i.want.world

the impending collapse of the united states

Niall Ferguson writes:

One day, a seemingly random piece of bad news -- perhaps a negative report by a rating agency -- will make the headlines during an otherwise quiet news cycle. Suddenly, it will be not just a few policy wonks who worry about the sustainability of U.S. fiscal policy but the public at large, not to mention investors abroad. It is this shift that is crucial: A complex adaptive system is in big trouble when its component parts lose faith in its viability.

Over the last three years, the complex system of the global economy flipped from boom to bust -- all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the radical monetary and fiscal steps that were taken in response.

Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will ultimately lead to much higher inflation rates or outright default. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece.

Ask Russia too. Fighting a losing battle in the mountains of the Hindu Kush has long been a harbinger of imperial fall. What happened 20 years ago is a reminder that empires do not in fact appear, rise, reign, decline and fall according to some recurrent and predictable life cycle. It is historians who retrospectively portray the process of imperial dissolution as slow-acting. Rather, empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse.

Washington, you have been warned.

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Austria's Economic Freedom

No major surprise: government spending and high taxes has Austria ranked 22nd in this year's Index of Economic Freedom - right above Germany. In part due to recent unprecedented large stimulus plans, the world experienced for the second time in the history of the Index's publishing an overall decreased of economic freedom.

Terry Miller's presentation of the Index at the Hayek Institute pointed out that despite large government spending to promote growth, early evidence has shown that increase in spending has undoubtedly the negative effect -

yet another attestation of delusionary Keynesian economics propaganda.

Click here to download:

Index2010_ExecutiveHighlights.pdf (926 KB)

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Efficient Markets Hypothesis is thoughtfully Disproved

Daniel Gross writes:

This afternoon, while walking into the Congress Center, the main hub of Davos, I noticed a piece of gray paper on the floor. It looked like it might be currency of some sort—certainly not a dollar, but perhaps Swiss francs or something else. I started to bend over to pick it up, but then I caught myself. This is the World Economic Forum. It is populated by hundreds of economists and by thousands of business people schooled in the tenets of economics. This is possibly the most rational, profit-maximizing concentration of human capital in the world. These are the actors who make up an efficient market. And of course adherents to the efficient market hypothesis famously don't believe in the concept of found money or found savings...

But I'm a connoisseur of economic irrationality. And so I bent down and picked up the paper. On one side, the grim visage of Queen Elizabeth. On the other, Charles Darwin. It was a 10 pound note, worth about $16.25. Just lying on the floor, unmolested by Nobel Prize-winning economists, CEOs of Fortune 500 companies, and financial journalists.

Gross concludes the efficient markets hypothesis must be false.

I've managed to lose a 100 Euro note before and as I read this, I can think of this irrational transaction as one of many that occurs daily. Then again, EMH describes the market as a whole whereby all actors can theoretically be wrong - in this sense - throw away cash.

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Fair Trade - Just Another Scam

Nestlé has just announced that KitKat – Britain's biggest-selling chocolate bar – will carry the Fairtrade logo from next month. But how much do consumers really know about the Fairtrade movement? Is it, as some say, an essential safety net that helps poor farmers earn a better living or, as others say, an example of western feel-good tokenism that holds back modernisation and entrenches agrarian poverty?  

We might think of sub-Saharan subsistence economies when we think of Fairtrade, but the biggest recipient of Fairtrade subsidy is actually Mexico. Mexico is the biggest producer of Fairtrade coffee with about 23% market share. Indeed, as of 2002, 181 of the 300 Fairtrade coffee producers were located in South America and the Caribbean. As Marc Sidwell points out, while Mexico has 51 Fairtrade producers, Burundi has none, Ethiopia four and Rwanda just 10 – meaning that "Fairtrade pays to support relatively wealthy Mexican coffee farmers at the expense of poorer nations".

The article additionally points out:

Another criticism is over institutional inefficiencies. The vast majority of the money from Fairtrade sales remains in the west – with only about 5% of the Fairtrade sale price actually making it back to the farmers. As Philip Oppenheim says, "any intelligent person will ask why I should pay 80p more for my bananas when only 5p will end up with the producer". Fundamental to the failure of wealth transfer are issues such as the fact that while 90% of the world's cocoa is produced in the developing world, only 4% of the chocolate is produced there. Developing countries remain locked in the primary sector commodities market, while the west cashes in on their value-added conversion.

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Today's 'wow' Momment

"Globalisation allowed the US to suck up the savings of the rest of the world and consume more than it produced." George Soros, FT.com January 23 2008.

Seismograph. The line indicates the daily volatility of the Dow Jones index, between 1901 and 2009.

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Andy Warhol would be happy

David Reilly at Bloomberg notes that the pricing of credit default swaps on both the US government debt and Campbell’s is the same...

Here is the link. Hat tip goes to TheBrowser.

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trying to make sense out of it all

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markets in everything: Hurling Shoes

The shoe hurled at President George W. Bush has sent sales soaring at the Turkish maker as orders pour in from Iraq, the U.S. (!, AT) and Iran.    

The brown, thick-soled “Model 271” may soon be renamed “The Bush Shoe” or “Bye-Bye Bush,” Ramazan Baydan, who owns the Istanbul-based producer Baydan Ayakkabicilik San. & Tic., said in a telephone interview today.    

“We’ve been selling these shoes for years but, thanks to Bush, orders are flying in like crazy,” he said. “We’ve even hired an agency to look at television advertising.”

Hat tip: Mahalanobis.   

via Marginal Revolution by Alex Tabarrok on 12/20/08

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Chrysler hires BK law firm

From the WSJ: Chrysler Hires Law Firm Jones Day as Bankruptcy Counsel

Chrysler's move suggests the auto maker is preparing for imminent financial failure should its efforts to persuade Congress to deliver federal rescue funds fall short.

Click on cartoon for larger image in new window. Rerun of a great cartoon from Eric G. Lewis, a freelance cartoonist living in Orange County, CA.

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don't do list: economic meltdown edition

The association community has always been enamored with the Jim Collins idea of creating “stop doing lists,” so here is my brief stop doing list for association community leaders feeling frazzled by a steady diet of negative information about the state of the global economy.

1. STOP reacting to each daily dose of bad news–It’s appropriate to be serious and sober about what’s going on today, but don’t overreact to every wild stock market gyration or new government report. Focus on integrating today’s data into your long-term view.

2. STOP looking for shortsighted ways to retrench–It’s appropriate to conserve resources by eliminating unnecessary expenditures, but investments in building staff and organizational capabilities do not fall into that category. Focus on value creation as your top strategic priority.

3. STOP redoubling your efforts as a defensive strategy–It’s appropriate to concentrate on serving members well when they most need us, but the overused “doing more with less” rallying cry is a tired and unrealistic approach. Focus on your ability to deliver what’s most important.

via Principled Innovation LLC 

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