Ed,
At 15:12 23/05/2010 -0400, you wrote:
I see the present financial mess as a problem based on conditions. As a
problem, action needs to be taken to make corrections in monetary, banking
and fiscal systems if the economy is to continue to meet peoples'
expectations, which may also need to be reduced.
I can't see any hope of fundamental financial reform until we're deep into
a crisis -- that is, much deeper than we are already in. (The next
generation are not going to be happy to pay high taxes to pay for the
governmental debts of this generation. See later . . . )
However, the problem arises out of age-old human behavioural conditions
of entitlement beliefs, greed and exploitation. Because the conditions
exist, the problem will recur again and again.
I'm afraid that this doesn't take us very far. All species are greedy and
exploitative and will expand until they reach limitations of resources or
competitors. As to entitlement belief, this is flexible over a period of a
two or three generations or more -- so long as a generation has no vivid
experience of how things were previously (if better) or how things might be.
It has certainly done that historically. I'm trying to read Reinhart's
and Rogoff's "This Time is Different" which deals with the many many
times the kinds of problems we are experiencing now have recurred in
history. While the settings in which the problems have occurred may have
been very different, the behaviour that led to them and what actions
needed (if not always taken) to resolve them were not all that different.
I agree largely. But we're now reaching implacable limitations (of cheap
fossil fuel energy, freshwater, population density) which, when their
equivalents were met with by other species in times past cause
extinction. And, as we know, indigenous populations in "advanced"
countries, with fertility rates having declined steadily for several
decades to what is now non-replacement of 2 per family is heading for
extinction. The experience of previous large-family immigrants in advanced
countries is exactly the same. Even if the population of the whole world
were to get to the same standard of living of the West then they, then the
evidence so far is that they, too, would be on extinction trend within a
couple of generations.
To absolve ourselves of the problems, we would have to make some pretty
fundamental changes in the way we live. In other words, we would have to
change the conditions which govern the way we live -- at some point, we
might all have to commit to living like poor monks in bleak monasteries.
But most monasteries -- in Medieval England and Europe, anyway -- were not
at all bleak. Most monks had a standard of living far beyond the ordinary
peasant. The great monastic orders were the equivalents of multinational
corporations today and were in the forefront of developing new technologies.
The introduction of digital technology, while of tremendous benefit in
many ways, has increased the rate at which problems will occur.
I agree.
It has also made it far more difficult to ascertain responsibilities
for them.
What I find so very fascinating about IT -- particularly since mobile
phone have become so versatile and relatively cheap -- is the exuberant
way that children and young people in the West are taking to it. During the
formative years of their lives, young people are binding themselves
together in an intensive way that they've never been able to do before. To
very considerable extent they are ignoring many of the institutions and
cultural values of their parents. In the advanced countries this cultural
revolution due to the mobile phone is -- what? -- barely 5 to 10 years old.
When the present adolescent generation reach maturity in, say, 10 years'
time, and some of them advance into businesses and professions of political
power during the following 20 years, then the existing cultural values of
advanced, so-called "democratic" (actually, manipulated) countries, will
voluntarily transform at a rate that's never happened before.
But I doubt whether it will be a new fairly comprehensive culture in any
particular country -- as has been attempted by highly centralized
governments since about the early 19th century. I think we'll see an
intensification of economo-educational trend that was already shaping up
during the industrial revolution -- a widening of the gap between the
present "educated" class from the "ordinary" class.
Keith
Ed
----- Original Message -----
From: <mailto:[email protected]>Arthur Cordell
To: <mailto:[email protected]>'Keith Hudson' ;
<mailto:[email protected]>'RE-DESIGNING WORK, INCOME
DISTRIBUTION,EDUCATION'
Sent: Sunday, May 23, 2010 9:55 AM
Subject: Re: [Futurework] Restoring the old economic model
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 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..
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.
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).
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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Keith Hudson, Saltford, England
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