You can't only believe in the markets when they are going up!
At present a large number of people are concerned and negative regarding the current global economic outlook. These include Bankers, surveyors, estate agents and economists. The consensus of opinions points to a feared economic slowdown and a housing market slump. Gordon Brown has thus come out defending his economic record and has promised to do something about the situation. (Lets all forget that he was Chancellor in the previous periods and is now Prime Minister…who is Alastair Darling? The current Chancellor's meeting with banks has become a footnote)
Gordon Brown had less of a hand in the good times than he believes or would have you believe and now has little ability to stop the downturn. The ‘narrative fallacy’ as extolled by Nassim Taleb is portrayed in Gordon Brown believing he is responsible for economic growth over the past decade. Looking back it may be possible for him to ‘fit’ his economic policies using a confirmation bias into the recent economic record of the UK. However, when considering the economic conditions of the past decade and the fundamentals he inherited it would have been very strange had the UK not experienced economic growth similar to that seen throughout Europe, North America, the Middle East and Asia. Gordon Brown can surely not claim his decisions to be of equal impact as cheap goods from China etc? Would he have taken the credit for creating an environment that allowed for complicated derivatives to generate profit and liquidity before the credit crunch?
The ‘virtual senate’ of investors and lenders that Chomsky discusses here effects economic policy, and that same ‘virtual senate’ has now more impact on monetary policy than Governments and maybe Central Banks. Monetary policy as eschewed by Milton Friedman et al may work ceteris paribus but when this ‘virtual senate’ do not allow for efficiency in the money markets by adjusting Libor or passing on rate cuts this results in monetary policy not applying in full. Therefore it will not be as effective in stimulating economic growth in a slowdown. In this situation, cuts to the base rate by the Bank of England are ineffective at everything but creating inflation vulnerability; which, is counter to their main objective. The Bank of England Act 1998 states that ‘maintaining price stability’ is the monetary policy committee’s first objective and supporting the Governments policies for growth and employment are subject to controlling inflation. (This differs from the objectives of the Federal Reserve and European Central Bank.)
Lets not forget that momentum is extremely powerful in markets. Confidence in the housing markets has turned and now a great deal of negative momentum is being generated. Once this momentum starts I think stabalising resistance will be at around 10%, 15% or even 20% year on year falls in the housing market. Upwards momentum in inflation could be just as if not more serious than slow economic growth. With global commodity prices what they are stagflation is a real danger.
If monetary policy is ineffective and there is no room in the budget for fiscal policy, (Taking Northern Rock into account the Government has already broken its own golden rules on borrowing let alone putting PFI on to the balance sheet!) Gordon Brown’s only remaining option is to politely ask the 'virtual senate' to help him out! That might be exactly what this is! However, game theory would suggest that the self-interested institutions will be cautious of moving first and therefore as a group will not provide Brown with the magic bullet his ratings so desperately need.
My conclusion is that the business cycle has not yet been completely conquered by modern politics or the economics of Central Bankers and that Black Swan events can create the same swings in momentum that have characterised economic history for generations. This is not a bad thing for those who believe in the markets. A more accurate pricing of risk and the dissolving of poor business practices can be a maturing benefit to the global economy. This is encapsulated in the statement 'You can't only believe in the markets when they are going up'.
Gordon Brown had less of a hand in the good times than he believes or would have you believe and now has little ability to stop the downturn. The ‘narrative fallacy’ as extolled by Nassim Taleb is portrayed in Gordon Brown believing he is responsible for economic growth over the past decade. Looking back it may be possible for him to ‘fit’ his economic policies using a confirmation bias into the recent economic record of the UK. However, when considering the economic conditions of the past decade and the fundamentals he inherited it would have been very strange had the UK not experienced economic growth similar to that seen throughout Europe, North America, the Middle East and Asia. Gordon Brown can surely not claim his decisions to be of equal impact as cheap goods from China etc? Would he have taken the credit for creating an environment that allowed for complicated derivatives to generate profit and liquidity before the credit crunch?
The ‘virtual senate’ of investors and lenders that Chomsky discusses here effects economic policy, and that same ‘virtual senate’ has now more impact on monetary policy than Governments and maybe Central Banks. Monetary policy as eschewed by Milton Friedman et al may work ceteris paribus but when this ‘virtual senate’ do not allow for efficiency in the money markets by adjusting Libor or passing on rate cuts this results in monetary policy not applying in full. Therefore it will not be as effective in stimulating economic growth in a slowdown. In this situation, cuts to the base rate by the Bank of England are ineffective at everything but creating inflation vulnerability; which, is counter to their main objective. The Bank of England Act 1998 states that ‘maintaining price stability’ is the monetary policy committee’s first objective and supporting the Governments policies for growth and employment are subject to controlling inflation. (This differs from the objectives of the Federal Reserve and European Central Bank.)
Lets not forget that momentum is extremely powerful in markets. Confidence in the housing markets has turned and now a great deal of negative momentum is being generated. Once this momentum starts I think stabalising resistance will be at around 10%, 15% or even 20% year on year falls in the housing market. Upwards momentum in inflation could be just as if not more serious than slow economic growth. With global commodity prices what they are stagflation is a real danger.
If monetary policy is ineffective and there is no room in the budget for fiscal policy, (Taking Northern Rock into account the Government has already broken its own golden rules on borrowing let alone putting PFI on to the balance sheet!) Gordon Brown’s only remaining option is to politely ask the 'virtual senate' to help him out! That might be exactly what this is! However, game theory would suggest that the self-interested institutions will be cautious of moving first and therefore as a group will not provide Brown with the magic bullet his ratings so desperately need.
My conclusion is that the business cycle has not yet been completely conquered by modern politics or the economics of Central Bankers and that Black Swan events can create the same swings in momentum that have characterised economic history for generations. This is not a bad thing for those who believe in the markets. A more accurate pricing of risk and the dissolving of poor business practices can be a maturing benefit to the global economy. This is encapsulated in the statement 'You can't only believe in the markets when they are going up'.
Labels: black swans, central banks, economic outlook, gordon brown, monetary policy, nnt, noam chomsky
posted by David King at
17:39
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