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Sovereign Debt Contagion Triggers Global Stock Market Crash

Stock-Markets / Financial Crash May 08, 2010 - 04:06 AM GMT

By: David_Knox_Barker


Best Financial Markets Analysis ArticleA Modern Day Jubilee on Wall Street

 “In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.” - Ambrose Evans-Pritchard, The Daily Telegraph

What does Moses (the Moses in the Torah, Old Testament and the Koran), Russian economist Nikolai Kondratieff, and System Dynamics at the prestigious Massachusetts Institute of Technology (MIT) all have in common? Quite remarkably, they all appear to have discovered, independently and from three entirely different perspectives that the long wave debt cycle regularly exposes the human folly of borrowing piles of money with no hope of repayment. These piles of borrowed money always trigger defaults and the need for austerity. The new idea of taking all the bad debt created by elites and commoners alike, and attempting to charge it off to taxpayers, and we might add voters, is a new twist that will surely backfire.  

Market observers should reflect upon the debt driven panic sweeping global markets this week and consider the words Moses, which he informed us he was passing on from a reliable source, “Every fiftieth year, on the Day of Atonement, let the trum­pets blow loud and long throughout the land. For the fiftieth year shall be holy, a time to proclaim liberty throughout the land to all enslaved debtors, and a time for the cancel­ing of all public and private debts.” Maybe the Greeks should have paid more attention to this ancient text and less to complex debt structures offered by Goldman Sachs, even if they are doing the work of God. Only now, after the Greeks admit they cannot pay, they march in protest, set fire to banks and demand a retroactive “Jubilee” for their debts. They should have considered this before they borrowed money from pensioners, banks and other sovereigns around the world.  

To take this ancient insight to the next level, the complex derivative instruments we now learn the Fabulous Fab was able to pass off onto sophisticated global investors was the work of an amateur compared to Moses. It turns out that flimflam Fab could have learned something about market price discovery for his clients from Jubilee finance. Readers may be interested to find that the Jubilee law regulated and mandated an automatic price discovery mechanism into agreements over 3,000 years ago. Here we can only quote from the derivative rules of the law, “Because of this, if the land is sold or bought during the preced­ing forty-nine years, a fair price shall be arrived at by counting the number of years until the Jubilee. If the Jubilee is many years away, the price will be high; if few years, the price will be low; for what you are really doing is selling the num­ber of crops the new owner will get from the land before it is returned to you.” What a novel idea, price discovery based on the actual cash flow that will be generated by the investment over the long run. No money down liar loan mortgages with no recourse didn’t make the cut. Many investors around the world that failed to get a handle around price discovery probably wish they had Moses for their investment banker about now.      

Before we leave Moses and move on to Kondratieff and MIT, a mention of the global consequences of fair dealing with your customer is in order. Moses further informed that, “You must fear your God and not overcharge! For I am Jeho­vah. Obey my laws if you want to live safely in the land. When you obey, the land will yield bumper crops and you can eat your fill in safety.” For the consequences of ignoring the basic rules of ethics, a live cam of the streets of Greece and the floor of the NYSE will suffice.

Regarding the Russian economist named Kondratieff, he was actually working for Stalin on the first five-year plan studying Western grain production and prices when he stumbled onto some disturbing evidence. To our knowledge, Kondratieff was not reading Levitical law while he was working for Stalin. After taking a close look at the agricultural data he had collected, Kondratieff began to see the emergence of a long wave in the rise and fall of agricultural prices and production in the market economies of the West. Fascinated with this, he began to study other segments of the global economy and markets, such as interest rates, land prices, debt, industrial production, and labor prices. He saw that they too followed a distinct long wave of boom and bust and debt, including sovereign debt, played a lead role.

Kondratieff did extensive research on what he found in the data and published his findings in a paper in 1926, which he delivered in a speech at the Moscow Institute of Economics. Kondratieff's research showed distinct long waves rising and falling in the global market economy from 1789 until his research ended in the mid-1920s. He became convinced of a long wave of prosperity and depression in the international capitalist system. He postulated that if his theory was correct, the free market system was headed for a debt bust and decline in the 1930s. However, he also concluded that the bust and the changes it spawned would, in time, give birth to a new advance of ideas, inventions, growth, and prosperity for market economies that would far surpass the previous advance.

Stalin was pleased with the notion of the impending collapse of the Western world's economic system as projected by Kondratieff for the 1930s. However, he was not happy with Kondratieff's predictions that the system would rebound. Something else troubled the Stalin regime even more than Kondratieff's prediction of the West rising to new heights after its next purifying fall. Kondratieff also concluded that lacking a free market for finding appropriate price and production levels, the planned communist/socialist system would naturally and of necessity become inefficient and stagnant, a permanent winter season. Kondratieff argued for more freedom for prices and production in the economy. In time, logic dictated that a planned communist economic system would fail because of the fundamental contradictions and lack of market forces. The history of Soviet demise tells us Kondratieff was correct.  
Kondratieff's struggle for more economic freedom in Russia (he opposed Stalin's agricultural collectivization programs) coupled with the idea that the free market system in the West would come back even stronger than ever during its next long wave advance was intolerable for the authorities. Kondratieff's research was, in effect, praising the inherent self-rejuvenating, long wave of the free market system, while predicting trouble, and in time failure, of a rigid, planned economy.
Kondratieff was rewarded for his research with imprisonment in a slave-labor camp, where he died in 1938. Alexander Solzhenitsyn recorded the death of Kondratieff in his book, The Gulag Archipelago. Kondratieff's death came only after his predicted economic and financial collapse in the West had occurred in the form of the Great Depression. The foundations for the new economic and financial beginning in the West, which Kondratieff predicted would come after a depression, were already being established when he died. The ultimate victory in the struggle of global economic and political ideas was already being won in the free market for ideas and capital in the West.

Moving on to the research at MIT, the founder of the System Dynamics Group at MIT is Jay W. Forrester. Prior his work in System Dynamics, Dr. Jay W. Forrester literally revolutionized the world with his inventions in the computer field. Inventing random access memory (RAM), the brain of all computers, is only one of many of Dr. Forrester's contributions to the world. However, when the history books are written, his contribution in the creation of the System Dynamics Model at MIT may well be seen as his greatest accomplishment. Forrester's development of the computer-simulated model known as the System Dynamics Model, earlier known as the National Model, and the research it has initiated in the long wave, is a stunning and historic achievement.

When Kondratieff discovered long waves in the economy in the 1920s, he was looking at historical economic and price data. From the reams of data he collected, he observed the emergence of the long wave cycle. The System Dynamics Group at MIT conducts research using the basic structure of interdependent systems, such as ongoing economic, political, and financial relationships that make up economic activ­ity. The program seeks to project characteristic behavior in the development of complex systems.

Forrester expanded the use of powerful computers to create simulated models. After great success with his earlier smaller-scale models of urban development, Dr. Forrester created the System Dynamics Model in the early 1970s. The object of the System Dynamics Model was to project the future direction of the national economy due to a myriad of interrelated relationships and processes.

The System Dynamics Model is a computer simulation of our national economy. The System Dynamics Model utilizes computers to project the future based on the outcome of current economic, financial, business, and political decision-making processes. It is important to note that old data are not used in the model. The System Dynamics Model is based on current decision making and relationships that produce spontaneous events. Forrester was looking for the future trends that relationships create by their interaction.

When Dr. Forrester first fired up his computer-generated System Dynamics Model, it naturally projected a long wave boom and bust in the economy. He was not expecting this. The model did not look at the past. It projected that the economy will naturally produce a long wave due to "current" complex relationships and decisions being made.

When Dr. Forrester looked closer at the future pro­jected by the System Dynamics Model he found that production, prices, and debt got out of control and created long wave periods of not just prosperity and but inevitable depression. The long wave cycle is created due to the everyday decision-making processes in the highest circles of business, government, and finance and their trickledown effect on the entire system.

Forrester’s most recent thinking is available in his Plenary Address at the International System Dynamic Conference in New York, on July 21, 2003. The following is the salient abstract from that address; “Traditional mainstream academic economics, by trying to be a science, has failed to answer major questions about real-life economic behavior. Economics should become a systems profession, such as management, engineering, and medicine. By closely observing the structures and policies in business and government, simulation models can be constructed to answer questions about business cycles, causes of major depressions, inflation, monetary policy, and the validity of descriptive economic theories. A system dynamics model, as a general theory of economic behavior, now endogenously generates business cycles, Kuznets cycles, the economic long wave, and growth. A model is a theory of the behavior that it generates. The economic model provides the theory, thus far missing from economics, for the Great Depression of the 1930s and how such episodes can recur 50 to 70 years apart.”

In Forrester’s 2003 speech, he addressed liberal monetary policy extending the length of the long wave, and the smaller business cycles. The impact on the long wave of loose money is simulated with the System Dynamics Model. The aggressive fiscal and monetary policies of the 1990s and 2000s, bought us a few more years of economic growth, but the price tag for those years is trillions of dollars in debt that is now collapsing all around us.

The elements that generated the boom and bust in Dr. Forrester's System Dynamics Model are the same ones Kondratieff had discovered. They are the same forces outlined and mitigated in the Levitical law passage regarding the Jubilee. The long wave cycle that began in 1949 is now in its final most painful years. Advanced cycle research using Fibonacci ratios in price and time suggest a global black swan event of a global sovereign debt and stock market collapse will occur from 2010 until 2012. However, long wave theory also offers the greatest hope available that a global boom will emerge in 2012, led by emerging markets and the power of free market innovation. All three of these long wave debt bust perspectives are presented in detail in Jubilee on Wall Street; An Optimistic

Look at the Global Financial Crash (2009), available at Robert R. Prechter, Jr. of Elliott Wave International had this praise for the book, “The Kondratieff Wave is so grand a force and so fully intertwined in our lives that it is exceedingly difficult to present comprehensively. David Knox Barker introduces all the key players in the long wave debate, from Moses to Kondratieff to the System Dynamics Group at MIT, and makes a compelling case for the existence and character of long-term social cycles.”

The depth of decline this modern day Jubilee and global long wave decline reaches is now unfortunately largely dependent upon politicians reversing past mistakes. Cutting taxes, slashing spending and allowing international free market capitalism to innovate and create news businesses and jobs is the best-case scenario. The big five U.S. banks are not representative of free market capitalism; they are the result of the unintended consequences of state capitalism. They should only survive this new phase of the global crisis if they can do so on their own, and a few of them may on their own merits. Volker’s euthanasia is a viable option. 

The next few years are going to be very painful. The worst-case scenario is that governments, on behalf of their political contributors, transfer trillions in bad debts onto taxpayers directly or through debt monetization, and thus require producers to pay the bills of the looters. However, a global political crisis is also building. There is small but growing chance that the political change that is coming will stop the political folly. It may arrive just in time to insure that a new long wave boom comes to the global economy beyond 2012.  

About the Author: David Knox Barker is author of Jubilee on Wall Street; An Optimistic Look at the Global Financial Crash, Updated and Expanded Edition (2009) with 24 long wave charts. He is the founder of, and the publisher and editor of The Long Wave Dynamics Letter. Barker is one of the world’s foremost experts on the economic long wave and predicts the end of the current long wave and the beginning of a new long wave beginning in 2012, when the greatest global economic boom in human history will occur. Barker was founder and CEO for ten years from 1997 to 2007 of a successful Internet based life sciences research and marketing services company, serving a majority of the top 20 global life science companies. Barker holds a Bachelor’s degree in Finance and a Master’s degree in Political Science. 

© 2010 Copyright David Knox Barker - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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