24 June, 2008

A New Economic Theory

Having read George Soros's "The New Paradigm for Financial Markets" a week ago, I am currently reading Naomi Klein's "The Shock Doctrine".
Both authors find fault with Free Market "fundamentalists" (Ms Klein being very critical of Milton Friedman's Chicago School in particular). George Soros also proposes a new Theory of Reflexivity which he prefers over the classical economist's concepts of "free markets", "perfect competition" and "equilibrium".
I'll try to make a few notes about what these writers have to say about globalization, the withdrawal of controls and the abdication of responsibilities plus the human misery that such practices have caused.

Soros believes that it isn't true that the markets are right. Rather, the financial markets are always wrong. However, they do correct themselves on most occassions and it is this ability that causes many economists and observers to think that markets will correct economic imbalances. Financial markets cannot predict economic downturns accurately and can actually cause them.
The manner in which market prices react to participant's actions is flawed because those actions themselves are based on an imperfect understanding (ie, not on "perfect knowledge"). Incomplete, biased and mis-conceived interpretations of reality drive participants, resulting in varying outcomes.

19 June, 2008

"Free Trade" in Food Is 'On the Ropes'

With developed countries subsidising their farmers to compete against the poorest of the developing countries "free trade" in commodities and food was always a joke.
This Bloomberg article now indicates that some thinkers are now beginning to realise that such a policy put food security in danger.

16 June, 2008

Crude Oil surpasses the Dot-Com Craze

This article, by Michael Patterson and Elizabeth Stanton, on Bloomberg suggests that there might well be parallels between the Dot-Com craze and the rise of Crude Oil prices in recent years. Crude Oil has risen to almost 8 times the price it was at in November 2001.

So, is Crude Oil a bubble ? Or is it really factors like "increased terrorism risk, the situations in Iraq and Iran, increasing demand from China and India, the fall of the US$, the general rise in commodity prices etc, stagnating production etc" ? Are economists right in berating developing countries for subsidising oil products for the poor ?

I think it is an outright speculative jump in prices. Crude Oil began rising a few years ago. But not many people noticed a link between the release of trillions of dollars by the US Federal Reserve, the European Central Bank, even the Japanese Central Bank since the "sub-prime crisis" erupted in August 2007 and the almost 100% rise in Crude Oil prices since then. If Stock Markets haven't been strong, if homeowners and corporates are facing difficulties in getting loans, inspite of low interest rates, where did all that money go ? How could billions of dollars pumped into the banking system not go to borrowers ?