Thursday, December 31, 2009

Happy New Year

Let's look back at the past decade. Two things stand in stark contrast.

First, the world is blessed with incredibly talented creators. The iPod, iPhone, Google, Prius, DSLR, Harry Potter, Matrix 1 etc. are remarkable achievements and will impact us for many years. Maybe generations. It is great to be alive now and enjoy this wonders.

Second, the world is cursed with appallingly bad Governance. We have a banking system that is supposed to make loans that get paid back. It fails. We have a Govt whose job it is to fund savings and maintain employment. It fails. We have a regulatory system that is supposed to focus banking on its proper purpose. It fails. We have an academy that is supposed to understand how the financial system works and explain it to others. It fails. Managing a fiat monetary system correctly is one of the top 3 responsibilities of a Government, and the US has demonstrated incredibly incompetence in this regard. Bernanke, Obama, Geithner, Summers, Rubin, Greenspan, are all culpable.

Moreover, just as the financial crises has exposed Macroeconomics to be a heap of rubbish with equations, what about Climategate? It has vanished down the memory hole, as if it never happened. The problems at the Academy, and the Academy/Agency nexus are just not getting fixed. The situation is unfixable.

Here's a graph of the Nikkei from 1984 to 1994.

It should scare be bejeesus out of you. I could make it scarier by extending the graph another 10 years up to 2004. The situation is parallel: the private sector built up debt levels above their ability to service out of income, and suffered a credit collapse. 20 years later, the Government has still refused to fund the private sectors demand for net savings by running insufficiently high deficits, and the economy has operated at a fraction of its available capacity. Worse still, the economic activity produced by the Japanese has been misdirected to harmful ends and the island is covered by ugly concrete.

Those who got out of the market in 2009 and are wondering whether 2010 is the year to jump back in, look at Japan. The jump from 15K to 20K in 1993 was a 50% rise -- fully equivalent to the bump the US had in 2009. But it all went away and it's been zigzagging between those bounds ever since. For 20 years and counting.

The last 10 years have been low return, high volatility for stocks. The next ten years will be the same, unless we see some mechanism that supports the de-leveraging sought by the private sector.


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