The unsustainable has run its course

Unlike national central banks, the Bank for International Settlements doesn’t have to worry too much about the effect of its statements on business and consumer confidence or on the possibility of political flak. Hence, it has usually tended to give a less rosy view of the economic outlook than other official and quasi-official institutions. The latest assessment is particularly gloomy .

The full annual report has the cheery title “The unsustainable has run its course and policymakers face the difficult task of damage control” (Overview here).

The money quote:

Perhaps the principal conclusion to be drawn from today’s policy challenges is that it would have been better to avoid the build-up of credit excesses in the first place. In future, this could be done through the establishment of a new macrofinancial stability framework, which would call for both monetary and macroprudential policies to “lean against the wind” of the credit cycle

It’s hard to disagree with this, but equally hard to imagine such a framework (reminiscent of the “new global financial architecture” proposed in the late 90s) being introduced without the stimulus of a truly dire financial crisis.

30 thoughts on “The unsustainable has run its course

  1. The last thing the world needs is new monetary policies. However it may need to return to some old monetary policies.

  2. John,
    I would agree that it is hard to disagree with this, in the same way that it is difficult to lean against the wind. The devil is, as always, in the detail. There is no real detail here.
    As the most regulated industry on the planet (with the possible exception of the nuclear power industry) it is also difficult to argue that the current problems do not have at least a substantial component of regulatory failure embedded within them.
    The question is whether more regulation is needed or whether less regulation is.
    In any case, trying to introduce a “new macrofinancial stability framework” while the current one (Basel II) is only just starting seems a touch premature at best.

  3. Pr Q says:

    It’s hard to disagree with this, but equally hard to imagine such a framework (reminiscent of the “new global financial architecture� proposed in the late 90s) being introduced without the stimulus of a truly dire financial crisis.

    Be careful what you wish for. Its not hard to see the combination of the PRC’s unsustainable ecological profile with the USA’s unustainable economic profile leading to the mother of all global crises.

    Its been a good year for bears. And for Pr Q, AUS’s most grizzly economic bear, it must seem like all his birthday’s have come at once.

    We have had a steady stream of climate change alarms. Then the BIS financial market downer. And just now I see that the IMF is about to pay Uncle Sam one of its dreaded visits, with adverse reports coming from Bank of Scotland and Barclays. The Age has a quick and dirty take:

    Der Spiegel wrote that the IMF had “informed” Federal Reserve chairman Ben Bernanke of plans that would have been unheard of in the past: a general examination of the US financial system. The IMF’s board of directors has ruled that a so-called Financial Sector Assessment Program is to be carried out in the US.

    This, Der Spiegel wrote, “is nothing less than an X-ray of the entire US financial system”, adding that “no Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing”.

    If this was to happen in Australia the International Monetary Fund would be hammering at the door of the Reserve Bank. But Australia does not have a President’s Working Group on Financial Markets, commonly known as the Plunge Protection Team, that allows the US Government to prop up the markets by buying shares.

    But the news that the US Fed has now lost its last vestige of credibility did not end with the German report. The Telegraph from London weighed in, following the Royal Bank of Scotland’s statement last week (also lost on the US public) that it was time to head for the crags, and reported Barclays Capital’s closely watched Global Outlook analysis that said US headline inflation would hit 5.5% by August and the Fed would have to raise interest rates six times by the end of next year to prevent a wage spiral.

    If the Fed hesitates, the bond markets will take matters into their own hands. “This is the first test for central banks in 30 years and they have fluffed it,” the report found. “They have zero credibility, and the Fed is negative if that’s possible. It has lost all credibility.”

    The wonder is not that it has happened, but that it has taken this long to happen. I have been staggered at the US economy’s ability to absorb one body blow after another (massive fiscal, financial and foreign debt, terrorist strikes, dot.com, telecom and housing bubbles and an endless draining war). A tribute to the ability of financial engineers to jerry-rig quick-fixes fast enough to keep the monetary merry go round in motion.

    I feel sorry for Pres. Obama. He will ride to office on a wave of public revulsion at the criminal negligence of the GOP. But his hands will be full cleaning up the aftermath from that party’s sponsorship of what has essentially been a decade long white collar crime wave.

    We’ve all been going hell for leather for most of the past generation. Its time for various forms of constructivism to give way to conservatism.

  4. A “perfect storm” of financial collapse, climate change, resource collapse and then world civilization collapse is about to play out. Got your box seat? Got your opera glasses? Only a few will get to see the final act though. Better hope (if anything) that you don’t get to see it. It will be more merciful that way.

    People who continue to believe the myths of comsumer capitalism (including the myth that it has any future at all) amuse me immensely. Everything is way beyond the sustainable point and indeed way beyond any kind of soft landing point. By the end of this century, the world population will be less, probably much less, than 1 billion people.

  5. @ jack strocchi:

    Oh, please. An FSAP is hardly a big drama. Many other countries, including Australia, have done one already. It’s only a climb-down for the US because Bush and his cronies don’t want to have to answer to anyone, especially not the international organisation down the road that they all thought the US Treasury controlled.

    They are a lot of work because the IMF people ask for masses of information that probably don’t exist (because a lot of them don’t have the skills to work it out for themselves – a significant minority of IMF staff are the people who couldn’t make it in their national central banks etc). But they are hardly the drama that Der Spiegel makes out.

  6. Ikonoclast,
    For a system you do not believe in it is and has been remarkably effective. Countries that adopt the “myth” become wealthy – their people come out of grinding poverty and many become very wealthy, children get educated, people travel, etc. etc. etc.
    Keep huddling in your nice, comfortable hovel. I am sure you can keep the mantra up – “Consumer capitalism is a myth…consumer capitalism is a myth…consumer capitalism is a myth…consumer capitalism is a myth…consumer capitalism is a myth…”
    Not in a hovel? Not scratching a living from the soil? Using a computer? Thanks consumer capitalism – that “myth”.

  7. Ikonoclast ‘the myths of consumer capitalism’???

    My – you are a cheery chap!

    Actually – maybe you’re right that the world population will be less than 1 billion by 2100 – perhaps by then we’ll have worked out how to settle Mars or solved interstellar travel. The human population might be 20 billion but only 1 billion on the home planet. But maybe 100 years is not long enough – maybe it’ll take 2-300 years. But have no fear – consumer capitalism will get us there.

  8. For those laypersons who are somewhat sketchy about the debate over monetary policy among dismal scientists, here’s a pretty good summary-
    http://faculty.tamu-commerce.edu/dfunderburk/572/yesi.txt
    Basically the debate boils down to those who believe in the omniscience/ability of central bankers to tailor money supply to the needs of the real economy and those who think the very notion is preposterous. Perhaps broadly defined as the Keynesian vs Austrian schools, although that may be a gross oversimplification a bit like left/right tags. Now I’m firmly in the Austrian camp, more as a camp follower and here’s a camp follower’s take on things from a discussion elsewhere-

    Now I’m no expert but the experts might like to recall that old MV=PQ equation again and think about PQ consisting of 3 broad parts. The real economic domestic PQ, the real foreign PQ(as it affects imports and exports) and the domestic assets PQ(ignoring the foreign assets one as stable) which that domestic money supply and velocity support. Increase the money supply with a heap of new household formation baby boomers in their youth and the reaction is swift and obvious. Not so when they’ve had their kids and are at the peak of their earning and savings capacity, thinking about retirement nest eggs and the Winnebago. A subtle switch begins with the assets PQ which might start to impact the real economic PQ, especially if central bankers keep feeding the money supply. No matter there’s always imports which might begin to rise in price (exchange rate mechanism), except if Asians spooked by a meltdown decide to work harder(low pay rates)and save harder to ameliorate that, in order not to be in such a position again. Central bankers oblivious to all these gradual structural changes keep on with business as usual piling on the money as the economy demands because they see no problem with the real domestic PQ. Welcome to their problem now should the players in those other PQ parts of the equation suddenly adjust their thinking and behaviour. The Austrians would simply say we told you so dummies.

    With the benefit of hindsight now and bearing in mind the following anecdotal sectoral impact may be the tip of the iceberg central bankers couldn’t have seen all these years, here’s the Keynesians’ problem in microcosm-

    Let me give you an anecdotal look at how China’s workers have impacted Australian building costs. As a tradey you have to constantly make economic decisions over tools. How much for how long and how many in the kit? Chinese workers have changed the equation dramatically. Cordless tools are a no-brainer as the tradey needs quick charge, long plateau, sudden drop off batteries, so forget the handyman, slow charge, immediate taper stuff. It’s the battery quality you pay for, albeit the Makitas, etc can use Chinese workers to build to their quality specs and keep costs down overall. Power tools are a different category now. Take the chippy’s stock in trade the Makita 9″ power saw($350). Yes he has the old faithful for first fix, but now he has a GMC 7.25″ ($48) and uses that frequently because he could buy a pack of 3 tungsten carbide blades for $10 vs $30 for one blade for the Mak. The GMC has a 3 year replacement warranty (only for no-commercial use), but how would they know if you keep the receipt in the warranty file and the unlikely happens. A personal credit card is a personal credit card, whether you’re using it to track business or personal expenditure. Since he mostly cuts 45mm maxm. thickness timber the GMC is fine(and lighter), although the blades are not as good(you’ll find that out cutting MDF or chipboard with their abrasive glues, where High Speed Steel is useless) However they’re both equally useless should he hit a nail or say a staple ripping down a door to size. Another one from the pack of 3 is much gentler on the wallet then. Same deal with an Ozito planer for $58 cost(yes that includes GST Chinese workers)Makita replacement planer blades are around $35 bearing in mind they’re all reversible for a new cutting edge once and equally useless if you hit that staple in the door. I have a Hilti rotary hammer drill(replacement cost around $750) on the shelf now because the universal chuck won’t hold the clip in masonary bits any longer and a new chuck is $140. It’s done some incredible work and there’s none better at the job but a Chinese copy of an old Kango design for $78 does me now for the last 3 years. They’re $69 now although I saw them out for $50 once recently, bearing in mind they come with spare brushes, standard drill chuck, 3 masonary drill bits and a spade and point jackhammer bits. Those bits have knocked down a few brick walls with ease that the Hilti never could. Yhis sort of cost allows the tradey to carry more marginal use tools like a recipro saw, Chinese made Bosch multitool instead of the dearer German, Fein Multimaster and so on, all making the tradey more productive at lower cost. That’s what Chinese workers have been giving our economy for years now, right down to the cheap, occasional use, inverter welder I can sling on my shoulder and whip up a ladder with the solar cutout welding mask and fix a structural steel stuffup in a flash. And while all this was going on with low interest rates, I wasn’t too concerned about high cash balances in the Company chequing account and making them work. That’s what central bankers in ivory towers couldn’t and wouldn’t have known all those years, with all those individual decisions aggregated together and they never, ever will. That’s the fundamental lesson of Austrian economics.

  9. The news report is a little more sensational than the actual IBS report and Cecchetti (who just joined BIS) said that the Fed did the right thing bailing out BearStearns, a “creative and aggressive response”

    In this matter Cechetti also says that the Fed “is the only official body that could act quickly and powerfully enough to make a difference”

    There is still a wide and divergent opinion as to what will happen next.

  10. In reply to Andrew (Reynolds), the results aren’t in yet. It’s all very well to trumpet the triumph of consumer capitalism just when it is at its apogee and apotheosis. However, a characteristic of this present situation is that the implosion and collapse will now happen very rapidly and just moments (historically speaking) past the system’s zenith.

    If I may use long term adapatation as a criterion of success, we can see that capitalism (in its current rampant form) is a maladaptive system. It has ransacked the resources and despoiled the ecosystems of the planet. The damage is now so dire that we are already far beyond the long term carrying capacity of the planet (in population and economic activity terms). The final days of the system are being “funded” by the last remaining and irreplaceable expolitable
    stores of fresh water sources, soils, forests, oils, coals and minerals.

    Capitalism did not give us computers. Science and technology gave us computers although the form and number of them have been influenced by capitalism of course and not always in a beneficial direction.

    I would hazard an educated guess that the operating systems (of desktop computers) for example would have been more logically, efficiently and elegantly developed if not entirely left to market forces but rather developed under a MITI model as in Japan’s MITI (Ministry of International Trade and Industry.

    I would have more respect for capitalism as a system (for it has its benefits and uses) if its theorists and advocates could properly understand its limits as well as its benefits. However, the general cry of its more zealous proponents is that it is all powerful system which gives us abolutely everything, which overesitmation goes along with a denigration of the necessary founding and ongoing role of the natural world and the role of other human systems like democracy and science.

    Because consumer capitalism has been allowed to run without significant check or balance it has now destroyed all its supports and will collapse as a failed system. I have no idea what will replace it if some humans manage to survive on this planet.

    The dream of getting to other planets (like Mars) and “climate-forming” them is a pipe dream. Hells bells we cant’ even run a planet with an atmosphere without wrecking it. How are we going to create an atmosphere on another planet. In any case, the energy physics of getting any sigificant payloads beyond our own planet’s gravitational field are quite impossible with all current knowledge of physics.

    Bill Gates once said that people overestimate what scientific and technological prgress will do in one year and underestimate what it will do in ten. I would go on to say that people then proceed again to wildly overestimate what it might do in fifty years. Have a look at Kubrick’s ‘2001’ for a prediction. We are now at 2008 and a township-sized orbiting space station and a vast moon base (as per ‘2001’)simply don’t exist because we simply don’t have enough energy to get all that gear up there

  11. Here’s a more eloquent description of what our omniscient Reserve has been up to-
    http://brookesnews.com/080505debt.html
    Of course they have not been alone and the biggest culprit of them all has been the US Fed. Basically the temptation of the printing press was too great and now the players that count have woken up to the world’s CBers ponzi scheme, the rush is on to turn all that funny money into commodity money, or the next best thing commodity streams. Hold on to your Billitons, Woodsides and Rios folks, lest they fast disappear like your home equity now. Their Frankenstein monster of inflation is beyond their control too. He’s broken out of the lab, taking their interest rate control lever with him and running amok. There’s no place to hide from him now. In India annualised inflation has hit 11% and tipped to go higher while the RBI has ‘officially’ raised interest rates twice to 8.5%. You can see that lenders would be receiving negative real return at those rates and won’t play that game. Consequently finance is fast drying up as it chases real value in commodities. To make the switch back interest rates will have to reach 2-3% above inflation and find safe borrowers to pay it. Hence the gridlock in capital markets. What a mess, all from Keynesian hubris that believes you can solve every economic sniffle with well meaning hankies over the years. Still, every cloud has its silver lining, or more likely a gold one once the analysis has been done and the recriminations have finally ended. Of course that’s when we’ve finally worked out how to unwind the years of malinvestments with real savings and investment and real govt taxation in future. No doubt a more poisoned chalice to sip from for some less lucky than ourselves-
    http://www.atimes.com/atimes/Global_Economy/JG02Dj03.html

  12. Ikonoklast – “Capitalism did not give us computers. Science and technology gave us computers ”

    Can you really decouple science and technology from consumer capitalism? Is it just coincidence that the most technologically advanced cultures just happen to be consumer capitalist?

    Don’t be pessimistic Ikon – cheer up! So what if the climate’s changing? So what if we’re running out of oil? We’re an incredibly smart and adaptive race – we’ll adapt! We’ll move to where the climate’s nicer (or grounds not flooded). We’ll finally get over our distaste for nuclear power or ‘solve’ the solar power issues.

    It’s an exciting time to be alive – I can’t wait to see what new advances our consumer capitalist society brings in the next 30 years. I mean really – who would have dreamed 10 years ago that we’d have something as exciting as a Foxtel IQ2!!!! What next!

  13. Ikon. Do you live in a cave? How do you access the internet? Seriously the thing that drives capitalism is competition. The computer that you (somehow) use started off the size of a room.Then the competitor came up with a computer half the size of a room.Wouldn’t you know it ,soon there was a computer a quarter the size of a room. Whatever next.And all so unnecessary because the original computer did all we wanted it too!

  14. Andrew asks “Can you really decouple science and technology from consumer capitalism?” I would answer, “Not completely in their present forms.” I would also answer, “Don’t conflate science and technology with capitalism so that you concieve that the former can only exist with and because of the latter.”

    Russia is a case in point. It is clear that Russia possessed, until the peasant reforms of 1861, a feudal system overlayered with a landed gentry/aristocracy system. From 1861 until 1917 it is very arguable that Russia made relatively little progress to even a 19th C model capitalist system compared to Britain and the USA. After 1917 it moved to a socialist system and a command economy until the collapse of communism.

    Despite never possessing anything near a true consumer capitalist system, Russian science thrived in many branches under 50 years of so of communism. This refutes the notion that science and technology CAN ONLY progress under corporate owned consumer capitalistism.

    Do not take this as defence or advocacy for the deplorable Soviet political system as it is nothing of the kind. I simply advance the points to demonstrate that pure science and attendant technology (being quintessentially ideology-free and value-free, other than seeking the empirical truth) are not linked by some iron law (one is tempted to say “some hisoricist law”) to consumer capitalism. The demonstration of one contrary case refutes the proposition.

    I do actually live in a cave. It is a “cave” made out of timber framing, exterior grade plywood and corrugated iron. Because we in the 21st century give ourselves airs and imagine our own nature to be so advanced beyond that of early man we call these things “houses”. 🙂

  15. “imagine our own nature to be so advanced beyond that of early man”

    imagine???

    It doesn’t need much imagination to realise how advanced we are Ikonklast. Just hire a charter plane to fly low level over the Amazon basin – I saw some amazing photos of a ‘long lost tribe’ recently. Yep – we’re pretty advanced…… unless of course you prefer living in rags, hunting for food, and dying at 30 of old age.

  16. Yeah Ikon, the good thing about the washup from the inevitable mess of all this Keynesian meddling is the introspection it will create. Firstly we’ll have to remove the temptation of the printing press from them once and for all for all our sakes. Then we can put their flawed, simplistic C&T feelgood on the back-burner while we take a good hard look at the overall failings of our current CM and what’s really needed to kick butt in the marketplace. It all just needs packaging up in a nice big invisible hand ribbon and bow, so they can appreciate the need to join all of us small invisible hands in the day to day tasks, rather than continually meddling in things they know nothing about and plotting to take over the world or run it or some such maniacal rubbish. They just have to be convinced to get the CM settings right and let go of the reins for good and sit back and enjoy the ride. We’ve got to work on that a bit yet but we can’t rush it as they’re a bit slow an the uptake, not to mention a bit set in their ways.

  17. Can you really decouple science and technology from consumer capitalism? Is it just coincidence that the most technologically advanced cultures just happen to be consumer capitalist?

    Is there a link between consumer capitalism and governments with large amounts of science grants? If so, then I’ll sign up for the theory that science and technology is coupled with consumer capitalism.

    In my experience, companies have very little interest in fundamental research (bloated monopolies with poorly managed research labs are the exception) and rather focus on what makes money in the short term.

    Fundamental research, otoh, is vitally important for a technological advanced future, yet it is exceedingly hard to extract value by the original researchers.

  18. Oh ye of little faith in the price mechanism-

    THIS REPORT-
    “WILMINGTON, Del. (AP) — General Motors is closing four truck and SUV plants in the U.S., Canada and Mexico as surging fuel prices hasten a dramatic shift to smaller vehicles.
    CEO Rick Wagoner said Tuesday before the automaker’s annual meeting in Delaware the plants to be closed are in Oshawa, Ontario; Moraine, Ohio; Janesville, Wis.; and Toluca, Mexico. He also said the iconic Hummer brand will be reviewed and potentially sold or revamped.
    Wagoner said the GM board has approved production of a new small Chevrolet car at a plant in Lordstown, Ohio, in mid-2010 and the Chevy Volt electric vehicle in Detroit.
    Wagoner announced the moves in response to slumping sales of pickups and SUVs brought on by high oil prices. He said a market shift to smaller vehicles is permanent.”

    COMPARED WITH THIS-
    “Harley-Davidson might be wishing it made a scooter about now. In fact, most motorcycle manufacturers without one in their lineups have got to be feeling the pain. Motorcycle sales are down this year.
    Scooters, on the other hand, are selling as fast as their little wheels can carry them from showroom floors. Sales have jumped 23.6 percent in the first quarter of 2008 compared with the same period in 2007, and they’re likely to continue their quick and upward trajectory.
    Daily headlines and the signs at your nearest service station already give the reason, but I’ll spell it out: G-A-S. Depending on the displacement, a scooter gets 40 to 120 miles per gallon, compared with 27.5 mpg for the average car and about 50 for a motorcycle.”

    See the boundless possibilities of overarching price? It’s all in the constitution of the marketplace.

  19. If I may take the liberty here of picking up John’s theme of “The unsustainable has run its course” that applies to all well intentioned Keynesianism. With the recent report that Australia has the world’s third most complex income tax system, it has to make you wonder who’s worse. You’ll recall so far my ideal CM relies solely on resource taxing, encompassing carbon and land use taxing and how that would impact upon players facing the ultimate prices it throws up. That immediately eschews all income tax pricing signals and distortions, not to mention the glaringly obscene effects of capital gains and negative gearing. So we’re the third worst eh? Have a look at the ultimate price signal facing this woman in another particular CM and ask yourself how on earth the poor woman ever got to face it-
    http://www.courant.com/business/hc-watchdog0622.artjun22-1,0,7144662.column
    That’s symptomatic of what’s unsustainable about our current CM in order to meet some very pressing challenges now. The overall price signals coming out the end of it all are bloody horrible in terms of where we need to be heading. Let the epitaph of our similar, current CM be-‘We all meant well at the time under the circumstances.’

  20. i’m with you, ike.

    the human race has been looting the planet, because ‘it’s inexhaustible, and i want to be rich.’

    but no matter, why worry? as long as personal survival is assured, grab what you can and dignify the process with a title, like ‘capitalism’. sounds so much better than ‘looting’.

  21. gerard,
    It was heavily used while it was ARPANET, wasn’t it? The addition of the .com. com.au, .co.uk etc etc etc added nothing at all to it. All of them are useless.

  22. Al loomis,
    Easy to critise, difficult to replace. What do you propose other than carping from the sidelines? Do you have a better way to allocate resources?

  23. Certainly “the mixed economy” seems more accurate than “capitalism” as an answer to the question “What system of social organization gave us computers and the Internet?”.

    A problem I have often noted is that people want to use the word “capitalism” to refer to something like “the range of social systems in place in OECD countries” then use the success of “capitalism” so defined to argue for “capitalism” in the sense of “a radically reformed social system with a much bigger role for markets”.

  24. PrQ,
    You and I (AFAIK) broadly support the current system, just with differences of emphasis in which way it needs to go.
    Ikonoclast (with lines like “…a characteristic of this present situation is that the implosion and collapse will now happen very rapidly…”) and al loomis (“…like ‘capitalism’. sounds so much better than ‘looting’.”) are (IMHO) arguing that the current system needs to be abandoned for something else.
    I would be fascinated to see what they propose to put in the current system’s place.

  25. “In reply to Andrew (Reynolds), the results aren’t in yet. It’s all very well to trumpet the triumph of consumer capitalism just when it is at its apogee and apotheosis.” = Ikonclast

    This argument has, of course, been made periodically for about the last 150 years.

  26. “We are now at 2008 and a township-sized orbiting space station and a vast moon base (as per ‘2001′)simply don’t exist because we simply don’t have enough energy to get all that gear up there”

    No, they don’t exist because Nixon gutted the US space program after Apollo and scrapped the manned Mars mission planned for the 1980’s.

  27. Pr Q says:

    equally hard to imagine such a framework (reminiscent of the “new global financial architecture� proposed in the late 90s) being introduced without the stimulus of a truly dire financial crisis.

    The US’ current eco crisis is unprecedented and not for just the obvious reasons (emergence of new industrial super powers and ecological crisis). It is experiencing a combination of real industrial crisis reminiscent of the 70’s and nominal financial crises reminiscent of the 80’s.

    The juxtaposition of economic crises has come about through a fundamental unaccountability of the US’s economic system. The US does not properly measure the economic impact of its ecological endowment and plutological environment.

    The US economy is not properly accountable to its real (ecological) sub-structure. Hence the economic shock as geological source and metereological sink prices rise. This sort of happened once before with the raw material price shocks of the seventies (OPEC).

    The US economy is also not properly accounted for by its nominal (plutological) superstructure. Hence the economic shock as various financial market scams are exposed (dot.com. telecom, sub-prime,). This sort of happened before with the financial rip-offs of the eighties (savings and loans, junk bonds).

    The US’s ecological and plutological crises stem from elites and populace unwillingness to properly acknowledge and measure economic reality. The populace want to go on driving gas guzzlers. And the elites are happy to clean up from parasitic money shuffling rather than productive activity. This is a kind of economic post-modernism, otherwise known as burying ones head in the sand.

    I dont know what the final outcome of these twin crises will be. There is strong evidence that the amplitude of business cycles is substantially lower in the late 20th C than it was in the early 20th C. The authors “the Great Moderation” thesis explain the dampened volatility to a combination of improved institutional regulation (monetary policy), instrumental mediation (info-tech inventory control) and primary industrial good luck.

    Taken together, we estimate that the moderation in volatility is attributable to a combination of improved policy (20-30%), identifiable good luck in the form of productivity and commodity price shocks (20-30%), and other unknown forms of good luck that manifest themselves as smaller reduced-form forecast errors (40-60%).

    Reuced forecast errors no doubt come from better use of computers to flexibly co-ordinate financial and industrial movements. The better rules and tools means that we can negotiate our transactions with ourselves with much greater facility. It may be that the price of industrial stability is purchased at the cost of much greater financial volatility.

    But it cant last forever. The Bush record on fiscal and financial regulation is not confidence building. And “nature cannot be fooled” so supply shocks eventually come around.

    So when the US finally pays the true cost for undervaluing global sources and sinks and its financial jiggery pokery it will not be pretty.

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