The Economy

 

“Do you not know, my son, with how little wisdom the world is governed?”
Axel Oxenstierna

Count Axel OxenstiernerSwedish statesman Count Axel Gustafsson Oxenstierna af Södermöre wrote that to his son Johan in 1648. Young Johnny was feeling anxious prior to taking on an important European diplomatic job. Oxenstierner Senior pointed out that the world was—as it still is—run by people a lot less switched on than most of us assume.

It’s been all downhill in the intervening three centuries and I wish I’d cottoned onto the problem a bit earlier myself.

…each of these perspectives comes to the same conclusion, which is that our global economy is out of control and performing contrary to basic principles of market economics.
David Korten

Economics 101 from the few who understand

Around the world, those in charge are making a total cock-up of economic management. Here in New Zealand, then Reserve Bank governor Alan Bollard was paid $600,000 p.a. to declare the world’s recession over in 2008; Prime Minister John Key and Finance Minister Bill English have been regularly predicating rosy outlooks upon the overly optimistic forecasts of the same Reserve Bank. They’ve all been peddling fantasy ever since the financial crisis started in 2007. Here I’m posting snapshots from people who really understand what’s going on.

When the meltdown started in 2007 there was a cry around the world of “Why did nobody see this coming?”.

Well some switched on people did, including—forgive my immodesty—One Wild Kiwi. Not because I understood economics all that well, but because I know who does. Hardly anybody listened to the right people, in fact they were derided, abused, and often fired. They were of course correct and if you’d like to know what’s really happening here are some of those people whose views are of value:
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How the 1% are cleaning out the rest of us: Part I

Occupy Wall Street posterThe Occupy Wall Street movement seems to be gaining momentum and there are people with a good track record of predictions—Dr Ravi Batra for instance—who believe that the time has come for such a movement to change the world. The non-productive money manipulators have broken the free market capitalist model and I’m hoping that pay-back time is nigh.

Where I part company with the Occupy Wall Street folk is that I don’t believe capitalism is the problem. Capitalism works well when adequately contained. It’s the failure of governments to regulate it that’s the problem.

Here is one of the ways the fat cats are creaming the system and destroying the world’s economy for the rest of us.

“Window Dressing”

The money managers borrow short term and use the loans to finance big risks without their shareholders’ knowledge. Then, prior to balance sheet publication, they sell the most toxic of those investments and pay back those borrowings. With luck, they make a killing on the dodgy assets without getting caught. The managers’ bonuses are earned on short-term gains, so their interests are not in line with the interests of their clients who want medium to long term gains on their investments.

The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund’s holdings are made public, in order to give the appearance that they’ve been holding good stocks all along.

The deceptive practice of using accounting tricks to make a company’s balance sheet and income statement appear better than they really are.
Investorwords.com

From The Wall Street JournalIt doesn’t always pay off as MF Global Holdings may discover very soon. The Wall Street Journal found such activity among “primary dealers,” major banks and securities firms that trade directly with the Federal Reserve are borrowing big during the financial quarter to invest in short-term high-risk investments to maximise their bonuses.When the end of the quarter looms they temporarily reduce borrowings by substantial amounts to hide their dodgy dealings.
Furthermore, the Journal reported in 2010: WSJ uncovered this dodgy practice at MF Global Holdings Ltd, who are filing for bankruptcy protection.

A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.

Wall Street Journal 2011

Unfortunately the gambling hasn’t paid off this time:

From Reuters:

Call it the mother of all margin calls: Up to 50,000 former customers of bankrupt broker MF Global must find some $1 billion in additional collateral almost overnight, or be forced out of their trades.

Next: How the 1% are cleaning out the rest of us: Part 2

 

I hate to say I told you so

But I told you soPoliticians are like diapers; they need to be changed often and for the same reason. Mark Twain

After the latest financial meltdown the cries were heard around the globe,

“Why didn’t anybody see this coming?”
“Why weren’t we told?”
“What are these economists smoking?”

We were told.

If you were one of those crying out, you were told. You just weren’t listening to the right people. You were told by Nobel Laureate economist Dr Paul Krugman; by Dr Doom, Nouriel Roubini; by people of integrity right here in New Zealand: Gareth Morgan, Colin James and Rod Oram.

Way back, before the New Zealand 2005 general election, the Wanganui Chronicle published a letter from me. I wasn’t prescient. I was just listening to the people who knew what they were talking about:

It was a relief to find that through your editorial column that our biggest problem has been addressed: the balance of payments. Neither the political parties nor the rest of the media are addressing the matters of most concern: what should we do to grow the cake so that we’re all better off 5, 10 or 20 years down the track.

Everyone’s excited by huge government budget surpluses. They’re blind to the fact that the balance of payments is massively in the red. It’s as if Mum has an extra thousand bucks in the housekeeping jar, but Dad’s putting the mortgage payments on VISA and spending the income at the pub and the TAB.

The major parties with their vote buying strategies are hell-bent on creating a big spend-up. They will exacerbate our already frightening deficit. If we’re to gain anything from having some of our money returned to us we must be bludgeoned into increasing savings, retiring debt and reducing spending.

The crunch will come. Don Brash knows it, Michael Cullen knows it. For short term political gain, or maybe because neither of them wants to win this election, they’re prostituting themselves.

A plague on all their houses.

Give me a checkbox on my ballot paper marked: None of the Above.

Those who cared to pay attention could see what was happening very clearly. And now we’re stumbling along at the mercy of the unprincipled and the incompetent. Politicians whose definition of integrity is whatever it takes to win the next election and our enlightened Reserve Bank Governor, Dr Alan Bollard, who declared the current recession over in 2008.

It’s a bit of a worry.