Categories
economics finance

boom/bust cycle

Insightful short documentary by Fred Harrison about the boom bust nature of economics and his analyses determining an 18 year economic cycle. Well worth a look.

The simple facts of the matter are that booms and busts are unstable situations exploited for profit by banks and other financial organisations. Banks and bank-employed economists tell punters bullshit fairy-stories about how every recession is different to further the goals of companies profiting from market instability. Unfortunately, complex mathematics and better technology provider the veneer of risk management for what is, essentially, more risky than a poker bluff. This is discussed at length in the Black Swan.

Sometimes quants and economists they get it badly wrong by incorrectly managing risk. It is unfair to suggest this is done entirely consciously as the economic shibboleth is reinforced in many economists minds throughout their college years. Those unwilling to take risks cannot progress. So we see a darwinistic system in place whereby those bankers moving the most money (traders, hedge funders etc.) are the ones most genetically and culturally oriented towards risk taking.

Building an economic and regulatory system on pseudo-“free” market instantaneous valuation of assets (particularly housing) will always produce the same disastrous results. Rolling averages are much more desirable as they protect the valuation of assets of the majority of people. Free marketeers claim this reduces liquidity and risk capital, stifling enterpreneurship. This is mistaken based on a persistently re-inforced view that industry is best funded using asset-backed leverage. i.e. the current banking system. It’s an entirely circular argument. Geoists make a convincing argument that asset-derived income and leverage fundamentally distorts economies and leads by-purpose to market instability. They argue that land taxes should be applied to discourage businesses based solely on the acquisition and leasing/sale of natural assets such as land and minerals. On the face of it, there’s a lot of merit to this suggestion. Milton Friedman saw the value of such taxes as they neither distort economic activity nor excessively burden the labour market. Pretty much exactly what’s happened in Ireland over the past few years.

In many ways the current recession is so bad and so potentially hazardous for international trade BECAUSE we managed to “inflate away” the obvious symptoms of previous recession. These being price falls, unemployment etc. The key to understanding this is to understand what inflation really is. As Peter Schiff points out we often misunderstand the cause/effect of inflation. We’ve had about 3 recessions since the great depression and subsequent war and each one was “fixed” by combinations of printing money and quantitative easing perpetuating what Schiff calls a “phony economy”. Indeed more than the Information Age this could rightly be called the Inflation Age. We’re seeing the culmination of a over 50 years of inflationary delusions coming home to roost.

The doctrine of this wild speculation of the past ~18 years has been “too big to fail”. America’s stimulus package is based on their close economic relationship with China and the belief that both economies are too big to fail. Remember that Chinese workers don’t have pension plans and so invest their savings in Chinese and international markets which are largely reliant on the US remaining the dominant consumer economy. Equally the US is reliant on investment from oil-rich Arabs, Europe is reliant on China as a manufacturing engine and the US as a consumer. Globalisation leads to increasingly internationally entangled economics. Not saying that’s a bad thing, just that it is.

This recession is compounded by environmental factors such as peak oil. Ireland with NAMA debt on board may not leave recession before the initial effects of peak oil hit the economy further. For the global economy to exit this recession the traditional way (through economics brinksmanship like quantitative easing) we may enter a period of hyper inflation to cover the severe losses of the past few years and the effects of peak oil on heating, industry, power generation etc.

The globalised world market resembles a Ponzi scheme that is exposed every 18 years or so but keeps going regardless. In many ways an economically disastrous 2010 for the US, EU and China might force world leaders to reevaluate the economic status quo and negotiate new international accords to improve matters. I often feel we need a new Bretton Woods..

Thanks to a friend on the David McWilliams blog site for making me aware of the documentary.

Categories
finance

tax rich kids

Not my advice but another suggested initiative for the government. You can read the irish times article hereThe sustained war on the middle classes continues unabated with huge taxes on buying houses, cars and luxury items like soap. Given the modest level of the student grant in comparison with living costs for students I think that we’re an expensive enough country to live in besides yet another balance-the-books tax that reduces the benefits available to the hardworking middle classes. The impact isn’t discussed in the article so I’m hopeful if cautious that any such initiative would be implemented sensitively.
The Irish economy is at a pivotal moment as it tries to move from a building bubble to a sustainable knowledge economy. Government policy should reflect this with greater investment in every aspect of education, including the financial supplements available to all parents to help educate their kids.

Categories
finance

Thought provoking documentary (The Biggest Crooks in the Room)

I don’t know what the take-up at the video-stores has been but if you’re looking for a provocative and articulate documentary on corporate america then “Enron – The Smartest Guys in the Room” should find it’s way into the DVD player or even red furry stocking. So why is this movie so noteworthy? It succinctly exposes a chilling cynicism and general misanthropy at the heart of Enron itself and tangibly explains the complicity of many of the world’s largest financial institutions in perpetuating lies about the organisation’s success. Many could claim they were duped but these are people who consider themselves very shrewd. Also it’s fair to say that the CFO’s proposals regarding using a network of companies to reposition debt stank. There should reasonably have been some suspicions. Yet the documentary tells us that a dissenter at Merril Lynch was fired for failing to appreciate what Enron were doing. What were they doing? Falsifying revenues and profits as quickly as they could to push and bolster the share price.
The end result of all this was staggering losses for ordinary workers whose pension funds were obliterated when Enron collapsed & the explicit manipulation of energy prices on the west coast of the United States for fun and profit. There are a few scenes in this movie which take your breath away. Rather than the often-snide commentary style of Michael Moore the filmmakers opt to show you real footage and let you judge for yourself. There’s plenty of footage to choose from with Skilling et al. turning in some pithy lines like:
“What’s the difference between California and the Titanic? (cue sniggers ) At least when the Titanic went down, the lights were on” (cue uproarious laughter)
So that’s pretty much every member of senior and middle management having a laugh about the rolling-blackouts in the state of California. Blackouts that Enron helped precipitate through resource and price manipulation. Director Alex Gibney also incorporates the behavioral studies of famous US psychologist Stanley Milgram by referring to his infamous Milgram Experiment which concludes that the majority of people will do what their told, to the point of killing someone, if the order comes from an authority figure. It’s all too easy to believe. Over 40 years later people are still trying to discredit Milgram’s findings as the suggested truth is too uncomfortable for societies that believe themselves to be both moral and just. Just to summarise the Enron story:

  • The company falsified revenues and profits over a prolonged period of time
  • The business model was apparently so difficult to explain that the CEO couldn’t explain it and the company was a “black box” which had to be “taken on faith”
  • Many financial analysts who SHOULD have known better took it entirely on faith! A young and inexperienced journalist pointed out that the emperor wasn’t wearing any clothes by asking the simple question “how does Enron make it’s money?”
  • Executives cashed in millions of dollars worth of share options when they knew they could no longer sustain the lie & while urging ordinary workers to use their pension allowances to buy Enron shares.
  • The various checks and balances that should have stopped this happening failed because auditors, bankers etc. were willing to overlook obvious inconsistencies in financial reports in return for massive payments and the promise of more in the future

Makes you wanna hide your money under the mattress! Occam’s razor would suggest that they weren’t the exception and there are other Enron’s out there. So the next time you’re offered a financial product or investment opportunity that seems too good to be true, it probably is.