Lives Of Our Days

Still on the woes of the global economy, here are a few of my favourite articles of the past week or so…

First, some wise words from WSJ’s Market Watch, challenging the myth of perpetual growth

We’re all addicted to the Myth of Perpetual Growth

Yes, economists are addicted to this ideology. Trapped deep in their denial, can’t see the problem, or admit it, or if they do, they are unable to stop themselves, see past their own myopic world view. They’re mercenaries working for capitalists who pay their salaries, and expect them to support the capitalist’s bizarre Myth of Perpetual Growth.

Worse, the public also bought into the myth. Yes, you believe everything you learned in college about economic theories, all the textbooks, everything you read in the daily press, the government reports, all those Wall Street analysts’ predictions relying on studies prepared by economists with credentials.

But everything you think you know about economics … is wrong. Dead wrong. And until economics acknowledge this, the discipline is on a self-destruct path.

Next, Barry Ritholtz’s lament that Spain’s bailout has already failed, followed by a re-post of John Mauldin’s latest newsletter The Bang! Moment Is Here, which begins thusly:

“Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence – especially in cases in which large short-term debts need to be rolled over continuously – is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang – confidence collapses, lenders disappear, and a crisis hits.

“Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, which makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained – or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

– From This Time Is Different, by Carmen Reinhart and Ken Rogoff

And finally, outspoken economist Steve Keen explains why 2012 could be a particularly ugly year:

The reason that we have this trauma for the asset markets is because of this whole relationship that rising debt has to the level of asset market. If you think about the best example is the demand for housing, where does it come from? It comes from new mortgages. Therefore, if you want to sustain he current price level of houses, you have to have a constant flow of new mortgages. If you want the prices to rise, you need the flow of mortgages to also be rising.

Therefore, there is a correlation between accelerating and rising asset markets. That correlation applies very directly to housing. You look at the 20-year period of the market relationship from 1990 to now; the correlation of accelerating mortgage debt with changing house prices is 0.8. It is a very high correlation. 

Now, that means that when there is a period where private debt is accelerating you are generally going to see rising asset markets, which of course is what we had up to 2000 for the stock market and of course 2006 for the housing market. Now that we have decelerating debt — so debt is slowing down more rapidly at this time rather than accelerating — that is going to mean falling asset markets.

Because we have such a huge overhang of debt, that process of debt decelerating downwards is more likely to rule most of the time. We will therefore find the asset markets traumatizing on the way down — which of course encourages people to get out of debt. Therefore, it is a positive feedback process on the way up and it is a positive feedback process on the way down.