Let this time be not different

Please, let this time be not different.  Please let this recovery be the similar to all the previous recoveries.

I have just finished reading This time is different by Carmen M. Reinhart and Kenneth S. Rogoff.  They bring together statistical data on all the world’s known debt and banking crises and look for patterns that precede them.  Their title comes from people saying during each boom that there will not be another crisis because we now have knowledge and experience from previous crises and  “this time will be different.”

Following each crisis there has been recovery in which the economy has grown to a new high. For the sake of all the people who are suffering from the current crisis it would be good if this time is not different and we could have a full normal recovery.  It would be even better for the planet and our long-term well-being  if we could adapt our economy so that people would not suffer from zero or negative economic growth.

One of the things which is different for this recovery  is that the marginal cost of extracting energy, mineral and agriculture resources has increased.  We have used up the most easily available of these resources and those that are left take a lot more work to extract.  This is bound to limit the potential for further economic growth.  We should beware of believing economic growth can continue forever.

I think there is an element of truth in the Elliott Wave Theory which applies to economics as well as the stock market. This theory says ups and downs run in series of fives and after the fifth the overall trend reverses.  Within each up and down there are series within a series.  I don’t  know about the fives but I believe the economy is fractal in nature and that there can be major turning points.  We should not rule out the possibility that we have passed a major turning point and that for some time to come we will have a series of downs and ups with each down going even lower.

As I read this book I wondered how the crises impacted people’s lives.  How serious was the unemployment?  How did people cope with unemployment?  Who were the people who lost their savings from defaults or inflation and how did they cope?  Did some of the one percent find themselves joining the poor?

In the current crisis, the headlines indicate young people are being hit hard and are the lost generation.  Meanwhile the cruise ships are packed with older people planning their next cruise.

It could be that during an economic boom we have a psychological need for economists to be telling us the boom will not end in a crisis.  Then we can work hard to prepare for retirement and to provide short-term profits for people in the financial industry.   We want to hide from ourselves the possibility we will lose the benefits of our hard work to defaults, haircuts or inflation.

As I was reading about all the financial crises I was saying “why oh why oh why would anyone want to put effort into the financial industry when there is such a high probability we will lose a lot of our savings?”  But then I have never been much for ambition.

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Environmental eating

The 100-mile diet or eating locally is one way people can try to be more environmentally sensitive in their eating habits.  Removing agricultural subsidies would be a more difficult and probably more effective way of doing the same thing.

We live on the edge of a major fruit and vegetable growing area yet when we walk through the major chain supermarkets most of the produce appears to be imported.  It is easy to understand those people who want to eat locally or eat a 100-mile diet (all food produced within 100 miles of ones residence) or “live in place”.

Unfortunately there is no guarantee that locally produced food is any healthier or more environmentally friendly than food grown elsewhere.  One does not  have to go far off the major highways to see what appear to be factory farms.  The Conference Board of Canada has said something similar in a recent report according to an article in The Western Producer.

Improved transportation and food supply chain logistics have made long distance transport of fresh and frozen food viable, economical and environmentally sustainable, says the report published in late July.

Local food production can actually consume more energy and leave a larger “environmental footprint” than food produced more efficiently and transported, says the report, Fast and Fresh: A Recipe for Canada’s Food Supply Chains.

(I think of the Conference Board of Canada as representing corporate rather than consumer interests.)

Another way to deal health and environmental issues in food production would be to remove all agricultural subsidies so that consumers would, as much as possible, know the full costs of the foods they eat and could make purchasing decisions according to their values.  Then we could eat locally  or imported depending upon which is cheaper and according to our values.  If the true cost of food is high enough some of us might decide to grow our own.

The problem with this approach is that subsidies, especially for farming,  are entrenched in our economy and removing this would be extremely difficult.  Also for political reasons governments generally practice a cheap food policy.

johnny_automatic_cornThis guy does most of the family grocery shopping at two stores.  One is plant nursery and produce store which carries lots of local items when they are in season as well as imported fruits and vegetables.  Their prices are usually less than the supermarkets and the farmers markets.  The other is a locally owned supermarket which carries some local products.

After writing the draft for this post I drove 10 km (return) to a  neighboring farm  to buy some fresh corn for lunch.  This was well within the 100-mile diet, but how environmental was it?  The corn was very nice.

Is economics a science or religion?

Is economics a religion or a science?  That some people ask this question is an indication that the answer could be complicated and interesting.  It could be that economics is neither and that it is in a class by itself.

Lets look at how these three disciplines handle knowledge, predictability and their psychological roles.

Science, religion and economics are all concerned with knowledge.   Science is concerned with what can be known from rational observations.  Religion gives answers to questions that cannot be answered from observations although the line between the two types of knowledge may be moving.

Economics has some problems with its body of knowledge in that not everybody even understands it and many people disagree.  A lot of economic theory and knowledge is useful although some things said are statements of faith.  One of the problems is that economics is concerned with human behavior, how we exchange goods and service, and people behave in  many different ways.  Some of us have strong commitments to the way we behave and think people who behave differently are sick.

Economics is famous for its assumptions which are taught in first-year classes and then forgotten because they obviously are not based on reality.  I like to think these assumptions should be used as guidance for policies which will take us closer to an equal and just society.

All three of these disciplines make predictions.  Scientists are generally rather good and accurate.  The accuracy of theological predictions we won’t know until a later date and economists are notorious for inaccurate predictions.  Part of the economic problem may be an assumption that economies develop in straight lines as per regression analysis.  It might be that economies are  fractal in nature in which case changes in fractal dimension (two minus the Hurst exponent) might give an indication of changes.  (I understand the Hurst exponent is used by the “quants” who have had some success in analyzing stock and foreign exchange markets.)

The most difficult part of this discussion is the psychological roles of religion and economics.  I cannot think of a psychological role for science.

Most of us have to come to terms with the emotional aspects of living in a world in which there is suffering, mortality and loneliness.  (See the lines at the bottom of this post.)  Religion provides a social life and helps people relate to the world by encouraging prayer, meditation  services, music, a work ethic and love.
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The way our industrial economy is organized leaves us with a different problem – a conflict between our short-term and long-term interests.  In an economy where growth is essential and lots of people want to be at the head of the pack,  we need to use large quantities of agricultural, energy and mineral resources.  But these resources are limited, or at least those which are easily accessible are limited.  While our short-term interests are to use up resources quickly our long-term interests are to conserve these resources.

As most of us, most of the time, act and think in our own short-term we need some psychological support.  This is where economists come. When a highly paid expert knowledgeable about things we don’t understand tells us that our exchange of goods and services and our work ethic are  creating wealth, we know that our short-term view is for the best.  It is essential for most people to believe in “free enterprise” (or a government managed economy) if the current economic organization is to continue.

The role of economists is not to solve economic problems or to warn us of crises.  It is to convince us that this time is different.  Most people want to believe it.

So is economics a science or a religion?  Probably it is in a class of its own and something unique to our way of exchanging goods and services.

The following lines are from the song Wandering Star from the musical Paint Your Wagon

Mud can make you prisoner
And the plains can bake you dry
Snow can burn your eyes
But only people make you cry

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Internet financial firms

The potential for geeky financial firms is featured in an article in last week’s The Economist.  At this time the firms are small compared to the banks but there is probably enough potential that the banks could be threatened.

This could be both good and bad.

It will be good if there develops and alternative to fractional reserve banking.  I am thoroughly convinced that money creation by fractional reserve debt is a Ponzi scheme which frequently collapses in a financial crisis.  If these firms do replace the banks and avoid fractional reserves  we will have to find another way of creating money.  Whatever it is it will require that the money supply be flexible up and down to correspond with the level of economic activity.  I rather like the concept of Local Exchange Trading Systems which could be expanded to a national level.

The not so good feature of geeky financial services is that they would be an ideal new venture for large firms such as Amazon, Facebook or Google, firms whose commitment to privacy appears to be limited to their own.

buttom2I can see two groups rubbing their hands at the prospect of one of these large firms becoming  involved in most financial transactions.

The first are those in the online advertising business who use information about people to target advertising and the second are government spooks and those in government who believe they know what is best for the rest of us and want to control our lives.  Just think: emails, friends, shopping and financial data on everyone all available from one source. I wonder if the spies already have access to personal  financial data.

Probably the people into social control are the most threatening.  Once the monitoring  systems are all in place it will be easy for somebody to misuse them.

Another article this week, from Forbes,  talks about small groups of people getting together to provide each other with financial support.  This sounds like the early  credit unions on the Canadian prairies where a lot of transactions took place on someones kitchen table.

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