is and how it is being created.
http://video.google.com/videoplay?docid=-9050474362583451279
Thanks (and Steve) for your discussion.
Just a comment about
Hi Steve,
I really respect you as an economist however I just wanted to make a comment about your statement
“such as it was, before Galileo’s empirical revolution, when what mattered to scientists was not empirical relevance, but conformity to with the Bible.
Actually the Bible is not “wrong” and Galileo “correct” as many people assume.
Ever since Einstein’s theory of relativity we know that there are no absolute frames of reference.
To adopt a frame of reference where everything rotates around the Sun is just as arbitrary as adopting one where the earth is at its center.
Depending on your perspective a better frame of reference could be to say that the sun and the earth both are rotating around the center of the milky way galaxy as we lie on one of its rotating spiral arms.
Even so this would be just another frame of reference, for the milky way is not standing still, it itself is hurdling through space.
There are no absolute frames of reference,they are merely conventions adapted as to purpose and perspective.
The frame of reference adopted, either has to do with your perspective or purpose – or the model that is the least mathematically uncomplicated.
( there are no empirical methods that will tell us one is right and one wrong – as they are merely adopted frames of reference – each equally valid, depending on your perspective)
For instance there is no absolute up or down.
The fact we always see maps of the earth with Aust at the bottom and Europe at the top, is just a convention. It would be equally valid to have the earth the other way up with Australia on the top. ( there is no absolute up or down arrow in space.)
If you imagine to equally sized stars/planets in space rotating around one another.You are free to pick your fame of reference. You could adopt a frame of reference were one planet is stationary and the other merely rotates around it OR you could have the second planet stationary and the first rotate around it OR you could have both planets rotating around one another toppling through space. In fact the mathematical model that has the least complexity is to adopt a frame of reference where where both planets rotate around their “center of gaavity” a point equally distant between the two planets. This frame of reference is possibly the best ( mathematically) but has them both rotating around nothing… (Hardly intuitive)
As another example when I am flying from one city in one country to another city in another country.I adopt as my frame of reference the surface of the earth.I don’t say I am flying here relative to the Sun and ending up here relative to the Sun ( which just happens to coincide with going from one city to the other ) as to do such a thing would be absurd and unnecessary – although equally valid.
The fact that people and the Bible talk about things where the frame of reference is the earth, is perfectly sensible and not at all incorrect,after all we live on the earth and not on the Sun…
There are no absolute frames of reference, and each are equally valid depending on you purpose.
If I can offer a personal observation, its wasn’t so much as the Church at the time was telling Galileo he was wrong. For true religion is about truth and they are in no way incompatible. All that was occurring was that ignorant people were getting the message that the bible and the church were supposedly “wrong”
and were throwing the baby out with the bath water, and taking license from that to reject the whole of religion and departing from the practice of religion – on mass.
So the church didn’t tell Galileo he was wrong, nor did they say he was right,they just wanted him to be quietly pursuing his work, as he was causing a panic…. in the minds of ignorant people.
As we now know, there are no absolute frames of reference,and neither position is right or wrong.
Galileo did not prove the bible wrong,nor is there any empirical evidence to decide one way or the other, they are merely adoptions of different frames of reference – each equally valid in their own right.
To me, science and economics are much more like religion than people are aware. They are a belief system just like Christianity. Science talks about proof, but theories keep changing all the time.
The number of science and economics textbooks that are now outdated would fill numerous libraries.
The writings of the bible on the other hand have not changed for centuries. The interpretations have changed and will continue too. Because of the nature of Mankind, not the bible. At least the bible clearly says, It is faith (belief) in Jesus that makes one justified. Not religion.
Science has been very clever in convincing the modern day masses (ignorant people) that using the word science means it has been tested and proved. Bull! someone has simply made up a theory, which they have convinced others appears (or has been observed to be) correct and it remains until some else convinces others that another theory is more correct.
I know that I sound ignorant and I hold one of the most minority views out there. So what. For hundreds of years science has been conning people, just like religion did through the middle ages.
David, can’t you see the speculation in commodities as a rational “short position”, on the US dollar and treasury bonds instead of a bubble?
Now you have a global margin call, but the trend will reinforce itself, right?
After all, adjusted for inflation commodities are now at 68 (if 1970 was 100), so you cannot claim that commoditities are a big bubble, when prices are so low. In year 2000 commodities was at a 200 year low adjusted for inflation, still they are at around the 1932 level. Not many times have agricultural commodities been as cheap as they are now. Sugar in 1950 5 cents, now 12 cents. That’s not adjusted for inflation!
I think those seeing the big commodity bubble have really checked the prices in an historical context, I rather think we are at the beginning of a rising trend of long term interest rates.
Let me add, that I think it could be so that in 2000, when the dow was at it’s bubble peak, commodity related stocks were dirt cheap, because commodity prices were at a 200 year low. They have performed well in the “reflation phase”, while other stocks have performed more “flat” on the dow, like in the 1965-1974 era. I think that trend might go on even for the next 10 years.
prudentsaver,
See: http://www.bloomberg.com/apps/cbuilder?ticker1=CRY%3AIND
From the CRB Vs USD chart since march URL above: To show some disconnect the CRB index rallied over 20% from the 20th of March to the beginning of July. The USD dollar went no where. The CRB index then started its fall and was down around 15% before the USD started its rally over a month later in August. My view is both the sentiment rationales in the two markets were different but at the end of the day are related the debt dynamics unfolding.
I don’t think the huge move of investment/retirement funds into the commodity market thought too much about the USD, and it was claimed they were just rolling futures over month on month with increasing one way investment. The percentage increase was also not rationally proportional with the CRB during that period, rising 200% (or 3 times) a direct influence of the drop in the dollar (say the Euro) would give a rise of around a 80% (I think) over that period. The rise in world GDP is another influence but commodity supply side also probably increased dramatically during that period. The point was, I think speculation can move in and destabilize these markets if the modus is cheap enough credit and debt expansion (money from nothing) will find a way when there is no where else to go.
I don’t have access to the data you refer, but the following site gives a lot of data on inflation and debt expansion:
http://mwhodges.home.att.net/inflation.htm
These are just my lay views, however, to consider further your assertion from this data here: The rising CPI itself is inflationary so create stress on an economy and citizen and part of the debt expansion problem. The site notes that CPI started to inflate this century with the establishment of the Federal Reserve and significantly since fiat money. It also points out that the figures have been underrepresented by government changes. Scrolling or clicking down to the Commodities section it shows there has been a significant rise in commodities returning to the alternate CPI line given (and I assume would be above the government figure) from the side trending period of the late 89’s,90’s. I think it’s the significant further sharp spike rise from these levels that is more critical in both considering instability and speculative debt activity. Another factor is possibly the reductions in real costs of finding, extracting, storing, and delivering commodities may have changed substantially with better technology developments which would be a deflationary influence masked by debt inflation.
Having said that, I do wonder if the US is bankrupt (which it was not so in 1929) and so the US dollar does collapse, what relative influence this will have on commodities.
On science versus religion discussed above, I think it best to consider both in differing spheres. I think what Steve was pointing out was the tendency and dangers for theories to become defended references and applied truths which may not mach reality. The fact science evolves as it continues to seek understanding; testing and considering hypothesis accuracies in the real world is its value to technological progressions – let there be many new books.
To make one paragraph above a little clearer:
I don’t think the investment/retirement funds thought too much about the USD with the huge move of into the commodity market, and it was claimed the funds were just rolling futures over month on month with increasing one way investment. The percentage increase of commodities was also not rationally proportional to the USD with the CRB during the period 2002-8, rising 200% (or 3 times) where as a direct influence of the drop in the dollar (say the Euro) would give a rise of around a 80% in the CRB index (I think) over that period. The rise in world GDP is another influence but commodity supply side also probably increased dramatically during that period. The point was I think speculation can move in and destabilize commodity markets if the modus of cheap enough credit and debt expansion (money from nothing) is present and particularly will find some way in the economy when there is no where else to go.
Ben Dickinson on November 4 began addressing the “root cause” of “why they didn’t see it coming”.. he said. “…. we as a race do many things that benefit us in the short run, but are disastrous in the long run, because we can FEEL the short-term benefit, but most cannot understand the long-term cost.” ” oldSkeptic”, offered a good piece the same day.
Then on the 8th November ‘markBaily’ took up the cudgel when ‘Steve’ made a passing reference about “Galileo’s empirical revolution”, suggesting that what was occurring beforehand was often “conformity to with the Bible”, developing some interesting points about “The frame(s) of reference….”
Finally, “Bullturnedbear” progressed the theme suggesting that “science and economics are much more like religion than people are aware”.
Arguing his case that the “writings of the Bible” are consistent, unlike science and economics textbooks that quickly become outdated. He says ” Science has been very clever in convincing the modern-day masses (ignorant people) that using the word science means it has been tested and proved” he says this is ” Bull ! someone has simply made up the theory which they have convince others, appears (or has been observed to be) correct and it remains until someone else convinces others that another theory is more correct.”
I think each of these propositions has a good bit to offer the conversation. “It’s the people – stupid”, or more precisely, “it’s the stupid people”.
Short termism born of ignorance, laziness, being unreasonable, having a highly inflated self-importance view of things and above all having little or no self-discipline (in a society that has lost its ability to apply ‘external discipline’ where it is so obviously needed).
Which takes me to the question I posed on November 6 “when is the last time you met a clerk?”
The answer is probably not recently, I did about 3 months back and I congratulated her.
Over a couple of generations, (‘gen x’ “gen y’ etc,) the idea that one starts at a level ‘where expectations meet real capabilities’, slowly faded.
It happened in part ( a lot else was nvolved)through people being told that “they are special”, “you deserve it,” (it’s easy to find in all the TV and print commercials).
So new descriptions were found to describe people who performed the general range of ‘clerical’ functions.
This also occurred completely across the range of “general manager” job descriptions and so on, through virtually all areas of professional endeavour.
So initially you got a spiffy title that for awhile satisfied your inflated ego (and you just didn’t mention to anybody for the time being that you were still on the ‘clerks’ pay scale – but there were ‘performance bonuses’).
Then through a period of relative prosperity (that coincided with a decline in ‘average general abilities’), we needed more and more of these people with the big titles to perform the collective functions so often carried out by a much lesser number of very capable, hard-working and modest clerks and general managers.
Now having this title to impress all the friends, it was necessary to have the trappings that went with it.
When younger, the very flash car originally bought on hire purchase did the trick. This attracted the opposite sex, moving in together, producing two titles (egos) to feed. It wasn’t long before rented premises didn’t suit the image and the new “architecturally designed neo Georgian mansion” became a ‘must have’.
Fortunately there were plenty of people with equally impressive titles “inventing new financial products” that facilitated the purchase of these mansions on little or no deposit (“we can work the system for you, just sign here”.)
Then of course you find that house prices are booming and yours is worth “heaps more” than when you bought it. And hey, you two have been working pretty hard in those high-powered jobs of yours, and surely you “deserve a treat or something special.”
What about an overseas holiday or even upgrading to a four-wheel-drive so you can look down on the ‘plebs’ as you muscle your way through the traffic, because after all, “you are important”.
Gee , lucky we’ve got the “equity in our home,” and I am assured by somebody who knows somebody (aren’t I somebody ? ! ), that it’s definitely the way to go; to make this “equity work for you”, My ‘Personal Account Banking Executive’ will take care of that “where do I sign”.
That holiday was fantastic and we found that we really did appreciate, respect, share mutually, give space, understand the differences, and yes, “love one another – “in a special sort of a way”.
So, big engagement party, setting up the pad with all mod cons, planning a mega wedding and naturally back overseas for that honeymoon, all to be fitted him with our hectic lifestyles in our high-powered jobs – with the appropriate titles. “Honey, look up the Yellow Pages for the Wedding Planners !”
I’m sure you get the drift.
And then – “bugger” !
things start to go pear shape with the economy, the high-powered jobs and wouldn’t you know what, the relationship/marriage (was that the contract we signed?) -just doesn’t seem to be “working out”.
Boy I’m really losing confidence now, and I’m blowed if I can work out why those dry sop, anti fun machine, nerdy stay at homes in the 50-year-old weatherboard joint in nowheres ville, seem so utterly happy and content;
and her still a clerk and him a tradie.
I simply cannot work out how it has all gone so horribly wrong.
I think it’s something to do with the science of economics, but that’s all a bit beyond me !
Just to correct: “The fact science evolves as it continues to seek understanding; testing and considering hypothesis accuracies to how well they fit with the real world is its value to technological progressions – let there be many new books.”
Hi David,
You slightly misunderstood my attack on science. I didn’t say stop testing, improving and writing new books. Keep it up and all the more. Human advancement benefits all. I simply was trying to make the point that my opinion is that science is a belief system too. Somewhere along the line though. Modern society has been convinced that science equals truth.
I’m not against faith either. We all need faith and hope to better our progression. Faith in science helps billions of people. I just don’t believe that science holds ultimate truth.
David, I agree (Sorry Keen I had no idea it got on a mailing list)
I think you are right that the long only positions does influence commodity prices, quite a lot to, and these long only positions started in 1999,
it happened around the same time China started to buy US treasury bonds (in 2000).
I think that, at that time, US interest rates should had start to move upwards, as a trend, but I have an impression that the US government bounds
are some kind of bubble beeing bolstered by China, while commodities have been a moderate bubble, but not the soft commodities. I think sugar will benefit greatly from a genuine shortage, and move very high.
I think shortages in other commodities can happen as well, but I am most pessimistic about sugar, the reason is that in a worldwide recession demand will increase a lot, while the spare supply don’t exist, infact storages have not been as low as now in a very long time.
It think Oil at around 30-50 dollar are justified by fundamentals. It does seems like the world are running out of cheap oil, and does influence commodities and the general cycle of inflation. The level of oil now, is probably comparable to oil at around 12 dollars in 1998. Atleast if oil go to 30-40 dollar, that will be the same as 12 dollar oil in 1998.
In relation to GDP, oil was 9 dollars in 1974 after the first OPEC oil shock, with a gdp at around 1,5 trillion, now oil have been between 50-70 lately, and the GDP is around 15 trillion
. I think these prices make sense. I like using GDP much more than using inflation. But these last years, even using GDP relative to prices in the past and now to find a resonable level don’t make sense.
Because the money the US printed were making growth anywhere but the US.
By the economics profession I have an impression they see inflation as the increase in price of a basket of things. But especially after Alan Greenspan took over, there were a number of trends, like the fall of the
Berlin Wall, China, India, etc, and the result of this was that the US and everyone else could print tons of money into a black hole and basically import deflation. But as Milton Friedman have said, there is no free lunch, and I think that means that all these pumping of money into a black hole, giving low inflation and deflation back, ultimately results in an increased demand in commodities such as oil, and anything else from
these regions, in that sense sooner or later all that money pumped out comes back into the CPI to bite.
Right now, I see that the debt bubble is collapsing, but I still don’t think stocks are very expensive as many stocks will pay much more than goverment bounds, even in a severe downturn.
Stocks like railroad stocks will benefit from lower oil prices, they will make more money, but I stil think they are vulnurable to a general sell off.
I am not in doubt that there is a genuine trend towards nuclear energy, increased oil drilling activity, and forms of alternative energy and electric/hydride cars, railroad and more infrastructure.. That trend is not a bubble. I think the next “dot com” could be in that direction, and also be like dot corn, but I suspect that we are entering an era of rising interest rates where there will be much less speculation, and much more attention to dividend payment than stock price appreciation. It’s also possible the lack of oil turn into a continuation of the partly scam with emissions, meaning ton’s of taxes and limits on energy usage, as food prices follows up. I think the extreme liquidation now, are affecting these things as everything else, but these are genuine long term trends.
I do think that there is a fat elephant that will sit on the world economy when it comes out of recession. And I see that as peak oil.
Good links on inflation, I think they are spot on. And I belive inflation the last years have been like in the early seventies, but this time the driving force is China, back then there actually was some genuine growth
in our economies. In the service economies that we live in, I truly think, fishing, hunting, primary sectors, and the commodity sector, and at a later stage after the drop in living standards occur, manufacturing, is where the growth can come from. I am wating for a global realignment of living standards.
Hi Bullturnedbear,
It was just meant to be humorous, thanks for the clarity and useful points. You have reminded me of a book I read through torturously many years ago, ‘Zen and the Art of Motorcycle Maintenance’ where the Narrator at one time a scientist, looking back on his life brings the reader to the moment he perceived (I have not tested this) for every test there are an infinite number of hypotheses and hence the need to consider the quality of thought also which he saw became a false dichotomy of objectivity and quality post the early Accident Greek Philosophers.
Here’s a couple of quotes I found on line from (or on?) the book:
“Phaedrus’ break occurred when, as a result of laboratory experience, he became interested in hypotheses as entities in themselves. He had noticed again and again in his lab work that what might seem to be the hardest part of scientific work, thinking up the hypothesis, was the invariably the easiest. The act of formally writing everything down precisely and clearly seemed to suggest them. As he was testing hypothesis number one by experimental method a flood of other hypotheses would come to mind, and as he was testing these, some more came to mind, and as he was testing these, still more came to mind until it became painfully evident that as he continued testing hypotheses and eliminating them or confirming them their number did not decrease. It actually increased as he went along.”
And
“Well, it is art,” I say. “This divorce of art from technology is completely unnatural. It’s just that it’s gone on so long you have to be an archeologist to find out where the two separated. Rotisserie assembly is actually a long-lost branch of sculpture, so divorced from its roots by centuries of intellectual wrong turns that just to associate the two sounds ludicrous.”
And
“Mu means “no thing.” Like “Quality” it points outside the process of dualistic discrimination. Mu simply says, “No class; not one, not zero, not yet, not no.” It states that the context of the question is such that a yes or no answer is in error and should not be given. “Unask the question” is what it says.”
http://tinyurl.com/6q8n2z
Another point, the real world is quite capable of creating its own problems and economic policy is just one aspect of all this and one hopes the trend in thought, understanding and inflence for quality is still up.
Hi prudentsaver,
Thanks for your ideas – much to consider.
David
The author of “Zen and the art of motorcycle maintenance” was never a scientist (the book is largely autobiographical so this is very cler) but a philosopher who had an interest in the philosophy of science. I think that bullturnedbear is getting the meaning of words like truth and belief in various contexts a bit mixed up (he is not unique in that). Science never claims to even aim for absolute truth, it really is a pragmatic process of producing ever better models. And I just wonder what he means when he says he believes “something”.
I like to believe that “faith” is something useful too – in the sense that a football teams “faith” that they can turn a game around can be a self-fulfulling prophecy. But that is something deferent from the “belief” that you WILL (necessarily) win the same game. Do you understand the distinction?
Certainty is overrated.
David…
thinking about it I might have to apologise there, it may well be that Pursig was for a short time (before the main story in the book) a scientist. But of course the book is about much more than the philosophy of science, it is also about teaching and problem solving and a road story. Great book.
“Do you understand the distinction?” There is the purity of science, lets say the “pragmatic process of producing ever better models” and there is its real manifestation. Who defines which is “better” and to what end. This is where I see quality of thought comes to bear. If science is not a about absolute truth, then one cannot say we are objective – objective to what – but only relative – relative to what – so we need to consider what truth we wish to pursue, to what end – that road can take us many ways. How is it influenced by whom or what, and what is our internal reference point with our inevitable, if not explicit beliefs, may be some questions to ask. If there is a lesson to be learned from the road to disastrous error of the current dominant economic theory I think it not, hey I’ve got a more accurate model or method of control, but to what end will my relative “objective” model achieve for humanity and the world we affect. I think Bullturnedbear is right in the manifestations of science do become beliefs that influence and can stifle society. The Neoclassical thinkers believed their economic model whole heartedly, and a great swath of the population has also believed they hold the truth – with no claim to absolute truth that is a con. Perhaps science overtly needs to rediscover hubris of the ancient Greeks also.
Dear David,
There is an extensive literature on scientific methodology which addresses your concerns. You might be surprised to find that the dominant approach to scientific methodology accepts that science is a belief system–though one that is subject to a process of confrontation of those beliefs with empirical reality.
If you do have, as seems to be the case, a strong interest in this area, then I suggest you trundle down to your nearest University library and take out books by Thomas Kuhn, Imre Lakatos, and (I think!) Paul Feyerabend.
There may be later developments in the methodology of science than these, but I think you’ll find that proper science has a good deal less hubris these days than it once did.
On the other hand, economics is little more than hubris. I want to move it more in the direction of a belief system that does confront empirical reality, and when proven wrong, evolves. Economics hasn’t yet cut the mustard on that crucial test of scientific behaviour.
Well interest only in the context of the economics/science being discussed. Thanks for the humble advise Steve – I’ll be mute and trust the answers are in the books wisdom. Thanks.
I always like to use the example of Newtonian Physics. Is Newtonian Physics “true” or “false”? The answer is that it is a very good approximation for everyday life.
David,
as regards the hubris of neo-classical economists (not all of them by the way), the key idea is “the map is not the territory”. They forgot that.
Reason,
Unfortunately, certainly for economics, these types of maps can change the territory. They forgot that also.