Beware the Ides of March

The soothsayers warning to Julius Caesar is well applicable to today's global economy. Wall street and main street have cheer-leaded the global economy to a "V shaped recovery". At prima facie, the global fiscal and monetary stimulus seems to have worked. GDP is non-negative, unemployment isn't collapsing and retail sales numbers are positive and the party with big bonuses is back on wall street...

However soothsayers are worried about the following issues. The contraction of credit in China, parliamentary election in Australia, Aussie housing bubble, Japan in a political and economic mess, PIIGS, the problem at the Euro, chances of hung parliament in UK, Bank of England facing the stagflationary checkmate, the state and local problems in US (California, Illinois, Arizona, Florida, New Jersey to name a few), the Commercial real-estate time bomb, Volcker Rule, the oncoming maturities of optionARMs and Prime loans etc. These are impending problems in 2010 that needs to be addressed. Its time to face the music, extend and pretend will no longer work. But the policymakers have exhausted their ammunition last year and it is very interesting how they try to combat the oncoming problems.

Im compelled to dwell little in to an economic thought that should have been discussed in schools, instead of teaching myths and forcing down garbage through students minds. A balance sheet recession emerges after the bursting of an asset price bubble. This leaves the private sector with more liabilities than assets on balance sheet thus debt minimization becomes the goal of the private and household sector. This happens despite zero interest rates, money pumped in to the financial sector. The newly generated debt repayments that enter the banking system does not leave the system due to lack of borrowers. This deflationary gap continues to push the economy towards a contractionary equilibrium aka depression. Thus the government and central banks can keep extending their balance sheet, but private sector will keep deleveraging. Hence no amount of stimulus or money printing will solve the problem which is endemic at the micro economy. But the former actions will bring to light the inflated government debt and question the credibility of the curre
ncy system involved. Hence as misunderstood by wall street titans and economic professors, an inflationary and deflationary outcome is simultaneously possible.

The elitists at main street and wall street have engaged in solutions without even inquiring in to the problem at hand. Little thought would lead to the realization that the western world has morphed in to a FIREconomy. As the name implies it is an economy driven by Finance, Insurance and Real estate. These sectors employ the majority of people. who have no skills what so ever (including myself); who do nothing but pass around pieces of paper and have a self-proclaimed notion of creating wealth. And to top it all the society is guided by "enlightened men" aka economists. The problem with economics is two fold. Firstly it is a social science, which is not a science as it does not have any laws. General theory of relativity is a law, Philips curve is not a law. Economic principles are not bounded by principles of rationality. Secondly, economics is an observation of trade and commerce. We don't need thousands of meteorologists to study the weather pattern, society will continue to exist with or without them. Real growth always comes from technological innovation that improves the quality of human life. The sole objective of finance, aside from handling the settlement system for trade and commerce, is to provide working capital to lenders who might create these paths of innovation. However, borrowing to speculate on asset prices is a ponzi behavior, that produces nothing of tangible value to society. Hence I do beg to differ with Goldman Sachs CEO who believes they are doing "God's Work".

The crux of the problem facing humanity is a broken political and financial system. The democratically elected political system is incentivized to engage in policies that might bode well in short term with no concerns for medium to long term consequences. Added to this a financial system that works not only through an ever expansionary credit but also by striving to maintain the credibility of the underlying central bank. Both of these systems are doomed to fail by structure.

Profound changes are impending on humanity over the next 25 years. The systemic economic crashes are symptoms of the structural breakdown. We are in the process of a turning around an inflexion point. So strap your belts on, as its going to a fun ride !!