Closer to the Edge November 2011
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An Irishman’s perspective on Ireland, the future, and other things from time-to-time …
Like a train sliding backwards over a precipice, as each carriage goes over so the weight pulling down grows and the weight resisting decreases. And the engine at the front, the ECB/Germany has to think can I still pull all this back up or should I cut the coupling and save myself at least.For those who prefer percentages, here's a handy chart from Zero Hedge:
What lessons does the historical record provide to those interested in trying to figure our whether or not today’s discontent is likely to produce revolutionary change or simply peter out?
One important historical lesson that seems particularly relevant to our contemporary moment is that it is much easier to be negative than positive. Or, to be more precise, it is much easier to mobilize against an old order than to generate consensus for a new one.
...Today, we are certainly living through a period of massive discontent. Sclerotic and unresponsive political regimes, economic downturns, and financial crises have created grievances and dissatisfaction in many corners of the globe. But much of this opposition remains focused more on what it opposes than on what it wants, better able to articulate why it wants to do away with the existing order than able to convey viable alternatives to it.
...Prognostication is always a difficult and dangerous business. Perhaps we are still in the early stages of our “age of uncertainty.” Powerful and attractive plans for changing the status quo might soon emerge. But if history is any guide, the chances of that happening are slim. Particularly in the West, what seems striking about the current period is the widespread sense of the need for change combined with the lack of any coherent plans for it.
This is a very big deal. One year ago, the Italian 2-year was at 2.010 and the 10-year was at 3.924. The Italian 2-year is now rapidly approaching where the Portuguese 10-year was one year ago.Maybe it's safer being a sideshow?
What this indicates is that the end of the Euro and the end of the EU in its present form will likely take place within one year. Greece and Ireland were sideshows. Italy is the main event.
Modern financial "products" and "instruments" are often highly complex and abstract, but the entire edifice can be distilled down to this: the system is based on the assumption that all risk can be hedged, and the difference between the initial position's yield/gain (i..e. placement of capital at risk for a gain) and the cost of hedging the risk of the wager to zero can be skimmed from the system risk-free.Now you know. Go read the rest here.
That is the entire system in a nutshell, and we can immediately see the advantages of this system over traditional Capitalism, where risk can be hedged but never to zero, and the return is correlated to the risk taken on.
...The entire global financial system is thus based on the equivalent of a perpetual motion machine: money can be borrowed or leveraged into existence in essentially unlimited quantities, and then deployed in risk-free skimming operations to harvest unlimited wealth.
What does this promise of using leveraged capital to skim risk-free fortunes do to the "real economy" of production and investment in plant and technology? It guts it. The risk of industrial Capitalism is real and cannot be hedged away; high-risk investments may blow up or they may return high yields. It literally makes no sense to risk real capital in productive Capitalism when a zero-risk skimming operation can be developed that essentially needs near-zero capital.
Thus financial capital has come to completely dominate industrial or productive capital. The pernicious consequences of this dominance have poisoned the economy and culture on multiple levels.
... the average upward bias in the official forecast of the budget balance, relative to the realized balance, is 0.2 percent of GDP at the one-year horizon, 0.8 percent at the two-year horizon, and 1.5 percent at the three-year horizon. The longer the horizon, and the more genuine uncertainty there is, the more scope there is for wishful thinking.Of course, our Department of Finance might be better at measuring and forecasting macroeconomic variables than finance ministries elsewhere. Hmmm.
...when we’re dealing with complex systems, truth is very hard to come by. To claim otherwise is the pretense of knowledge. What we are really debating is ideology and philosophy. That’s the fight of the century - more bottom-up or more top-down. That’s what’s really at stake. We may pretend otherwise, that we’re just economic engineers trying to make the system work better but I think that’s an illusion fostered to encourage people to buy our intellectual wares.We simply don't know enough about what makes any economy grow to be able to forecast the economic future, let alone shape it. According to Charles Kenny some 18,000 statistical analyses have been published since 2005 alone on what drives GDP per capita growth. And the answer?
So what’s the secret to economic growth? The short answer is that there appears to be no short answer. ... the available data don’t allow us to make any hard and fast statements about “what causes economic growth” at all. That there might not be a holy grail of growth policy, however, is unlikely to prevent people of economic faith from looking. The next six years will undoubtedly see another 18,000 papers on the topic. Just don’t spend too long reading them. Episodes of fast growth and stagnation around the world will continue to take us by surprise.Worth remembering as the debate about austerity etc gathers pace in the years ahead. And as we ponder the probability of Ireland experiencing the future forecast by the Department of Finance. I'll leave the last word to Charles Kenny again:
There’s a reason it is hard to predict the future: It hasn’t happened yet.
"This is perhaps why everyone running around in V is for Vendetta masks makes me laugh. Moore’s vision of a rebellion against a totalitarian fascist dystopia was predicated on a simple duality: “Us” vs “Them”. The people vs the system and similar tropes. The problem is that an “us” doesn’t exist anymore. As much as anyone who appropriates the anonymous rebel idea wishes to believe they are in league with everyone versus the man/the system/whatever, they’re more likely to be in league with a startling minority of people who happen to believe in a given cause. A cause which is in any event one amongst many." Jack McDonald
Put simply, the combination of China’s export-driven growth and the desire to build up FX reserves to prevent a repeat of the 1998 currency crises generated a glut of savings which was invested in western bonds, causing a fall in their yields.Nevertheless, the growth agenda needs to be pursued vigorously. And not just in Ireland. Now the world has 7 billion mouths to feed, getting on a path to sustainable growth is more vital than ever. Whilst there have been many suggestions for how best to kick start growth (for example ICTU's recent call for a €6 billion investment programme over the next 3 years), most ignore the biggest long term issue affecting growth: demography.
In principle, this drop in interest rates might have triggered a boom in real capital spending. But it didn’t, perhaps because the "great stagnation" meant there was a dearth of investment opportunities. Instead, lower rates unleashed a bubble in house prices, the bursting of which brought down banks.
Finally, the global retreat from marriage is also likely to depress and distort economic growth. Evidence drawn from Europe and North America indicates that children who are raised in an intact, married home are more likely to excel in school and be active in the labor force as young adults, compared to children raised in nonintact homes. Married adult males also work harder than their unmarried counterparts and enjoy an income premium over single men of between 10 and 24 percent, in countries ranging from Germany to Israel to Mexico to the United States. These findings suggest that market economies in the Americas and Europe—from Canada to Chile, from Spain to Sweden—that are now experiencing a retreat from marriage will also reap a new crop of problems as fewer children have the opportunity to acquire the human and social capital they need to thrive in the global economy and as fewer men have the motivation that marriage brings to fully engage the world of work.Reversing the retreat from marriage might not seem like an obvious solution to the growth problem we are facing (to economists anyway), but feeding 7 billion men, women and children - and the next billion that will be born in the decades ahead - will take all the economic, social and technological skills we can muster.