STRAWS IN THE WIND

Of late I have become more and more convinced that there is something wrong with our economic models. I don't think anyone could argue against the fact that the 'experts' have managed to get us into a mess. What bugs me is the fact that they seem to be blaming it on us and not the system. As someone said the other day, it wasn't the workers who broke the banks.

The nearest I have got to a view on this is that the post 1960 de-regulation of the financial systems unleashed a torrent of greed and speculation that led to 2008, in effect a re-run of the 1920s. The obvious answer would seem to be more effective regulation but something Nigel Lawson said the other day got me to thinking. He said he was all in favour of separating casino banks from core Main Street banking services but thought it was useless to try to 'regulate' the casino. He said that there were more brains in the banks than the government and any attempt at regulation would be playing catch-up and doomed to fail. Far better to structure the system so that all losses were born by the gamblers, no more bail-outs. This is obviously attractive but I begin to wonder whether this would work, the Lords of the Universe could still do immense damage.

Human beings have always tried to see into the future, there is an enormous history of divination and prophecy, the most respected men in Judaism were always described as 'The Prophets' and were looked to for guidance. Signs and portents like comets or other natural events were sought for and 'interpreted'. I think we have moved beyond this now but I still take note of straws in the wind, little snippets of information that impinge on me and eventually seem to indicate a pattern. The main source of these for me are random reports from commentators. Of course no commentator (even me!) gets things right all the time but patterns can start to build.

Recently I am seeing a faint pattern emerging, I seem to hear more and more suggestions that perhaps the basic problem is that our systems are wrong and we need a radical alternative. It seems to me that as long as I can remember the basic dichotomy in economics has been between the advocates of Keynes, particularly the acceptance of deficit-financed spending to stimulate activity together with a large measure of central control and Monetary theories a la Friedman which advocate freedom for the markets to govern economies and the pursuit of 'Sound Money'. That's about the level of my knowledge of economic theory and whilst I have recognised the value of the Keynesian model in two world wars, my personal economic management has always been on the Micawber Principle, don't spend more than you possess, in effect 'Sound Money'. So what would an alternative system look like? The short answer is I haven't the faintest idea, don't look to me as the Second Coming. However, I am encouraged by the fact that some people seem to be asking these questions in the groves of academe, who knows, they may eventually come up with an alternative.

Meanwhile, in the real world we seem to be looking at a scenario that is, in effect, some sort of melt-down. Every indicator I have seen is going South, even the economic miracle that is China is in trouble. During all this my impression is that our Lords and Masters are floundering. We hear blame being cast, individual countries being used as scapegoats and a hidden assumption that the situation is manageable using existing models. I'm afraid I don't buy it, I think we are watching a global train wreck in slow motion. So what do I think is missing?

During my life experience has taught me that certain strategies work. One of them is Worst Case. If you are faced with a developing process with an outcome you can't predict one way of planning is to start by assuming that the worst may be about to happen and plan for that outcome. In this case it is failure of states and institutions. Perhaps we should abandon all thoughts of control, accept the situation that faces us and instead of waiting until chaos overtakes us, start by managing chaos on a small scale. For instance, instead of throwing phantom money at Greece, accept default and manage it. The same applies to the other problems. The EU thinks that $120billion would ensure that the EU banks exposed to Greek debt survived. The market analysts suggest $300billion to $400billion. Who are the markets going to believe? Should we be looking at the management of controlled failure of these banks?

I don't want to push this any further, I'm not qualified to do it. We get to the stage where we can't see the wood for the trees, it all gets too complicated for any government or world body to manage. My suggestion is that there may be merit in splitting the chaos into lumps we can understand and manage and start now by controlling them by allowing them to happen and coping with the adjustments we have to make. There is an outside chance that this would stimulate deeper thought and perhaps even modifications to our systems. At the very least it would be positive management of reality and could inspire more confidence by the markets towards our Lords and Masters. It could be that this realistic process might produce some new thinking, a new economic model. If so it would have the merit of being based on reality and hard facts, not phantom money and exotic algorithms.

SCG/20/10/11


Stanley Challenger Graham




Barlick View
stanley at barnoldswick.freeserve.co.uk

AM I AT LAST STARTING TO GROW UP?

Life is strange. At various times I have thought that I might be a grown-up at last but then something happens to make me wonder. I suppose I feel like an adult (about time when you think about it!) but secretly have always considered myself child-like and perhaps naïve about some things. Of course this might be part of the human condition and I'm no different than anyone else.

What has triggered this off is the awful realisation that I listen to right wing commentators advocating monetary views of the economy and find that I am agreeing with some of their more moderate statements. This as bad news for someone who has always considered themselves to be a left of centre social democrat.

I suppose that the simplistic view, Keynes Good, Friedman Bad, was always naïve but it fitted my beliefs best and I stuck to it even though, in the management of my personal economics, I was definitely an advocate of the Micawber Principle, you can't take more out than you put in. I still work that way and it serves me well. I suspect that this confusion reflects the low level of my understanding of economics!

So, am I going to make any radical changes? No, because for one thing it is too late and it wouldn't do any good anyway. I shall continue to watch in awe as our political masters advocate strict monetarism and borrow or manufacture phantom money like drunken sailors to shore up their creaking policies. At the same time I shall monitor my spending and try to save money on my pension. My mind goes back to the old days when Vera and I were raising kids on an income of just over £30 a month when the loan repayment on the farm was £15. We used to sit down at the end of each week and allocate all our income. It worked and I see no reason to start doing anything different.

This NOP is confused, I know that and it may be that recognition of the confusion is perhaps a sign that I am growing up. I am reminded of the old union official who was asked if he had learned anything when he ditched his Communist beliefs and switched to the Labour Party. He said “Beware of certitude!” I think I know why he said that!

A funny for you heard on World Service this morning: “Never eat in a restaurant that has more items on the menu than place settings, they have a big freezer”.

SCG/30/10/11


Stanley Challenger Graham




Barlick View
stanley at barnoldswick.freeserve.co.uk

I think you are quite wrong, Stanley, and history would show that,
especially the history of deflationary policies in 19th and 20th (and now, I
fear, 21st) century America.    Before government acquired so many
responsibilities, the main cry was sticking to the gold standard, where
(they claimed) money was real money and not mere paper.     J P Morgan,
during the 1890s depression, broke the country on Cleveland's devotion to
the gold standard.    Cleveland borrowed money to buy gold from Morgan who
immediately presented government securities to buy the gold back, further
depleting the government's gold reserves and forcing Cleveland to borrow
more money to buy more Morgan gold, and every time  JP made a big profit on
the exchange, on the interest, and on the commission for the gold sales.
Eventually, it got so bad that they didn't even bother moving the gold from
Morgan's strongrooms to the government buildings.    Meanwhile, producers
(farmers and workers) were getting less and less for their product, so they
produced less and less.    Most economic historians (never mind the
monetarists) believe that the deflationary cycle was broken only by the
discovery of gold in the Yukon, and perhaps the increased gold production in
South Africa (interrupted by the Boer War)..

The national economy is not a household economy, certainly not a
conservative household involved mainly in providing for its own security.
If anything, it's more like a mega corporation, needing to maintain a
productive and a cash flow lest its citizens (employees) suffer.    So the
difference is that we are citizens, not employees, and in a democracy that's
a big difference.  

Or should be.   

There is one sense in which the monetarists may have a point but I have long
since forgotten what it was.

Cheers, Bob

Thank God for that. I don't mind being confused or childish but I'd hate to be a Friedman Monetarist!  I loved his last sentence....