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High Frequency Failure Economics

Economics / Economic Theory Aug 13, 2014 - 12:06 PM GMT

By: Andrew_McKillop


High Frequency Failure
Japan's most recent GDP data showing a 6.8% annual rate of contraction was quickly shrugged off by the markets as only a signal for more handouts from the Japanese government and the BOJ. But Shinzo Abe's government has to admit the failures are coming faster all the time. In the global finance industry we can move on from the easy explanation why we have HFT, Dark Pools, Libor rigging, FX rigging, oil and gold market rigging and the rest  – that they deliver large easy profits to insiders, fixers and riggers. These fail-sure (rather than fail-safe) processes are also essential to maintaining an appearance of real economies with real markets. They serve this additional basic function.

They maintain the fiction of wealth and growth in “mature economies”, able to support the parasite outgrowths of crony finance, supported by wealth and growth. We could call it conspicuous criminality, like conspicuous consumption of the financial elites, a subject area developed and analyzed long ago by Thorsten Veblen. Their frequency of attack on the real economy only goes one-way, to more and further excesses. The process has high gain positive feedback.

On any logical criteria the “mature economies” are being led down a winding path of no growth by the G7 Group, are locked-in to wealth destruction, and have been at it for a long while. Their very low economic growth when corrected for purchasing power and real currency values, and compared with any period before the 1980s - including the period following the 1929-1936 Depression and including the immediate post war period of 1948-1952 - is extreme low despite the official data being almost certainly heavily exaggerated.

Zero real growth of wealth, and worse, is the real context when the data-rigging is removed. In other words, wealth destruction in the classic pyramid-building process that Veblen talked about.

When we compare the developed economies' very low growth with their sovereign debt, the percentage of their populations active in the economy, their unemployment rates, the levels of real wages and incomes, the zero growth of these real incomes, and plenty of other metrics, we find repeated failure.  The apparent but false image of “wealth and growth” has been replaced by wealth shuffling and of course siphoning by the crony financial elite. This is the Default Economy.

High Speed Shuffling
The wealth destruction process has high gain positive feedback – as real wealth declines the wealth shuffling accelerates. No conspiracy theory is needed because this “positive retroaction” effect is fully automatic. Conspiracists, instead, can look at which shark ran out of fish dinners, first, and they can also check the constantly declining water level in the shark pool.

Marine biologists can tell you that some “high trophic level” predatory feeders need close to their own body weight of food, per day, meaning that Veblen's parasitic elite has to accelerate their wealth-depletion, even as the economy runs at zero growth, or less. The combined impact of declining real wealth for a radically expanding percentage of the total population, and declining economic growth – shifting to “negative growth” (an oxymoron) – has several major results, all of them speeding the decline process.

One is simple and also automatic. One by one, “mature economy” leaderships will announce that, very regrettably, austerity politics are needed. Real incomes must decline, not just stagnate. The sovereign debt “must be reduced”. Somewhat incredibly, but real in today's political-economic (and moral hazard) context, deflation must be avoided and inflation maintained – well above already-contracting average real wages and incomes paid to the stagnant or declining numbers of active workers in the declining economy. Only an idiot cannot forecast this will further reduce growth.

Little remarked but a sure sign of increasing economic failure, the G7 group and other developed economies are distancing themselves from the Emerging economies, led by China. The emerging economies are no longer wanted onboard. Re-industrialization of consumer manufactured product industries in the “mature” de-industrialized nations is now needed, to cut the wallowing trade deficits financed by debt. Bank of India chief Raghuram Rajan puts it increasingly bluntly. He says the G7 Group now treats the Emerging economies as throwaway adjustment mechanisms for the G7's own crisis. He says that western leaderships are deliberately sabotaging the global economy.

Talismans of the Lost Economy
We do not have to mention equity markets because the merest glance shows firstly that they are rigged, and secondly that equity prices are wildly overvalued on any rational economic criteria. An across the board cut of 60% would bring them closer to real world fundamentals. This however ignores the other key role of extreme equity values - they serve as “lucky charms” for western elites and of course for the pensions, mortgage and real estate, insurance and other industries, especially the banks. Extreme high asset values fend off and assuage the fear of reality – economic decline and destruction of wealth.

Despite flimsy arguments to the contrary, all commodity markets are now systematically “assetized” or “financialized”, and inflated when they are not savagely deflated. Oil is one of the outposts of the Lost Economy, whose price simply must be kept at $100 a barrel or brought back to that price whenever it tumbles. No logic is needed or wanted!

The tragic and false reasoning is that “the growing economy needs oil”. Because the economy is growing, oil prices must rise. Any 5-year-old can understand! For a declining economy, logically speaking, the opposite would apply. The “perverse logic” that oil is rare and valuable has however now been abandoned for a string of other commodities, such as iron ore and coal.  They are no longer rare and valuable. The handy prop of climate change, drought or flood, livestock diseases and other somber threats can however be used to pump up prices in the soft commodities, on a haphazard basis.

 Artificially high food prices buttress artificially high equity values for food producers and maintain the myth of solvency and credit-worthiness of these producers. Snapping the false link with the real world in this domain, as in others will produce a chain reaction of Lost Value and further reveal that wealth destruction is now fully in charge..

Comfort Theory versus Wealth Destruction
The comfort theory of all central bankers, never of course openly stated is that holding down gold prices will Save the Money. Run alongside that theory, central bankers also believe that inflation is vital “for growing economies”. Gold markets are therefore obligatorily rigged.

Nowhere and never will the central bankers admit that adding inflation to a stagnant or declining economy is a formal death sentence for the economy. Their utterly simplistic and perverse belief is that because inflation is a characteristic of growing economies, adding inflation will restore growth.In fact it can only accelerate the destruction of wealth.

As Thorsten Veblen explained, the ultra-concentration of remaining wealth in a declining or stagnant economy – the Pyramid Effect – ensures and enables every kind of malinvestment leading only to further wealth destruction. This is apart from the totally predictable Moral Hazard of concentrating remaining or residual wealth. The scene is therefore set for abrupt and “unexpected” adjustments throughout the economy, and society.

The predatory model of barbarian society, featuring pillage, replaces other and later models of society but as the shark-in-a-pool analogy shows, this is a zero sum game. As many other non-Marxist economists of Veblen's generation said, the economy of deliberate but not purposeful waste is always unstable and will always lead to social change.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - 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 advisor.

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