The Market Religion

A recent article by Time columnist James Poniewozik highlights “The Market” as the focus of ideology, especially as expressed by commentators on financial cable network CNBC. (See CNBC Under Fire: Sticking Up for the Big Guy?):

 

… CNBC looks at everything, particularly politics, in terms of how it will affect “the Market.” The commentators on CNBC murmur about the Market as if it were the Island on Lost: a mystic force that must be placated, lest it become angry and punish us. “The Market doesn’t like …” “What the Market wants to see is …”

And, oooh, is the Market cranky at Obama! The Market doesn’t like raising taxes on the wealthy (even if [Warren] Buffett does). The Market doesn’t like government health-care reform or cap-and-trade environmental policy or big budgets or limiting bonuses at bailed-out banks. And don’t get the Market started on bank nationalization. That ticks the Market off!

From the Bubbleconomics point of view, I would suggest that this kind of religious fervor about markets plays a role in the formation of economic bubbles at all levels. It reminds me of one of the oversimplifications that come up in discussions of intelligent design: A given condition exists, therefore the believer thinks God must have made it.

But simply because markets can offer certain benefits in some circumstances, it doesn’t follow that they should be trusted blindly as if they were one of the marvelous creations of the Deity. The greater Market is just a function or outgrowth of the human civilization we live in. While it is true that the whole is greater than the sum of its parts, that doesn’t mean that the whole is somehow naturally virtuous.

AB — 23 March 2009

 

 

Ron Paul predicts 15-year depression

According to an article by Phil Davis in Financial Times yesterday, U.S. Congressman Ron Paul believes the U.S. economy could be heading into a 15-year depression:

“The US government just won’t allow the correction the economy needs.” He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. “No one remembers that one. They’ll remember this one, because it will last 15 years.”

A key cause, Paul contends, will be reliance on what he calls unstable “fiat currencies” rather than the gold standard.

At his web site, Paul defines “fiat money” as “money that can be inflated or increased at the push of a button at the say-so of a powerful person or organization.” He contends that nowadays “most dollars are just blimps [should this be sic? maybe not!] on a computer screen and it’s extremely easy for the Federal Reserve to create money out of thin air whenever they want to.”

Paul tells Davis that he advocates the Austrian School of economics:

“People don’t like the Austrians because they are against big government, against armies and against the welfare state. To accept Austrian economics, you have to accept limitations of credit expansion and that is what has kept the government and financial firms in business for so long.”

Some explanations of the Austrian School can be found at the Wikipedia entry and at the Ludwig von Mises Institute web site.

Judgin from the Wikipedia entry, the Austrian School puts its faith in market mechanisms:

It emphasizes the spontaneous organizing power of the price mechanism, holds that the complexity of subjective human choices makes mathematical modelling of the evolving market extremely difficult (or impossible) and therefore advocates a laissez faire approach to the economy.

Here are some other Ron Paul quotes from Davis’s article:

“People will start to abandon the dollar as current and past economic policies create a steep rise in interest rates.”

“If you are in Treasuries, you will need to be watchful and nimble to time your escape.”

“Europe and the US will both have to fundamentally change their money systems.”

“The last place you want to be is in the stock market,” he says. “It may not bottom out for 10 years – just look at Japan.”

“The breakdown of Bretton Woods was my motivation for running for Congress. I have been talking about the dangers ever since and warning that the control by central banks over the money supply would create an enormous bubble.”

“Gold is natural money and has been for 6,000 years.”

A couple of years ago, my dad and I watched a fascinating interview with Ron Paul on The News Hour on PBS. The comment of my dad, who is very liberal politically and disagrees with Paul on many points, was, “Well, it’s hard not to like him.”

AB — 23 March 2009

Attributed Value: How much is stuff really worth?

Today the term “attributed value” occurred to me as a way to modify the concept of value in the light of subjective opinion.

How much is something really worth? The traditional common sense answer is that something is worth whatever someone else will pay for it.

In other words, the value attributed by the best available buyer — the attributed value.

Conventional economics probably already has a term for this concept, but I thought I would pin it down while it’s on my mind.

During my career, I have had two businesses for sale. One I sold successfully. The other I was not able to sell at all. From my point of view, both businesses had value, but the one I was not able to sell had no attributed value.

At the time, I consulted a business broker who tried listing the business for me for awhile. We also discussed pricing strategies. One rule of thumb he mentioned is that some people price a business based on two years’ worth of profits. But what it really comes down to in the end, he told me, is the market reality: “This business is worth whatever somebody is willing to pay you for it.”

Wikipedia has an article related to this topic: “Subjective theory of value.”

This idea of attributed value has relevance to Bubbleconomics in that economic bubbles appear to be partly sustained by attributed values that are unnaturally high and thus unsustainable.

The concept of attributed value also has relevance to the question of the Big Bubble. Wikipedia’s article on “Market capitalization” says,

The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007 and rose as high as US$57.5 trillion in May 2008 before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008.

Yet did the real value of all the stuff represented by those market capitalization figures actually change that much over those time periods? Or did the Big Bubble just deflate because of falling attributed value?

AB — 20 March 2009

Gallup: Americans favor economy over environment

Since 1984, research firm Gallup has been asking Americans whether they think priority should be given to the economy over environmental protection or vice versa. For the first time this year, the trend crossed over in favor of the economy, as you can see on this graph:

Writing for Gallup, Frank Newport comments:

The reason for this shift in priorities almost certainly has to do with the current economic recession. The findings reflect many recent Gallup results showing how primary the economy is in Americans’ minds, and help document the fact of life that in times of economic stress, the public can be persuaded to put off or ignore environmental concerns if need be in order to rejuvenate the economy.

From the Bubbleconomics perspective, this trend is not surprising. People tend to act in the short-term to preserve their personal bubbles, which depend in turn on maintaining the Big Bubble. This tendency is understandable from the human perspective, but in the long term might be leading the world into an environmental catastrophe.

AB — 20 March 2009

The Grandest Ponzi Scheme and The Great Disruption

In his recent column “The Inflection Is Near?,” New York Times columnist Thomas Friedman raises the question:

What if the crisis of 2008 represents something much more fundamental than a deep recession? What if it’s telling us that the whole growth model we created over the last 50 years is simply unsustainable economically and ecologically and that 2008 was when we hit the wall — when Mother Nature and the market both said: “No more.”

Friedman references physicist and researcher Joseph Romm, who writes at www.climateprogress.org. In “Is the global economy a Ponzi scheme, are we all Bernie Madoffs, and what comes next?,” Romm describes the global economy as “the grandest of Ponzi schemes, whereby current generations have figured out how to live off the wealth of future generations.”

If that’s not sufficiently gloomy for you, Friedman also references environmental activist Paul Gilding’s article “The Great Disruption,” in which he maintains that in 2008 the world entered a period that he calls The Great Disruption:

Our whole global political and economic system has been built on incessant growth, so this crisis will strike at the heart of society. Growth is the underpinning policy focus and strategic assumption of all governments, central banks, corporations and investment funds. It is never questioned and anything less leads to intervention to restart it. So when growth stops, things get very difficult. People throw out governments, shareholders throw out Boards and Boards throw out CEOs. So we can expect all that before we face up to reality – we have a system design problem.

However, Gilding refers to himself as an optimist. Although the crisis will “herald an unparalleled era of system stress, economic stagnation and social tension,” he believes that during that time “we’ll evolve a new economic model and then rebuild”:

This disruption will drive a transformation of extraordinary speed and scale. It will leave in the dust all other major global changes we’ve faced – those driven by war, technology or globalising markets. It will be an exciting and ultimately positive transformation, with great innovation and change in technology, business and economic models alongside a parallel shift in human development. It could well be, in a non-biological sense, a “great leap forward” for humanity with a move to a higher stage of evolution and consciousness.

AB — 18 March 2009

Does Bubbleconomics offer solutions, or is it all negative?

Someone with a critical eye might look at Bubbleconomics as a negative endeavor. So this is a valid question: Are we just mouthing off about how bad the human economics system is, or do we offer solutions?

One answer to that is that Bubbleconomics is very much an exploratory project. Our ideas are in discovery and might be looked at as trial balloons or straw men — certainly not sacred cows, if you will permit another cliche.

While we are not interested in recommending government policy, we do recognize that governments, businesses, non-governmental organizations (NGOs), and individuals might undertake projects to combat the negative human effects of economic bubbles or to exploit the resultant entrepreneurial opportunities. Such projects could take place on a large or small scale.

For example, I was thinking this morning about the growing phenomenon of homeless tent cities in the U.S. The tent city in Sacramento, Calif., has received much recent attention due to its being featured on the Oprah Winfrey Show.

Naturally the recent upsurge in such settlements brings to mind the Hoovervilles that emerged during the U.S. Great Depression. But we might also consider favelas or shanty towns like the ones in Brazil, or refuge camps. (See this panorama view of Rocinha in Rio de Janeiro.)

If the Big Bubble hypothesis is correct, the world could see an increasing need for such settlements as economies collapse and populations are displaced. What might be the needs and opportunities arising as a result? What are the possibilities for creating intentional settlements, low-cost housing, products, and technologies targeted at the increasing needs for such encampments?

These seem like fruitful areas for exploration, and I am certain that innovators, entrepreneurs, charities, governments, and researchers are already investigating them.

One recent example I came across is EDAR (Everyone Deserves a Roof), a non-profit organization that distributes mobile shelters that have been compared to covered shopping carts.

AB — 15 March 2009

Levels of Economic Bubbles

It seems useful to identify several levels of economic bubbles:

Personal bubble: The economic bubble formed by an individual or a family created and maintained by self-interested behavior (See “Defining terms in Bubbleconomics“)

Microbubble: An economic bubble formed on a relatively small level, such as in a limited geographic location or niche market

Macrobubble: A large bubble that plays a major economic role in a large economy, globally, or in a major industry or industries

The Big Bubble: The theoretic global bubble consisting of the entire world economy based on unsustainable growth (See “Defining terms in Bubbleconomics“)

AB — 16 March 2009