Monday, August 15, 2011

A long, long winter.

clip_image002Peach trees here are well into full bloom as if to challenge the snow-capped Langeberg mountains in the distance to shrug off their embrace of winter. The first buds appeared in early May already, a month earlier than last year. I thought it strange then, that the peach trees would start exposing their tender pink blossoms to the vagaries of the icy wetness, frost and snow. But for all of that, the harvest was good giving some assurance to the local farmers that the mysteries of climate change may not be as frightening as they first believed.

While the early blossoms on fruit trees may confuse the local oldies and lull others into a false sense that the winter’s worst is over, it at the very least reminds us of the inexorable march of nature’s cycles. The cold and wet that invades even our marrows will end and soon glorious spring and then cheerful summer.

Economists such as Nikolai Kondratiev and Joseph Schumpeter were strong exponents of the idea that economics too has natural cycles: as inescapable as those of nature. Others, of course, would have us believe that we have developed the knowledge, technology, efficient markets and policy responses to control the seasons; to suppress the waves so that they become little more than gentle lapping at the shore.

Have we? If Kondratiev is correct, are we not seeing the beginning of a half century slow down? Has the constant anti-cyclical meddling, and the reliance on split second market responses to create stability, balance and efficiencies not created the opposite? And are the latest global events not simply confirming that for too long we have harboured delusions of grandeur? The mere fact that a dubious rating from a financial agency can trigger a major slump that most saw as pretty inevitable and that a U.S. policy statement on interest rates could trigger a sharp reversal only to be reserved again shows how unstable and unreliable speculative judgement and market responses have become. Knee jerk policy responses to the market events may encourage some early peach blossoms. But in the distance, the mountains remain firmly in the grip of snow and ice, which is the real gist of Bernanke’s statement.

It may take months and many roller coaster rides to assess the full outcome of the latest volatility. There are far more qualified observers who no doubt will add their postulates to the mix in the weeks and months ahead. The key problem comes back to old world logic: you cannot spend or borrow yourself out of debt. You also cannot continue endlessly to borrow on your twenty or thirty year bond to pay off your credit card.

It has taken a generation to create the mess. It will take a lot more than a few years to correct it. Discounting talk of a “double dip”, Harvard’s Kenneth Rogoff sees latest events as part of an on-going “contraction” the end of which is still a long way off.

By accident of birth I, and many baby boomers, have been placed in the middle of two generations who are as alien to each other as Klingons are to humans. We bridged a generation between deprivation and abundance. The deprivation was more equally shared and the abundance disturbingly less so.

Those are physical and material. They can arguably be corrected by policies and regulation. The greater and far more disturbing aspect of that generation gap is behaviour. Without recognising the absolute need for a change in behaviour, all actions will be futile. They may encourage early blossoms, but they won’t change the seasons.

What are these differences?

We were a lot more patient a half century ago. Some three weeks ago, I wrote: “There is an increasingly credible argument that the biggest single cause of world economic woes can be attributed to impatience. In short, win becomes lose when “W.I.N.” is an acronym for “want it now”. Easier credit and quicker transactions have resulted in a huge debt overhang, lower savings and big sovereign debts. Sounding an ominous and prophetic warning of “another financial crisis that will be just as bad, if not worse, than the last one”, Sheila Bair, the just retired chairman of American Federal Deposit Insurance Corporation a month ago attributed the 2008 crisis to favouring the short term over the long term, impulse over patience.

A half century ago, critical prices such as interest rates, exchange rates and wages were fixed, pegged, managed or stable. Under the initial drive of the Reagan/Friedman combination, most of these controls had disappeared by the mid 80’s, exposing them again to unbridled speculation. Technology has substantially fuelled short-termism enabling greater speculation and the inordinate growth of quick buck instruments such as hedge funds and derivatives. Far from creating greater balance and efficiencies, these instruments have become detached from long term fundamentals and have arguably destroyed not built market reliability.

Government responses have been equally short-term, running up debts to the hilt in trying to find a balance between market stability, austerity, stimulus demanded by a suffering populace and looming inflation. Much of the additional liquidity has simply gone into fuelling further speculation setting us up for another fall. In the United States, the measures have favoured Wall Street rather than Main Street.

There was a time when government budgets were divided into a “capital” and “current” account. The former covered longer term spending such as infra-structure, and the latter running expenses such as education and health. The deficit before borrowing was assessed against the capital account, and any deficit on the current account was frowned upon. Once current expenditures are built into a deficit, it becomes extremely difficult to contain, let alone reverse. Today the norm is simply the annual deficit and the accumulated debt against GDP It is no longer what governments need to spend but simply what can they can afford to according to this magical benchmark – one seriously questioned by Yale University’s Robert Shiller.

Our previous generation expected less from life but had higher aspirations to improve it. They were largely a self-reliant lot who understood that a better future for themselves and their offspring was only possible through hard work, innovation and effort. This was shattered by the great Depression and in the United States and the West by New Deal economics which increased reliance on governments. This has built in an inflationary bias into these economies.

Although banks have historically been a pet hate of the poor, companies were less so. They seemed to be less profit obsessed in my youth. Statements like those of Bill Kellogg that companies existed to “add value to people’s lives” and not to maximise profit did not ring as hollow then as they do today.

This changed dramatically in the “greed is good” decade of the 80’s when the S&P 500 average price earnings ratio more than quadrupled up to 2000. It ushered in greater concentration of economic power, more frequent company reporting cycles, shorter C.E.O. tenures and much wider pay gaps.

The “what’s in it for me” response to life seems to be more prevalent today than it was 5 decades ago. We have made self-interest and its natural outcome of raw material selfishness with an insatiable appetite for consumption and acquisition a cornerstone of economic growth. At a deeper level, we have, within one generation shifted our aspirations from meaning to means and have inseparably linked the two.

It is a very different world from that of my youth. Whether it is better or worse is by its very nature highly subjective and influenced by much more than material well-being. I would not argue with those who insist that it is a much better world today, but then few could dispute that we have picked up some very bad habits along the way.

Behaviour is mostly a reflection of habits, and habits can change. Indeed I believe they are: both spontaneously and involuntarily, and for the better. But it may still be a long, long winter.

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