If A Market Is Not A Market ...
Wed 26-Oct-2011
Long ago when the world was young I went to a high school to learn about the wonderful power of Markets and The Invisible Hand. A market itself didn't have to be a shabby patch of ground with fruit stalls and bric-a-brac on sale. A market was a place, even an imaginary place, where contracts were exchanged. Contracts were a kind of agreement where two parties agreed to exchange A for B for mutual benefit.
Many kinds of contracts in history have only been possible when both parties agreed first of all to follow some set of rules. For example a man and woman might choose to live together because they find each other sexually exciting. Pretty soon however, to avoid conflict, they come to agreements about money, housework, having children (or not), and all the rest. In fact we know that most cultures have developed strict formal rules about such relationships, and sealed the deal with something defined as a marriage contract.
However, the people who taught me about market relationships were called economists. These economists usually conceded that there needed to be commercial rules or laws about particular kinds of market relationships. For example, the buyers and sellers of motor vehicles within Australia have to work within certain rules of disclosure, commitment and so on. However, the economists insisted that over and above the influence of local, particular regulations, market relationships were governed by a set of natural laws, akin to the 'laws' of physics, or perhaps biology. This was 'The Invisible Hand'. For example, if there were many buyers and few sellers, the exchange relationship (hence the price if money was involved) would be tilted in favour of sellers.
The supply and demand law example seemed reasonable to an economic neophyte. Quickly my economics teachers projected this nice example to encompass and define the universe of daily life in which we struggle to make a dollar. At this point in the thesis, even as a 17 year old, my bullshit detectors went on red alert. The Invisible Hand sounded remarkably like the Invisible God, a trick of social control brandished by frightened authority figures, whom I had long since ceased to hold in awe. Ergo, I repeated the patter they wanted to hear for some examination papers, duly got an 'A' pass, and forever decided that economics was mostly humbug.
Chucking out market conundrums with the economic bible in fashion was the tactical mistake of a teenager. Firstly the problems, if not the solutions, were genuine. Secondly, it took me too long to learn that the human world was a warped place, running on mocked-up, back-of-an-envelope scribbled solutions whose truth didn't matter. If getting a nice job and nods of respect were the goal, then you had to suck up to WHO scribbled on the backs of envelopes, not WHAT they scribbled. Actually, I could never bring myself to swallow this fact of life, which is why I'm a washed-up failure, and why economics text books continue to sell for impressive sums of money.
Well, it is far too late to do me any good, but The Invisible Hand has been having a rough time of it lately. This is very interesting. Since the management professional class was invented by James Burnham in 1941, this priesthood has claimed to interpret the will of The Invisible Hand for the unwashed masses. However, like most priesthoods, they soon began to invent a self-serving scripture. A major tool of the invented economic scripture, as played by the sect of Investment Managers, has been Invented Magical Markets, operating beneath the veil of Public Markets and known only to the chosen few. Pretty early in the game of modern capitalism, it was seen that insider trading (or what I have called an Invented Market) was toxic to Public Markets. Solemn rules were therefore promulgated against insider trading. Ha ha. What a forlorn exercise. The enforcers were that very class of the economic priesthood most likely to benefit from violation of the rules. The history of economic booms and busts for two hundred years now has been a tale of new ways to pull off insider trading in hidden Invented Magical Markets.
The Great Financial Crash of 2008 which has denuded millions of employment and their life savings in the Northern Hemisphere is now written into the text books of Economics 101 as punishment by The Hidden Hand for the sins of playing with financial derivatives. Financial derivatives were fortune cookies stuffed with dope to reduce any semblance of critical thinking by investors to mush. They were created of course by that wiley priesthood of economic management for their personal profit, as always, through the timeless tricks routine of Invented Magical Markets. We all nod wisely. So, that will never happen again, will it?
Uh, yes it will. Actually it never stopped happening, even as the mask was ripped from George Bush and his economic generals of the universe. The trillions of dollar credits, created with a stroke of the pen in Washington were a shrieking air raid siren to the priesthood of investment managers and their clients, who stampeded away from the impending inflation of dollars, into supposedly safer commodity investments. Hence commodity prices became hugely inflated instead, apparently transferring wealth into the arms of commodity producers and away from consumers (who just happened to include the same monkeys who were investing). Yet even this was a trick. Hot off the press now we learn about vast hidden tides of "dark inventory" - in effect an ocean of "virtual commodities" masquerading as real commodities in hidden commodities markets. These virtual inventions (let's just call them organized lies) have fatally polluted real commodities markets and now turning toxic (deja vu of derivatives / junk bonds anyone?) are about to crash ashore like a tsunami with all the carnage of a second GFC (http://atimes.com/atimes/Global_Economy/MJ26Dj02.html ). With luck, at least the price of petrol might drop before Australia goes down the gurgle hole.
Meanwhile, across the Pacific lake in the turgid smog of Beijing, those other, Communist masters of the universe saved China from the GFC by casting billions of yuan into the seething jungle of Chinese capitalism. Well, didn't they? Save the Party, that is. Hmm. The actual enterprises that make things that can be sold for moolah weren't on the A-list for Beijing handouts. Those sweat soaked enterprises are no soul mates of risk-adverse bureaucrats counting their pension contributions in nice offices. Nope, the torrent of yuan went down vacuum chutes to banks (government owned) who funneled it to SOEs (government owned enterprises, money losing by definition), who funneled it into building whole cities of new apartment towers. Why? Well, it all has to do with the crazy logic of Chinese capitalism.
You actually lose about 3% a year officially (more in reality) by putting your money into a Chinese bank. That is, inflation tops out bank interest by a wide margin. So the middle classes have squirreled their savings into apartment "investments" - now around 60 million EMPTY apartments that MUST eventually lose money. Nobody will buy these apartments as a living proposition because the resale prices are in dreamland, set for "profit". Meanwhile tens of millions of unhappy young couples delay marriage, unable to ever afford housing. There are whole cities of empty apartments, a time bomb waiting to explode.
Ah, but those billions of yuan from Beijing were not even exhausted by building ghost cities. The slob managers in SOEs therefore set up unofficial, legally uncontrolled "trust funds" to lend capital to cash starved real businesses at up to 60% interest a year. Even at Economics 101 level, you'd think that this would look like a sure, unsustainable loser. Well, desperation, greed, and ignorance are a dazzling combination. The real engines of China's economic growth, factories by the thousand, have sated their voracious appetite for capital by borrowing at impossible rates. Meanwhile, stuck with their empty, unsaleable apartments, still flush with cash, Chinese citizens in their millions have spent the last couple of years also pouring their personal savings into these unregulated "trust funds" which promise of vast returns. Talk about a "dark inventory". This fantasy lasted until a couple of weeks ago, when a swathe of factory owners in Suzhou suddenly met the reality of impossible debt repayments by jumping out of windows or fleeing the country. Now the eponymous "richest city in China", Ordos, is collapsing in similar style. We wait in morbid fascination for the dominoes to fall.
References
Chung, Olivia (2011) China's borrow-and-die epidemic spreads north. Asia Times. Online at http://atimes.com/atimes/China_Business/MJ26Cb01.html
Cook, Chris (2011) Dark Inventories and the Death of Markets. Asia Times. Online at http://atimes.com/atimes/Global_Economy/MJ26Dj02.html
Lam, Willy (2011) Beijing caught in debt dilemma. Asia Times. Online at
http://atimes.com/atimes/China_Business/MJ21Cb01.htmlMcDonald, Hamish (2011) Clean, open banking a Chinese dream. Brisbane Times. Online at http://www.brisbanetimes.com.au/opinion/politics/clean-open-banking-a-chinese-dream-20111021-1mc4l.html#ixzz1bTnTcUhm
Sempa, Francis P. (2000, Fall) The First Cold Warrior: James Burnham (1905-1987). American Diplomacy, 5:4. Online at www.unc.edu/depts/diplomat/AD_Issues/amdipl_17/articles/sempa_burnham1.html
Sisci, Francesco (2011) Faltering China carries global risk. Asia Times. Online at http://atimes.com/atimes/China_Business/MJ18Cb01.html
Smith, Adam & others (1776) The Invisible Hand discussed as a concept in The Wealth of Nations (and in many works later). Outline online in Wikipedia at http://en.wikipedia.org/wiki/Invisible_hand
Wikipedia (2011) Late 2000s Financial Crisis. Online at http://en.wikipedia.org/wiki/Late-2000s_financial_crisis
Zhang, Monan (2011-10-24) Shadow banking risky. China Daily. Online at http://www2.chinadaily.com.cn/opinion/2011-10/24/content_13959381.htm
All opinions expressed in Thor's Unwise Ideas and The Passionate Skeptic are entirely those of the author, who has no aim to influence, proselytize or persuade others to a point of view. He is pleased if his writing generates reflection in readers, either for or against the sentiment of the argument.
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