Tuesday 3 May 2005

Pic of the day: Never underestimate the power of economic tides! (Screenshot from the anime Mahoraba ~Heartful Days~.)

Economic tides

Like most old-school economists, I tend to see markets as rational, at the core if not in every detail. This is a pretty good guess, because if some people act rationally and others not, the first will tend to win over time. The key word, obviously, is "time".

It stands to reason that there is great inertia in a herd of a million sheep, so why not in a million people? Or several million people? As long as everyone around you is moving forward, this will naturally look as the safest option, unless there are actual visible wolves ahead. Or even then, if it seems likely that someone else is closer to falling into the gaping maw than you are. Stopping a large crowd is notoriously difficult, even when the individuals would have already stopped by themselves.

Sometimes I feel like this quote I sometimes see online: "Assume a spherical chicken of uniform density..." (From a fictitious cookbook for physics theorists.) For some calculations this makes perfect sense, but because one detail is specific (chicken), the whole phrase dissolves into parody. It is the same with the economy. When viewed from far enough away, the trends are simple, grand and obvious. But once you come close enough to see the chickens, the mathematical beauty dissolves into mad cackling and frantic milling around.

I've told you people for a while now that you should be exceedingly cautious about borrowing money against your homes, especially if you live in the USA or a country that depends on the USA. This is because the cost of debt and homes are inversely leveraged, like that old playground favorite: A sturdy plank laid across a stone. When one end goes down, you know with divine certainty that the other end will move upward with a similar force. In the economy, movements are very slow, and so it may be easy to forget that the same thing happens with the same force of natural law. As interest rates go up, house prices will eventually be forced down. Furthermore, these things move in waves. Or perhaps more fittingly, tides; for the movement is slow but unyielding.

***

I have in the past underestimated the lengths that the Bush administration would go to, to challenge the laws of economic nature. Some of you may remember the story about King Canute and the tides: When people had praised the king long enough, he one day gathered his court and went to the seashore. There he stood in all his kingly regalia and commanded the incoming tides to turn. This, of course, did not happen, and the king soon got his feet wet. Most historians believe that the king was well aware of this all the time and just wanted to make a point of this, that even kings cannot change the laws of nature.

Presidents cannot change the laws of nature either, but tell that to George Walker Bush. The man is not actually retarded, in the sense that he cannot function in society. But he doesn't function well in his current position. He didn't do too well in school, and it may be that his later success is more due to the resources (not least human resources) that his father lent him. Whatever the truth of this, those resources are no longer enough. Bush and his team are about to meet the tides, and there is reason to think that he will be a lot more surprised by the outcome than king Canute was.

The tides are coming, you see, but as usual their strength is hidden by their slowness. But for each passing month, the USA is borrowing a couple more billions from abroad, over and above what the country must borrow to refinance older debt. For each passing month, the interest rates are creeping upward. The time is over when you could refinance your mortgage and take out the difference as a pseudo-income. It was fun while it lasted, and as long as you stick to your house you are likely to keep the low-interest loan for quite a while. So it's not like the sky is falling. But it is getting hard to get new loans at an affordable price. And it is hard to finance a new home. This means the property market is slowing down. People can no longer use their home as a cash cow to buy more than they earn. And people aren't earning a lot, except the CEOs and their friends in the boardroom. The brief "boom" lately seems to be the first where wages did not grow, which in itself is a pretty good hint that it was never what it looked like.