Category Archives: Economics

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Filed under Economics, Evolution

Bad news – 20 reasons why Depression 2 is just around the Corner – Good News from Carlota Parez is that it is part of a cycle which ends in a “golden age”

If you think we are going to escape another great depression I suggest you take a read of  Paul Farrell’s article at Market Watch titled “20 Reasons Global Debt Bomb explodes soon -which trigger will ignite Great Depression 11”

Yes, 20. And yes, any one can destroy your retirement because all 20 are inexorably linked, a house-of-cards, a circular firing squad destined to self-destruct, triggering the third great Wall Street meltdown of the 21st century, igniting the Great Depression II that George W. Bush, Ben Bernanke, Henry Paulson and now President Obama have simply delayed with their endless knee-jerk, debt-laden wars, stimulus bonanzas and bailouts.

So how do we make sense of this and what can we hope for after the meltdown?

One of the best pieces of analysis I have seen – and without a doubt the most positive – comes from Carlota Parez – Author of  Technological Revolutions and Financial Capital: The Dynamics of Bubbles and the Golden Age.

She has seen this all before – the financialisation of the economy, asset price inflation bubbles fuelled by speculative debt and ultimate crash – not once but 4 times since 1770. In her opinion we are half way through a 5th cycle that is following the same dynamics as the previous four cycles.

If she is right – and we have sufficient energy and an ecosystem to support us – we should emerge from this in what she calls a “golden age” of wealth redistribution off the fruits of the infrastructure investments made since 1971.

But we need the crash first and we will need to see re-regulation of finance and the end of the belief that the value of the stock market equates to economic growth. And by the by – for all of us in Australia who still believe that house prices will continue to go up for ever – and its somehow different here – she predicts that house prices will once again become affordable.

Apart from her though leadership interview, there is an excellent slide presentation of her ideas of the golden future of growth after the crisis at slideshare .

You can also listen to an mp3’s of her talks and videos – there are links to these at her website

Carlota Perez: The Thought Leader Interview

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Filed under Economics, Evolution, Rediscovering Ancient Wisdom, Technology, Uncategorized

The Common root causes of sickness in Bees and Humans – are we both headed towards the same early human caused extinction?

The BBC has an interesting article today that links the decline in bees in many countries to the decline in biodiversity. I agree with the article and have a further take on the subject.

Shock horror – bees are getting sick for exactly the same reasons as humans – they are eating a diet and getting stressed in ways that their systems weren’t evolved for – and the cause is the modern human environment, diet and lifestyle.

Just as we are increasingly eating a diet of processed sugars and carbohydrates – that come from fewer and fewer food sources so are the bees.

Note: Processed and reconstructed variations of corn and soy make up an increasing component of the diet of humans and animals, and this includes bees. One of the ironies is that bees have access to a more diverse diet in cities than they do in the country side – there is now more plant diversity in cities than in the modern farming countryside.

Bees no longer live in stable environments. The bee industry has been commercialised. Bees are now dragged all around the country in trucks to service different farms. This constant change and travel causes stress in much the same way as we humans are stressed by changing jobs, work environments and constant travel. And it should be no surprise that chronic stress weakens their immune systems in the same way as it does ours.

And, to supplement their bland diets and increased workloads, commercial bees are fed simple sugars in much the same way as we feed ourselves sweets, sugary drinks and coffee to keep ourselves going.

The problem for the bees, and poor humans, is that they don’t have choices like the well off humans do. Their environmental choices are set and limited by the environmental conditions created by the wealthy humans who own the businesses that create these environmental conditions and employ the less well off.

The bad news for the wealthy humans is that they are shooting themselves in the foot. If the bees die off the human species will die off too.

The downside of being at the top of the food chain is that we humans are dependent on the survival of the species lower down the food chain for our survival.

While the wealthy have the option of escaping climate change and environmental damage in the short run, by moving location and putting on the air con, the species on which our survival depends do not have this luxury.

99.9% of species that have been on this planet are extinct and we are now in the midst of the 6th great extinction. And this extinction is being caused by us humans.

Alan McCrindle

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Filed under ecology, Economics, Evolution, Politics, Strategy, Yoga

One Structural systemic cause of the GFC – a shift of share ownership from individuals to institutions

I am a great believer that if you know how a system is structured you will be able to predict how it performs in different environmental conditions.

As the chart below indicates there has been a fundamental shift in who owns shares in the USA over the last 50 years.

Prior to the start of financial deregulation – which really started with the removal of the constraints of the gold standard in 1971 -shares were predominantly owned by individuals.

There has been a large structural Shift in share ownership in the last 50 years

The majority of shares are now owned by institutions who hold them on behalf on individuals. These institutions compete with each other to deliver the highest returns. Performance is measured by the quarter and Funds managers are similarly rewarded for short term performance – but with zero claw back of performance pay if performance subsequently declines.

This leads to herd like behaviour by the institutional funds managers. If the market starts going up – like right now in December 2009 – they need to be in the rising market otherwise they will be left behind in the performance tables.

It does not matter if these funds managers know that the markets are overvalued and likely to collapse some time soon. If and when the markets collapse they will once again be able to claim deniability – “we couldn’t see it coming” will be the cry. Fund managers will point to the fact that all the other funds were doing the same – how can they be blamed for not seeing when they are doing the same as everyone else. There is safety in the herd.

If you want to know where high CEO pay came from, part of the answer lies in institutional share ownership.

As for the gambling behaviour of the Banks – this too took a jump when Investment banks shifted from partnership to public ownership. Who in their right mind would risk leveraging 40:1 with their own money?

And right now the situation is even worse. Banks like Goldmans are reporting big profits but these are coming only from trading. The same pattern is in the other banks. The only place they are making money is by high frequency trading – leveraged trading using other peoples money. This in itself is driving up the share market.

And when the markets crash and the banks suddenly look sick again it will be high street on the hook again to bail them out. They have now become too big to fail and they know it. They can do anything they want and get away with it.

And this is supposed to be Democracy.

Alan McCrindle

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Filed under Economics

“Financial Depth” and sophistication or “diminishing Marginal returns” and Collapse

 

 

 

The thing about data is that it can made to say what ever you want it to say. A few weeks ago I read a quote to the effect – statistics is boring science fiction. It appealed to my sense of humour.

 

A few weeks ago I was looking through the latest report on Global Finance by the McKinsey Global Institute.- Mapping Global capital markets (the 5th edition).

In this report they present a concept they call the  “Map of Global Financial Depth”. Basically it is plot of per capita GDP of various countries versus the value of all the finance that was required to generate these GDPs (as a percentage of the GDP).

 

As their graphic indicates there appears to be a trend which they have called financial depth  – a mark of sophistication and modernity.

In essence, the data appears to be saying that countries with high per capita GDP can only achieve this with high financial depth. The very way that the graphic is presented, with a positive trend line that starts to increase vertically at the end, equated with a “mature” market, suggests that high “financial depth” is something to aspire to.

mckinsey-financial-depth-or-declining-productivity-of-debt

 

 

But hang on a moment. This data is saying something else too. It is saying that there are diminishing marginal economic returns.

 

 While Indonesian’s manage to generate one dollar of economic output with one dollar of finance for an annual per capita income of about $6.000 and the Czech’s generate $25,000 using $1.50 of finance to generate every dollar, modern economies require $4.50 of finance to generate every dollar of income.

 

Have a look at this data presented in a slightly different format and for one country – the USA – over an extended time period. The reality of the diminishing marginal productivity of capital is very clear – moreover it is trending “downwards” rather the Mckinsey “upwards ” chart. And,  if you take the liberty of projecting the trend line over time we might find that as soon as 2014 we are in a position where additional capital actual starts to destroy the economy!!

 

 

Diminishing marginal productivity of debt - usa

Diminishing marginal productivity of debt - usa

 

 

 

 

The USA economy could start start shrinking as early as 2014

The USA economy could start start shrinking as early as 2014

 

 

 

 

And the problem with this is that it was this  phenomenon that caused the collapse of 24 complex societies in the past. Joseph Tainter studied the development and subsequent collapse of 24 complex societies and came to the conclusion that as they became more complex they required an increasing amount of energy to run. Unfortunately he noticed that in each case, there was a diminishing marginal energy return As the complexity of each society increased problems arose that required solutions that were increasingly complex and increasingly expensive . At the point where the energy return on the energy invested in new solutions dropped below zero the society collapsed.  

 

The key driver of human progress has been our capacity to harness energy. For example, some estimates suggest that our current modern western lifestyle requires the equivalent of 140 slaves per person – the rate for the USA today is around 300. We have only managed to achieve this through cheap, non-renewable, fossil fuels. It is no coincidence that the industrial revolution and our capacity to harness coal as an effective energy source occur at the same time. 

 

Where will this energy come from in the future?

 

human-enegy-use-over-time1

 

My take on this data is that it indicates how we are, and have been,  “consuming our future” in an unsustainable way.

Free-market capitalism may have finally collapsed. The question of how this is about to play out in global society is unclear but I am expecting substantial societal collapse as a consequence.

Anyone who believes that governments will be able to rescue the world from a depression has not understood the economics and the psychology of the situation.

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Filed under Economics, Energy, Sustainability

Inflation in Zimbabwe – winners and losers

Yesterday I was talking to an old friend of mine in Zimbabwe, a white guy who used to live next door to me. I asked him what life was like there and how inflation was effecting life.

 

Inflation: To the moon and back but a money spinner for the wealthy

 

When I left Zimbabwe, one Zimbabwe dollar was about equal to one US dollar. Apparently, at the current exchange rate, if you piled up all the one dollar Zimbabwe bills it would take to buy one US dollar on top of each other they would more than reach the moon and back!! 

 

For people like my father who get a government pension, the total annual amount is apparently not enough to buy one coffee a month.

 

But on the other hand there are people who are making big money out of inflation. He gave an example of a common friend who had borrowed the equivalent of US$300,000 for one year from a bank in Zimbabwe. Apparently the moment he got the money he managed to convert it into US dollars. When the time came to pay the money back at the end of the year it cost him the equivalent price of two coffees in US dollars. In other words he had made US$300,000 in one year for the price of two coffees and all he had done was borrow in Zimbabwe dollars, convert to US dollars and hold.

 

So who is losing out on this deal – the average person on the street who has their money in the bank. Yet another case of privatising the gains and socialising the loses. The Zimbabwean equivalent of a Wall street banker.

 

So if you think life is tough in Zimbabwe it is for many but for many others it is still the “good life”. If you simplistically measure the quality of life by the antiquity of the cars people drive then apparently Zimbabwe is doing better than New Zealand!

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Quiz: Are you a COMMUNIST or a CAPITALIST?

Quiz: Are you a Communist or a Capitalist?

 

To find out simply answer these questions.

 

1. Do you want fewer and fewer options as a consumer as small independent businesses and genuine free enterprise are marginalised or crushed?

 

2. Do you want the public to be at the mercy of a small cartel of unaccountable despots?

 

3. Do you want to be continuously assaulted by relentless propaganda?

 

4. Do you want your economic system to be doomed to end in failure?

 

If you answered YES to most or all of these questions then YES you are a communist or a capitalist.

 

If you like this sort of satire it is from a 4 part series titled Silly Money by Bremner, Bird and Fortune. Replays are available on Googlevideo

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