Showing posts with label Friedman. Show all posts
Showing posts with label Friedman. Show all posts

Friday, November 28, 2008

Bloomberg is reporting

A little off topic but the scope of the economic difficulties is coming into focus. Bloomberg is reporting the Fed and Treasury are prepared to provide unlimited financial resources to the market to offset the threat of deflation. If you have read the Preliminary Research Report that I wrote in May 2004 I expressed a concern that if left unchecked, the economy could slide into a deflationary period that would be particularly brutal. It would seem that the Fed is in agreement that this must be avoided and is willing to spend up to $7.4 trillion to eliminate the risk. 

Are we not pushing on a rope? Having the value of money erode in the market is one thing. Having the governments contribute to its further erosion by dropping interest rates and bailing out potentially failed organizations just seems wrong. People need higher interest rates in order to encourage savings. The more logical solution to this problem is to get people motivated to invest by giving them a decent return for the risk they are taking in their investments.

We can generally agree that the source of this problem was the low interest rates of the early part of this decade. (See my entry on mis-allocation of capital.) When capital provides little to no returns, with high risks associated with those returns, money is considered cheap. If money had a cost, would it not allocate financial resources to the projects with the highest return. When money is worth little investments have little to compete with. When the government guarantees every and all transactions, a sloppiness in the capital allocation process starts us down the road to moral hazard. 

I know this is contrary to current economic thinking but I have to ask are we only making this problem greater by further diluting the already sloppy capital allocation that has been carried out? It seems to me to be the case.

Our current policies of expansive money supply were created in the great depression. They are assumed that these are the means in which to have the economy return to a normal operating environment. But is this assumption, which is based on the lone event of the great depression interpreted incorrectly? Stuffing the banks full of cash does not make them want to loan it out. Handing money to consumers does not make them want to spend. What motivation is there to take a risk?

One unforeseen consequence of this over-stimulated economy is the demand for energy was obviously significantly overstated. The current price declines are a reflection of the influence of deflation in a market and the long term capital deflation appears to be right around the corner.  To make matters worse, the decline in reserves and production are only exacerbated by the energy industries long term capital projects being shelved. How many times have we seen these big projects stopped and never return. It will be a gutsy investor who stands up and says their building a new offshore drilling rig. Making our future production horizons even more constrained.

There are serious distortions being introduced into the marketplace for energy. I think the dynamics of the industry are accelerating at a pace that many of us, and certainly myself, are only now realizing how fast paced this environment is. One last link to Bloomberg shows them suing the Fed in order to determine if the Fed has made an unannounced change in their policies and are targeting inflation; to eliminate the deflation by flooding the market with "printed money." If we already have the recession, why doesn't the Fed invert the yield curve to force the market interest rates to rise. Throwing cash around in a panic is only making everyone nervous.

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Monday, September 29, 2008

It's not enough.

The bailout package being discussed in the U.S. is not enough to fix the system. Keep the $700 billion and use it to help build the "new" systems after the failures are purged from the landscape.

Attempting to refill the toilet bowl as it's flushed is, and always will be, futile. The systems supporting our economy are no longer adequate to meet the needs of our economies. The way they are structured is based on many of the principles established in the 1930's depression era. Have we learned anything about economics since then? Has Information & Communication Technologies developed since then? Let the failure occur.

If we read Professor Carlota Perez, who's analysis has shown this is a systemic economic event. That has happened consistently over the past 300 years. We should welcome this decline for the opportunities that it provides. This turning is as violent and disruptive for a reason. Organizations don't change from the old technologies that brought the economies along. They have to collapse in order for the new players and organizations to rise from the ashes.

The entire world economy will be going through the same problems. Europe is stuck in an economy that is static since Margaret Thatcher, and she was only able to bring Britain into the 20th century. With everyone falling, the economic leaders will remain the economic leaders in the next era.

The energy industry is not immune to these events. We have seen some high profile oil-sands projects canceled for one reason or another. I suggest financing is not available. And as I have suggested CNRL's Horizon project will be one of those eyesores that quietly rusts in the middle of nowhere. When credit systems fail, capital intensive industries such as oil and gas will feel it. What should someone who has worked in oil and gas do after they have been laid off from the oil and gas companies? They should join me here in making this software that will define how the new oil and gas industry is rebuilt. Unfortunately this is the only way that business can make the fundamental changes from era to era.

One thing that is systemic in all of Professor Perez writings is the scope and speed of the new environment that we are moving towards. Very quickly we will see the focus of people move away from the housing and consumer focus that brought the system down. They will now understand and appreciate that the greatest miss-allocation of capital (the past ten years) is over and they can begin building a new and more prosperous life from the ashes. It's time to invest in those businesses that will lead the world out of the old economy.

I noted earlier that the Financial Marketplace may have seemed a bit of a stretch in terms of the changes that were proposed in the Draft Specification. With the events of the last couple of months we see that the banking system is inadequate for our future needs. New regulations and technologies will be introduced into the system that will mirror the changes I have proposed in the Financial Marketplace module. Professor Milton Friedman has this to say about the "crisis" we find ourselves at the beginning of;

Only a crisis-actual or perceived-produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. Friedman 2002, Capital and Freedom.
This projects pace has slowed to a crawl. I am unable to move the project any further without the financial resources necessary to make this real. If there is any doubt in your mind as to the need for such a "radical" change, it should be put to rest by these recent events, and those that will be coming. If you know of someone in our revenue profile, an oil and gas investor disgruntled by the bureaucracy, send them the URL to this web log and encourage them to keep this project moving forward. And, join me here.

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