Tuesday, June 22, 2010

Seasonally adjusted thinking

Farmers know how things work: they plant in spring and harvest in fall. Their business is in sync with nature’s cycles. If modern central bankers could do the same, we wouldn’t need to have G8 or G20 Economic Summits to save the world.

Modern economies work in cycles, just like nature’s seasons. There are times of expansion, when economies run smoothly; and there are times of economic contraction, when financial things get rough. Classic theory calls for governments to stimulate economies when things are rough in hopes of smoothing them out. And we all know that stimulating an economy costs money. Governments are supposed to recoup those costs in the good times. They are supposed to sow (stimulate the economy by lowering interest rates and increasing government spending) in weak economic times and harvest in the good times. (Harvest means increase taxes and pay off government debt.) And if they consistently did this, there would be no need for a massive meeting in Toronto this week.

Why can’t they get it right? Why were crazy European bankers and American mortgage companies allowed to blow up the world’s economies in 2007 and 2008? Why did the world’s taxpayers get bagged for billions of bail-out bucks in 2008-9? And why will this G8 – G20 meeting resolve to recoup those billions now, before the world’s economies move from the rough times to the smooth times? Why can’t they be like farmers and line up their G8 – G20 business with the natural cycles of the economy?

It’s because of the law of cause and effect.

In nature, the interaction between the earth and the sun causes the seasons. We human beings found nature’s cycle and lined up our agricultural activities with hers. Human beings have been doing this for millennia because we can objectively observe nature’s cycle.

The economic seasons are not as easy for us to objectively observe. That’s because we human beings are both the cause and the effect of economic cycles. It is our collective activity that makes up the economic cycle. When masses of people borrow money and buy things, that causes economic expansion. And when we all stop buying and pay off our loans, that causes a recession. We cause the cycles. What makes people borrow money and buy things? Desire for nice things the confidence that we can pay back the loans. And what makes us stop buying things and pay off our loans? Fear that we can’t pay off our debts and will lose what we have. Confidence and fear: desire to have things and fear of losing what we have. It’s difficult for most of us to be objective about our own desires and fears.

That’s what went wrong in the earlier part of this century: normal desire turned into greed. Bankers and mortgage lenders wanted bigger and bigger bonus’s. The sellers and manufacturers of things kept up the advertising pressure. Consumers became addicted to buying nice things. (Remember the slogan: shop ‘til you drop?) The western world went into a consumers’ feeding frenzy and the business world kept right on feeding it. Normal desire for a reasonable life became greed for more and more. Look in your basement and in your garage. Are they full of “stuff” you no longer use? Check your neighbour’s basement and garage. More stuff? That’s what went wrong. Collectively we bought too much stuff and borrowed too much money.

And this week the G8 – G20 Economic Summit will try to sort all that out. In order to create economic spring time, they’ll need to inspire confidence in ordinary working people. Can they persuade the public it’s safe to keep on buying and keep on borrowing, but within reason? Tough job.

What’s emerging from the series of G8 – G20 meetings since 2008 is this:
1. Blaming the banks. Increased regulation and taxes for the banks
2. Preserving the status quo: even though the big financial corporations have failed, we must preserve the system in its current form.
3. Bail outs are OK. Shifting of economic risk from the big institutions to the citizens/governments is OK.
4. Ordinary citizens can trust the G8 – G20 to do the right thing and it will all work out.

What should we expect form the June 2010 World Economic Summit?
1. Regulation and taxation of the banks.
2. Assurance that the current system still works.
3. Austerity measures to help governments recoup what they lost in the bail-outs and stimulus deficits.
4. Statements by our leaders that everything is fine and they’ve reached a satisfactory compromise.

Farming wisdom is not part of the G8 – G20 mentality. Their job is to take credit when things go well, and to take credit for fixing things when they go wrong. The closest they ever come to farming is closing the barn door after the horse has left.

To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).

Contact Ken directly at ken@castlemoore.com.

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