CHAOS-ONOMICS: Strangely Attracted to the Truth
Apr 30
chaos-onomics.com
"... if this whole community is called upon to serve the interests of just one member of the world community [the US], that is hardly acceptable."
Russian President Vladamir Putin
Looking at a graph of the US current account deficit evokes memories of Samuel Clemens' Tom Sawyer, specifically the opening scene wherein Tom cons people into whitewashing his fence and paying him for the privilege. However, this choice of ideological association is a learned trait, the effect of long months of reading and contemplation. Indulge me for a moment as I share highlights of the process with you, i.e. there is a point to the digression.
I am not a "trained" economist, a phrase which hopefully evokes a dual image of a lack of formal education in economics as well as that of an un-trained dog, failing to sit on command like the other dogs. My formal post-secondary education focused on Physics and Philosophy and it was, in the main, greed which led me to seek riches on Wall St. However, the riches, I thought, would only flow if I came to an understanding of the game being played. Initially, this led me to focus on the mechanics of finance, the art of being a dealer, so to write.
This knowledge of the mechanics of a rather arcane subset of finance, currency options, led me to the world of financial analysis where I became acquainted with trained economists. Initially, I parroted their expressions, in much the same manner as the CNBC crowd. I quickly became hip to the lingo and could say with conviction that "current account deficits were bad." I didn't really know what that meant but most people listening to me didn't either so we all trooped blindly along in our ignorance. Eventually, though, this cursory understanding led me into error and I began the long slow process of learning the real world meanings of the language of economics.
Many books and months of contemplation later and I have a reasonable working knowledge of terms, like "current account". It was knowledge that could not, I believe, come from quantitative analysis. Staring at graphs, running regressions, and searching for correlations left me with a flat notion. I could just as easily been researching the flight speed of different brands of unicorns. I speculate that this disassociation is partially to blame for the fraud which permeated Wall St. in the latter half of the 90s. When people's life savings become numbers on a screen bad things are likely to happen.
"So", you might be thinking, "I waded through the digression, where the beef?" Today's graph depicts the US current account deficit, a measure in US$ of the value gap between US imports and exports. What that graph tells you is that the US has been receiving goods and services valued in the aggregate much higher than the value of what we give in return. What the graph does not tell you is the volume of goods exchanged, nor does it adjust for equilibrium pricing by which I mean, is the price of, say, Oil far too low and the price of, say, financial services, far too high? Luckily, according to theory anyway, these discrepancies come out in the wash, over time.
One other thing the graph tells you is that, to date, the US has no intention of repaying this loan, which is what this is, any time soon, such as was indicated when policies were enacted following the 1987 crash which led to a restoration of balance around the time of the first Gulf War. In theory, repayment of this loan would require a move into surplus roughly equivalent in both magnitude and duration to the current foray into deficits, i.e. many years and many billions of US$ worth of goods and services.
Digging a bit beeper into the real world meaning of this graph, a rising deficit of this nature evokes memories of Ross Perot's "giant sucking sound" of US manufacturing jobs leaving the country. In a sense, the US has become a nation of clerks, or to use the more popular phrase, a service sector economy. In the event the rest of the world tires of feeding our needs for real goods, say because they don't want to take any more of our wampum, we will have to revert to making them ourselves. While the transition from a goods producing society to a service sector society was hardly painless, the shift back might be even more ugly. It is one thing to be out of a job while goods continue to flow into an economy, it is another to be unemployed when those goods stop flowing. This is not to argue that the US is doomed, I have faith the transition will be accomplished, it will, however, likely be disruptive to a great many people.
One aspect of the new economy mantra was that these figures had no real meaning. Recessions needn't occur, imbalances needn't be corrected. It would appear, however, from the rising tension on the international scene that just as my "current account deficits are bad" idea wasn't particularly utile, so too is the new economists' hope. The EU yesterday signaled their intent to create an EU army, which means they won't be needing the military services of the US in the future. The opening quote from Russia's Putin suggests to me that his nation has had enough of paying to wash the US' fence, after all, Russia just finished a fairly painful economic adjustment process, why should the US be immune? China, apparently, is going to get some of their oil from a proposed Russian pipeline, so their need to foot the bill for US Mid-East adventures has diminished. Meanwhile the US Treasury is warning of a possible debt default. While some of this is rhetoric, I am surprised that the April tax receipts are only lasting until the end of May.
The moral of today's newsletter is that these data series bandied about in the press and on TV have real world counterparts. Ignoring these implications leads one into error, as any incomplete idea will do. What's the difference between a human temperature of 102 and 108, life and death, man, not just 6 degrees. Just because US policy refuses to face this music does not mean it won't be faced. In my view, the current, ongoing, international realignment is the effect of Tom Sawyer's current account. US policy either incorporates the need to return to balance into their view or things are going to get ugly. As P.T. Barnum famously said, you can fool some of the people, all of the time and all of the people, some of the time but you can't fool all of the people, all the time.
==========
on change, on the margin
I remember the interplay between markets and economic data during the first Gulf War quite clearly, mainly because my view at the time was pissing into the wind, so to write. At the time I kept wondering, "how can this be?", "how can the markets ignore what seems so clear?". Luckily I've come to incorporate a few answers to those key questions into my world view so I can rest a bit more comfortably while the optimistic winds of popular sentiment run counter to more sober evaluations.
From a strict real sector view, the economy was in a fairly constant process of imbalance correction during the late 80s and early 90s. Tax rates were raised and the ever weakening US$ was finally eating into the trade deficit. About the only bright light was the shift in sentiment, quantified in the expectations sub component of the Conference Board's Consumer Confidence Index, which jumped from the low 60s to 100 immediately following the the first Gulf War. Those cheering about today's release, which left both expectations and current situation readings well below 100, might want to consider what a poor indicator this gauge proved to be early last decade.
Comparing the economic foundations, which I think of as a mix of current trends and policies, of the two Gulf War periods leads me to think that this time round the effects might not prove as wonderful. The key difference, in my view, lies in the policy stance. Well before Saddam began to rattle his saber over Kuwaiti oil thefts Bush broke his "read my lips, no new taxes" pledge and Greenspan was just beginning to ease policy (from 8.25% to 6% from Oct 90 to Mar 91) after many months of tight money. While it took another year or so, those policies laid the foundation for the 90s recovery, which took on a Frankensteinian life of its own sometime during 1994.
Currently, policy has yet to reflect the need to correct the ever growing imbalances. Thus the, in my view, precarious situation in financial markets. Just as we can see in the policy response to SARS, there are the facts on the ground, and the policy choices to deal with those facts, or not. Just as Toronto was rewarded with a WHO all clear, for fear of an economic slowdown, so too, I believe, has the US economy been given an all clear, for the same fear. Sadly, as I am painfully aware while rehabilitating my ankle, it takes time to heal. Just because today is bright and sunny and the Iraq War is over doesn't mean that my ankle or the US economy is now well, no matter how nice such thoughts fit in the mind.
Economies change on the margin, which is to say at a fairly glacial pace, contrary to the hopes of the day traders. Until the powers that be accept the need to correct the imbalances, recovery will remain elusive. Equally, the longer the powers that be wait, the less accommodative the rest of the world will be in financing US hegemony and thus the greater the chances of an explosive move in the precious metals. I agree with Bill Murphy on this, underlying conditions continue to improve for Gold investments. |
