The French Bourse has lost half of the gain the ECB spent 750 billion euros buying. Half in a week. 4.5% down today.
The Dow has fallen 2% and the Nasdaq almost 3% at the time of writing.
The Euro has fallen against the dollar, below any level the market recognises, which means the market is now not sure what the euro might be worth. A recipe for collapse. So now we will expose Mr Barosso and his, ‘We’ll defend the euro with everything we’ve got’ for the fatuous, amateurish, posturing, nonsense it was. Step up Mr Barosso! What have you got?
Answer – almost nothing.
Europe has three connected problems now. Still massive sovereign and bank debts. Budget cuts which the markets are only now realising cannot be guaranteed to happen and even if they do happen, will certainly not be enforced at the speed the markets want. And finally the certainty that the first two problems will conspire to make growth estimates wildly optimistic. Which means the EU will NOT grow its way out of debt or recession. The EU is getting nearer to the event horizon where debt’s gravitational pull becomes too large and growth which tries to escape from it is pulled back in.
An example of what I mean is Portugal’s commercial debt. The debt of so many of its companies and its municipalities, is of a size that the debt will choke the growth which they need to pay off the debt. The obvious but stupid answer, is more severe cuts, instituted faster. The problem with this answer is that those deeper and more rapid cuts, decrease any chance of growth yet further. That, in turn would mean the ability to earn money to pay off the debts will shrink, and the debt to growth ratio will be worse. The markets are realising this.
The UK has shown the way. The Tory/LibDem coalition is trying to make it impossible for a vote of no confidence. If they succeed it will mean no matter how unpopular their actions become there will be no peaceful, parliamentary way of voting them out. The only way they could be toppled is if their own MP’s voted against them. This is a blatantly anti-democratic attempt to grovel to the markets and show them that people power will not derail the bankers plans.
Democracy is being sold out at every turn.
Thank you, Mr. Golem XIV for relentlessly banging the drum, our drum, I'm grateful the people has such a powerful voice as yours… My God! We have an interesting week before us… the week when it unravels…?
Thank you Mr Eirik.
Next week will indeed be very interesting. The markets have to be rallied, the LIbor relaxed, and worries about euro and debt assuaged. A tall order. If these things are not done then our leaders will find themselves nearer and nearer the event horizon.
But will the unravelling happen next week? To paraphrase a British politician, there's a lot more unravelling left in the continent.
Yes, Mr. Golem,
well the experience is that everything in politics happens over such a protracted time, much too slowly for us that already knows how the endgame plays out.
Patience is needed, and if we live to watch it and tell, we can tell our grandchildren about an event that surpasses everything in economic history, 1933 was just a walk in the rain.
When "shock and awe" 750 billion Euros buy you 2 days of respite only, the figures in the other side of the equation must be truly out of this world…
I hope we can rely on your analytic capabilties for the next few weeks… You're not going away for any exotic, non-internet vacation for a long time, I hope…?
What? And miss the show?
No. I shall be here.
Good, I also appreciate your thoughts greatly and have for a couple of years since I first spotted you on CIF.
In terms of understanding the issues better (I just try to keep up with you at times if I'm honest..) could you recommend any reading? I guess by 'issues' I mean in two terms i) global economics in general – both entry level and the more arcane aspects and ii) political context.
Of course my education will continue in the meantime by reading yourself!
ianu –
I'm mostly self taught in economics, (except an economics module during my degree which i never turned up to!) but found the following books very helpful and readable and they helped me see what was on the cards at a time when everyone else was telling me we'd ended boom and bust for ever…
Dr Strangelove's game – a brief history of economic genius by Paul Strathern. This book is great at explaining just how much societies are shaped by economic ideas and how the ideas usually end up having unintended consequences
Money : where it came from, whence it went – JK Galbraith, a facinating and wryly amusing book about the role money has played through history, a bit US biased but gives a good explanation of economic cycles and their consequences. The same author's 'great crash of 29' is narrower in scope but also worth a read
And heavier going but well worth a read, (particularly if you like history books) is 'Sterling : the rise and fall of a currency' by Nicholas Mayhew which covers the 1000 years of sterling's history and shows you all the different things that can happen to a currency over time. What's unlikely over ten years may be inevitable over a hundred years…
All of these books are fairly old. I'd suggest that whatever books you chose to read, you make them older ones since economists are always adamant that the current mainstream theories are the only ones that explain everything and everything that came before was flawed and created by lesser beings. Reading older stuff makes you realise they're generally just making it up as they go along.
It's also worth reading the Economist magazine from time to time. It often says idiotic things, (although the buttonwood column isn't too bad) but a lot of important people make their decisions based on what they read there so it gives a good insight into the corporate mindset.
ianu,
I think you should definitely take Tam's recommendations.
Galbraith is the intellectual giant among them. I have not read "Money", though I should have. The book that accompanied the BBC series Galbraith made for the BBC back in 1974-5 is a good and easy start -"The Age of Uncertainty". It was prescient.
I would also highly recommend "The Death of Economics" by Paul Ormerod.
Ianu –
you could also watch on youtube a recent BBC film called High Anxieties.
I don't think that anyone really understands *fully* what is going on anymore. I personally think that the main reason for all this mess is the increasing financialisation of the economy over the last 50 years. It is like a cancer in many respects, sucking the life from productive labour. I think that Michael Hudson writes very well on this theme and also some of the articles on the "new economic perspectives" blog, http://neweconomicperspectives.blogspot.com
ianu —
For other blow by blow accounts —
Gillian Tett at the FT very good on financiarisation and unwelcome deets on derivatives .
Edmund Conway's blog at the Telegraph — he even references the "zerohedge" site which I recommend highly . The last two articles worth a look.
georgewashington2 ranges widely and has stacks of refs .
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Good to hear that GolemXIV is not going on holiday !
Out now to tend my veg garden …
I second that about the blog Rob refers to, it's excellent. Thank you for the information! It's so good even, that I plan to read myself up on it.
It deals among other subjects with the failure to tax the rich in the US, making up the balance by loans from abroad, and through bail-outs leave it all to labor abroad to shoulder the loans. Capitalism is certainly inventive of new ways of exploiting labor.
About the BBC film GolemXIV mentions, I cannot recommend it. I found it mystifying and generally incomprehensible as to its message. My 17-year old son called it hyperbole.
More than 25 years ago, I heard about the butterflies' wings in Brasil causing a storm in Europe. The idea is fascinating and possibly true. There has since been no recorded, documented instance of this happening once. This would of course be observationnally impossible due to the complexity of the system. The chaos is complexity.
The idea is 'metaphysical' in the late professor Karl Poppers sense. See for instance Ch. 11 of "Conjectures and Refutations"; "The demarcation between science and metaphysics".
Morning Lars,
Is it the film which you found poor in its attempt to look at Non-linearity/deterministic chaos in relation to finance, or the underlying mathematics itself?
I hope it's just the film you found unconvincing or unclear, because the maths itself is not really up for grabs. The chaos of non-linear systems is not due to complexity.
There is complexity in such systems which adds to their intractable unpredictability BUT because they are also and primarily deterministically chaotic they cannot ever be reduced to linear predictability.
I really think the lessons of the non-linear word are very important for economics and an increasingly inter-connected world.
I know this has been repeated so often that it has become trite and emptied, often, of real meaning – but it is still critically true.
Dear Mr. Golem, I don't understand mathematics at all, and so my comment is about the film and also about its presumption about the 1 to 1 applicability of mathematics to nature and society, which is not a question once and for all resolved.
I have some pillars in my thinking:
1. The categories in one science do not necessarily translate well into another (ex. Kant's critique of Pure Reason and of Metaphysics, hence also my scepticism about metaphors)
2. The quality of science reveals itself in the precision of the predictions that can inferred from it, predictions that can be refuted (Karl Popper in the “Logic of Scientific Discovery”) by observations contrary to it. Chaos theory predicts unpredictability, and so nothing can refute it.
Engineering (applied natural science) has done well, even meteorology has some predictive powers in weather forecasts.
Social science delivers close to nothing. I think it's the same with macro-economy.
Economy does however provide numbers necessary for reasoning about economy and for making choices. Very useful.
3. Events in markets and society are nothing more or other than aggregates of individuals' actions (the methodological individualism position held for instance by Norwegian social philosoper Jon Elster of Collège de France and Margareth Thatcher: "There is no such thing as society").
From where the unpredictability factors in other sciences stems, I cannot say, but in social science and economics, I think it's the "human factor", mostly the changing feelings (fear, greed, hubris…) and the ever changing surroundings that forces humans to change too.
Although good arguments can be made in favour of determinism, we are nowhere near a science to predict what is determined individually or as society – It’s just too complex. You will not be in a very different place if you describ it as chaotic. In any case you cannot predict well.
Our subject, the financial crisis, I cannot see enlightened much by describing it in terms of chaos.
I see rational choices (how can I earn my bonus?), rational risque taking (It's my job, everybody does it and it's for my employer to decide if he wants it and bear the blow if it's a bad decision). I see irrational choices in the financial institutions making decisions wiping out their equity.
I see the reality of numbers (aggregates) dawning, causing a reorientation, different choices imposing themselves; we cannot go on with this, and now defaults begin to mount, straining liquidity, hurting asset values. OMG!, we cannot roll over debt anymore! What can we do? The Government, of course…it’s, after all, in the best interest of society that our institution is saved.
I see self-fullfilling prophecies (I think the Euro is about to weaken against the dollar, so I better sell what I have of it)
In short, I see humans at work, and no butterfly wing’s effect.
Dar Mr Eirik,
I see no reason for us to argue. In the end, whatever the ingredients of our underlying analysis, we< I think, share a deep feeling of being lied to, and of injustice being perpetrated upon the less well off in the name of saving a 'system' whose main function at the moment is not serving the 'many' but protecting the wealth of the 'few'.
Your remarks about science remind me very much of the beliefs of a very close friend of mine. He too find non-linearity clashes with his Popperian view of science.
Chaos mathematics does make predictions but they are less pleasant than the predictions of linear science.
Linear science says we can always improve our weather forecasting if we gather more and better data. It turns out this is not true. There is a mathematical horizon line beyond which you cannot see no matter how much data you gather. This flows form the maths.
Poincarre who first discovered this was horrified. Others since have had the same reaction. It matters not. It is the case anyway.
We live in a non-linear world.
What we see on the surface is indeed all the aggregate of human actions exactly as you describe. I agree entirely with you. All I am pointing out is that there are also non-linear dynamics, within the nature of the financial system. And these dynamics make certain kinds of actions unwise.
Actions we seem determined to undertake.
As for metaphor, I think they have a power and role in moving the mind, which logicians and positivists may find a scandal. But they have this power nevertheless.
I think it is up to us, to prove that those who hold differing philosophical and metaphysical outlooks are not doomed to spend their energies on pointless and enervating bickering. This has traditionally been the fate of all those in radical opposition to the broad mainstream.
Let us make sure it is not our fate.