March, 2012 Archives
Fragility And Instability Are Part Of Global Capitalism And We Have Done Very Little To Address This
by Riaan Nel in Global Economy
“A sophisticated, complex, and dynamic financial system such as ours endogenously generates serious destabilizing forces so that serious depressions are natural consequences of noninterventionist capitalism: finance cannot be left to free markets” (Hyman Minsky, 1986)
During the 80’s and 90’s the above quote by Minsky was very controversial. That was the zenith of the “free markets” ideology – the notion that the less government interferes with the market the more efficient the market will allocate resources. To a large degree I still agree with this basic notion; however, it is my belief that finance and investment do not work well in a non-interventionist environment. Hyman Minsky’s theory about capitalist development and financial instability is how I view global finance in general, and how I view investment strategy specifically.
From Minsky’s perspective the economy was a complex, time-dependent system. He saw society as an “evolutionary beast,” changing in response to endogenous forces. According to Minsky the fundamental determinant of the path of capitalist development is the institutional structure of the political economy. It is this structure that regulates, facilitates, influences and constrains political economic activity. Consequently, capitalism has many varieties. In Minsky’s thinking time-dependency is an important structural variable of contemporary capitalism – production precedes exchange, and finance precedes production. Thus, credit creation is at the center of capitalist development.
Another important element of Minsky’s approach was the importance of profit-driven structural change. Minsky had long argued that present and prospective profits influence economic activity within the context of a given institutional structure. Most contemporary economic theories see finance and credit creation as merely a facilitating process within the economy. This view ignores the fact that financial firms are also profit-seeking institutions, and that credit creation is a production process in and of itself. Moreover, credit creation is a profit-seeking production process that precedes other production activities in time. The financial system takes on special importance according to Minsky’s theory of capitalist development since the system exerts a strong influence on business activity, and is also prone to innovations in profit driven credit production. Another essential element in Minsky’s theory is public policy. In Minsky’s view capitalist development cannot be understood without incorporating government policy. Government policy is an inescapable determinant of the path of capitalist development. In summation – a particular capitalist political economic system is created by profit-seeking credit creation, preceding other capitalist production and distribution processes, as well as government policy. Read the rest of this entry »
by Riaan Nel in Global Economy
Definition of “Margin Call” in general terms: When an investor investing in an asset with borrowed money is required to deposit more collateral or sell the asset due to a decrease in the price of the asset. Referring to the real “margin call”, is implying that the US and the West have grown their economies with too much borrowed money over the last decade, and since the advent of the financial crisis with too much “printed” money. At some point we all will have to “pay” for our stuff with “real” money – that is the real “margin call” awaiting us all! How will the real “margin call” manifest itself? Through another collapse in asset prices to “clear” the system (i.e. another global crisis and recession), and/or through the lowering of our living standards due to inflation and higher taxes.
Recently, David Stockman, author of the book “The Triumph of Crony Capitalism”, and President Reagan’s budget director, was interviewed by Bernard Condon from AP. Stockman has a very bearish and negative outlook on the US economy. Through my own studies and research I tend to agree with Stockman; however, I am cognizant of the fact that one can get wrapped up in a certain paradigm and outlook, and then you tend to magnify only those facts that support your outlook. To a certain degree there is always a battle in outlooks between the bulls and the bears – bull are eternal optimists, bears are always predicting the next recession. (Here are some links about these debates: http://www.sanddollarinvest.com/research.php; http://www.worldpoliticaleconomy.com/site/?p=496; http://www.sanddollarinvest.com/investment_theory.php).
This caveat notwithstanding, like Stockman, I remain pessimistic about the prospects of the US economy because we, and the entire West for that matter, are still saturated with debt. Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-’90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP. Think about the middle of the previous decade, people were taking $25,000 or $50,000 out of their homes for the third or fourth refinancing. That’s what was keeping the economy going, creating jobs in restaurants, creating jobs in retail, creating jobs as gardeners, creating jobs as Pilates instructors that were not supportable with organic earnings and income. It wasn’t sustainable. It wasn’t real consumption or real income. It was bubble economics. So even the 1.6 percent (annual GDP growth in the past decade) is overstating what’s really going on in our economy.
by admin in Global Economy
By Stratfor (http://www.stratfor.com/forecast/annual-forecast-2012)
There are periods when the international system undergoes radical shifts in a short time. The last such period was 1989-1991. During that time, the Soviet empire collapsed. The Japanese economic miracle ended. The Maastricht Treaty creating contemporary Europe was signed. Tiananmen Square defined China as a market economy dominated by an unchallenged Communist Party, and so on. Fundamental components of the international system shifted radically, changing the rules for the next 20 years.
We are in a similar cycle, one that began in 2008 and is still playing out. In this period, the European Union has stopped functioning as it did five years ago and has yet to see its new form defined. China has moved into a difficult social and economic phase, with the global recession severely affecting its export-oriented economy and its products increasingly uncompetitive due to inflation. The U.S. withdrawal from Iraq has created opportunities for an Iranian assertion of power that could change the balance of power in the region. The simultaneous shifts in Europe, China and the Middle East open the door to a new international framework replacing the one created in 1989-1991.
Our forecast for 2012 is framed by the idea that we are in the midst of what we might call a generational shift in the way the world works. The processes are still under way, and we will therefore have to consider the future of Europe, China and the Middle East in some detail before drawing a conclusion. The 2012 forecast is unique in that it is not a forecast for one year in a succession of years, all basically framed by the same realities. Rather, it is a year in which the individual forecasts point to a new generational reality and a redefinition of how the world works. Read the rest of this entry »