At 09:55 23/05/2010 -0400, you wrote:
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.
That seems to be a sensible distinction to be made.
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 think it's the latter, but not due to IT, only greatly accelerated by it.
To put the disestablishment (1931, 1971) of currencies another way , it's
been like playing a soccer game where the goal posts are moving about.
There are no fixed terms of reference. Hedging can only work against known
and mathematically well-defined risks. when I first started taking an
interest in economics I was wary of "gold freaks" as those who living in a
medieval past.
I dont 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..
But once you've made a distinction between a condition and a problem I
don't see how you can change one into the other. I think the financial
situation is a condition that can only be solved when it becomes evident
that it can't continue any longer.
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 cant 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.
Yes, well Quantitative easing (which we've been gulled into calling) has
been a temporary alleviation of the credit crunch and, until a week or two
ago, many economists and financial commentators were saying that economic
growth was resuming -- but conveniently forgetting about the massive debt
that has to be paid off..
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 dont, even though it seems that we can or maybe
its 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).
I think it's a condition which can only end in disaster, and then we'll
have to start all over again with a sensible currency this time (so that
governments will forced to discipline themselves).
Keith
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
Keith Hudson, Saltford, England
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