The evidence for a long-term economic decline

This blogger thinks the economy is into a long-term down trend. It could be that not everyone sees this; it may depend upon the color of hat you wear. If you are retired with a good defined benefit pension it may be more difficult to see a down trend than if you are a young person trying to find an unskilled job that pays enough to cover rent, food, entertainment and a little saving to get married and buy a house.

Some of the evidence relates to the resource base. There are lots of energy and mineral resources left on the planet. The problem is that we have used up the easiest accessible resources and what is left is difficult to extract and will take so much energy they are useless. Another type of evidence is geographic and long-term in nature. This includes famine, epidemic, uncontrolled migration, state failure and climate change.

dog-3277416_1920One of the difficulties is that we are used to seeing the economy as a straight line going up. Economics students learn about regression analysis which takes a number of data points and calculates the best straight line that indicates their direction. Using the slope of this line one can project the trend into the future. It is assumed the trend is up.

Another approach about which I did not learn until after I had completed my formal study of economics is fractal analysis. Fractals are lines that go up and down with a series of ups an downs within each. Like a seashore. Fractal analysis tries to identify major turning points in the ups and downs. The mathematics is not well-known. It involves the concept of fractal dimension which can be calculated by the formula two minus the Hurst exponent. If economists used this approach it would be much easier to accept the possibility our economy is going into a long-term down trend and their forecasts would be more accurate but not always what most people want to hear.

What then is the evidence for the long-term future?

In economic theory changes in prices are signals to producers to increase or decrease production. Increasing prices also indicate a shortage of a good and we have been experiencing a lot high prices for some basic goods. It may be that we need more information about prices relative to each other. Maybe our economic data collection has been to support our views on economic growth and is not sufficient to give us a clear picture of relative prices.

In recent discussions about energy a lot has been said about peak oil and solar. Maybe we do not have to worry about oil shortages because the cost of solar has been coming down and will soon be able to replace oil. This may well happen and it may have an interesting effect on economic decision-making. We as individuals will be able to make the basic decisions about solar use in place of bankers who now decide what oil projects go ahead and who gets to do them. The down side of this is that if a lot of oil infrastructure becomes obsolete and has to be written off a lot of the money supply will disappear and the lack of money will cause a lot of suffering to a lot of people.

In spite of all the talk about a service economy we still need lots of minerals for food, shelter and transportation. High prices indicate we have used up the most easily available mineral resources. The future may depend upon recycling and here the picture is cloudy. Recycling takes a lot of energy and the high cost may force us to reduce our use of minerals. Water is another issue. There are parts of the world where water shortages are becoming a serious problem.

Another indication of a declining economy is the trend to tiny houses, shared accommodation, young people continuing to live with their parents and even homelessness. It used to be that non-union working people could expect to live in a detached house with a front and back garden.

Most of the evidence for a down economy identified in the first part of this post has to do with the availability of energy and mineral resources. There are also some long-term geographic trends which could also cause mankind some serious problems.

The guideline here comes from a book by historian Ian Morris called Why the West Rules – For Now: The Patterns of History, and What They Reveal About the Future.

Morris’s book is a good summary of the long-term history of the world. Using evidence from a number of disciplines he shows how geography has influenced the rise and decline of civilizations. His perspective is much longer than most of us are familiar with.

He identifies what he calls the five horsemen of the apocalypse – famine, epidemic, uncontrolled migration, state failure and climate change and shows how these have combined to produce disastrous, centuries-long collapses and dark ages. Are we exempt from the consequences of these problems?

We are already familiar with these trends. The question is are they strong enough to cause us problems or are they gaining strength?  For me, a retired person living in Canada, they are mostly academic but for many people around the world they are very real and very serious.

Some people argue this planet is capable of providing enough food for the current population, especially if we reduce waste. Even so the situation is rather precarious and we should be paying a lot more attention to what is happening in agriculture. Monoculture, factory farming of animals and the use of pesticides could easily threaten our food supply.

The threat of epidemics is always with us and the more people are crowded onto this planet, the greater is the threat. We are lucky public health practitioners have been able to quickly control recent outbreaks.

Migration has been a big problem for Asia, Africa and Europe. It is also an enough of an issue for some Americans to want to build a fence and take children from their parents.

Climate change was a major issue until we realized how many plastic straws we are using. Stopping the use of plastic straws will be a lot easier than dealing with climate change but will not stop the changes from taking place. At least people will be doing something.

This blogger has found the concept of state failure difficult, fascinating and intriguing. It is a complex issue because justice is one of the most important functions of government. At the same time many people demand of government legislation that is exploitive because it restricts competition. This is a conflict of government responsibilities in which the exploiters tend to win. The balance between the two is by degrees and changes through time.

You will notice I said justice rather than law and order. I believe one of the indicators of state failure is that so many people, including The Economist and the Supreme Court of Canada, talk of law and order rather than justice. Law and order is easier to define and enforce. If some government were to pass legislation saying police are required to kill a thousand people at random each year, would we still be supporting law and order. The president of the United States has been quoted as encouraging police brutality and to me this sounds like encouraging them to kill at random. Maybe Trump is an indicator of American state failure.

There are lots of laws that are not just. Anything that tries to force the values, morals or religion of one group on everyone has to be unjust. There are lots of laws that are not written but which are enforced ruthlessly by the public, the media and the courts. For example, men are evil and any expression of male sexuality should be punished. Fathers are expected to walk away from their children without emotions. Men should not be emotional under any circumstances.

Governments like to reward their supporters and to purchase votes and/or support. It is easy to get governments to pass exploitive economic legislation and to get them to provide handouts to protect people from natural disasters and their own stupidity. A lot of government is supporting and encouraging special interests, often at the expense of everyone. Some people want minimum government but want their own interests protected,

As the economy goes more and more into decline it will be more and more difficult to provide handouts and this will be seen as state breakdown. Governments around the world are facing riots as fuel and food subsidies become difficult to maintain.

This conflict between justice and the exploitive demands of special interest may be pushing all governments into a state of failure.

In this post we have looked at a number of resource based and geographic indicators that the economy is on a down trend.

Here are some other indicators:

Unemployment

High public debt

The rise of radical left and radical right political movements

High interest rates

Non-performing loads held by banks

Falling standards of living – however one defines them

Expensive education

High crime rates

Crowded public transportation

Homeless people

People are losing confidence in their banks

Business people are will to exploit their customers for the sake of profit

Every time I read a news report at least one item supports the idea that the whole world is going into a long-term down trend. There are loads of problems with the resource base and if we go short we will not be able to sustain the standard of living to which we have become accustomed.

There are always positives and negatives. In terms of economic growth the negatives appear overwhelming. This guy has read about hunters and gatherers and believes it is possible for people to arrange their production of goods and services for long-term sustainability. It will require a major rethink of values. It will be a challenge.

 

 

 

 

This blogger thinks the economy is into a long-term down trend. It could be that not everyone sees this; it may depend upon the color of hat you wear. If you are retired with a good defined benefit pension it may be more difficult to see a downtrend than if you are a young person trying to find an unskilled job that pays enough to cover rent, food, entertainment and a little saving to get married and buy a house.

Some of the evidence relates to the resource base. There are lots of energy and mineral resources left on the planet. The problem is that we have used up the easiest accessible resources and what is left is difficult to extract and will take so much energy they are useless. Another type of evidence is geographic and long-term in nature. This includes famine, epidemic, uncontrolled migration, state failure and climate change.

One of the difficulties is that we are used to seeing the economy as a straight line going up. Economics students learn about regression analysis which takes a number of data points and calculates the best straight line that indicates their direction. Using the slope of this line one can project the trend into the future. It is assumed the trend is up.

Another approach about which I did not learn until after I had completed my formal study of economics is fractal analysis. Fractals are lines that go up and down with a series of ups an downs within each. Like a seashore. Fractal analysis tries to identify major turning points in the ups and downs. The mathematics is not well-known. It involves the concept of fractal dimension which can be calculated by the formula two minus the Hurst exponent. If economists used this approach it would be much easier to accept the possibility our economy is going into a long-term down trend and their forecasts would be more accurate but not always what most people want to hear.

What then is the evidence for the long-term future?

In economic theory changes in prices are signals to producers to increase or decrease production. Increasing prices also indicate a shortage of a good and we have been experieincing a lot high prices for some basic goods. It may be that we need more informtation about prices relative to each other. Maybe our economimc data colllection has been to support our views on economic growth and is not sufficient to giive us a clear picture of relative prices.

In recent discussions about energy a lot has been said about peak oil and solar. Maybe we do not have to worry about oil shortages because the cost of solar has been coming down and will soon be able to replace oil. This may well happen and it may have an interesting effect on economic decision making. We as indiivuduals will be able to make the basic decisons about solar use in place of bankers who now decide what oil projects go ahead and who gets to do them. The down side of this is that if a lot of oil infrastructure becomes obsolete and has to be written off a lot of the money supply will disappear and the lack of money will cause a lot of suffering to a lot of people.

In spite of all the talk about a service economy we still need lots of minerals for food, shelter and transporttation. High prices indicate we have used up the most easily available mineral resources. The future may depend upon recycling and here the picture is cloudy. Recycling takes a lot of energy and the high cost may force us to reduce our use of minerals. Water is another issu. There are parts of the world where water shortages are becoming a serious problem.

Another indication of a decling economy is the trend to tiny houses, shared accommodation, young people continuing to live with their parents and even homelessness. It used to be that non-union working people could expect to live in a detached house with a front and back garden.

Most of the evidence for a down economy identified in the first part of this post has to do with the availability of energy and mineral resources. There are also some long-term geographic trends which could also cause mankind some serious problems.

The guideline here comes from a book by historian Ian Morris called Why the West Rules – For Now: The Patterns of History, and What They Reveal About the Future.

Morris’s book is a good summary of the long-term history of the world. Using evidence from a number of disciplines he shows how geography has influenced the rise and decline of civilizations. His perspective is much longer than most of us are familiar with.

He identifies what he calls the five horsemen of the apocalypse – famine, epidemic, uncontrolled migration, state failure and climate change and shows how these have combined to produce disastrous, centuries-long collapses and dark ages. Are we exempt from the consequences of these problems?

We are already familiar with these trends. The question is are they strong enough to cause us problems or are they gaining strenth? For me, a retired person living in Canada, they are mostly academic but for many people around the world they are very real and very serious.

Some people argue this planet is capable of providing enough food for the current population, especially if we reduce waste. Even so the situation is rather precarious and we should be paying a lot more attention to what is happening in agriculture. Monoculture, factory farming of animals and the use of pesticides could easily threaten our food supply.

The threat of epidemics is always with us and the more people are crowded onto this planet, the greater is the threat. We are lucky public health practitioners have been able to quickly control recent outbreaks.

Migration has been a big problem for Asia, Africa and Europe. It is also an enough of an issue for some Americans to want to build a fence and take children from their parents.

Climate change was a major issue until we realized how many plastic straws we are using. Stopping the use of plastic straws will be a lot easier than dealing with climate change but will not stop the changes from taking place. At least people will be doing something.

This blogger has found the concept of state failure difficult, fascinating and intriguing. It is a complex issue because justice is one of the most important functions of government. At the same time many people demand of government legislation that is exploitive because it restricts competition. This is a conflict of governement responsibilities in which the exploiters tend to win. The balance between the two is by degrees and changes through time.

You will notice I said justice rather than law and order. I believe one of the indicators of state failure is that so many people, including The Economist and the Supreme Court of Canada, talk of law and order rather than justice. Law and order is easier to define and enforce. If some government were to pass legislation saying police are required to kill a thousand people at random each year, would we still be supporting law and order. The president of the United States has been quoted as encouraging police brutality and to me this sounds like encouraging them to kill at random. Maybe Trump is an indicator of American state failure.

There are lots of laws that are not just. Anything that tries to force the values, morals or religion of one group on everyone has to be unjust. There are lots of laws that are not written but which are enforced ruthlessly by the public, the media and the courts. For example, men are evil and any expression of male sexuality should be punished. Fathers are expected to walk away from their children without emotions. Men should not be emotional under any circumstances.

Governments like to reward their supporers and to purchase votes and/or support. It is easy to get govenrments to pass exploitive economic legislation and to get them to provide handouts to protect people from natural disasters and their own stupidity. A lot of government is supporting and encouraging special interests, often at the expense of everyone. Some people want minimum government but want their own interests protected,

As the economy goes more and more into decline it will be more and more difficult to provide handouts and this will be seen as state breakdown. Governments around the world are facing riots as fuel and food subidies become dificult to maintain.

This conflict between justice and the exploitive demands of special interest may pushing all governments into a state of failure.

In this post we have looked at a number of resource based and geographic indicators that the economy is on a down trend.

Here are some other indicators:

Unemployment

High public debt

The rise of radical left and radical right political movements

High interest rates

Non-performing loands held by banks

Falling standars of living – however one defines them

Expensive education

High crime rates

Crowded public transportation

Homeless people

People are losing confidence in their banks

Business people are will to exploit their customers for the sake of profit

Everytime I read a news report at least one item supports the idea that the whole world is going into a long-term down trend. There are loads of problems with the resource base and if we go short we will not be able to sustain the standard of living to which we have become accustomed.

There are always positives and negatives. In terms of economic growth the negatives appear overwhelming. This guy has read about hunters and gatherers and believes it is possible for people to arrange their production of goods and services for long-term sustainability. It will require a major rethink of values. It will be a challenge.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Economic growth, sustainability and degrowth

A lot of people realize there are problems with the economy but few if any understand what is happening. Therefore we have varied reactions. Many people cling to faith in economic growth, some are exploring the concept of sustainability and a few are looking at “degrowth”. This blogger thinks of the three approaches as points on the ray of a matrix.

Predicting the future is difficult although the shorter the term the easier it is. Economists are little help because most are paid directly by business people or indirectly through government. Very few people get away with telling the whole truth to the people who pay them. Most economists find it expedient to say what their employers want to hear and that is mostly that the economy will continue to grow and that there will be continuing profits.

Nor can we expect the truth from political leaders as their positions depend on maintaining the support of the people. It is hard to think of any government leader telling us we will have to tighten our belts and remaining in power. Are citizens mature enough to listen to that? It would be interesting to see a political leader try.

trafficOur recent economic memory is based on a tremendous use of energy and mineral resources. Not only have we fought two world wars we have also had the resources for an incredible standard a living in which the rich have grown richer and the rest of us have done okay. The result is we have a strong committment to economic growth and a belief that it will continue forever.

Many economists are fond of regression analysis because it assumes constant economic growth. It is a mathematical formula which takes a series of data points and calculates the best fitting straight line through them. It is generally assumed this line will angle up.

This guy thinks we would get a more truthful picture of what happens in the economy if we were to use fractal analysis. Fractals are series of ups and downs each with a subseries of ups and downs within them. The sea coasts are often used as examples. The mathematics of fractals is not as clear as regression analysis but there are some useful concepts. I am fairly certain those people who do “black box” analysis of stock markets are using fractal analysis. They are apparently having some success. The concept of fractal dimension can be calculated (two minus the Hurst exponent) and changes indicate a change in direction.

If we were to apply fractal analysis to economics it would be easier to see and accept ups and downs in the economy and easier to develop mechanisms to deal with them.

The word “sustainable” as applied to economic growth is a buzzword in some circles but I find it challenging as its meaning is not clear. I suspect it is mostly a cover for continued economic growth.

To the extent that some people use fewer energy and mineral resources it is good but I suspect that sustainable development maintains a committment to economic growth. Sustainable to me means going on forever and that is what a lot of people believe about economic growth.

The reality is that the quantity of goods and services we can produce and exchange depends upon the quantity of energy and mineral  resources we have and can retrieve with a reasonable expenditure of energy. The concept of sustainable development is probably 100 years too late.

Our committment to economic growth is so strong I am not aware of any career economist having thought about what happens when the economy goes into decline. This is unfortunate as the economy regularly goes into recession and this time it may be extended.

This blogger figures current economic problems are because we have used up the most accessible energy and mineral resources. Sure, there are lots left but they require massive amounts of energy to retrieve them. Solar may help but not yet. I fear that we will be forced into degrowth.

If so the challenge will be to figure out how do distribute fairly the goods and services we have, how to cope with leisure, how to create money that will not disappear during a crisis and how to not fight over the available resources.

Money will be a special problem as fractional reserve banking works only in times of economic growth. When growth stops and banks stop making loans  the money supply goes down and because it is fractional reserve the money supply goes down with a multiplier effect. Ouch. A super big ouch.

There are lots of anecdotal evidence from around the world that we are going into a down economy. This could easily be an explanation for a lot of the negative news, both economic and non-economic, to which we are becoming accustomed.

If we could get away from our committment to economic growth we could focus instead on happiness. This concept is impossible to measure although there is some evidence that people do not need a lot of material things to be happy.

What ever happens and wherever humanity ends up it looks as if we will experience a lot of human suffering. I would like for us to minimize the suffering and maximize the happiness.

 

 

 

 

 

 

 

 

 

 

 

 

 

Forecasting markets and a no-so-random walk along the Nile River

It would be a long walk from Wall Street to the Nile River but data about river flows has provided an interesting tool for analysing investments (and the economy).  This tool raises doubts about the theory of the random walk on Wall Street.  It may the basic tool used by a lot of “quants” who have had some success working the markets.

Harold Edwin Hurst was a hydraulic engineer working on the Nile River early in the twentieth century who was concerned with managing the river flows with the new dams.  With access to extensive historical data on the varying annual flows he decided to prove that they were random.  Through a number of years he worked out a way to determine if a time series is random or not.  If the Hurst Exponent is .5 then the series is random.  If it is greater than . 5 there is some probability a the series will continue its trend.  (The maximum is one.)  To Hurst’s surprise the exponent for the Nile River flows was about .8.

If the Hurst exponent for a time series is greater than .5 then it is not random and there should be some potential to predict what it will do.  There is software available to calculate the Hurst exponent using several different calculations.  One requires just 32 data points.  When one applies the Hurst exponent to market (and probably) economic data one finds it varies up to .8 and sometimes higher.

Not only are markets non-random, they are also fractal in nature.  This means they go up and down and within each up and down there other ups and downs.  This applies regardless of the time applied to the series.  If you have a time series at one minute intervals all the series at longer intervals will also be fractals and when a longer time series changes direction all the shorter ones will also change direction.  The key to analysing fractals then is to identify the turning points.

The key is a concept called fractal dimension.  This is a measure the extent of the ups and downs.  It appears that changes in fractal dimension indicates changes in the direction of the time series.  If several time series of the same data change fractal dimension at the same  then the time series is probably going to change direction.  If one is playing a market or trying to predict the economy this should  be useful information.

The formula for fractal dimension is simple: 2 – H, where H is the Hurst exponent.

If one wants to apply this to market data one probably needs a lot of programming skills and some very fast computers. These are available to the “quants” who also certainly know about the Hurst exponent and fractal dimension.   There is also a problem in that if this works and a lot of people are successful they will even out the swings in the prices.

Who is correct:  the academics who claim Wall Street is a random walk or those who believe it is not true?  My guess is that some times it is random and at other times there are patterns which may be identified.

Could this be used for forecasting economic ups and         downs?  Perhaps.  Economic data are difficult and expensive to obtain and not always accurate.  There may also be problems with the number of data points needed to get accurate results.

When Hurst walked along the Nile River I wonder if he thought about Wall Street and economic forecasting?  He probably realized the potential for his exponent beyond river flows as he published an article about his exponent.

He who pays the economist calls the tune

If one wonders why economists have had so much difficulty predicting and explaining the economic crisis it might be helpful to look at who pays their salaries. Isn’t there an old saying that he who pays the economist calls the tune?  As most economists work for large corporations, governments or universities (paid indirectly by governments) they have to answer ultimately to chief  executive officers or presidents/prime ministers.

The question then is what do these people want to hear?  Does the chief executive of a major bank want to hear that he is participating in a Ponzi scheme or does the president want to hear that we are going into a major recession and that his voters are going to have to accept a decreasing standard of living?

Probably not.  So economists tend to focus on things that will not be offensive to these people or that will help to support them.

Consider the book Freakonomics by Steven Levitt and Stephen J. Dubner.  This popular book is very interesting but it doesn’t  touch on any of the big economic issues with which we are currently trying to deal.  People who have lost their jobs and homes to the crisis will not find much here to help them.  Nor will the book encourage them to become drug dealers. (Here is the Wikipedia entry on Freakonomics.  http://en.wikipedia.org/wiki/Freakonomics )

Another example is this article ( http://www.economist.com/node/12851150 ) from The Economist, December 30, 2008.  This article lists eight up and coming economists and talks briefly about the work they are doing. None of them are doing research which will help us understand or cope with the current economic crisis.  Here are three quotes from this article which I think help make the point.

 

They share the same knack for finding ingenious ways to answer unlikely questions, often by plundering forgotten troves of data.

 

Mr Gabaix made a splash in 2006 when he concluded that the “excessive” pay of chief executives was not necessarily excessive. Compensation may have grown sixfold from 1980 to 2003 not because managers were six times greedier, but because the firms they ran were six times bigger.

 

What, then, unites these eight young stars and the discipline they may come to dominate? Economists still share a taste for the Greek alphabet: they like to provide formal, algebraic accounts of the behaviour they explain. And they pride themselves on the sophistication of their investigative methods. They are usually better at teasing confessions out of data than their rivals in other social sciences. What defines economics? Economics is what economists do—the best of them, anyway.

 

So long as the economy was growing it didn.t much matter what questions economists asked and most of their research assumed continued economic growth.  As a student I learned regression analysis with its upward sloping line.  It wasn’t until later that I learned about fractals with their ups and downs.  I speculate the people who sign economists’ pay cheques would not be much interested in economic projections based on fractals.

I believe most people who study economics want to make the world a better place.  Also we tend to think and act in our own short-term interests and for most people that is their pay cheque.  The economists I am criticizing probably believe they are helping make the world better – or would  be if only people would listen to them.  Who is to say one person is right rather than another when it comes to solving deep problems and shaping the future.  Sometimes, to others, our vision of the future is wishful thinking.

What then is the role of economists if not to make accurate forecasts and to solve major economic problems.  Shortly after starting my study of economics I decided economists were the theologians of the twentieth century.  Some of their debates are as relevent as the medieval debate over how many angels could dance on the head of a pin.

I have a theory that we need to believe the things we do are important and necessary.  Sometimes we need people to reinforce this belief.  As most of what we do involves the exploitation of resources we need to believe this is good.  As it becomes more difficult to extract the remaining resources it becomes even more important we have people to help reinforce our work ethic.  The theory is that this is the true role of economists.

The random walk and fractals

Long-Term Capital Management,  the theory of fractals and the Hurst Exponent lead me to question that markets are random and rational in the debate recently given a nudge by the awarding of the Nobel Prize in economics to economists on either side of this question.

For me the timing of the award was good because I have just finished reading When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein.

Long-Term Capital Management was an attempt to make money  out of a belief that markets are rational.  The company employed academics in economics/mathematics to trade according to models run on computers.  It worked for a while and this company became one of the most successful hedge funds and two of its board members were awarded the Nobel prize in economics.  But one of the reasons it failed was because the markets did not always behave as they had been modelled.  They behaved like fractals.

Another reason the company failed is that its employees were not really geniuses.  I have a theory that genius is 90 percent plagiarism.  Thus anyone can be 90 percent genius so long as they listen.  Those who don’t listen are stuck down below 10 percent. This would suggest that to be a genius you have to listen.    It is clear from the book that these guys were not listeners.   They were caught with the idea that you can prove how smart you are by how much money you can make.

The author of this book figures the way to make sure there isn’t another LTCM is with greater regulation.  Rather than regulation governments should require financial institutions to publish detailed information about their operations.  These guys were extremely secretive and refused to provide their associates with information which would have revealed their operations as being much riskier than anyone believed.  Their customers should have refused to work with them but the company was making so much money no one wanted to be left out.

I didn’t learn about fractals until sometime after I had studied economics. Now I think they provide a good model for a lot of human activity including markets and economics.

The classic example of a fractal is the sea-shore with its ins and outs and more ins and outs within the major ones.  Think of the song about a wheel within a wheel within a wheel.  The Elliott wave theory is a fractal, just remove the fives.  Markets and the economy can be seen as a series of trends with trends within trends.  They also have major turning points rather than following the straight line of regression analysis.

So the problem for somebody trying to forecast markets or the economy is to identify turning points, especially the major ones.

There is a concept of fractal dimension which indicates the extent of the trends and it can be calculated with the formula 2 – H where H is the Hurst Exponent.  Changes in fractal dimension indicate turning points.

Edwin Hurst was a hydraulic engineer working on the Nile River in the first half of the twentieth century.  He wanted to prove the different annual river flows were random and developed a way of testing a series of numbers to determine whether or not they were random.  To his surprise they were not.

The same test can be applied to any time series including market and economic data.  The Hurst exponent can now be calculated with as few as 32 data points and it varies considerably with each calculation, most indicating the numbers are not random.  This by itself is a strong indication that there are problems with the random walk theory.

I suspect a lot of the “quants”  who are currently using “black boxes” to play the markets, apparently with some success, are using the Hurst Exponent.

The importance of the debate about random walk may depend upon how much we want to understand about how markets and the economy actually work.  It may be that some people don’t want to understand how things actually work.  For those of us who do I think fractals are more promising.  And one should never place one’s savings with fund managers who don’t listen.

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.

Headlines good and not so good

We’re starting to see headlines that at least in the United States the economy is starting to recover.  At the same time there are lots of news articles about how people  continue to suffer economic pain.

Perhaps it depends upon what style of hat one wears.  For some people things are going to improve but for lots of others it will continue to be tough.

I figure the economy is fractal in nature with lots of ups and downs of varying durations..  If this is correct then the first question is which way is it trending,  the second question is how long before it turns down again.and the third question is how do we prepare for the next downturn.

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