Outside the economic box

Nov 20 2013 07:25
*Edward Ingram
IF YOU had a car and it constantly surged ahead but then fell behind its desired speed, you would take it to an engineer and get it fixed.

For decades, economists have tried high level mathematics and a kind of ‘fly by wire’ system of controls and balances requiring ever more measurements and interventions, taking this into the mainstream theory of how things should be done.

It amounts to managing an unfixable economic model.

Maybe it is the product of intolerable pressures to publish NOW or as soon as possible, and in quantity - as if anyone has time to read more than a tiny fraction of that stuff, never mind actually use it.

Or maybe it is just the syllabus that is taught at universities.

But the fact is that the internal financial instabilities which they are trying to identify and manage are caused by the way that we structure savings and debts.

And the external (imported) instabilities are largely the product of something similar – the way market forces caused by the imbalance of trade and high speed investment flows are allowed to come into conflict, both trying to influence the price of currencies, and both succeeding.

In the days of Newton and Darwin, academics were paid whether they produced or not. They liked to get to the bottom of things and produced some remarkable papers as a result.

It was possible to go through almost all the main sources of literature on any given subject because they were contained in relatively few papers or books.

Now we can produce a new paper or a new book so fast with the help of electronics that we are completely overwhelmed by the stuff.

In the meantime, with the advent of globalisation almost any distortions anywhere can affect the entire world economy. According to the chart below, over 30% of world gross domestic product is in international trade.

What to do?

What I found, as a practising financial adviser for over two decades from 1970, is that my clients, the public, and businesses were not well served by the financial services that were, and still are, on offer.

I blame these for the instability that disrupts our pension plans, savings, investments, borrowing budgets and cash flows.

If our economy cannot get that kind of thing right, then how can it provide a working basis for planning ahead and for steady growth? Clearly, this lies at the heart of the problem.

Dealing with complex systems

Engineers, social scientists and doctors are all taught to check out whether everything is being done 'by the book' as a first step.

When I looked to see how the pricing of debt was done, in the case of mortgages, it immediately became clear that the lending model in use is unstable because it is not doing things by the book.

If you go to the source of a problem and put that right, what happens is that dozens of symptoms that you had previously been trying to address simply vanish.

If you fail to do that, as some economists are taught, when using the usual interventionist/medication approach, there are always winners and losers. Each intervention has its own distorting effects.

A contact of mine, who tried to explain some of this new thinking to a professor at one of the world’s leading universities, was told: "It cannot work." Asked why, the professor replied: "There are no losers." Asked if that is what he was taught at university, he said: "Yes."

Well in my experience, if you take your car in because there is something wrong with it, the only thing you lose it the cost of your repair. Everyone else wins.

When you start looking at things from this knowledge base, you immediately see why current central bank strategy and the previous Obama stimulus have, by comparison with dealing with the fundamentals, created more problems than they might be solving.

I look forward to explaining that, and to explaining more of exactly why the new replacement financial products that I have already written about on Fin24 can solve problems that the traditional approach cannot solve.

 - Fin24

*This is a guest post from Edward Ingram, a leading specialist in mortgage finance and macro-economic design for sustainable growth who is involved in studies in macro-economic reforms.

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