You can read 1000 economic forecasts, particularly of western economies, without once encountering the question, what if people protest against the policy. Yet, this to me will be the key issue for the next decade. Can the institutions of society implement policies at both the required level of intensity and duration to bring the world economy back into balance, or at a minimum trending that way? I don't think so. Others, like Stephen Roach at MSDW, do.
Despite admitting that the denial he sees amongst attendees at MSDW's investment conferences might also be found in his own views, he sticks to his guns. Institutions and leadership, he believes, will alter the path of history.
Institutions, the people who run them and the people who are run by them (or not as the case may be) have been features of recorded history for as long as the record exists. Detachment or megalomania depending on your perspective is a feature of those who rise to lead long in the tooth institutions until crisis conditions put those institutions to the test. Throughout history established institutions have been reactive, not proactive. Expecting this time to be different is to me like waiting for the sun to rise in the west.
I'm not arguing that the current world leaders don't think they can pull it off, I imagine they do, as other leaders throughout history have. I just don't think they appreciate the current thinness of the veneer of civilization, particularly in the US.
A people propagandized into accepting the virtue of fighting those with whom they disagree is a powder keg waiting to explode. I note with some concern the just released FBI data on violent crime which showed a jump in 2005-a year, mind you with a housing boom that made economic conditions more pleasant than currently exist.
If the long hot summer progresses with $3 gas, rising interest rates induced foreclosures and bankruptcies, a few hurricanes and perhaps a war with Iran to boot, the people will not be happy. When push comes to shove, I think the first option will be to ease up on monetary tightening.
But let's get a bit more specific and less abstract as we contemplate Mr. Roach's faith that institutions and leadership will alter the path of history.
Which institutions, I wonder. The same Central Banks who allowed the inflation of the 70s to appear, or the depression of the 30s? Is Ben Bernanke the next incarnation of Paul Volcker? I can't imagine Paul Volcker having a problem communicating with Maria Bartiromo, he would most likely have just walked past. No. Academic, politically correct Ben is a long way away from the brusque, cigar chompin' Volcker.
What leadership, I wonder. The Bush team, whose credibility, despite the killing of al-Zarqawi, is on par with Nixon's. Does Mr. Roach really believe that after being told the Iraq war would reduce oil prices among other untruths, that the people of the US will calmly accept the bursting of the housing bubble, which will be far more painful than the Nasdaq deflation, without a fight? While CEOs earn 200-400 times their wages? Not now, I think.
It is a feature of the leading institutions of any empire to look the wrong way at the wrong time- to try an old technique when its time has past. 6 years ago I think the US population would have accepted (with some grumbling) a cleansing recession that restored a degree of balance to international trade. In the event, the Neo-cons beat out the Larry Lindsey's and Paul O'Neill's and the military option, one of the oldest tricks in the book, was the policy option on which the Bush Presidency's credibility was spent.
One of the ironies of history is summed up by this quote from Jean de La Fountaine: A person often meets his destiny on the path he took to avoid it. It will be ironic indeed is those who claimed the end of history will have been instrumental in reviving the cycle, if such proves to be the case.
Monday, June 12, 2006
Tuesday, June 06, 2006
How's that rebalancing call working for you, Mr. Roach?
On May 1 of this year, Stephen Roach announced that the world, in an economic sense, was on the mend because world financial authorities were ready to take their medicine. The USDX had just fallen from 90 to 85, the Yuan was strengthening and interest rates were rising the world over.
Over the past month, however, these same authorities are starting to realize that the medicine does not taste good. Employment growth, according to the BLS has slowed appreciably and the US equity markets, along with those of other nations, have declined, in some cases substantially. Suddenly, there is talk that the Fed might need to pause. The Republican majority can ill afford a summer economic swoon going into November elections.
Also in the last month, Mr. Paulson has been named Treasury Secretary. Strangely, at least if we are to believe Mr. Roach's view of the authorities' willingness to take their medicine, the US$, the fulcrum for Mr. Roach's rebalancing, has stopped falling and rallied back to roughly where it was on May 1. Rising commodity prices in $ terms, to me a necessary consequence of a falling $, seem to have spooked the same authorities, who have trotted out the now very tired strong dollar mantra.
So are the authorities willing to take their medicine or not, now that they can see that there will be no rebalancing gain without consumer (a.k.a. voting citizen) pain? Perhaps in theory, but theory is not reality. We will see just how resolved the authorities are in the coming weeks.
Of course, things could get out of hand despite institutional support for the status quo, indeed, in my view, it takes just such a set of circumstances or constantly promising to get one's house in order, but just as constantly failing to follow through to produce such an outcome. Despair can drive men to do previously unthinkable things.
Going back a half millennia, it was widely known that the Vatican needed to reform (Jan Hus had railed against Church policies a century before Luther, and was burned at the stake for his efforts) and many promises were made to that effect, albeit only to be broken. I wonder when the monetary incarnation of Luther will appear posting his 95 theses on the doors of the Monetary Authorities' 21st Century Church.
Over the past month, however, these same authorities are starting to realize that the medicine does not taste good. Employment growth, according to the BLS has slowed appreciably and the US equity markets, along with those of other nations, have declined, in some cases substantially. Suddenly, there is talk that the Fed might need to pause. The Republican majority can ill afford a summer economic swoon going into November elections.
Also in the last month, Mr. Paulson has been named Treasury Secretary. Strangely, at least if we are to believe Mr. Roach's view of the authorities' willingness to take their medicine, the US$, the fulcrum for Mr. Roach's rebalancing, has stopped falling and rallied back to roughly where it was on May 1. Rising commodity prices in $ terms, to me a necessary consequence of a falling $, seem to have spooked the same authorities, who have trotted out the now very tired strong dollar mantra.
So are the authorities willing to take their medicine or not, now that they can see that there will be no rebalancing gain without consumer (a.k.a. voting citizen) pain? Perhaps in theory, but theory is not reality. We will see just how resolved the authorities are in the coming weeks.
Of course, things could get out of hand despite institutional support for the status quo, indeed, in my view, it takes just such a set of circumstances or constantly promising to get one's house in order, but just as constantly failing to follow through to produce such an outcome. Despair can drive men to do previously unthinkable things.
Going back a half millennia, it was widely known that the Vatican needed to reform (Jan Hus had railed against Church policies a century before Luther, and was burned at the stake for his efforts) and many promises were made to that effect, albeit only to be broken. I wonder when the monetary incarnation of Luther will appear posting his 95 theses on the doors of the Monetary Authorities' 21st Century Church.
Sunday, June 04, 2006
Ouch, that statistic just bit me!
Guns don't kill people, people kill people, is one of the key retorts from the gun lobby in America, and one with which I agree. While reading Daniel Gross' When sweet statistics clash with a sour mood in the NYTimes a paraphrasing of the above retort came to mind. Statistics don't mislead people, people mislead people.
But wait, you might be thinking, didn't Mark Twain (Benjamin Disraeli if you happen to be reading this in the UK) opine that there are three kinds of lies: lies, damn lies and statistics. Yes they did but I don't think either Disraeli or Twain meant that the statistics themselves are the problem but rather the people who present them. I'd like to go one step further though and add that readers allow themselves to be bamboozled by statistics.
Let me share a memory to highlight what I mean. When I was 12 my father went back to school, first studying Philosophy en route to a Law degree. Thus our home library was soon augmented by the works of Descartes, Berkeley, Locke and Hume, to name a few. As children are wont to do, I emulated my father and read, perhaps tried to read would be a better description, some of these works. My impression was that these books were confusing.
When I began my own studies in Philosophy as an undergraduate a few years later, I was surprised to find that these once confusing works were now understandable. Indeed, each time I have revisited these works I have come to find more and more meaning. Yet the texts were unchanged from the first time I had picked them up. That is, the books themselves weren't confusing. I just didn't have enough background and life experience the first time I picked them up to discern much meaning in them.
The conclusion I drew from this was that meaning is subjective. As Thomas Carlyle put it, In every object there is inexhaustible meaning; the eye sees in it what the eye brings means of seeing.
This is not to argue that words don't have an objective meaning, but rather that unless a person acquaints themselves with those meanings, they may confuse themselves. John Locke's notion of each new mind as a "tabula rasa" or "blank slate" comes to mind.
I am reminded of this need to fill in the blanks in my head each time I begin to study a new field or era in history. Just recently I began a study of the Middle East and had to slog through quite a few books before I had what I call a Rosetta Stone moment- a sense that I had just found the key to unlock the mysteries hidden in the texts.
From that point on, I wasn't slogging through the texts but reading them with enough background to divine the broader outlines. Names like Selim, Osman, Suleiman, Mohammed, Ali, and Saladin which had once been empty markers in my head began to evoke times, events and effects on further acquaintance.
During my slogging periods I need to keep reminding myself that I need first to crawl before I can walk. I need to know that I don't know to learn. Thus the same sense that might lead a person to say that a book is confusing or a statistic is misleading leads me to say that I need to do further study.
The above is not meant to argue that people don't cherry pick among statistics to paint a picture that fits their view, they do. So do I. Rather I am arguing that each person can, if they choose, educate themselves sufficiently to avoid being permanently confused or misled.
Knowing, for instance, that 23.4% of the CPI measure of US inflation uses owner's equivalent rent of primary residence, rather than the cost of a home or that the employment data assumes some degree of continuity in new business creation and related employment helps in demystifying the gap between the picture these numbers, taken at face value, might suggest and the world of your experience.
This type of due diligence may well have other effects, to wit, one might begin to wonder why the data are presented as they are. This too, it seems to me, is a fruitful avenue of personal research.
We all, thank God, have minds. What we think with them is, at least in part, up to us, for good or for ill. Evolution may well have increased man's capacity to think over the millennia, but evolution won't read the books for you.
But wait, you might be thinking, didn't Mark Twain (Benjamin Disraeli if you happen to be reading this in the UK) opine that there are three kinds of lies: lies, damn lies and statistics. Yes they did but I don't think either Disraeli or Twain meant that the statistics themselves are the problem but rather the people who present them. I'd like to go one step further though and add that readers allow themselves to be bamboozled by statistics.
Let me share a memory to highlight what I mean. When I was 12 my father went back to school, first studying Philosophy en route to a Law degree. Thus our home library was soon augmented by the works of Descartes, Berkeley, Locke and Hume, to name a few. As children are wont to do, I emulated my father and read, perhaps tried to read would be a better description, some of these works. My impression was that these books were confusing.
When I began my own studies in Philosophy as an undergraduate a few years later, I was surprised to find that these once confusing works were now understandable. Indeed, each time I have revisited these works I have come to find more and more meaning. Yet the texts were unchanged from the first time I had picked them up. That is, the books themselves weren't confusing. I just didn't have enough background and life experience the first time I picked them up to discern much meaning in them.
The conclusion I drew from this was that meaning is subjective. As Thomas Carlyle put it, In every object there is inexhaustible meaning; the eye sees in it what the eye brings means of seeing.
This is not to argue that words don't have an objective meaning, but rather that unless a person acquaints themselves with those meanings, they may confuse themselves. John Locke's notion of each new mind as a "tabula rasa" or "blank slate" comes to mind.
I am reminded of this need to fill in the blanks in my head each time I begin to study a new field or era in history. Just recently I began a study of the Middle East and had to slog through quite a few books before I had what I call a Rosetta Stone moment- a sense that I had just found the key to unlock the mysteries hidden in the texts.
From that point on, I wasn't slogging through the texts but reading them with enough background to divine the broader outlines. Names like Selim, Osman, Suleiman, Mohammed, Ali, and Saladin which had once been empty markers in my head began to evoke times, events and effects on further acquaintance.
During my slogging periods I need to keep reminding myself that I need first to crawl before I can walk. I need to know that I don't know to learn. Thus the same sense that might lead a person to say that a book is confusing or a statistic is misleading leads me to say that I need to do further study.
The above is not meant to argue that people don't cherry pick among statistics to paint a picture that fits their view, they do. So do I. Rather I am arguing that each person can, if they choose, educate themselves sufficiently to avoid being permanently confused or misled.
Knowing, for instance, that 23.4% of the CPI measure of US inflation uses owner's equivalent rent of primary residence, rather than the cost of a home or that the employment data assumes some degree of continuity in new business creation and related employment helps in demystifying the gap between the picture these numbers, taken at face value, might suggest and the world of your experience.
This type of due diligence may well have other effects, to wit, one might begin to wonder why the data are presented as they are. This too, it seems to me, is a fruitful avenue of personal research.
We all, thank God, have minds. What we think with them is, at least in part, up to us, for good or for ill. Evolution may well have increased man's capacity to think over the millennia, but evolution won't read the books for you.
Friday, June 02, 2006
The limits of finance
Henry Paulson's appointment to the position of Treasury Secretary brings yet another Goldman Sachs player (Joshua Bolton was recently made Chief of Staff) to the Bush team. Upon hearing the news of Paulson's appointment my first thought was that the US has been declared bankrupt and Goldman Sachs has been appointed receiver. Perhaps holders of US debt are getting a bit antsy with the "deficits don't matter" approach of Cheney et. al.
This is to invert the arrow of causation described in most press reports. Rather than thinking the Bush team chose Mr. Paulson, perhaps it was the global financiers, worried about the most recent spike in commodity prices, inter alia, who are driving the changes. Most press reports suggest that Mr. Paulson will have a much greater voice in policy than his predecessors, which fits with the inverted arrow of causation model. Goldman Sachs will now be driving US financial policy.
Alas, but at least in my view, the problems the US faces are not financial but political, although the political miscalculations have financial repercussions. That is, the corporation that is the US government is not a well run ship that has unfortunately been unable to navigate the financial waters but rather seems to me more and more like one of those never profitable internet companies that were the rage in the late 90s.
The collective sigh of relief press reports describe emanating from Wall St. is to me a sign of confusion as to the power of finance. A well run finance department can extract more profit from an already profitable corporation, and can put off the day of reckoning for a non profitable one but it can't turn the latter into the former.
Moreover, the ability of the financial wizards to obfuscate the underlying financial facts on the ground (think Enron) tends to lead to a reduction in pressure to get the underlying business in shape in much the same way as as an ability to forge a report card tends to lead to a reduction in pressure to actually do well in school. Financial legerdemain then becomes counter productive to the true goal.
And it is the true goal that ultimately matters. In the case of a commercial corporation, the true goal is underlying profitability. In the case of a governmental corporation, the true goal is a sound economy which includes such features as ultimately balanced fiscal and trade accounts.
So, while Mr. Paulson may well be a financial wizard, he will likely not have the answers to the underlying problems of current US policy. He will not be able to help win the wars in either Afghanistan or Iraq and without victory on those fronts, the US will eventually have to deal with the failed experiment in imperialism.
You see, when President Bush says that it is imperative that we win the War on Terror I believe him. The US is, as they say in games of Texas Hold 'em, all in on a hand of military dominance. If the Afghanis and Iraqis prove as tough as the Vietnamese to subdue, the hand the US is playing with will not take the pot. And then the markers will come due, regardless of who runs Treasury.
This is to invert the arrow of causation described in most press reports. Rather than thinking the Bush team chose Mr. Paulson, perhaps it was the global financiers, worried about the most recent spike in commodity prices, inter alia, who are driving the changes. Most press reports suggest that Mr. Paulson will have a much greater voice in policy than his predecessors, which fits with the inverted arrow of causation model. Goldman Sachs will now be driving US financial policy.
Alas, but at least in my view, the problems the US faces are not financial but political, although the political miscalculations have financial repercussions. That is, the corporation that is the US government is not a well run ship that has unfortunately been unable to navigate the financial waters but rather seems to me more and more like one of those never profitable internet companies that were the rage in the late 90s.
The collective sigh of relief press reports describe emanating from Wall St. is to me a sign of confusion as to the power of finance. A well run finance department can extract more profit from an already profitable corporation, and can put off the day of reckoning for a non profitable one but it can't turn the latter into the former.
Moreover, the ability of the financial wizards to obfuscate the underlying financial facts on the ground (think Enron) tends to lead to a reduction in pressure to get the underlying business in shape in much the same way as as an ability to forge a report card tends to lead to a reduction in pressure to actually do well in school. Financial legerdemain then becomes counter productive to the true goal.
And it is the true goal that ultimately matters. In the case of a commercial corporation, the true goal is underlying profitability. In the case of a governmental corporation, the true goal is a sound economy which includes such features as ultimately balanced fiscal and trade accounts.
So, while Mr. Paulson may well be a financial wizard, he will likely not have the answers to the underlying problems of current US policy. He will not be able to help win the wars in either Afghanistan or Iraq and without victory on those fronts, the US will eventually have to deal with the failed experiment in imperialism.
You see, when President Bush says that it is imperative that we win the War on Terror I believe him. The US is, as they say in games of Texas Hold 'em, all in on a hand of military dominance. If the Afghanis and Iraqis prove as tough as the Vietnamese to subdue, the hand the US is playing with will not take the pot. And then the markers will come due, regardless of who runs Treasury.
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