A very long time ago I did some consulting work for a futurist. He used to say that when he encountered a new situation he tried to determine whether it was a problem (that could be fixed) or was a condition (that would have to be lived with). He said that we waste too much time trying to fix conditions.
So the issue is: Is the present financial mess a problem or a condition. If the latter, then it is a condition made possible by the introduction of digital technology into an old established business, trading. I don't know the answer. But if it is a condition then we have to wait until the situation has been made so difficult for people that great trade offs will be made and tolerated to allow us to somewhat modify the condition so that it comes to resemble a problem.. Winter is a condition. Aging is a condition. What I have for supper is a problem, something I can do something about. I can ameliorate the condition of winter by going to a sunny clime in the winter season. I can do something about aging by working out, nutrion, etc. I can ease many aspects of a condition but can't solve it as I could a problem. Both involve trade offs to make the condition easier to live with. What I have for supper is a problem which lends itself to an easy solution. The financial mess might just be a condition of humankind. Something like war. Why not control the outbreak of wars? Easier to do than fix the financial markets. But we don't, even though it seems that we can or maybe it's a condition. Is war a problem or a condition? Is the quest for financial stability and predictability a problem (with 50 year fixes that depend on technology and geo-politics) or is it a condition (same answer: with 50 year fixes that depend on technology and geo-politics.but for which there is no permanent solution available). Thoughts?? Arthur From: [email protected] [mailto:[email protected]] On Behalf Of Keith Hudson Sent: Sunday, May 23, 2010 3:55 AM To: 'RE-DESIGNING WORK, INCOME DISTRIBUTION, EDUCATION' Subject: [Futurework] Restoring the old economic model Last week, the well-respected Bloomberg website ran a story about the most successful investment bank in the world today -- Goldman Sachs (GS). In the first quarter of this year GS made a profit on every trading day. Yet, during the same period, 9 of its 11 published forecasts to its own investor-clients turned out to be wrong. (Those two figures might be slightly wrong here -- it could have been 7 out of 9. I'm relying on memory. I should have kept a copy but I didn't realize at the time that my subconscious mind would be working on this astonishing fact.) Needless to say GS clients are pretty upset by this revelation. Now, in the conventional way of the frequent buying and selling shares or currencies, any investment manager will tell you that the odds against being able to do this profitably over as long a period as a quarter year in non-boom times are very great. To do this on every working day of that period, the odds approach infinity. The only possible way that this can be done is by being able to survey every potential price movement that is available at any instant of time during the 24 hours and to pile-in on the slightest evidence of an upturn or a downturn. If the investment is large enough -- relative to the size of the object item (the shareholding of a business or a tranche of currency) -- then the effect can only be to enhance the initial movement. Once the price of the object item has moved up or down sufficiently to exceed the difference between the bid price and the offer price (commissions charged by intermediaries in the transaction) then the original transaction can be reversed and a profit made. If enough transactions are being made simultaneously, even if only a miniscule profit is made on each in-and-out, then a consistent, failure-proof cumulative profit can be made. This strategy could even be enhanced if, for example, a client of GS asks them to make a purchase or a sale. On balance, this decision is likely to be slightly more informed by expert knowledge (perhaps by an insider?) than otherwise. Once again, if such a transaction is judged sufficiently large to potentially nudge the market, even if ever so slightly, then GS can pile in with additional money of its own. However, unlike its client, GS would immediately follow with a reverse transaction of its own money as soon as a profit was realized. I also remember reading somewhere that such is the intensity of transactions on the shares or money markets these days that object items can be bought and sold in 11 seconds! Overall, how large this consistent (daily) profit can be made by an investment bank (or hedge fund) depends on how many opportunities can be surveyed and acted on simultaneously and how much capital it has at its disposal or can reliably borrow at short notice. Unlike, say, 10 or 20 years years ago, when sufficiently powerful supercomputers were still few and far between, this strategy would have been impossible. Today, however, an investment bank or hedge fund the size of GS can afford such a supercomputer. All that remains then is to devise algorithms that will survey hundreds (or thousands) of object items with the slightest sign of life and then buy or sell them automatically -- and reverse them almost immediately afterwards once a profit has been made. This, however, has two problems -- both of a catastrophic nature. The first is that although the strategy appears to be fool-proof, the algorithms may not be. It was the simpler and cruder sort of automatic stop-loss algorithms (program trading) that initiated the stock market crash on Black Monday, 19 October 1987. Starting in Hong Kong, where shares crashed 45%, it continued all round the world. The crash was only prevented from going further downwards when program trading was stopped and normal movements of share prices resumed. Even so, many economists were afraid that a recession of 1930 proportions would follow. In the event, normal trading resumed but it took two years before all the paperwork was sorted out and the previous level of share prices was regained. This time, however, with larger money markets involved (including sizeable tranches of government bonds which had previously been the province of individual investors or investment managers), and highly competitive strategies between large financial bodies, there is no guarantee that weaknesses in program algorithms might not recur and something even more catastrophic than the 1987 event might happen. These days, how many years would it take to sort out the paperwork? (The paperwork of the 2008/9 credit crunch is still not sorted.) The second problem is that by this fail-safe method of aggrandizement, GS, or perhaps two or three of such sizeable financial bodies, could theoretically end up owning the whole world! Or, more accurately, the whole of the Western world. Of course, in practice, bankrupted governments, businesses and electorates everywhere would have revolted long before this situation could be reached. Indeed, it's already the case that there is a powerful general mood at all levels outside the financial sector of the Western world that many of the financial operations carried out by GS and large hedge funds must be stopped. During this very week-end, the future of the Med country members of the European Monetary Fund might be at stake. (The Sunday Times tells me this morning that Spain is now as jittery as Greece.) But what can be done? Apart from tinkering about with regulations concerning investment banks and hedge funds -- which both the Senate and the House of the US Congress are now considering -- which can only lead to more evasion by cleverer people in due course, almost nothing really constructive can be done. It still remains that our present financial system has already resulted in all Western governments being deeply in debt -- some irremediably bankrupt already -- with the prospect of deep deflationary recession or hyperinflation in the years to come. Orthodox economists can't decide. The phrase of the moment is "a new model is required". Could it be that the new model ought to be the old model -- the one that obtained before 1931 and 1971? In 1931 the UK pound (then the predominant trading currency in the world) was disestablished from real underlying value (which happened to be gold -- although that particular commodity is not an absolute requirement); and in 1971 the US dollar was similarly disestablished. Since then, the paper documents of currency have been printed at will by governments (subject to what their electorates allowed them to get away with by way of inflation), usually by playing around with central bank interest rates. Without solid foundations, currency prices have wobbled about -- sometimes wildly -- against one another. It's no wonder that, since then, following the fashion set by governments, a whole raft of other financial documents quite beyond useful insurance policies against risk should have been invented. These can now ricochet around the world with the speed of an electron so that nobody can possibly know what the true overall situation really is. We now have CDOs, CDSs, CDXs, CDO1s, etc and no doubt other derivatives are already forming in the minds of inventive people in the investment banks and hedge funds. I won't end with another repetition of the solution that I've make all too frequently in the last year or two, save to say that it has long been advanced by what is called the Austrian School of economists. What they write is usually so convoluted that it's almost unreadable, but they certainly have the only solution that's possible -- the restoration of the old economic model which served the world very well for most of the time since the first coin was minted at around 900BC in order to improve on bartering. Keith Keith Hudson, Saltford, England
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