Posts Tagged ‘economics’

October 18th, 2011

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The Economics of Everything

This is a post from about 5 weeks ago, before the Occupy Wall Street protest started. It was lost on a server transfer so I’m reloading it now. It makes interesting reading when thinking about the Occupy movement and what its core concerns are. I think the post below encapsulates those concerns, namely: measurement, institutions and values. Our current system externalises as many costs as possible, has institutions cuorrupted by money, and has lost any sense of meaningful values, other than monetary gain. Not only has our economy become monetised, so has our society. In terms of how values have been set aside and how they may be recovered, this piece by Chris Hedges is revealing. On to the original post.

Economics is quite popular these days. It’s not so much the traditional discipline, itself, that is the focus, but a constant flagellation of its representation. Simply put, it’s not delivering the goods. Many trained economists would argue that economics is not the problem but the solution. To paraphrase “it’s the politicians, stupid!”.

The word “economics” also seem to be creeping into the title of every other book, blog or column. “The Economics of…….sexdrugsfootball, hairdressing (i made that one up) and so on. The message is clear. People want to know how the world works and seek to understand it through the lens of economics, which is, as I’m repeatedly informed, only about the allocation of resources. We’ve also had Freakonomics followed up by SuperFreakonomics, just in case you didn’t get it the first time.

Diane Coyle is a serial offender is this area with 2 recent books called “Sex, Drugs and Economics” and “The Economics of Enough” (I would recommend both and happy to lend them to anyone local). These books do help us to make more sense of the way our economy works and, therefore, how our society is structured. Economics describes how people transact with each other and for what reasons. Getting into the nitty gritty of personal life seems an odd place for economics to be but research continues to show that how we make decisions is very much dependent on variables which can, to some extent, be measured and quantified. Put bluntly, incentives and pay offs do matter (unless you have no impulse control at all – read male teenagers – but this can be controlled and measured as well).

The Economics of Enough” is a well written account of  the economic challenges facing us and how we can move forward to create more even prosperity and happiness. Diane outlines what is importance to people: happiness, nature, posterity, fairness and trust. She then looks at where the problems are: our measurement system, our values and our institutions. She then finishes off with a “Manifesto of Enough”, a ten point programme for shifting to a world of “Enough”. It’s all very useful and accurate in its conception. What I like about the book is the realisation that our values have become warped (seen readily in the fiasco of the Global Financial Crisis and its response) and our institutions have become corrupted by those same values. Changing that will require some serious reform and will face major resistance by the vested interests happy with the current situation.

Slipping nicely alongside this book is a new film called “The Economics of Happiness“, which I screened last night in Christchurch to an audience of 115 people, including 2 local MPs. This film, by Helena Norberg-Hodge, Steven Gorelick and John Page, visits themes raised by Diane in her book, but it does so in a more poetic fashion. Drawing on many years research and living in Ladakh, Helena pulls together a picture of a severely fractured global population struggling to maintain its humanity in the face of the onslaught of globalisation. The film dismantles many myths around the benefits of globalisation, describing it is ultimately a process designed for major transnational corporations to increase profits at the expense of people and planet. It’s naturally tends towards the polemical but it’s hard to dispute the evidence. Median incomes do not tell us the whole story. The constant externalisation of environmental and social costs produce a massive hidden subsidy to the global business network. The global institutions (IMF, WTO and World Bank) support and embed this process and remove sovereignty wherever possible so that business faces no impediment. We don’t pay the true costs but some one else picks up the tab.

This links back to Diane’s discussion around measurement. Economics can only be of use if the variables, that are plugged into the models, have integrity. As both Diane and Helena note, the value of integrity is missing. The pressure of profit takes few prisoners and if a cost can be ignored, it will be. Whilst Diane is still in favour of economic growth, she recognises it must come within a properly constructed framework. Helena goes further in promoting a more localized world, where we are in touch with, and close to, our processes and means of production. This approach brings the connection back into our lives and this, ultimately, is the root of the happiness we are looking for.

The clear message from these works (and others like it) is clear. There is a desire for a new approach to our economy and there is evidence to support it. The various manifestos, blueprints and proposals for reform are starting to merge in content and structure. Slowly but surely a solid platform for re-envisaging our society is coming together and a renaissance in economics may not be far away.

September 28th, 2010

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Basel III: Again and Again and Again…Maneuvre

So Basel III is finally with us…….phew……can’t wait for Basel IV. I’m not sure about a fifth one as that really would be a joke too far but then again if we can have a Rocky and Rambo V why not Basel V? We will really be up the creek when that one comes out. Is this one likely to change anything? No one seems to think so but then again 2 years ago I said the same thing about Basel II!!

It all comes down to leverage which now is well understood. The new capital requirements simply squeeze poorly capitalised banks a bit harder but really make sod all difference to the underlying problem which as we all know is excess credit creation. This credit creation is also known as money supply expansion. Are credit and money the same thing? well yes and no. When you get a new loan from the bank, you have received credit. This credit appears as money in your bank account and can be converted (though usually ins’t) into note and coin. But here’s the nub. Whilst money, the the form of note and coin, cannot be destroyed (ok you could burn it), when you pay back your loan that money is cancelled…in a puff of smoke. It only existed in your imagination. Of course that same “money” can be relent but new credit can always be created as long as there is enough “equity” in the bank…….come in Tier 1 capital and other assorted IOUs.

For example, the money supply in New Zealand has contracted by nearly $10bln in the period from Feb 09 to Jul 10. That’s why there’s no money in the economy……it’s goneski. But if we dealt in real money it would never disappear; once it was created it stayed in circulation or under your bed but it could not be destroyed.

The ability of banks to inflate and deflate the economy is still very much theirs with central banks acting like the lunatics they are by playing important games with their interest rates. They haven’t quite worked out the mess they made over the last 15 years by focusing on inflation and forgetting about asset prices, leverage and moral free speculation.

Gareth Morgan notes this in his take on it but again misses the real point, as does Basel 1,2 and 3 (and probably 4 and 5). It is the quality of money supplied into an economy that is the most important aspect of the economy. Copious amounts of speculative credit has blown out the “real” economy creating a mess which could take decades to unwind.

But we need to address this sooner or later….otherwise we will get the same maneuvering again ………or is it the same manuva?

June 8th, 2010

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3D View: Debt, Deleverage and Definancialisation

It’s taken me a long time to get round to this post. My eyes have been glued to the train wreck that is European fiscal management. Who could forget the financial gymnastics performed by many EU wanna-bees prior to EMU integration. 3% budget deficit….no problem said Greece….we have some very good accountants in Athens.

So the chickens have finally come home. And now the Euro project is in harms way. Or is this just the next stage in complete sovereign consilience? It’s fiscal consolidation or that’s the end of the road.

The real problem, if you look hard enough under the falling limbs of the EU forest, is simply debt and its modern bedfellow, leverage. The financial binge of the last decade, built upon market deregulation in the 80s, has simply finished. Apres le binge, le deluge as they might say in Paris. A bad hangover is one thing but watching bankers get on the big white telephone is no fun at all.

The debt binge primarily was brought about not so much by low interest rates (though that helped) but by the belief that capital gain was guaranteed. Stocks always go up in the long run, property always goes up in the long run…..don’t worry about income, just borrow as much as you can and buy an asset. These financial assets have become a magnet for all investors and, naturally, sellers of investment products. I wonder how many people are holding derivative products which allow them to catch the upside of the stock market with no risk unless the market falls 50%….oops. Certainly Mr Buffet has a few of those.

The return to a time when people invested in companies based on their fundamental performance and bought houses to live in is long overdue. That people cannot afford to buy a home is without doubt the result of excessive lending by banks over the last 30 years. This is the root cause of the problem. Banks have actually created the inflation we have seen in financial assets….unearned income to be exact. That asset price inflation has seen real wages fall heavily over the years consigning the average wage earner or those unable to access leveraged credit to a lifetime of renting and debt.

The maths of excessive leverage is the simple maths of compound interest….compounded.

As Paul Volcker noted in this recent piece,

“There was one great growth industry. Private debt relative to GDP nearly tripled in thirty years. Credit default swaps, invented little more than a decade ago, soared at their peak to a $60 trillion market, exceeding by a large multiple the amount of the underlying credits potentially hedged against default.”

The bottom line is very simple: we have spent our GDP already….for many years hence.

Now it’s payback time. The payback process could take many forms: bankruptcy, forced asset sales or a slow descent back to a normalized level of activity – actually living within our means. Stripping away the financial sector so it works for people and business rather than conspiring against them will be the first requirement: not so much regulation as reengineering.

Whichever route we take it will be a painful adjustment made worse by the fact that those who are in charge are actually responsible for perpetuating the current system or refusing to question and change it.

January 17th, 2010

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2010: A New Decade, A New Odyssey?

I’ve been traveling a lot in the last 3 months: China, Pacific Islands, Singapore, USA and the Caribbean. It’s been an interesting time to just observe and not spend too much time thinking and writing. It’s been an amazing decade, the noughties, a time of profound shifts and shocks.

The nineties seemed so easy in comparison…yes some financial disasters but they are part of the regular boom/busy cycle..but in general times were good and there was an air of stability. Y2K came and went and in all the excitement we had ourselves caught up in a huge stock market bubble…..the tech wreck….horribly followed by 9/11 and the start of a new era in US expansionary policy.

The last decade saw the financial system gutted from the inside out. That it is still standing is a testimony the the magic that one can weave with numbers. The spread of social media and the growth of the internet was nothing if astonishing. The ability to communicate 24/7 took many by surprise and for some completely took over their lives. The rise of Apple….and the iPod generation transformed music, computing and basically created a whole new industry in itself…mind you was it much different to the Walkman and its introduction? Yes Google, Apple, MySpace, Facebook, YouTube and Twitter brought the world of media, in all its forms, to a completely new level. But that’s what technology does…we’re just moving at an exponential rate.

China and the rest of the BRIC gang really came to the party. The US ended the decade on its knees…wrapped up in wars it cannot win, with a financial system in disarray and an economy on its knees. With Japan the first industrialized economy to fail and the US not far behind, the global shape of international relations has changed. Multi-polarity is an uncomfortable idea for many and how that works out will be a real test.

On that subject climate change continues to take center stage notwithstanding the inevitable failure of the Copenhagen talks. The records all show the noughties being the warmest on record but the small matter of fiddling numbers won’t have helped bolster the case of extreme action. When arguments hinge on tiny fractions any question on their veracity can have serious consequences. As a researcher in this area for sometime i must admit even i have become somewhat sanguine over the whole thing.

When I look back over the last decade and forward to the next, it seems as if the same themes will recur:

- Financialisation of Economies: Can we remove the yoke of derivative financial instruments from the real economy?

- Technology: Will social media enable the development of a networked based economy?

- Global Politics: Can we move to a multi-polar world without the necessity of the United Nations as a de facto world government?

- Climate change: How do we manage the change in our climate and the resulting shifts in population and its attendant baggage?

There’s plenty of hope in those questions for moving to a more sustainable world. But any one of those we get wrong could easily send us into a period of darkness. Let’s hope we don’t end up taking this road.

I will explore each topic in more detail over the next few weeks.

July 6th, 2009

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$ Watch: BRICs get down to business in Yekaterinburg

Yekaterinburg could well be a name to remember much like Maastricht, Yalta, Bretton Woods and other places that carry major political history on the back of their relative obscurity. A few weeks ago the big 4 players, Brazil, Russia, China and India, met to in Yekaterinburg to discuss the vexed issue of the $, US assets and US global financial dominance.

As I’ve discussed before there is a major shift underway in the way the global market is structured. Not just in terms of currencies but also trade and influence. The BRICs have a powerful case to make: 40% of global currency reserves and almost half the world’s population (though Russia’s population is declining, a somewhat serious issue).

There is a strong feeling that the US has acted recklessly overt he last 30 years in flooding the world with $ and creating huge imbalances which have caused such chaos in global markets. So whilst there is always plenty of posturing and grandstanding, especially from the Russians, there is a real case for the US to answer:

- Global trade imbalances.

- Cowboy capitalism.

- Turbo boosted monetary expansion.

- Instability in global financial markets.

It’s also interesting that the meeting of the SCO (Shanghai Cooperation Organization) was held at the same tim and the US was not invited even though it wanted to attend. There is a strong argument that there is no real alternative to the $ but that doesn’t excuse the facts. One dominant currency has not helped create a stable system. It has simply allowed to issuer to experience huge profits from seigniorage and wield extraordinary political and economic power.

And can we really take the rating agencies seriously? They are all US based organisations. Ultimately whether the $ loses influence or not depends on the alternatives. I still believe a commodity backed currency is a likely development, given the nations involved.

At the same time the development of local currencies will help create a more stable and complex system. For now though expect more talk about a $ alternative and expect it to be driven by the BRIC crew starting with the upcoming G8 summit in Italy.

June 18th, 2009

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New Zealand: Small Business crying out for Microfinance

Following on from the news about Kiva moving into the US small business market, fleet footed Ben Kepes calls us to action in New Zealand.

Small businesses in NZ have seen no relief from high interest rates in the recent lowering of rates here. At the same time credit is hard to come by and many business owners have resorted to credit cards to keep their businesses going.

This is a troublesome state of affairs given its the productive economy that has to earn the dollars to pay back the humungous debt necklace hanging around the necks of Kiwis.

So what’s the state of play with microfinance at the moment? Well Kiva is going great guns. It’s really tapped into people’s desire to help and be generous in giving but created this new joy of creating and empowering change for people. It connects people together and that personal touch pulls the punters in.

The more tradtional p2p lending services are not finding life so easy. Charis Palmer reports here on recent developments citing problems for Prosper in the US and some success for Zopa in the UK. Locally Peermint has fallen by the wayside, Nexx hasn’t really got going and Lending Hub has joined a busy Australian market.

So there’s no shortage of platforms but it’s proving harder than expected to deliver the business. But there seems to be no platform for small businesses to secure funding. This is certainly an opportunity as there is certainly a strong and established market on the borrowing side with appropriate forms of due diligence available.

The major stumbling block for p2p start ups has been compliance with various regulatory authorities. However there may be ways around this and with politicians supportive of the small business sector the time may have come for a serious attempt to create what would be a mini-corporate bond market funded by the retail investement market direct.

Now that sounds like a major step forward in building a more productive economy.

About

"I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. Since moving to NZ, I have been an angel investor, budget advisor, director, trustee, mentor and business consultant. I'm currently a Councillor at Christchurch City Council and a Trustee of the Volunteer Army Foundation and the Christchurch Arts Festival Trust. I write about the intersection of economic, social and environmental issues."

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