Moments of madness

Some economic foolishness we subject ourselves to.

It certainly is a strange, strange economic world we live in.

Take Britain’s ousting of France as the world’s 5^th largest economy as an example. It did so just after Christmas by recalculating its national accounts, specifically Gross Domestic Product. Not much wrong with that: after all Nigeria did something similar earlier to overtake South Africa as Africa’s largest economy. What makes the British move a bit strange, if not bizarre, is that in order to qualify for that position it included the proceeds of prostitution and drugs in the numbers, boosting GDP by some £12½bn. According to The Telegraph, France will not do the same on moral grounds – which must be another first: France taking higher moral ground than Britain.

One wonders what the suits at rating agencies Moody’s, S&P and Fitch are going to do with this. Will they be checking the veracity of these numbers by visiting some shady places in London? The more serious question, of course, is how long policy-makers will continue to slavishly follow this ridiculous GDP metric. Are we at a point where junkies and Johns can affect interest and exchange rates? A bit of a stretch, I know, but an illustration of the weird world we live in.

And then there’s oil. Commentators have justifiably been stretched in trying to explain the sharp drop in the oil price on the basis of increased production and lower consumption. A mere five years ago it averaged $35 a barrel; then shot up to $110 within a year or so to fall dramatically in the last few months. This can only be explained by speculation and possible price manipulation way beyond production cartels, and in financial markets estimated by the Economist more than a year ago to involve some 200 billion barrels, valued at about $20trn.

Be that as it may, the oil price prompted economist Mike Schussler to pen some satire on social media during the holiday season.

Part of it read: “The oil price is on trend for free oil soon. Saudi Arabian sand exports will outperform oil revenue then. Camels will make a comeback in the Middle East as the major transport mode. The EFF will nationalize SASOL in time for investors to say ‘thank you for bailing us out’.

“The last South African tax payer leaves in May 2016 as debts pile up and Juju shouts at investors ‘pay back the money!’

“’Which money’ they whisper back. ‘You just took the mines and Sasol’.

"’Yes but there must be money as we are paying for this nationalization;’ says Julius as the government is forced to pay employees with no money coming in as oil is now free and gold and platinum prices are less than Eskom power prices!”

The full impact of what’s happening in the oil markets is far more pervasive than most in the mainstream media have been covering or can even hope to cover. When an important international price moves dramatically, most cannot see much beyond celebration on the one side, and lamentation on the other – depending on whether one is a consumer or producer.

But oil is more than a tradable commodity. Not only is it by far the world’s biggest in value, but price volatility can disrupt stock markets, government finances, trade balances, currencies, exchange rates, interest rates, a whole array of financial instruments including shale junk bonds, and demographic and political stability. All of these are linked and individually fragile.

Then I came across another piece of economic absurdity: the reduction by the American city of Detroit of city pensioners’ incomes in an attempt to resolve its financial crisis. What at first seemed to be a rather remote and perhaps not such a newsy event, took on another dimension when I realised that this one city was something of a microcosm of our Western economic system.

The once thriving world vehicle manufacturing centre is insolvent. The city has 9,700 workers, with 21,000 retirees drawing benefits. Its population has declined by 63% since 1950, and unemployment has tripled since 2000 to nearly 20%. It is not undue exaggeration to see this replicated through much of the Western world. The trend of the past thirty years is culminating on the one hand in rapid inflation of assets and financial instruments such as property, stocks and bonds and on the other deflation of production such as commodities and manufactured goods, as well as average individual incomes.

Apart from exacerbating income disparities, the concentration of wealth in financial services has become exponentially incestuous, largely failing to translate into greater consumer spending and production of goods and services. All of this rests on a debt ridden monetary system that is persistently debasing our means of exchange.

2015 is already shaping up to being a year of disruption. This will not only be in markets but in economic paradigms that we have held for many decades. At least we are beginning to understand what does not work and hopefully we could see a return to classical economic theory and the rules of transactional correctness.

Wealth simply cannot be created through money or debt. Tangible value is always created by production. Consumption merely confirms it.