The ghost protocol and the theory of economic relativity

It was no big celebration, however it happened. 

The 5^th anniversary of the collapse of Lehman Brothers, or in other words the start of the 2008 financial crisis.

5 long years – at least someone managed to take off the sign of Lehman’s.

What else happened?

During the crisis plenty of promises were done. A lot of money spent this or that way.

 

Barack Obama and Angela Merkel were reelected. Their people were happy with the way they solved the problems right?

Bo Xi Lai was sentenced to life in prison and Ben is sent back to the elementary school to get some additional English lessons.

And?

Some of those promises were fulfilled – on both ends of the Ocean, by different ways, but the banks were forced to report more for newly established state institutions,

the banks got some money and had to promise not to spend this money on too much risky businesses. 

China was shaken a bit and 80% of the people on this planet Earth, mainly those, who are not citizens of those great nations creating all this troubles suffered like crazy – only from this burst of bubble…

Some of the “shadow banking” disappeared from the world map. (By the way if you do not know what is shadow banking, please look at this link http://www.imf.org/external/pubs/ft/fandd/2013/06/basics.htm)

And some survived. However largely this shadow is still around us and plays a fun game of “catch me if you can” with the regulators (meaning governments)…

All in all we know one thing – the governments did a bit of facelift on their financial system's regulation and in fact nothing changed at all.

The next bubble is nicely coded into the system.

Why we mention the shadows, as at the time the majority opinion was, that the banks with the effective help of the shadows made far too much risks and they were the root for the collapse..

It seems like yes…

And now there is a moderate debate about how and what to regulate, is the regulation enough or too much…

In fact the moment the governments need to bail out their banks, they must have the right to regulate them… This sounds logical.

However no one knows what would happen if they do not bail out anyone. We can only refer to the past, if no bail out, than it would be another Great Depression.

Just to remind you; 

Franklin D Roosevelt had used his 1933 inauguration speech – in the depths of the Great Depression – to declare that the"money changers have fled from their high seats in the temple of our civilisation".

He went on: "We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit." (http://www.theguardian.com/business/2013/sep/15/five-years-after-lehmans-new-crisis-ahead)

But in our modern case the governments bailed out not only the banks, but some shadows and a lot of private businesses as well, like the automobile industry… And they definitely did not even think about Roosevelt's ideas.

Where is that money? In my previous post we called this phenomenon as “meltdown”…

Hmm… There must be someone, like the magician in the circus…

Ohh no… the money in fact never disappears… The one disappeared was never there! Some guys were thinking it is there, but it was not… That is the great act of real magic right?

How this can happen?

Not so simple, but we shall try to think about it…

The economists since thousands of years learned to think in figures in two dimensions, same as the bankers since the times of the Templars. Value and time.

However in those good old times, they have learned something. On one end someone gave money, on the other end someone else will receive less. Someone asks for money, they lend them and after certain time they have to give back more. If not, they will become bad boys…

But then it started to grow, that someone lends money to another one, than that lends it further and further and each on this chain will earn some money. The money started to flow anywhere and everywhere.

In the books this money multiplies… And it supposed to boost the economy.

Originally it is assumed, that somewhere, somehow this money shall be spent for some assets, goods or services.

But in our modern case our money just circling from one to another financial institution and doing absolutely nothing, but multiplying itself.

And it does it with the efficient assistance of the shadows… In fact the shadows are the one making possible to make this vicious circle…

And not only – you need to have financial assets to increase the effect even more…

Just an example;

Apple went public at 1980 and started to trade at USD 22 per share and it grew till 5 years ago to USD 100 per share. Since last 5 years it managed to grow from 100 per share to 700 and now it is around 500. 

Does anyone can honestly believe, that Apple net worst is up by 5 times since 2009? That is the real magic right? Or we can ask ourselves is this a “fair value”?

But we need to come back to the money.

It is a strange thing – we have experienced a real revolution in communication. I remember those days, when to make an oversea phone call was a matter of half a day exercise. I also remember the times, when in the night I was standing over the telex machine to get the latest Reuters report on some commodities. Also, when change of “keys” between two banks took several days, sometimes weeks.

Today the communications work with the speed of light. 

And the economic thinking works like an old and tired elephant.

You can ask me why? You look around. The crisis is 5 years behind us, but in fact nothing substantial was done.

What was done is only temporary.

Any economist or even future economist in any school will tell you, that the money flows on the easiest direction. Money does not like to be regulated.

Same as a river – you can change its course, you can flow it even reversed, but at the end of the day that river will appear somewhere you even did not expected.

The comparison with the river is good, but it is also

wrong. The water influenced by gravity usually flows down.

The money can flow in any direction.

Anywhere. But not like gas, which fills up any empty space. No, the money flows where it likes to be, where it can multiply.

So again regulate or not regulate?

My answer would be – first need to understand.

How?

Need to change our view and our approach to the question.

It is time to understand, that the economy is not a two dimensional system, including the financial markets. They have three dimensions! Which on is the third? The space.

We also need to understand, that no static models can be used to understand the current state of the economy. But this should be only the beginning.

I admire A. Einstein for his brilliant mind.

I am looking forward to find an economist, who might comes to the idea to apply the
E = mc² 
in the economic science.

We can start from the observation, that the economic processes are happening in separate time from their results; 

It is like the magic. You come home and you see, that your vase is standing on the table. But in fact it is broken long time already or it does not belongs to you at all. 

You only see something, but you do not know about it. You remember the situation? 

Ben wakes up 2 weeks before the Lehman’s collapse and feeling a bit headache about the housing market. He goes to Barack and says to him, that there is a bit of problem, but our economy is perfectly strong… And Barack goes for golfing with no worry..

And Ben was standing at that time on a half melted iceberg, thinking, that he is still in the middle of the North Pole… Is he so stupid? No, not really…

In other words, in the economy things are happening not in the time when we notice them and also not to the extent we expect them to be.

If you get sick, you can go to a doctor and he can say what is your problem. The doctor can decide if he is going to operate you or send you for further tests or just send you home and order you to sleep.

In the economy, when the sickness appears, it turns out to be already there. Very simple – because of the nature of the economy and the finance we see only the results, but even the results we never see in real time. And here we come to the theory of economic relativity.

And there is one more question? Can we push back our economies,

as they were before? Answer is no, absolutely not.

 

So after the 3 dimensions and relativity, we came to the question of irreversible processes.

In the economy nothing is reversible. This unfortunately needs to be understood as a basic principle.

And the main problem of today’s economic advisors and decision makers that they have learned a lesson and they also learned years ago how to deal with certain situations. 

They think they have their central banks, some finance committees, ministries of finances, advisory and supervisory boards, and they can regulate or deregulate the markets, increase or decrease the interest rates, issue or buy back some bonds, print new money etc.

But these are the tools of the prehistoric man who lived in the cave and it took him half a day to ignite a fire…

The problem is not in the money, not in the regulation or deregulation, not in the shadow finances and even not in the banks.

Unless we do not know how to understand the basic economic and financial processes and will not put upside down all what we have learned until now, we shall be nowhere…

In fact we shall be somewhere – we shall be back to good old crises situations… Most probably more and more often and if not, than it means, that the crisis shall last for longer and longer periods...

Politicians usually love to scare their audiences, that the economy will stop, this or that will collapse. In fact the economy works at any time in every moment, the economy never stops. But it can be a pleasant experience from the participants or it can be a misery for all.

Let me come back to  the shadows –  the "bad guys" were shrinking more than to half in those days of Lehman's collapse. By the way before those turbulent days the shadows were bigger, than the “official” banking sector…

So the Americans were all happy - shadows are gone!… But all the same shadows the next day appeared in the majority of the emerging markets. This "franchise" had to be exported immediately abroad!

And what happened later? Later the shadows changed their faces and came back to America. 

 

But now they are no more shadows, we better call them ghosts – as the main auditing companies in the US (not the government, as they have no clue) estimate them for 10-20 trillion USD net worth for the last year… 5 years ago during the collapse of Lehman's their value dropped to 8 trillion…

Nice right? So where did we get with all this money spent and all the regulation done? The same day Mr. President waked up with the suggestion what to change; there were already dozens of new ghosts created, before even he could take his morning coffee…

And here we stop a bit…

Some of you may remember the times of the real threat of the global nuclear war.

But even those, for whom the Bay of Pigs invasion is a history, might seen several films referring to the times of Cold War. In all this films some big guys were carrying some metal coffers, in those coffers there were some codes and some keys and before someone could launch a nuclear attack, they had to make a decision, put in a lot of codes, keys and had to communicate to the enemy on some phones…

So why this was all done?

To avoid an unwanted incident and unwanted war.

As even 50 years ago, the military powers started to use automatic control systems. Those systems could spot out the enemy and give a reply in moments after they find out the treat. Far much faster, than any human being can do.

For the nuclear weapons they have also designed such systems, but after a while they understood, that in case of a false signal, they should not start a full scale nuclear war against each other risking by the way to wipe out the majority of the people on the Earth.

Why I describe all this?

Today most of the financial companies reacting based on pre-written algorithms, specialised softwares. Meaning by automotive ways.

Without any hesitation, decisions are made in a quarter of second and they sell or buy and react practically in an autonomous way.

The human contribution comes in giving the necessary tasks, programming and analysing the data. Majority of the transactions today made by machines with random human interference.

What happens on the level of the policy makers?

They have no system of spotting out the nature of the financial transactions, the main flows and the possible future dangers. The amount of data they collect now proved to be useless in most of the cases together with the tools for analysing those data..

On the top of this they have no quick response systems. Ben's and Barack's delays during the last financial crisis  cost trillions of dollars!

However the technology is there – just jump on the other side of the road to the ministry of defence (or Pentagon:-))… It is all there… Not only the technology. but also the full know-how. At least they can make some use of those guys. 

We have command control centres for everything, even for chicken farms, but not for economic decision making - nice right?

However this kind of technology can work, if the decision makers are aware of what they want to know and against what they want to protect themselves… But to answer those questions we shall need to come back on our triple question:

-       - 3 dimensional economics;

-       - Theory of relative economics;

-       - Non reversible processes in economics

Until then, the biggest achievement of those decision makers was to make “stress tests” over the banks…

Great – if you do not know how to swim, they can keep you half a minute under the water and you shall be dead.
If you are a good swimmer and have some time to exercise in advance, you shall survive probably even 3 minutes…

But will this help to you if a massive tsunami comes? No, definitely not…

But no problem - let the banks learn how to swim, as swimming lessons are always good for health!

We shall follow next time from here…