By Mike I could have titled this “Stocks hit new high.” But “Stocks prepare for new crash” is more to the point.
Yes, the recent jump in stock prices was based on some good economic news. But “good,” these days, is relative. We’re more than four years into a freaking depression. Maybe, just maybe, some cautious optimism is warranted. But exuberance? New records? What’s going on?
The answer, of course, is that it’s not about the real world at all–the stock market is one place where rich people and rich companies park their money when they’re not spending it. And they’re doing fine (we’re in a depression, they’re not). So they buy up each others’ assets in a sterile bidding war that has nothing to do with the real economy. For a while, everyone in the market thinks they’re rich, but they can’t all be that rich–there’s just not enough wealth in the real world to go around, especially because the rest of us need some to stay alive (although this is less and less important). At some point, some rich people realize that only the people who sell their assets fast, before everyone else catches on, will get a good price for them. And then everyone else catches on. And then it all goes to hell.
An analogy: Think of the financial world as the snow on a mountaintop, with the mountain being the real economy. The snow can’t build up forever; when there’s more snow than the mountain can support, you get an avalanche.
And to extend the analogy: while you can look and say, damn, that’s too much snow on too little mountain, you can’t predict exactly when the avalanche will come, or what will trigger it.
That’s the situation we’re in today–the financial world, which has the collective memory of a fruit fly, has gone and reinflated the financial bubble whose collapse sparked the current depression. It’s not going to last. The only question is exactly when and how the crash will come.
The way I see it, there are two ways the latest burst of irrational exuberance can play out.
One is that everything goes to hell pretty quickly. Like, this fall or next fall (crashes tend to happen in the fall for some reason).
The other is that some of the money in the market finally bleeds over into the real economy. (For instance, rich people use their sterile money to buy up real estate as well as stocks, reinflating the real estate bubble. As real estate prices rise, the construction industry revives, paying money to people who actually spend it, improving the real economy.) That means more mountain to support the snow, letting more snow build up and staving off the crash for two or three years more.
This second option is of course how financial markets are supposed to work–they’re supposed to fund real-world investment, which creates real wealth, which is reflected in higher asset prices, leading to more investment, and everyone’s happy forever.
But today, real-world investment is a minor afterthought in a market focused on the sterile circulation of paper and electronic balances. In fact, as I point out in Economix (page 215 panels 1 and 2, for those of you following along) the stock market is often a negative source of investment–between buybacks and special dividends, real-world companies give more to the market than they get back. That’s money that could have gone to wages, or taxes, or lower prices.
In other words, the real economy subsidizes asset prices. But we can’t subsidize them forever. Hence the title of this post.
By Mike I can’t believe I’ve let this news sit for a month (my only excuse is that my day job is brutal). Anyway, this deserves trumpets and drum rolls: On the Ropes, illustrated by Economix’s own Dan E. Burr, is out!
Here’s an interview with the author, James Vance. Key line: “Dan is a collaborator’s dream.”
My copy is on its way; you can buy your own here. Or, if you don’t like Amazon, here.
By Mike Steve Keen, author of the excellent Debunking Economics, which I used as a source, has a project on Kickstarter that’s worth a look.
The video and text on the Kickstarter site explains the project pretty well–basically, Keen says that he has a better economic model than the ones that economists use today, a model that could have predicted the depression we’re in.
And you know what? He’s almost certainly right. Mainstream economists’ models are, I’m sorry, sort of crap, and Keen has been one of the few very well-informed voices–one that mainstream economists can’t ignore, because he speaks their language (math)–saying so.
Keen has compared the differences among mainstream economists to the differences between Protestants and Catholics, which is spot-on–mainstream economists, for all their arguments, agree on their basic assumptions, much like Protestants and Catholics agree on the divinity of Christ, the existence of the Trinity, and so on. In this case the assumption in question is how much banks matter; to Keen, they matter a whole lot, while mainstream economists’ models assume them away to a shocking degree.
Now, I personally won’t be investing in his project. That’s because I think that the entire idea of economic models, as currently practiced, is flawed. In other words, Keen is trying to reform something that should be abandoned. I think systems like the economy can be simulated, either in the real world or in computer programs that create independent entities and see how they interact, but they can’t be modeled using economists’ current tools, which involve using very sophisticated calculus. The problem is that the more elaborate your mathematical reasoning, the more definite the units you start with have to be, so you wind up with a bunch of simplifying assumptions that don’t resemble the real world. In the end, you wind up with an analysis that is satisfyingly sophisticated but is also remarkably crude.
It’s sort of like chess; chess is an abstraction of warfare, but it’s so abstract that we would never ask Magnus Carlsen to direct our wars for us.
Unfortunately, in economics we base our policies on similar abstractions. Improving those abstractions–making them match the real world slightly better–is going in the wrong direction. Imagine if we actually did make the mistake of asking chessmasters to direct our wars; that would be a big problem, and the solution would *not* be to make chess more accurately represent real warfare. In both cases, the solution is to abandon the focus on abstraction and look at what actually happens in the real world.
But that’s my opinion, and I may be wrong. If you believe that the basic project of mainstream economics–modeling the economy with very sophisticated math–is sound (or even if you believe that it’s flawed but here to stay), then you should contribute to Keen’s project; better models might just prevent some of the insanely shitty policy we’ve seen over the past decades.
EDIT, 2/21: Damn, I’m good–the Kickstarter has already reached its goal, just a few days after I posted this. Post hoc, ergo propter hoc!
By Mike Matthew Feeney at Reason magazine gave Economix a nice review, calling it “a surprisingly entertaining use of the graphic novel format for education in a sometimes tricky but always important field.”
This is especially gratifying because the folks at Reason (a libertarian bunch) tend to skew conservative, and Economix is pretty unabashedly liberal, so we have many points of disagreement (although I used Reason as a source in some cases, like how deregulation gave us today’s delicious, delicious beer). The fact that Feeney mentions my “surprising fairness” makes me think my efforts to separate facts from opinion–always a delicate thing–worked.
And seriously, how many books get good reviews both from the lefties at Truthdig and the libertarians at Reason?
By Mike I’ve fallen behind in my updating, but Economix has gotten more good reviews:
Honestly, I can’t believe how captivating a book has been crafted about what most of us would agree is one of the dullest subjects on the planet.
“In my eyes it should be a tool in adult education compulsory!”
That last one was via Google Translate, of course.
By Mike I somehow managed to not post that Economix was reviewed (and recommended) by the illustrious Johanna Draper Carlson on Comicsworthreading.com last week. Now it’s number 5 on her list of the best graphic novels of 2012!
This is a good day.
By Mike Thomas Hedges on Truthdig reviewed Economix! His review goes into some depth, with valid criticisms (I did in fact tend to give each president credit or blame for everything that happened during their administration, whether or not that was entirely fair; at one point I had far more nuanced discussions, but they, like so much else, were cut from the book for space). Still, he clearly liked it; any day where the book gets a review titled “Understanding Economics in Plain English” is a good day!
You can read it here: http://www.truthdig.com/arts_culture/item/understanding_economics_in_plain_english_20121214/
By Mike This Friday evening, screw The Hobbit–that’s apparently not going to be very good. (Sigh.)
Instead, come to hear me speak at the Full Circle series! I guarantee that it will be the only talk you hear that includes both forgotten economists from the 1960s and Master/Blaster from Mad Max: Beyond Thunderdome. Okay, the only talk you hear this week. Okay, the only talk on Friday in Manhattan.
EDIT, much later: Actually, I really liked The Hobbit.
By Mike The LAMP is a very worthy organization; it works to make kids more media-savvy. And Emily Long, bigwig of The LAMP, interviewed me, here. If you were thinking, damn, I wish I could read an interview with someone who quotes obscure 1956 books at length, well, now is your chance.
And a donation to The LAMP can get you a copy of Economix! Win, meet win.
By Mike Steve Keen’s talk on the C-Realm podcast is wonky in the best sense–it gets deep into subjects that most people find impossibly arcane but does so clearly, in a way that makes it obvious what’s at stake.
Check it out!
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