World Economy in Zugzwang

Something is wrong! It’s not necessary to have any specific knowledge in economy to understand what is happening. In Europe the power is being concentrated while countries are in race who will be the first to default (to be rescued), the US fired all their weapons into the economy and they gained nothing (results are debt, unemployment, downgraded credit rating and weak financial markets), global markets are again in Zugzwang[1] and in the background of all these events is the same political/bureaucratic class telling us “It’s not our fault, but we can fix this”.

The one thing that is way too wrong is the total collapse between the reality and the fantasies of the political/bureaucratic class. This class hasn’t changed: the main players on the US/EU political stage today are the same as in September 2008. Today they sound as confident as they were in 2008. It’s part of their job – to be confident. There is no way for Ben Bernanke to stand in front of the public and say “I don’t know what’s going on, but I think we are going to collapse”. And the politicians are still mourning that the markets are not listening (listening to the fantasies and wishful thinking of the political bureaucrats). 

What is happening in the past few months is disturbing. The level of adequacy of the political bureaucrats felt to the critical minimum. The US entered in technical dispute with S&P and denied the reality. Obama said that according to him the country is AAA and he doesn’t accept such ratings from credit agencies. Obama’s strongest argument was that Warren Buffett also thinks like him, as Buffett’s name was “shot” in the first 30 seconds of the President’s speech. Still, NBC broadcast was showing the real picture – Obama speaking in his typically polished style, while in small quadrate next to him the Dow(n) Jones index was all in red and sinking.

In Europe the situation is even worse. The bureaucrats are constantly speaking about the so called speculators – “the speculators attacked this country”, “we will protect ourselves from the speculators” and so on. It sounds like the only problem in Europe is the existence of some secret brotherhood called “the speculators” that is wondering which country to be ruined. It is familiar story – the excuse with the speculators always has been preferred in such situations. When Lehman Brothers went bankrupt in September 2008, Dick Fuld (CEO of Lehman) until the very end was accusing the speculators and wanted government protection. You want to play on the market and win, but when you are totally into your own mistakes and the market is after you, then you want protection and the game is not so compelling. The same is with the governments – we gave promises, the markets are financing us (on the back of the taxpayers) and everything is OK. But when the markets left you and even bet against you, they are evil speculators who must be put behind the bars.

Leaving behind the rating agencies and the speculators, the excuses in Great Britain for the weak recovery are very interesting. During the second quarter of 2011 the economy of the UK was weaker than expected and the reasons for that were… the tsunami in Japan, the Bank holiday, the royal wedding and… the hot weather! No, these are not just someone’s thoughts, this is the official position of the UK statistics. There were wedding and heat, so these are the reasons for the bad shape of the economy? Just to remind you that the bad economic data for the last quarter of 2010 were caused by… the cold weather. We are free to say that the weak recovery in the UK is caused entirely by the weather – it’s either too cold or too hot.

The actions of the European bureaucrats deserve attention and they will have serious affection over my country (Bulgaria). If at the start the idea for the Union was for the people to travel, work and invest freely, at present day we are moving toward other direction – the liberties are not so important, as the centralized decision making by group of people chosen by the bureaucracy, not by the people. Now the problems of Europe are another chance to move in the same wrong direction. We already have one currency, now the bureaucracy is working on one fiscal policy and probably one European minister of finance. The proposal for European taxes is already a fact: European VAT and European tax on financial transactions. The so called European IMF is also a fact and it saves governments and banks across the continent. As a background to all this centralization going on, Spain decided to close its labor market for all Romanian workers. So much for the freedoms, now it’s the time for the bureaucratic machine to work for itself.

At the end remains the question what will happen from now on and why the markets are moving in “mysterious” ways. The reason is clear and it’s called lack of adequate market signals. The economic agents are taking their decisions on the base of the information they possess and the signals by the markets. As signals you should not understand the politician who is speaking that from now on everything will be OK. This is not market signal, but useless movement of the air with the only goal to be on the TV. The market signals comes with the prices where the information from all actors is present – those who demand and those who supply. The same is with money, as the signals are present in the interest rate.

When the interest rates are low this gives signals that the savings are raising, i.e. the preferences are not for today’s consumption, but for tomorrow’s one. This is signal for invest – it’s like the market saying that now is the moment for long run investments. But this is false flag, because there aren’t any more savings, just the interest rate is kept artificially low with the help of the central banks and money printing. The signal is misleading and it leads to the so called boom, i.e. to mass investment in useless projects (Mises called it malinvestments). That’s how we reached to September 2008 when the investments happened to be bubble and the world economy collapsed. Everybody were surprised how the market players have made such mistakes, and in forefront appeared the old story about greed (“animal spirits” of Keynes). But this is not explanation. People didn’t become more stupid or greedy, just the “market” signals have misled everybody. This is the only adequate explanation for the fact that everybody is wrong at the same time. Just everybody is fallowing the same wrong signals – artificially low interest rates.

Everything said above is in effect today. The economic agents now know that the market signals are false. They know that the interest rate is a political instrument and can’t give any information about the real preferences of the market – to invest or not to. That’s why everybody is in zugzwang. It’s like to play chess with closed eyes, without knowing the position on the chessboard. You’ve got to be crazy to play anything…

[1] Zugzwang is a term usually used in chess which also applies to various other games. The term finds its formal definition in combinatorial game theory, and it describes a situation where one player is put at a disadvantage because he has to make a move when he would prefer to pass and make no move. In short, it applies to a position in which one player can move only with loss or severe disadvantage. The player would prefer to wait until the conditions somehow change which in chess is not possible.