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Strange Days
Oct. 22nd, 2008 08:56 amA very underrated movie, if I may say so.
But, where were we? Ah yes. Strange days when you look at the 24-hour chart for sterling and it bears a closer resemblance to the annual chart. Nine cents in 24 hours? Rocket on. But cancel the Florida holiday.
It then struck me that one of my best investments this year was the couple of thousand dollars I left in a drawer at home when I last got back from Vegas. Mattress funds rock!
++++++
The International Monetary Fund announced on October 7 that it estimated the "real" loss from the financial meltdown at $1.4tn. I consider this to be a gross over-estimate, in that it entails a mass of double-counting and a confusion as to what a "real" loss is. For example, if people own shares in company x, which goes bust because of $300m in mortgage defaults,, costing the shareholders $1bn, and this causes company Y to go bust, costing company shareholders $1bn, is the real loss $2bn or $300m? The answer is $300m. Where did the other $1.7bn go, you might ask? Well, it went to the same place that the dotcom boom money went -- out of the pockets of small dotcom-boom investors and into the pockets of the likes of Paul Phillips, and other dotcom people who got out at the top.
This is more than mere academic wittering about the number of angels that will fit on the head of a pin. The amount that was spent in the past five years that was counted as wealth but which has ceased to be wealth (a) now and (b) in 10 years' time, is important if we are to gauge the extent of its impact. From chatter about it being a mere crisis of confidence or of liquidity, the talk now seems to be of a global mega-disaster. Both viewpoints were wrong.
Look at it another way. If you divide the $300bn to $500bn "real" loss in the US (my estimate) by the number of adults in the western world, and then compare that with a $1.4tn loss globally, and divide that by the number of adults in the whole world (because, even though most of these are poor, they are "represented" by sovereign wealth funds who had not been counted under the first assessment), then you come to a fairly similar per capita result, about $2,000 each.
However, it becomes more significant because the per capita per year in the west is greater than the per capita per year globally. But, all in all, it isn't a very big number.
What is concerning investors now is the realization that it's not so much what has already been lost that matters, as that the good times are over and the consumption overspend in the west has to come to an end. That is consumption that will be lost, not to repay past debts, but to stop future debts occurring. It is that second number that is likely to push us into recession. Let's pick a number out of the air and call it $1,000 per head per year in the US.
Now, that is a big number. If you throw in multiplier effects, it could mean a 5% to 10% contraction in the "real" economy. For societies predicated on 3% growth per annum, you need to do a lot of rethinking. For countries such as China, predicated on double-digit growth, you need to do a LOT of rethinking. Where will the millions of migrant workers who arrive each year in expanding Chinese cities find work if the economy is not growing quickly? Will this lead to political unreast in China and India?
The major impact in the west will obviously be that of asset deflation -- the only debate is on how that asset deflation will manifest itself (falling prices with static money values, or static prices amidst a falling value of money) and how the punishment will be distributed. If we get falling prices with static money values, current debtors (i.e, past spenders) will get it in the neck. If we get static prices with falling money values — high inflation, in common parlance — then past debtors get forgiven and those who were "prudent" will get punished.
You may read many articles in newspapers about what "should" happen and what would be "fair". But, as we know, life isn't fair. What will matter is whether those who decide which route we travel down are debtors or savers.
_____________
But, where were we? Ah yes. Strange days when you look at the 24-hour chart for sterling and it bears a closer resemblance to the annual chart. Nine cents in 24 hours? Rocket on. But cancel the Florida holiday.
It then struck me that one of my best investments this year was the couple of thousand dollars I left in a drawer at home when I last got back from Vegas. Mattress funds rock!
++++++
The International Monetary Fund announced on October 7 that it estimated the "real" loss from the financial meltdown at $1.4tn. I consider this to be a gross over-estimate, in that it entails a mass of double-counting and a confusion as to what a "real" loss is. For example, if people own shares in company x, which goes bust because of $300m in mortgage defaults,, costing the shareholders $1bn, and this causes company Y to go bust, costing company shareholders $1bn, is the real loss $2bn or $300m? The answer is $300m. Where did the other $1.7bn go, you might ask? Well, it went to the same place that the dotcom boom money went -- out of the pockets of small dotcom-boom investors and into the pockets of the likes of Paul Phillips, and other dotcom people who got out at the top.
This is more than mere academic wittering about the number of angels that will fit on the head of a pin. The amount that was spent in the past five years that was counted as wealth but which has ceased to be wealth (a) now and (b) in 10 years' time, is important if we are to gauge the extent of its impact. From chatter about it being a mere crisis of confidence or of liquidity, the talk now seems to be of a global mega-disaster. Both viewpoints were wrong.
Look at it another way. If you divide the $300bn to $500bn "real" loss in the US (my estimate) by the number of adults in the western world, and then compare that with a $1.4tn loss globally, and divide that by the number of adults in the whole world (because, even though most of these are poor, they are "represented" by sovereign wealth funds who had not been counted under the first assessment), then you come to a fairly similar per capita result, about $2,000 each.
However, it becomes more significant because the per capita per year in the west is greater than the per capita per year globally. But, all in all, it isn't a very big number.
What is concerning investors now is the realization that it's not so much what has already been lost that matters, as that the good times are over and the consumption overspend in the west has to come to an end. That is consumption that will be lost, not to repay past debts, but to stop future debts occurring. It is that second number that is likely to push us into recession. Let's pick a number out of the air and call it $1,000 per head per year in the US.
Now, that is a big number. If you throw in multiplier effects, it could mean a 5% to 10% contraction in the "real" economy. For societies predicated on 3% growth per annum, you need to do a lot of rethinking. For countries such as China, predicated on double-digit growth, you need to do a LOT of rethinking. Where will the millions of migrant workers who arrive each year in expanding Chinese cities find work if the economy is not growing quickly? Will this lead to political unreast in China and India?
The major impact in the west will obviously be that of asset deflation -- the only debate is on how that asset deflation will manifest itself (falling prices with static money values, or static prices amidst a falling value of money) and how the punishment will be distributed. If we get falling prices with static money values, current debtors (i.e, past spenders) will get it in the neck. If we get static prices with falling money values — high inflation, in common parlance — then past debtors get forgiven and those who were "prudent" will get punished.
You may read many articles in newspapers about what "should" happen and what would be "fair". But, as we know, life isn't fair. What will matter is whether those who decide which route we travel down are debtors or savers.
_____________
