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.
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.
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.
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.
The introduction of digital technology, while of tremendous benefit in
many ways, has increased the rate at which problems will occur. It
has also made it far more difficult to ascertain responsibilities for
them.
Ed
----- Original Message -----
*From:* Arthur Cordell <mailto:[email protected]>
*To:* 'Keith Hudson' <mailto:[email protected]> ;
'RE-DESIGNING WORK, INCOME DISTRIBUTION,EDUCATION'
<mailto:[email protected]>
*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 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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