Buckaroo economics

Daniel Cowdrill

I get the feeling that this particular horse has bolted. I talk of course not of an actual horse, but of the financial crisis.

As banks lose confidence in one another and credit is tightened, world demand has started to fall sharply. This means overproduction and mass unemployment. 

Adam Smith very elequently described this process way back in 1776:

“When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of rent, wages, and profit, which must be paid in order to bring it thither…  If at any time it [supply] exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate… If it is wages… the interest of the labourers… will prompt them to withdraw a part of their labour or stock from this employment.” 

In other words, people get made redundant. 

We are beginning to see Smith’s process working its way through. The Economist tells us that the price of raw materials and shipping costs are falling. For example, since the summer the price of steel has fallen by 20-70%, alongside other base metals like Copper and aluminum. Key measures for shipping commodity prices are down such as the Baltic Dry Index, down 85% since May. 

This fall in demand, of which these figures only allow a snap-shot, is starting to create unemployment as businesses cut production. Figures released yesterday show unemployment here in the UK up 164,000 in the three months up to the end of August. By Christmas the number of unemployed is projected to reach 2 million, and by 2010 some analysts predict unemployment will reach some 3 million. 

This horse has certainly bolted, leaving politicians looking a lot like by-standers.

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3 thoughts on “Buckaroo economics

  1. In the Rainforests around the equator there are many millions of tall, sturdy and ancient (by human standards) trees, and these support multitudes of life forms – many of which we can see, and many more which we can’t, or haven’t even discovered yet. Every so often the rain falls for longer than normal, the wind and lightening combine with tremendous effect, and some of these ancient trees come crashing through the canopy and collapse, life draining from them, on the forest floor, where slowly they are returned to the earth from where they came. The miniature ecosystem which came to depend on something seemingly so permanent, so dependable, either is destroyed with the tree it-self, or needs to seek a new home. Yet from this act of tremendous natural destruction new life is born. Seedlings, perhaps from the very same tree which fell, now can reach for the sunlight. Many will not reach the canopy, but the one(s) that do become just as solid and dependable as the tree which preceded it.

    These acts are natural, they exist and happen every day in some rainforest around the world (whether in Latin America, Africa or Asia) and they can be classified and quantified by the laws of nature we ourselves are bound to observe.

    Similar laws, some of them described by the eminent economist, Adam Smith, apply to our worlds economies. Take what meaning you wish from my analogy. Personally I like to think of what is happening as unfortunate, tragic even, but still, a natural economic phenomena, and something we will recover from, stronger than ever.

  2. I agree Dom. If looked at in economic terms, or even romantic terms, this is a re-alignment. Essentially many American home-owners who should not have been credited led to a loss of faith in banks.

    I suppose where I would disagree to some extent, is that there were man made causes to the current economic downturn that might have been avoided with some foresight.

    It was fascinating to read the Time’s ‘Ten people who predicted the financial meltdown’. Christopher Wood, a senior strategist at CLSA (brokers) said in October 2005, “Investors should sell all exposure to the American mortgage securities market.” Adding in 2007, “Some institutions have been behaving like leveraged speculators rather than banks… The UK economy is heading for a sharp shock. It just remains to be seen how bad.”

    Vince Cable is also in this list, wrongly in my view. He was warning about personal debt in the UK, which was not the cause, or even a contributory cause, of the financial crisis.

  3. I’m quite sure many could see it coming, and many more who could, but didn’t want too, and even more then that maybe thought something might happen, but took no action, and then even more people then that couldn’t and didn’t see it coming. Those who went on borrowing like credit was going out of fashion, and those who lent like there is no tomorrow, and yes, for some of those – both creditors and debtors, the phrase “no tomorrow” has a certain ring of hard ironic truth about it now.

    For the rest of us, effected to some extent or another – and there is hardly anyone with any form of involvement in the economy who hasn’t been effected directly or indirectly in some way or another. Though I think you might be mistaken in thinking that personal debt isn’t in some way a factor towards this. Afterall the loan or line of credit or morgatge or credit card all has to come from some source or another, which is then put onto the balance sheets of whichever bank the customer gets their particular product from. The debt, as it sits on the balance sheets, is then repackaged and sold into investment veichles. Hence the huge right downs as millions of severly over-leveraged households defaulted.

    Now all of this is natural in some way or another when it comes to the workings of international finance. It could happen even more easily in the fifteenth century than it does in this day and age. The results of course are very different. In fifteenth century Europe it could mean starvation or rebellion, or both, at the same time. These days . . . well the results are being widely discussed everywhere, so I need not describe what we already know.

    So from what you are saying, and from what I understand, I would have to concur; yes, some foresight and much of the worst of this might of been avoided. But that might be a question future historians and economists will have to settle. For now I’m happy to use more prudent financial stratergies myself, and that way avoid the fates I know some people can come to in an economic climate such as this one.

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