Thursday 22 September 2011
Making sense of the distribution and lag effects
Let us explain the problem or rather challenge of choosing between Quantitative Easing (QE) and an Interest Rate reduction to stimulate economic activity, with reference to the Bell Curve diagramme above:
There are two major factors at play here:
With a bout of QE, the effect feeds into the margins of theBellcurve and it takes time for the distribution network (money supply chain) to filter the new enhanced supply into the economy at large. So there is both a distribution and time lag effect with QE.
On the other hand, with an immediate Interest Rate reduction, the effect is to cover the larger middle ground of the Bellc urve more instantly. Yes, it does depend on your wealth and debt holder structure too, but both borrowers and savers feel the effect more immediately.
But, with Interest Rates currently so low, this option is not really that feasible. With inflation running at between 2 – 5% depending on which side of the pond you are, effectively savers are paying an additional ‘tax contribution’ to the Treasury by this stealth means.
So we are back to the scenario of a tax on the stock (or wealth) of the economy, as most flows have dried up.
Therefore, join the happy queue over here.
Monday 19 September 2011
Forget about recapitalising the French Banks, saving Greece, (or the Euro)….
Continuing our conversation on Innovation
Yes, we admit it! The headline statement above is all about grabbing your attention. We are not advocating any disorderly default crises.
What we believe is that the ‘agricultural’ economic base and the semi-integration of Europe, via market and monetary union, without going the full circle of political and fiscal union as well, has at this point failed.
Not that a major concerted (and concentrated) effort to ensure it does not fail will end in failure itself. But has anyone really asked the question: At what financial cost?
If an US Treasury Secretary, Timothy Greitner, has to take the unprecedented step of flying across the Atlantic to come and join a European Union Finance Ministers meeting, then something big must be on the cards!
Is he going to come and tell Germany and France in person to just let Greece go?
This reminds us of a stanza from Felix Dennis’ poem “How to Get Rich” about timing:
“Good timing? To win it You gotta be in it. Just never be late To quit or cut bait.
This might just as well be the message for Europe: How not to get Poor. The key words are “Never be late to quit or cut bait”.
What we believe is happening behind the scenes is the planning for an orderly default mechanism and Euro ‘disbanding’.
The more Angela Merckel’s resolve hardens around saving the Euro, the less we believe Europeans themselves are warming to this concept.
So what about Innovation then?
We started this article with the intention of continuing our conversation on Innovation.
So, what we mean by Recapitalising Europe actually is related to addressing the culture of decay that has enveloped Europeover the last few decades. If Europe is referred to as the ‘Sick Man’, then there must be something behind that statement.
And we believe that it is the general lack of support for invigorating Europethat is a key driver.
What do you mean, we hear you ask?
In the quest to unite Europe, we have built a framework of a European parliament, a Council of Europe, a judicial system, etc.
With these institutions have come regulation, rules and edicts. Sometimes messy, sometimes helpful. But at this juncture, we are so overrun by nonsensical regulation that the will and spirit to be creative and innovative has drained away from the general citizenry.
This is a very, very sad state of affairs. The young European citizens have lost their ‘psychological contract’ with the wider Europe and European integration goal. High rates of youth unemployment across Europe is breeding a generation of disengaged European citizens and ultimately is an opportunity and efficiency waste in the medium term.
But how do we Recapitalise a spirit of Innovation in Europe?
This is a key question we are going to ask of our network and as part of our general ‘outreach series’ and report back on our progress towards establishing an Innovation Framework for Recapitalising Europe.
Please ‘tune-in’ again soon for a status and progress up date.
Very recently the Independent Commission on Banking (Vickers Commission) published its long anticipated, yet low in surprises report on Banking Reform in the UK.
Rather than rehash the analysis already performed, we only have two items to add at this stage:
- Get your calculators out, or at least keep the Quants busy, because unravelling and implementing reforms are going to cost a lot of money (and we all know who pays for that at the end of the day)
- How do we create the ‘Imperfect Competitive’ markets or at least address Oligopolistic Competition more effectively?
In a fiercely competitive international market space the desire to aggregate banks and financial institutions and hence reduce cost economies of scale at the expense of risk accumulation is overwhelming. (Which the discredited Sir Fred Goodwin ex Chief Executive of Royal Bank of Scotland [RBS] can testify to only too well)
Let’s hope the Vickers Report is not the start of the death knell of the UK financial services sector; or perhaps in a cynical way, that is exactly what is (intended) needed to address the UK’s long-term structural reliance on the financial services sector at the expense of a more balanced portfolio of productive output and activity.
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The Market eQuation (MeQ):
Today we are commencing our investigation and outreach to discover what we will call the Market Equation.
Basically the idea is to come up with a mathematical equation and rating or ranking system to assess the state and status of various markets.
Whether this will lead to a theory of Markets that can compete with some of the other theories in existence is open to debate.
The basic premise is this:
There should be a methodology to access the Openness and Fairness of any given market versus other comparable markets. This specific ratio or result should therefore determine the individual participant’s level of engagement and commitment to that specific market. The result should also be able to be repeatable over time in order to elicit trends and movements of particular markets relative to each other.
The basic equation can be expressed as MA2R4K2E3T3 = OF outcome (Open & Fair).
OF = (A)2 x (R)4 x (K)2 x (E)3 x (T)3
And derives from the Market Equation Table listed below:
The Market Equation Table
|Objective (External) measure|
MA2R4K2E3T3 = OF outcome
Therefore: OF = (A)2 x (R)4 x (K)2 x (E)3 x (T)3
The subtler reader might already have seen through this equation. Because by dropping the M (which will always be 1) the letters that remain result in the word raket if unscrambled which in effect is:
RACKET or not? With the additional C being the complex bit so ultimately the Market Equation becomes a COMPLEX RACKET.
Ever since the Great Depression and JMK’s ‘The General Theory of Employment, Interest and Money (1936)', have we had more intense government interference and hence taxation in most advanced economies. Thank you JMK.
But seriously, how much is too much? There must be value in controlling fiscal policy, monetary policy and (social) employment policy, but is this being done in an integrated fashion and with ‘value maximising’ principles?
We at theMarketSoul Limited believe this not to be the case.
We prefer to take a leaf out of Joseph Schumpeter’s book and view the economic cycle as either short (1 – 2 years), medium (around a decade) and long-term (many decades).
The trouble with any form of economic analysis is that taking any temperature readings during any specific cycle is just that – A temperature reading. Meaningless without being set in its proper context. We generally have a major problem in identifying where we are in any given long-term cycle.
It is only with hindsight and the historical perspective that we can truly determine where we were and where we thought we were heading.
It is our belief that we are (still) in the midst of a major paradigm shift, triggered by the innovation wave of the ICT revolution over the last 20 years.
We still have not fully grasped the consequences and full extent of this ‘drift’ to a new equilibrium.
As one of the unintended consequences we are currently facing up to a sovereign Debt balloon and are desperately trying to determine when we will encounter ‘Peak Debt’.
One of the popular libertarian ideals is to cut government’s stake as a percentage of total output of GDP. We endorse this view, but it appears that at the end of the day (because we have forgotten what Laissez faire looks like); we’ll still need someone to keep the lights on, adjust the interest rates and collect our taxes. All this in the name of job creation…