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Minieconomics.com
All material distributed on this website is copyrighted by Stephen Wheeler © 2002 |
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| It's The Economics, Stupid!
UNDERSTANDING ECONOMICS The Economists are dead !!! If you do not know where you are, and how you got there, how can you possibly find your way home? The Keynesians and the monetarists spend all their time fighting each other and have not noticed that neither of them really understands what has happened, and what is happening. The world knows, and that is why economics is called the dismal science. This book explains why the economists have been wrong and gives the basis for a new, easily understandable theory of economics, Minieconomics, a theory that understands the past and the present and can accurately forecast the future. It now can become a clear science. In 1990 I wrote a paper called ‘I can see clearly now that the credit has gone’: maybe this book should have been called ‘I can see clearly now that the credit is going’. In that paper I forecast a paradigm shift in interest rates and inflation that was inconceivable at the time. Other titles could be ‘The fall of the 1st world’, ‘The fall of extreme capitalism’ or just ‘Time to jump the Economist’s ship’. Even though inflation is currently low and interest rates circa 3% I am forecasting yet another paradigm shift to 0% inflation, excluding the effects of devaluations, and 0% interest rates combined with significant deflation in property and equity prices. This will be combined with a 1st world depression lasting more than a decade and an end to the extreme capitalism and free market policies that the Washington Consensus and the IMF have forced onto the world. Some of the conclusions that I have come to – following the arguments set out in this book – are of huge concern, to us personally, to stock markets, governments, companies, and world economies. There have been two long periods of sustained strong economic growth, the eighties and the nineties. The first of these was caused by the introduction of Financial Deregulation in the 1980s that enabled banks to lend more freely nationally and internationally; the second by the Head of the Federal Reserve of the USA, Alan Greenspan, when he successfully extricated the 1st world from the problems caused by the first. By Greenspan allowing the second period to run out of control the 1st world now is facing the prospect of the longest depression since the 1930s. There are conflicting views in respect of the 1930s. Seventy years on and there is not an adequate explanation of what caused the Great Depression or its recovery. Was the recovery due to the war or to government actions?
The Fed v The Bundesbank (effectively now the European Central Bank) The battle still goes on between the theories of Milton Friedman, the American, whose views on the 1930s’ depression are supported by the Federal Reserve, and Von Hayek, the Austrian, whose views are supported by the Bundesbank. Friedman believed it was the failure of a number of banks that led to the Depression and hence if one bolsters the banks and reduces interest rates, the problem is solved. Von Hayek believed that those were the symptoms rather than the problem and it was the explosion of credit – mainly asset based and for the asset market – followed by the dearth of credit that created the problem. Greenspan used the Friedman solutions for the early 1990s’ recession and has produced a Von Hayek problem! If Von Hayek was on the right track then Financial Deregulation in the 1980s was misguided and the 2000s’ depression will make that of the 1930s look like a tea party.
Name an economist that you can trust As for the monetarists and the Keynesians, neither may be right. If you cannot name one economist whose forecasts you can trust then there must be something very wrong with conventional economic theories. The problem for governments is that all economists have their own views of what is happening and will happen in a country’s economy but those views are generally different and backed by arguments that have similar levels of credibility and plausibility; so how do they choose the right policies? The economists’ general answer to their inabilities to forecast accurately is that Economics is an art not a science. I believe that it is a combination of both, psychology and mathematics. I started the book explaining about paradigm shifts and that is what is desperately needed in the economics profession and its teachings. If you are in possession of the correct economic map then it is easy to find out where you are, where you have been and which road to take to where you want to go.
Microeconomics is an art Microeconomics seems to me to be an art, not a science, in that each micro decision is based upon personal preferences and influences with respect to buy/sell of quality, quantity, shape, colour, price, time, education, health, smell etc. within a system of exogenous pressures. In other words microeconomics depends upon psychology. Different ‘peer group’ pressures – micro and macro The exogenous pressures that can affect that psychology through the macro peer group pressure include the media, financial conditions, social conditions, climate, geographic position, politics etc. Different peer groups, however, tend to exhibit similar characteristics and tendencies but to a greater or lesser degree. The micro peer groups can be stratified in respect of sex, age, race, employment status, socio economic group, marriage status, wealth etc.
Market Research can identify the microeconomies – homogeneous micros Writing the above points me towards market research. Does market research give the right sort of answers? The answer must be yes as long as the questionnaires have been properly designed, weighted and stratified into homogeneous groups. Using market research with different homogeneous stratifications or microeconomies it must be possible to build up minieconomies.
The Gap between micro and macro is too big – mini is the key In order to get from the minieconomies to the macroeconomies it is not just a case of adding the minieconomies together because again there are different homogeneous groupings. For example the economic effect of purchasing a loaf of bread is different from that of purchasing a television. Their velocities of circulation are different, the bread is bought every day, the television may be bought once every five years. Their economic multipliers are different. The bread involves a little low-level labour and commodity ingredients whereas the television involves sophisticated development of components, television programmes, electricity, financing etc.
Homogeneous minis – similar velocities and multipliers It seems obvious therefore that it is possible to build up the macroeconomy using accumulated minieconomic groups within homogeneous groupings according to economic and financial multipliers and velocities of circulation. These homogeneous sectors are not inviolate; they can, over time, fragment with some of the fragments expanding other homogeneous groups. For instance, property bank loans could be used for property development; economic purchases instead of property purchases. This ‘fungibility’ is likely to be affected by peer pressure, in other words psychology.
Start with psychology – finish with psychology From the above, both micro and macroeconomics are affected by psychology or peer group pressure. The peer group pressures tend to follow trends, for instance the increase in wine drinking, the increase in popularist politics, the increase in house ownership, the reduction in home cooking.
Understanding the different trend constituents A trend can be like an elastic band; the more that it is extended the more its strength. Imagine a belt made up of many elastic bands with different tensile strengths but of the same size. The tensile strengths can be compared to the level of economic multiplier for a given sector so technology would have high strength and food production low strength. If that belt is now stretched and the food production band loses strength, it has little effect on the overall strength of the belt, but if the technology sector band broke then it would have a significant effect. In order to get back to the same strength when there are no more high-tensile bands available then many more low-tensile bands would have to be used. The same is true in the economy and explains why Japan’s expansion in low economic multiplier public works programmes is not offsetting the downturn in the high economic technology sectors.
Important underlying trend – confidence Confidence is the key to the level of financial and economic multipliers and to the velocity of circulations. If a company is extremely confident then it will invest in the most risky development projects. If an investor is confident then he will invest in the most risky shares or bonds. If a bank is confident then it will go to its lending capacity limits and the banking multiplier will be at its highest.
Government and Capitalist economic values are different Putting it back into a financial context, extreme capitalism produces the high value development-risk money; the governments produce the low value economic money. The governments would have to reflate through public works programmes with far larger amounts of money than is being taken away from the technology development markets. In technology development there are no sales to monitor but it affects the sales of many other sectors.
Multiplied expansion and multiplied contraction On one side there is the economy and its economic multipliers, on the other is the financial system and its financial multipliers. If a bank makes a profit then if that profit is retained, or more funds are attracted, because of that profit, then loans can be expanded by a multiple of that extra balance sheet strength. If that bank however has a retained deficit because of bad loans and loses some balance sheet strength then that loss is effectively demultiplied in terms of its lending capacity.
Government and Capitalist financial monies are different If the Government is reflating the financial system with cash when the banks are demultiplying through reducing their lending books then, as in Japan, it probably will not have any positive economic effect because that money is not then multiplied; the government does not have the control over the money.
The real difference between Government and Capitalist controlled economies A Capitalist economy needs confidence, the more extreme, the more confidence; just like the stretched elastic band. A Government controlled economy can make a positive trend without confidence and then the fact of that trend can produce confidence. This is, however, only possible when the elastic band or economy has not been fully stretched before hand. In other words, Argentina’s Government can influence its economy, the USA’s cannot. Liberalised international capital markets concept is theoretically wrong Capital flows are a combination of investment and trade monies. These monies are different. The direction of investment flows can be changed rapidly; trade flows build up and fall over significant periods of time depending upon the elasticities of purchase of the constituents of that trade and currency rates. Investment flows are absolutely dependent upon confidence and that confidence is very dependent upon the media. The problem is that investment flows are not simple money. They become bank deposits that then get multiplied through the banking system. The more efficient the banking system and the higher the banking multiplier means the higher the financial risk money which in turn becomes higher risk economic money. This higher risk economic money is the high economic multiplier money. The longer the positive investment flows the higher the risk in the economy. When the money is withdrawn a multiple of that money disappears from the financial system stopping the higher risk development money and hence the economic demultiplier starts. Korea is an excellent example of this. Whoever controls the money, controls the world.
US$ a safe haven? Anything but!!! The US dollar is the safe haven. The financial system is strong and efficient. The media and ‘independent’ organisations like the Heritage Foundation, which happens to be based in Washington, say that the USA has the best potential for growth and is one of the best places for investment. It and they are all wrong. Understanding the above you will see that the USA has had ten years of increasing trade deficits which have gone into the bank deposits and have been multiplied up an incredible 15-20 times. It has had other major net investment inflows into its financial markets. The current financial and economic problems are probably only being caused by more money not entering the USA. The results of capital outflows have been seen in Korea and Japan so it is not difficult to imagine the financial and economic chaos when the money starts withdrawing from the USA. Japan and Korea had the ability to export their way out of some of their problems, the USA does not. The USA is making enemies and the Saudis have already started removing money. The media, controlled by the USA, has brainwashed the world into believing how strong the USA is and that is what has enabled them to be strong, especially militarily. The cracks are becoming crevices and I think that Greenspan, and maybe Bush, understand this. In November 2002 Greenspan made a speech in which he said that the markets should not overestimate the abilities of the policymakers. The markets did not understand the significance of this but they will.
Watch out! The USA is a cat in a corner How does the USA get out of its economic and financial problems? Some economists say that it was the war that took the world out of the 1930s’ depression. I disagree, but I also believe that the USA will try and fight its way out; like the cat in a corner.
Conclusion My conclusion is therefore that the psychological influences at the micro and mini level are different and that these separate influences produce different trends. The most important trend by far is confidence, and this is what can cause paradigm shifts in behaviour and markets. The major influence on confidence and peer pressure is the media. Once the trends are understood, the economics becomes highly mathematical and predictable. Faster and more universal communication over the last one hundred years has meant that peer group pressures are not limited to villages or cities, they are now international and spread or ‘directed’ instantaneously by the controlled media. This was the reason for the fall of communism. The Internet, however, can work on a ‘pyramid’ system of communication and a lone voice should be able to become the voice of the nation if that voice has enough reason. In the same way that the Capitalists are undermining the strength of Capitalism, the strength of the media is being undermined by the ultimate media, the Internet. This book therefore concentrates on confidence, the past, understanding money and inflation, trends, psychology, capitalism, politics and market participants. The Economists have been psychologically wrong and using the wrong mathematics and theories. |
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