Tuesday 10 April 2018

Waiting For The Market's Music To Stop.

Prophetess Of Economic Doom: Political Economist Ann Pettifor cannot say exactly what will trigger the next global crisis. A sharp uptick in interest rates – especially in the United States – could do it. Or, the outbreak of a full-scale trade war between China and the USA. More likely, however, the crash will be precipitated by pure fear. Terrified of their loans not being repaid, lenders will raise the cost of money beyond the borrowers’ capacity of to pay. That will be the signal.

IN THE MOVIE Margin Call, the enigmatic financier, John Tuld (played by Jeremy Irons) repeatedly compares the business of playing the markets to a game of musical chairs. When one of his employees, Peter Sullivan (played by Zachary Quinto) comes to him with alarming news about the financial viability of Tuld’s investment firm, the following exchange takes place:

JOHN TULD: So, what you’re telling me, is that the music is about to stop, and we’re going to be left holding the biggest bag of odorous excrement ever assembled in the history of capitalism.

PETER SULLIVAN: Sir, I not sure that I would put it that way, but let me clarify using your analogy. What this model shows is the music, so to speak, just slowing. If the music were to stop, as you put it, then this model wouldn’t even be close to that scenario. It would be considerably worse.

JOHN TULD: Let me tell you something, Mr. Sullivan. Do you care to know why I’m in this chair with you all? I mean, why I earn the big bucks.


JOHN TULD: I’m here for one reason and one reason alone. I’m here to guess what the music might do a week, a month, a year from now. That’s it. Nothing more. And standing here tonight, I’m afraid that I don’t hear - a - thing. Just ... silence.

That was the fictional exchange going through my head this morning (9/4/18) as I listened to Ann Pettifor give AUT’s Policy Observatory her all-too-factual analysis of the global economic situation. Seldom have I emerged from an academic gathering with such a feeling of dread. The British political economist’s words shook me to the core. Like John Tuld in Margin Call, Ann Pettifor is also convinced that the music is about to stop.

The supposed worldwide economic “recovery” from the Global Financial Crisis of 2007-2009 has been fuelled, almost exclusively, by debt. Debt on an unimaginably large scale. Debt so big that it would require the value of all the goods and services created in the world for the next four years to pay it back.

Theoretically, all of this debt is secured by the assets against whose value it has been issued. But, as Pettifor (Fellow of the New Economics Foundation, Honorary Research Fellow at London’s City University, and economic advisor to Jeremy Corbyn) reminded her listeners, so was the debt issued by the banks in the run-up to the GFC.

On 9 August 2007, however, the global banking fraternity – no longer convinced they could accurately value the financial instruments being offered as collateral for their loans – simply stopped lending to one another. This was “Detonation Day”: the moment when the GFC became both inevitable and unstoppable.

Everything now points to another such detonation being imminent. Pumped-up by the steady expansion of global liquidity the world’s stockmarkets have climbed to giddy and unprecedented heights. Over the last few weeks, however, the value of the stocks and shares traded on the world’s exchanges has fluctuated wildly. Such volatility, warns Pettifor, almost always precedes a catastrophic market crash.

Exactly what will trigger the next global crisis is impossible to predict. A sharp uptick in interest rates – especially in the United States – could do it. Or, the outbreak of a full-scale trade war between China and the USA. More likely, however, the crash will be precipitated by pure fear. Terrified of their loans not being repaid, lenders will raise the cost of money beyond the borrowers’ capacity of to pay. That will be the signal. The moment when one or more of the real John Tulds out there will strain his ears to catch even the faintest echo of the market’s music, but will not hear – a – thing.

Just … silence.

This essay was originally posted on The Daily Blog of Tuesday, 10 April 2018.


greywarbler said...

Some thoughts before I jump off my chair. Has anyone suggested a protocol for NZs in this situation? Is there a form of barter note as a template with explanation of how to work it? Local Currency?

Could you follow up this post with another that goes into the ability of banks or someone to take a dip into your savings, which I have heard about.
Is it government will do this or banks or both? Has it been agreed upon by NZ? If not how quickly can they pull parliament together to pass it? How soon can banks shut down to stop a run? Do they have to pay you out if you have got into the bank?

Perhaps Rosenberg might like to make a comment here or to a group of 'ordinary jokers' as opposed to the ones at the coalface of joking, I mean financing and finagling.

Charles E said...

'Such volatility, warns Pettifor, almost always precedes a catastrophic market crash.'
Really? Let us hold her (and you I presume) to that statement. She will look smart if we have a crash very soon… which no doubt she hopes for.

Wonder what she said a year ago? Two years? Three … Five. I predict it was similar. Oh yes she predicted the last crash… but for many years, early.. before 2003 in fact. So over five years early. The Economist newspaper was warning us similarly but not predicting…. Particularly, they were warning about mortgage derived securities.
She's an expert on debt, yes. But she is also selling a line.. Fair enough. Most people are. But it is a factor.

Predicting a crash any day based on volatility is somewhat like saying earthquakes are determined by moon phases. Bound to look right to the naive because there is always a moon coming or going. That, we all agree is quackery though. What she says is as much politics as economics, and she is very political. She wants her dire views to come true, to confirm her world view.

This below is what I think I have absorbed from The Economist over 25 years reading it nearly every week:
A crash can come seemingly out of the blue just as easily as after fever like volatility. Usually a big fall comes from a great height, is about all we know or should say, unless we are selling something…. So yes the risk is up currently. But ‘any day’ for a few years now has been true too. At any one time there will be someone saying.. ‘any day now… wooo…..’ And one day that person will be right… by chance alone.

We had plenty of volatility in recent years then much less in 2017. Yes the stock markets have been fuelled by loads of cheap money and have risen a great deal, yet not also without quite good reason since companies across the globe have been doing pretty well, i.e. earning and saving plenty. The huge debt is mostly government debt, although not here, where it is individuals who have stacked up debts. And those borrowers are nervous about rising interest rates … yet the central banks are very very carefully looking to raise them. They are in this game too and do not want to crash it. …. So are the Chinese who have a huge stake in the West… plus the world’s highest debt…

So we do live in volatile times, although that is not that unusual at all. But nobody, not even great sages who sold more books because they got it right once, and advise great prophets and seekers of doom like your hero Corby, can predict the future. It is unpredictable. Same as it ever was.

Nick J said...

Yes Chris, dread is a very precise response to the bad news about the current economic model. It has coloured my thinking for years, yet despite my Cassandra outlook it never quite seems to occur. Yet. For which I'm thankful. However it must, as sure as eggs are eggs, and when it does.... your dread will be realised.

So some salient facts. Oil and coal,our primary energy sources are finite. We live on a finite planet where nothing can grow forever. Our economic models assume constant growth using finite resources. The debt mountain we fear is the expenditure of tomorrow's resources to satisfy today's desires. Yet if tomorrow the resource is gone the debt will be unpaid. That is what we face.

What I just stated is heresy. It may be factual and true but it is as unwelcome as an aged sailor telling tales about the results of hunting albatross at a wedding. We would rather indulge in another round of techno narcissism and imagine driverless electric cars on a Mars colony than face reality. That which must be will school us very harshly. Tomorrow the debt will be called in.

Jens Meder said...

Well, isn't then the economic health and moral confidence boosting answer to preventing another financial crisis -

in higher savings rates and surpluses creative efforts for the debts repayment rate to exceed the borrowing rate ?

David said...

Four years ago I recall realising that the level of private debt made a global economic crash likely, and it was time to avoid the stock market, pension schemes that invested in the stock market, and to get out of debt.
However the word "likely" can cover a range of possibilities, ranging from the slow deflation of the huge bubble on the one hand, to waking up to find that banks and money machines have shut down on the other.
You are already a step ahead if either of the above scenarios happen if you are prepared for an earthquake, and in New Zealand you should be. After the Christchurch earthquake many of us had no access to food or water, but managed well enough with a well stocked pantry and strong social networks.
What has caught me by surprise is that a sort of "spiritual"" collapse has happened first in many countries. In Japan nearly one in five women in prison is 65 or older. They commit minor crimes in order to escape poverty and solitude. In the US many elderly have the choice of either starving or living in cars and travelling from place to place doing menial work. In even the poorest countries families look after their old people. In the US there is now rampant drug addiction among the economically gutted middle classes. Their politics, education institutions and hospitals are money making rackets. Over in the Fourth Reich, what the euro has done to Greece is just the beginning.
The good news is that the world is not ending.

Polly. said...

Chris a pertinent viewpoint which would have much support in most economies.
What could save a major crash?.
The answer is the old but true answer, create demand by more war, then destruction and takeover of countries.
New politics emerge.
The demand is created.
Unfortunate fact of life.

Phil Saxby said...

So far, your comments seem to have inspired only a respectful silence, too!

Heraclitus said...

As a naive young investor who felt the full force of October 87 it amazes me financial levitation has persisted for so long.
A new generation will soon learn lessons that will stand them in good stead for the rest of their investing lives...like I did. Financial 'markets' and their snake oil sales acolytes are parasites on productive human endeavour.
Bring the silence on.

greywarbler said...

I've sent this article to a couple of relations. So far the feedback is...silence. I think we are all dazed; at everbody's ability to lie, obfuscate, use subterfuge etc and what a scenario of conundrums we have to choose from.

I can't see us finding the end of this Snakes and Ladders board. It just seems that everyone chooses their particular route and goes back and forth on it and other things are just distractions. Or one has to prioritise what to worry about each day - make a list, the top goes to the bottom and hardly anything drops out, and new ones constantly intrude. For sanity's sake I think of something nutty - so I choose Monty Python - the best sorts of mixed nuts there are.

Anonymous said...

Ed Wilson (the Ant Man) revived the idea of consilience.
Here they discuss the pathway between economics and biology

Guerilla Surgeon said...

"Wonder what she said a year ago? Two years? Three … Five. I predict it was similar. Oh yes she predicted the last crash… but for many years, early.. before 2003 in fact. So over five years early."
Seems to me that's exactly your technique over the Brexit predictions Charles. :) Predict economic prosperity, and if it turns up anytime in the next 10 years you'll take the credit.
And how many of your economists predicted the crash of 2008? Very, very few if any. Let's face it, the sort of macro economics you espouse just doesn't predict. So is not even a dismal science, is not a science at all.

David Stone said...

@ Charles E

Picking the timing is indeed hazardous as it is subject to human sentiment and unpredictable actions of key players.
QE was, esp in respect of the massive purchase of large company issued bonds (i.e. printing new money and giving it to companies too big to fail) unprecedented in history. And QE for the banks on the scale of it , and for reasons of rescuing them rather than monetary management was also unprecedented and many economists were against it.But everted a complete collapse . How many people having predicted the GFC in 2007/8 could also have confidently predicted that the reserve banks and governments would take this action.?
I did predict a collapse then , to friends etc. but not that QE action. and not of corse the exact moment.
But now that QE has been used I don't see why it won't be used in the future to keep the whole castle afloat. To arrest a major market crash the major reserve banks will just quietly enter the market and arrest the slide with more QE but no announcements.
This will steadily transfer more and more of the world's wealth effectively from the mass of populations and from the states into the hands of the already immensely wealthy few and fewer and fewer of them, but I don't now see what's going to trip it up.

Jens Meder said...

All monetary gymnastics is still subject to the laws of physics, that nothing can be created out of nothing by humans.

Unless there is a practical or imaginary example to refute that, it must be taken into consideration for everything contemplated on the material level.

On the economic level according to this law of physics, only work, saving and profitable investment can sustainably fulfill demands for higher consumption potential on food, housing, health and pleasure.

The priority for a healthy economy is an adequate savings rate for useful investment and meeting debt repayment commitments.

Jack Scrivano said...

I suspect that it is a mistake, possibly a fatal mistake, to run the world economy on the basis of the hour by hour, minute by minute figures spewed out by a dozen or so major stock exchanges. But there are many who have billions invested in these numbers. And, thus far, no one has offered a compelling alternative.

pat said...

Guess thats how you define compelling Jack...as Ann Pettifor promotes we have an alternative that has been trialled already but was undermined in the name of greed...and IMO gross self destructive stupidity

David Stone said...


The whole point is that the creation of money is categorically not subject to the laws of physics. It is a completely substance-less immaterial concept. There is no finite amour of it, and no limit to how much Reserve banks and infinitely mores trading banks can create. Your savings idea would be fine if there was a finite amount of it , or a limit to how much could be created but there is not. That's why many people want to bring back a gold standard to impose some limit so that savings , or the purchasing value of savings could be secure. I don't think it would help much myself without he discipline that would fix the problem anyway, but if you want to save buying gold or something tangible is what you should do.

greywarbler said...

Jens Meder
You are fundamentallty wrong. The ideas we have are made out of nothing, when they are put down as plans they are just lines and curves on bits of whatever. The money we treasure is either momentary effects produced on a screen, or on paper, or it is objects that we release in limited amounts that we use as proxies for exchanging skills or materials.

Nick J said...

Love the Fourth Reich David, so true when you look at German war aims in 1939 it has come to pass without a shot fired even got the Ukraine.

greywarbler said...

Charles E
You are so wise, yet she'll be right all in one breath. Then with a dose of sourness thrown in at those who attempt to cast a shadow on the bright sunshine falling on worthy moneymakers. I remember reading that in India a Brahmin who unfortunately had the shadow of an Untouchable fall on him, would be irate and distressed. So much so that he would need a ritual cleansing.

You seem to be of similar eminence Charles E and object to the hovering of wary doubt about our financial house of cards. It's just that we don't want it to cloud over our sunshine parade. For when it rains in today's selfish economy, the old adage applies:

"The rain it raineth on the just
And also on the unjust fella;
But chiefly on the just, because
The unjust hath the just’s umbrella.”

Jens Meder said...

Yes David Stone -
The printing of money does not create wealth, but merely reduces the value of wealth it represented before the print.
However, debt creation is wealth creative for the borrower through the repayment of debt, as easily understood when repaying a home mortgage.
Because of useful and desirable low rate of inflation (as a tax to discourage hoarding cash "under the mattress" out of the economic system), the bulk or retirement savings should be invested in tangible and marketable assets which preserve value more realistically than interest bearing accounts and bonds.

greywarbler - you seem to be quite right that regardless of the laws of physics, ideas and plans drawn are practically "out of nothing" if they don't have to be paid for, and produced in "free, spare time"- which actually has been paid for by someone - or not, greywarbler?

But now please explain by theory or example, how can you get anything done without capital which has to be saved at the expense of consumption potential by someone ?

Because if you can explain how that could be done, then obviously there would not be any poverty in the world - and you, greywarbler, would be more famous than Adam Smith and Karl Marx.

Guerilla Surgeon said...

The music of the market has stopped in Kansas. In fact it's pretty much stopped Kansas. Anyone who thinks this bullshit actually work should take a look at what happened there. Tax cuts, huge deficits, public services cut, schools closed on Fridays, people out of work. It's a laboratory, luckily not here at the moment, but some people are still claiming it works. Almost unbelievable.

greywarbler said...

'The expense of consumption potential by someone? To get to basics, there has to be production beyond self-sufficiency that gives product to trade with. There is a base line retained for the needs of the producer but beyond that consumption potential can be foregone in order to trade with that excess. So far so good, pretty basic stuff. Then the 'farmer' borrows on having that same excess next year, and exchanges his future excess, for a document that promises payment from his crop next year. This amount borrowed is added to the proceeds of this year's excess and he buys a tractor. This forward-lending is still risky for the parties because the crops could fail next year. So the lending organisation hedges the sum that has been advanced on credit. And there is a charge for setting up the loan, but that is not all, there is interest to be paid on this advance which has been created within the money system. This is a burden on the farmer and his sale of his crops which have not even been sown yet.

It is all concept now, a crop which must be sown and grown in season at a price to cover the advance, as well as interest on this advance which has been created out of thin air, or at the will of the financial entity.
The trouble with 'capital' is, that it gets too far away from simple transactions, and because of the extra money credits from selling financial payments, gets further away from real production till there are only convoluted equations and derivatives. It seems quite dodgy to me. When gambling on a racehorse, at least there is a known racehorse, with form, over a set length and with a jockey of known experience and results.

I mention again the cartoon from The Telegraph of the financier Alex by Peattie and Taylor. He is a chancer and each day's offerings shows a different example of his skill of bending uncertain fate to deliver a dividend. His interests and family are subservient to the workings of the City. He goes for a walk in the park with the pram, his baby son and wife. Only she carries the baby and he wheels the pram; the hood shades the screen showing the latest financial figures.

As for Kansas they have been through the wringer and are being squeezed out as squashed cartoon characters themselves. Perhaps we can plot our own course in their footsteps.

Jens Meder said...

Well, greywarbler - haven't you got it right in your long story ?
Simply, that the farmer has to save (and invest) for the tractor, regardless whether purchased on credit or cash.
This is the physics based basic economic function of capitalism (or "surplusism" as the saving or creation of surpluses for trading, investment or security reserves) - and as long as everything on credit together with its administration costs and risk of loss and/or "inconvenience" compensation rates (interest) are being paid, the credit system within sustainable (repayable) proportions works wonderfully and helps the industrious and thrifty to get ahead faster, than if they had to save the full price of their larger purchases before getting to buy and use them.

So it all depends on our ability and willingness to provide - save - for practicing "surplusism" - or capitalism ! (???)

greywarbler said...

Jens Meder
Trading is essential to humans' viability. So don't get cocky because you manage to turn that into 'capitalism' in your mind.

Getting surpluses is important to survival through poor seasons, and to have product, skill to trade.

Surpluses utilised as standing credits as savings are ways of storing those in a relatively undepreciated way till wanted. In an economy relying on consumerism and growth and engineered waste and inefficient manufacture too much put aside as savings results in a slowing of consumerism and growth.
That's called the paradox of saving in economics. So to enable exponential growth financial businesses are enabled to lend money against some collateral that is valued usually in some official way. Or it may be loaned against a promise, such as by an aspiring politician to enable the business and accretion of wealth of the lender to the best of his/her ability.

Capitalism has built on the basic transactions and needs of humans and, beyond certain limited projects, has turned into a hydra that is consuming all that we hold dear, including humanity and our planet.

Myths express in poetic language our imaginative thoughts that may not be acceptable or get discussed in everyday talk. The myth of hydras has been around for as long as humans can vaguely remember our past history.
The oldest extant Hydra narrative appears in Hesiod's Theogony, while the oldest images of the monster are found on a pair of bronze fibulae dating to c. 700 BCE. In both these sources, the main motifs of the Hydra myth are already present: a multi-headed serpent

So it's a massive challenge to tame this beast. It has to be recognised first though, confusing in its shape-shifting nature. Perhaps deep in our unconscious those tv shows with zombies lurching around the endangered
living humans who must protect themselves from the zombie disease, reflect a dim understanding of ordinary humans' plight. But you and the many practical, common-sense citizens happily amassing money while others eke out a brutish life, are protected from understanding the nature and source of your wealth by lack of reflection and imagination. I think I heard the
apt term 'wilful ignorance' from Jeffery Sachs interview with Kim this morning. He makes good points, seems well balanced - we all would do well to listen to him and to see and hear him further - He is taking part via video link in next week's inaugural NZ Sustainable Development Goals Summit in Wellington.


Jens Meder said...

greywarbler - capitalism or "surplusism" - which you actually confirm as a basic universal cultural need in your mystically elaborate presentation -

can be used or abused with consequent results on the physical level like everything else, and there is no need to resort to ancient fables to illustrate that.

Even the famous marxist Janis Var..is(?) claims to have discovered, that Karl Marx was not really anti-capitalist, but predicted the inevitable "socialization" of capitalism - into state monopoly capitalism or capital monopolism.

He is well aware of the failures of that so far - and has not come up so far with practical proposals on how to do it more humanely and effectively.

What about "socializing" capitalism into "peoples capitalism" with at least a minimally meaningful level of capital ownership by all citizens eventually, instead of govt. monopoly capitalism and no direct individual participation nor responsibility in it ?

greywarbler said...

Jems Meder
I don't trust people like yourself who are such proponents of capitalism to
follow some mythical people's capitalism that you refer to. We had already opportunityy to share in the nation's wealth and the decision was made that it wasn't acceptable to the nation's real capitalists.
So we have thrown out the idea of a democratic, educated nation and have had a sinking lid austerity placed on us.

The people are divided in the eyes of the capitalists into CEOs getting paid huge sums, and workers who can suffer unemployment through dynamically changing, viciously competitive companies practising capitalism. You need to stop singing about it. You make me think of canaries down a mine and wish you were there.

I think you love not looking at what is but to harp on about your favourite theory. Well sit on a cloud with your harp and think on these assertions from philosophers and feel uncertain. Is that postmodernism? I am sure it will take you closer to the truth whatever it may be at any given time.

a) All truth is limited, approximate, and is constantly evolving (Nietzsche, Kuhn, Popper).
b) No theory can ever be proved true - we can only show that a theory is false (Popper).
c) No theory can ever explain all things consistently (Godel's incompleteness theorem).
d) There is always a separation between our mind & ideas of things and the thing in itself (Kant).
e) Physical reality is not deterministic (Copenhagen interpretation of quantum physics, Bohr).
f) Science concepts are mental constructs (logical positivism, Mach, Carnap).
g) Metaphysics is empty of content.
h) Thus absolute and certain truth that explains all things is unobtainable.

Jens Meder said...

Dear greywarbler.
While on the basis of point a all your points from a to h might be philosophically acceptable -
but for simple survival even philosophers are subject to the laws of physics, regardless what they think or do.
Is that theory or inescapable fact, greywarbler.
Same on economics:
If you(or Popper, Bohr, Nietzsche or Marx) cannot describe a case of wealth creation for reserves, trading or investment without saving or creating a surplus for it at the expense of hand-to-mouth consumption potential, then you must accept it as fact, not theory, that without capitalism - the saving and using of capital or surpluses - wealth creation just does not happen, or is
If you don't want to hear about it, just describe a sequence of actual or imaginary happenings that disprove it, regardless of what I might "love" or not.physically impossible.

Even a substantiated, material facts, not myth based theory or fable - would do.

Geoff Fischer said...

In 1905 Max Weber wrote "The Protestant Ethic and the Spirit of Capitalism". Long enough ago for us to have forgotten its message, which is that protestantism laid the basis for the triumph of the capitalist system and, at the same time, imposed restraints on the way that surplus could be acquired and the uses to which it could be put. Without those protestant (though not exclusively protestant) moral restraints in place we have robber baron or neo-liberal capitalism, call it what you will, devoid of balance, stability, compassion and justice. As we have seen, any political and economic system can lose its way, and that usually happens when ideology overwhelms the natural human instinct towards decency, compassion, righteousness and justice.