Posts filed under ‘Economics’

We’ve been here before

I’ve become very interested in the Kondratieff Long Wave Cycle or K-cycle and have been looking into all the booms and busts that have taken place over the last 150 years or so. Since WWII, we’ve been living pretty comfortably and times have been prosperous. But when you look back, there have been regular cycles of economic panics and booms. For example, there was a huge panic in 1907 in the US, known as the 1907 Banker’s Panic, which was apparently anticipated around 1910.

In 1902, a newspaper article, entitled “Panics and Booms” appeared, which frankly describes our economic crisis of today. Written by L.M. Holt in 1897 (at the tail end of the Long Depression in the US) it was republished in 1902 and Holt argues that booms always follow busts. The early 1900s were boom times so the article was a warning to prepare for an upcoming economic hissy fit.

Basically, Holt says that a depression is caused by over-indebtedness and to get out of a depression, we have to pay back the debt (and clearly in our own times that includes bailouts and stimulus packages). The more debt, the longer the economic slump. Here is the 1902 article but you can also read it here. The article is fantastic because it’s such a simple read – no pointy-headed economic jargon or economic formulae.

It’s really worth reading if only to realise that it seems the lesson for each generation is to learn all over again what is within our means and what is not affordable. But do we ever learn? As Holt says:

“Gradually the surplus debts of the country are paid and the people breathe easier again. People live within their incomes and temporarily learn economical habits.  Men smoke fewer and cheaper cigars and ladies purchase fewer ribbons and occasionally fix over a bonnet and dress instead of getting new ones.”

So when we recover from the GFC, our collective task will be to stick with the “economical habits” we will surely have to adopt to survive the GFC and we will have to learn the hard lesson of not getting sucked up in over-indebtedness again.

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April 4, 2009 at 2:00 am 3 comments

She’ll be right mate! (we hope)

The global financial hissy fit is hitting Australia. We are not immune, despite this country having rich, natural resources. You need a country or two to buy these natural resources and if those countries (like China) are feeling pain, well, you ‘aint going to sell as much as you think. What happens is that these countries come after your natural resources, hoping to get them at bargain basement prices – so, for example, Chinalco has an AU$30 billion bid for 18% of Rio Tinto (although I suspect the Foreign Investment Review Board will block this).

Our national unemployment rate has risen from 4.8% to 5.2% on the heels of 590,000 people being tossed out of a job. Australian banks are ditching their employees overboard and moving jobs to India. Pacific Brands (the company behind labels like Bonds, Holeproof, Berlei and Hard Yakka) has closed seven of its Australian factories and axed 1850 jobs (which will be sent offshore as part of its restructuring plan). In a day of horror, 3565 jobs were lost when BHP Billiton, Rio Tinto, David Jones and CSR took the razor to their workforces.

Our PM is saying: “Things will get worse before they get better ….The magnitude of the global financial crisis almost beggars belief.”

But I was having lunch with a chap the other day and this person said: “Global recession? What recession? People are still lunching and buying things. She’ll be right mate!” Ah, yes the good old Aussie national response to anything that looks as though it might disrupt our obsession with footy, meat pies, Holden cars or retail therapy. This response has always struck me as about as dumb as sticking your head in the sand. Alternatively, we could say it’s the Aussie fighting spirit – that we’re a nation of tough as boots people who endure harsh weather, droughts, floods, bushfires, you name it. So a global financial hissy fit isn’t going to scare us one bit. Bring it on!

But pause for thought: I had to travel to Melbourne earlier this week to facilitate a meeting and in the hotel room was a copy of The Week (Australian edition, March 13 2009). I’d been reading Harry S Dent’s book, The Great Depression Ahead, and was too forlorn to continue onto Chapter 7 that evening. So I picked up the mag and it opened magically to page 3, where my eye immediately caught sight of this quote (by David Salter):

“What worries me is that when the bad times arrive, which they surely must, we might not turn out to be quite as resilient as we thought. Australians today aren’t the same stoic bunch as those who faced the Great Depression. For them, Gallipoli and the horrors of the Western Front were just 15 years earlier. Many of the tough men and women who’d survived the terrible drought and financial hardships of the 1890s still sat at the head of family tables. We’re much softer now – coddled by welfare entitlements and high standards of living based on personal debt. Will we still have the reserves of tenacity, endurance and self-sacrifice to match our grandparents?”.

And THIS I think is the profound question that will face Australians in 2009 and 2010. As a nation, do we still have the right stuff to weather the vicious storm ahead?

March 20, 2009 at 2:00 am 5 comments

How do you define “Depression”?

Now, you know I am no pointy-headed economist, so I’ve been doing a LOT of reading on the GFC or global financial hissy fit as I prefer to call it. Interesting to see our current financial mess has its very own acronym. Hopefully, one day soon we can say LOL GFC – because we’ll experience an upturn.

But cast your eye over the ThinkingShift Book Club on the right panel of this blog – see the book I’m reading? It’s freaking me out frankly. Basically, it says late 2009 or early 2010 we’re all doomed as the Big D will hit us. Big D being Depression, major financial drama. I’ll do a future post and let you know what the book says but with all the talk of the Big D, it did prompt me to wander off and find out how a Depression is defined.

As I understand it: a Depression can be recognised by changes in the Gross Domestic Product (GDP). The GDP is the total value of goods and services produced within a country’s physical borders during a period of time (usually one fiscal year). GDP excludes net income from abroad. So apparently you know you’re in the icy grip of a Depression when real GDP declines by 10% or more. Anything else, it’s a Recession. I read somewhere that this distinction had to be made because prior to THE depression of the 1930s, any economic downturn was referred to as a depression, so economists named smaller economic declines “recessions”.

So far so good. During the last major economic drama in 1982, when we teetered on The Edge of the Big D, GDP fell by 3%, so it didn’t reach that magical 10% threshhold. So let’s look at the current GFC – is there a 10% GDP decline and are we about to teeter off The Edge? Yeah, well it ‘aint good news.

The Wall Street Journal is talking prophecies of doom and darkness saying:

“The bottom line is that there is ample reason to worry about slipping into a depression. There is a roughly one-in-five chance that U.S. GDP and consumption will fall by 10% or more, something not seen since the early 1930s.”

Mmmm….my cunning mathematical ability tells me that’s a 20% chance of slipping off The Edge. The article was written by a professor of Economics so guess he has a better idea than most of us about what’s going to happen. Research apparently shows that depressions are closely associated with stockmarket crashes like we’ve just witnessed. So there’s an increased chance of a depression looming when the stockmarket goes haywire. So of course the 1930s Depression was accompanied by a stockmarket crash of 55%. And the WSJ research uncovered 71 cases of stockmarket crashes that were followed by depressions.

In fact, looking at 34 countries, research shows that there is a 28% probability that a “minor depression” (macroeconomic decline of 10% or more) will occur when there is a stock-market crash. And there is a 9% chance that a “major depression” (a fall of 25% or more) will occur when there is a stock-market crash. I thought a depression was a depression, full stop/period. Didn’t realise there are minor and major depressions.

More interestingly, there is a 73% probability that a “minor depression” will also feature a stock-market crash whilst for a “major depression” to be accompanied by a stock-market crash, the probability is 92%.

I’m sure this was not meant to be humorous but the WSJ article finishes off by saying:

“The odds are roughly one-in-five that the current recession will snowball into the macroeconomic decline of 10% or more that is the hallmark of a depression. The bright side of a 20% depression probability is the 80% chance of avoiding a depression.”

Okay, so I’m hanging on to the 80% bright and happy statistic. But when I stick my nose in Harry S Dent’s book, The Great Depression Ahead, I’m afraid he’s not so optimistic. I’ll bring you what Dent has to say in a future post.

March 16, 2009 at 2:00 am Leave a comment

A Kondratieff Winter?

I’ve said thousands of times (well, many times) that I’m no economist. In fact, I find Economics dreadfully dull. When I read or hear the words “accumulation”, “consumption”, “stagflation”, “deflationary growth”, I start to nod off.  It’s just not sexy stuff. But I’ve been making a concerted effort to grapple with economic theory so I can try to make sense of the global financial hissy fit we’re currently enjoying, not.

I’ve brought you some posts where I try to flesh out my thoughts or share stuff with you – and today is another one of these posts. I’ve started to see the term the “Kondratieff Long Wave Cycle” pop up in the economic blogs and websites I monitor. It’s also called the K-cycle. Do you know what it is? Nope, me neither. So I decided to upskill myself.

Apparently, this Kondratieff dude is a little known Soviet economist. Maybe in economic, pointy-headed circles, he’s well-known but to the average Joe Blogs, I doubt he’s a household name. I encourage you to go off and research yourself but this is what I understand.

Professor Nikolai Dmitriyevich Kondratieff (1892-1938) helped the Soviets formulate the first five-year plan. In some blogs, his surname is Kondratiev. And the entry in Visual Wikipedia shows the relationships and web surrounding Kondratieff. In 1926, he published “Long Waves in Economic Life”, which apparently pissed off Stalin. He was spirited off to a gulag and then copped the death penalty in 1938.

Kondratieff’s gloomy economic theory (which has never been accepted by mainstream economists) was that capitalist economies are fated to long waves (or K-waves) of boom and bust ranging between 50-60 years in duration. He predicted the Great Depression and eventual rise of the capitalist West (that’s probably what pissed off Stalin).

The K-cycle consists of phases that are likened to the seasons:

  • Spring – inflationary growth phase, which sees the expansion of production, affluence, falling unemployment, rising wages and so on. This growth phase lasts about 25 years.
  • Summer – recession. Growth reaches the limits of resources.  There’s a drop in production, a rapid rise in unemployment and a back-lash against an economy of abundance.  This phase last 3-5 years.
  • Autumn – deflationary growth, selective industry production, innovation, rapid increase in debt as society orientates itself towards consumption. This phase can last 7-10 years.
  • Winter – depression, the economy contracts sharply, there’s an exhaustion of accumulated wealth. Kondratieff viewed this phase as a time of cleansing when the economy can recover from times of excess and lay the foundation for future growth. He considered this phase would be characterised by a 3-year collapse followed by 15 years of deflation and quiet innovation.

The table below shows how economists have mapped these phases to the booms and busts in the US since 1784.

Joseph Schumpeter trumpeted Kondratieff’s theories. Seems to me the winter chill is setting in and we’re riding the K-wave towards a dark Winter phase. There’s overextension of credit and a worldwide decline in economic activity.

I found this great graphic that explains it all.

You can view a larger graphic here.

I’ve been trying to find out when these cycles began (ie how far back in history did Kondratieff go looking for K-waves?) and what phase are we in fact in now? According to Wikipedia, economists who follow K-wave theory believe that we’ve had 5 K-waves since the late 18th Century:

  • The Industrial Revolution—1771
  • The Age of Steam and Railways—1829
  • The Age of Steel, Electricity and Heavy Engineering—1875
  • The Age of Oil, the Automobile and Mass Production—1908
  • The Age of Information and Telecommunications—1971

And goes on to say: “The current cycle most likely peaked in 1999 with a possible winter phase beginning in late 2008.” So it seems we are still in the fifth cycle, which means we haven’t reached the Winter phase yet – great.

Anyway, not sure I have my head completely around this as I’ve just started researching – maybe you know more. If so, leave a comment. But Kondratieff’s theory makes sense to me.

February 26, 2009 at 2:00 am 5 comments

Obama’s snowballs

You’ve probably seen this very funny Obama meme, which seems to involve cats, McCain, Sarah Palin, babies and my favourite to be picked on – former Prez Bush. Apparently, Obama was having a bit of fun with one of his staffers and snowballs were being thrown. Somehow, an orange kitty cat became the butt of the joke. Here’s the cat and Bush versions.

You can see other versions here. Now, these snowballs are not like Rumsfeld’s snowflakes and I can’t give Obama any advice on his throwing arm or his aim. But seems Indiana University is prepared to give Obama some words of wisdom. Imagine you had the proverbial 2-minute elevator ride with the Prez – what advice would you have for him? If you’re a bit stuck, you can consult the University’s latest issue of Perspectives on Policy, which sees 30 academics dishing out thoughts on health care, education, the environment and so on. Here are some of their ideas:

  • Boost consumer spending by using federal funds to reduce state sales taxes.
  • Use the power of technology to improve citizens’ health, not just the health care system.
  • Take advantage of the global interest in learning English to help young Americans engage with the world.
  • Reach out to China and India, the world’s most populous countries, to tackle climate change.
  • Create an Arts Corps of people to share the experience of having one’s life changed by art.
  • Send Mahlia and Sasha to ballet class. “It will send such a powerful message to children all over the world.” (Chair of the Department of Ballet).
  • “…we need to value science for what it can teach us about uncertainty, as well as for its ability to reduce uncertainty” (conservation biologist) because it can provide strategies for “weathering surprises, reducing damage and hastening recovery.”

I would advise: no matter how tough it gets, erase the word “secrecy” from the US Government dictionary – make sure all your policies are transparent, not just your talk. And think very carefully about throwing money into the potential black hole of bailouts – because the economy as we know it is stuffed. We need to think about what the post-global financial economy and society will look like. Let’s not go back to the greedy bankers, pillaging of the environment and obscene consumerism. There is a gentler way. We must find it.

So…what advice would you give Obama right now?

February 24, 2009 at 2:00 am Leave a comment

How low would you go?

When I offered up my predictions for how 2009 would pan out, I said that employers could get nasty and force workers into accepting lower wages by exploiting collective fears of a Recession, Depression, unemployment, Deflation (take your pick). Unfortunately, seems this is happening.

General Motors is busy trimming employee salaries. Casual and part-time employees are getting screwed in Australia where the economic pinch is becoming more of a painful squeeze. Academics are taking a haircut on their salaries rather than face mandatory days off and some are being asked to accept a 12% cut in salary.  The Governator, Arnold Schwarzenegger, is forcing State workers to take two days off per month unpaid in order to save US$1.3 billion. The Governor of Ohio is following the Governator’s lead by seeking a 5% pay cut for State workers and a reduction of the working week hours (40 down to 35). Across Asia and the UK, pay cuts of between 10% and 25% are happening. Heck, even top celebrities in South Korea are getting their incomes slashed.

Now, if it’s a choice between no job because of the Global Financial Hissy Fit or a job with less pay – what would you choose? If you work for Jet Airways (India), you might give the finger to management who are suggesting a voluntary pay cut. Only 50% of Jet Airway’s staff agreed to a hair cut on their salary. A UK survey of 1000 employees revealed only 1 in 10 would take a pay cut although over a quarter would be prepared to have their hours and their pensions contributions axed. Disturbingly, 1 in 10 also said they would have no hesitation in stabbing another employee in the back if it meant keeping their job (there goes teamwork and collaboration!). But sometimes desperate times call for desperate measures. The embattled Irish economy has 66% of people surveyed saying they would willingly take a pay cut.

If you don’t fancy a pay chop, you can always relocate to more exotic places. IBM is apparently offering their laid-off workers a chance to relocate to developing countries like India, China and Brazil. Of course, this is very attractive to companies like IBM because you’d be paid in local currency according to in-country pay rates.

I think there’s clearly a mixture of companies taking advantage of employees contrasting with workers willingly taking a pay cut to save their job. I would have no issue with a pay decrease IF it was across the board, all employees, and starting with senior top dogs (who frankly could take a hair cut of 25% or more).

So I guess the question we are all going to increasingly face in 2009 is – how low would you go to keep your job? Competition for jobs will be fierce. I truly feel sorry for school leavers and fresh out of Uni graduates. So I am not entirely surprised to come across a new website where job seekers actually bid for LOW pay.  Recent College grads in Massachusetts have created jobaphiles, a job-auction website, and job seekers try for positions based on who will work for the lowest salary. The bids are based on how much a job seeker is willing to be paid and are accompanied by resumes and photos. Employers come onto the site and cherry pick from amongst the bids.

I’m not quite sure what to say about this. On the one hand, it’s a proactive business model that helps young grads get a job. On the other hand, employers are most likely going to select the bidder who will accept the lowest or low wages – and this maintains the downward pressure on salaries we are seeing and potential exploitation of workers.  I’ve always told you I’m no economist but with all the reading I’ve been doing, I’m sure I read that pay cuts are a sign of deflation (which is defined as a general drop in prices and is the opposite of inflation).

Have you taken a hair cut on your salary?  Would you do so to save your job?

February 16, 2009 at 2:00 am 2 comments

Who to blame?

If you’re interested in pointing the finger at the individuals who caused the biggest financial hissy fit since the Great Depression, then read this article. There are 25 names to choose from. Leading the pack is Alan Greenspan – you know, the dude who loved weapons of mass destruction (derivatives) and encouraged Mum and Dad to take out variable interest rate home loans. He’s also the one who needs to look up a dictionary to find out what the word “regulation” actually means. Greenspan would be at the top of my hit list too. He is busy defending himself as former friends, colleagues and economists point the accusatory finger at him.

But there are honourable mentions for Gordon Brown, UK PM, who also needs to cruise the dictionary for “regulation” and Bill Clinton for his idiocy in repealing the Glass-Steagall Act (the Depression-era law that separated investment and commercial banking). Because commercial banks (ie banks that accept deposits and offer loans) were salivating to get into the financial products market and offer stocks, mutual funds and also underwrite securities, Prez Clinton signed the Financial Services Modernization Act 1999 (known as Gramm-Leach-Bliley Act). This Act (of stupidity) erased the dividing wall between commercial and investment banks, meaning that commercial banks could own investment banks and vice-versa. This effectively created superbanks, with Citigroup being the first superbank, and allowed the superbanks to tie their lending activities to their investment activities (the very thing Glass-Steagall prevented. Greedy commercial banks were involved in stock market investment in the pre-Depression era and this was seen as a major cause of the 1929 financial crash. Commercial banks of that era had taken on too much risk, were speculating with depositors’ money and making unsound loans.) And so the sub-prime avalanche started with the era of the superbanks.

This is as I understand it. In fact, you can read very interesting testimony before the Committee on Financial Services, US House of Reps, Oct 2007 from Robert Kuttner, an economist and financial journalist. Having done a ton of research for his many books, particularly around the causes of the Great Depression and efforts in the 1930s to create a financial system that would prevent a repetition of a financial collapse,  Kuttner says:

Since repeal of Glass-Steagall in 1999, after more than a decade of defacto inroads, superbanks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s – lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s“.

And then of course there’s good old Dubya, who gave the finger to sound regulation and whole-heartedly embraced ninjas.

There were of course some clever people crying out in the wildnerness – academics and financial experts who clearly saw the warning signs of an impending humongous financial crisis. Professor Nouriel Roubini is one of these people.  Back in 2006, Roubini (an economist dubbed Dr Doom) was ringing the alarm bells and telling the IMF that the US economy was at risk of a housing bust and deep recession, which would have dire consequences for the world. He referred to Dubya, Henry Paulson and Ben Bernanke as “a troika of Bolsheviks who turned the USA into the United Socialist State Republic of America”. (Love this guy: what’s his phone number?!!)

Dr Doom’s recent warnings are that “banks face bigger credit losses than they realize, more financial companies will require state takeovers and the world economy will keep shrinking throughout 2009”. Great.

Meanwhile, what can the Prez of Hope & Change do? Millions are looking to Obama (I’ve seen him referred to as The One) as the saviour who will pull us out of this economic doom and gloom. A really great article in The Age pointed out that if the global financial hissy fit was all that Obama had to deal with – well, we might be okay. But he faces multiple convergent crises – shortage of natural resources; proliferation of nuclear weapons; global warming; and failure of the American bid to establish a global empire and the current decline of US influence abroad.  All are inter-related.

Read the article, it’s a great critique and offers up a reason why all these crises emerged at once. Future historians will study, analyse and draw the conclusion that our era is the story of:

“…how the largest government, business, military and media organisations began to tell lies to themselves and others in pursuit of, or subservience to, wealth and power. Banks, hedge funds, ratings agencies, regulatory agencies, intelligence services, the White House, the Pentagon and mainstream news organisations can grind inconvenient truths to dust, layer by bureaucratic layer, until the convenient lies that had been wanted all along are presented to decision-makers at the top.”

In other words, it will be a future study of groupthink (a concept incidentally I’ve been discussing with my Uni students recently).

February 1, 2009 at 2:00 am 2 comments

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