Economists are a quirky and somewhat religious bunch are
they not? Some may say they fit into the nutty professor category and that
their body serves no real purpose but to transport their head around the planet.
They live in this mental space that is hard to define and because of this are
perhaps seen as not living in the real world.
I recently joined the Institute For Dynamic Economic
Analysis (IDEA) which is a Not For Profit Organisation that has a huge agenda to
reform and transform the way we view economics. There is no doubt the social
science of economics needs a total overhaul. It requires a rebranding and
relaunch and IDEA has the “A” team get this job done because we know where
things have to start, we need to go back to the beginning and unlearn the wrong
way we do economics and relearn the right way.
The global economy has transformed into one giant ecosystem,
integrated and linked. The ecosystem is delicate and the job of economists is
to nurture and protect the ecosystem in its entirety for risking the extinction
of one part will surely cause a shift in the balance of the remaining parts.
It is for this reason that I believe that the Federal
Reserve and all their support team should have concentrated on reading and
covering the work of Hyman Minsky Professor Steve Keen and the work done by the
Queensland Department of Agriculture back in the 1930’s before the introduction
of the “cane toad”.
I am guessing now that many of you are likely thinking how
and what does the Queensland Department of Agriculture have in common with the
modern day economic and financial system. If you are thinking that, indulge me
by reading on and allowing me to provide clarification. This blog will be a
journey for the layperson, a simple explanation that will toss out economics
technical jargon and mumbo jumbo.
I hope by the end of this piece you will all see how
directly and precisely a comparison can be made between the future impact of
the current US Federal Reserve Policy and the disastrous results the cane toad ecological
blunder produced in my home country of Australia.
The journey begins with the US Federal Reserve response to the last
Global Financial Crisis. With the beginnings of an exposed flaw in the economic
system, the natural forces that had built the economic ecosystem saw need to
recalibrate. The global Financial Crisis was upon us. The disproportionate
growth in the financial sector vs the real productive economy had upset the
natural balanced state of the global economic ecosystem.
The global economic ecosystem was faced with its own version
of the “frenchi” and “greyback” beetles that were damaging and eating away at
the real producing economy. The Financial sector was hurting production and
output the same way those pesky beetles were affecting the output of Australian
Cane sugar.
In many ways the Federal Reserve and other Central banks
were confronted with similar issues to the Queensland Department of
Agriculture. I understand one is about an economics and finance ecosystem and
another is a nature based environmental ecosystem however once stripped back to
its basic form an ecosystem is an ecosystem is an ecosystem is an ecosystem.
Faced with the mounting damage the beetles were doing to the
cane crops the Queensland Department of Agriculture decided to unleash a
foreign toad, now affectionately known as the “cane toad”. It was introduced to
eradicate those pesky beetles once and for all and return our wonderful
natural, even stevens, recalibrated and rebalanced ecosystem to a more
productive and sustainable path.
Approximately 80
years have passed since the first “cane
toad” set foot on Australian soil and it is abundantly obvious that is has
produced little more than disastrous results. Cane toads have continued to do
what they do best “eat and procreate”. They are now an epidemic costing the Australian
economy much more than the pesky beetles would/could have. Their population has
spread and so has the immeasurable damage they have done too much of Australia’s
native flora , fauna and wildlife.
I would say that Quantitative Easing and Federal Reserve
interference through its “bond buying” program, is in essence, introducing a
foreign species into the global financial ecosystem. There were bank bailouts
and a Federal Reserve risk reduction backstop. The “bond buying” program was
introduced to keep long term interest rates low to enable a recovery in a
similar way the Cane toad was introduced to keep beetle population low to
enable a recovery of cane crop production.
Are you following?
So as the Cane Toad population grew so did the systemic
damage it was doing, at first slow before accelerating aggressively. So this
brings me to my next direct link. QE has had the effect of providing liquidity
to emerging markets, facilitated a “carry trade” bonanza as investors borrow at
low supressed interest rates in the USA and invest in higher yielding emerging
market bonds and equities markets etc.
The Thailand Stock Exchange (SET) has more than doubled
since 2010 as have many other emerging economies equity markets. QE has also produced
a wave of analysts examining international markets in a different way than ever
before. It seems that analysts want to chart the sea of carry trade liquidity as
it finds a new home much like a toad would a new river or creek.
Are you following now?
The Shiller index has been touted as a great way of picking
up opportunities in emerging markets by identifying value by comparing P/E
ratios amongst international equities markets indexes. I admire the work that Professor
Robert Shiller has done and the contributions he has made. He thoroughly
deserved his Nobel Prize.
In saying that I admire Shillers work, I do have my doubts that his index can be
relied upon to pick up major trading opportunities in emerging markets in much
the same way that the path of least resistance my not be the first direction
the toads go as their population expands.
Though I take issue in certain ways of calculating
opportunity to exploit the effects of QE, I maintain my position that QE is to
the global economic ecosystem, what the Cane toad was to the unique Australian
natural ecosystem. If the lessons learned by the Department of Agriculture in
QLD were examined and applied along with the teachings of Minsky, Keen and co
to the decisions made by Central Banks then perhaps the ecological disaster
about to strike the global economy could have been avoided.
It seems that for the global economy only time will
vindicate the warnings of the maverick band of economists that include
Professor Steve Keen, Dr Anne Pettifor, and Professor Michael Hudson. Though I was
originally apathetic, convinced I could not make a difference, my position
changed when I met Professor Keen back in Sydney at my most recent visit. He
expressed the importance of reform, and though he is softly spoken, I could see
what it meant.
I joined IDEA because this is as much a humanitarian plight
as it is a fight to change how we do economics and although they are not one
and the same fight, they can both make a difference in making the world a
better place to live.
So my journey begins at team IDEA economics to make a
difference the only way I know how. To give IDEA economics a voice, to bring
the message and draw a link between economics and something that real people
understand in the hope that 80 years from now my QE and the Cane Toad story
will not spread and will be just a chapter in a book that went unpublished.
