George Soros on market equilibrium

Presently, George Soros is on a book tour promoting his new book.George Soros,  In the book he questions neo-classical economics where markets reach a state of equilibrium where buyers and sellers are content.

His main argument is that the neoclassical economics that postulates that markets tend to equilibrium is nonsense. He founds this view on what he calls the theory of reflexivity, which broadly says that use of scientific methodology in economics is wholly inappropriate, because economic agents cannot avoid influencing the outcomes they forecast.

If markets do not find equilibrium and thus are as likely to overshoot on the way up as they are on the way down, then should governments interfere to avoid the euphoria on the way up (i.e. during the dot com boom the peak, at March 2000 the Nasdaq was 5,132.52 ) and the despair on the way down (i.e. dot com boom collapse, in which by October 2002 the NASDAQ lost 78% of its March 2000 valuation)

However, by interfering in this way governments will limit and reduce the possibility of economic growth and thus vast improvements of standard of living and income are unlikely.

Instead,we would perhaps become a France or Germany, every year we  would just limp along with 1% economic growth. 

Would citizens be happy with this?

Ireland's Reckless Banks

Irish banks have placed themselves into a very difficult position. They have lended so much money to Irish property developers that they will find it difficult to remain solvent if the continued downward trends in the property market continues.

In a note, by Morgan Kelly of UCD, he notes that lending to builders and
developers continues to grow rapidly and now stands at almost €100 billion, an increase of
€20 billion on last October. To put these numbers in perspective, €20 billion is twice the market value of Bank of Ireland shares; while €100 billion is the approximate value of all public deposits with retail banks. Effectively, the Irish banking system has taken all its shareholders' equity, with a substantial chunk of its depositors' cash on top, and handed it over to builders and property speculators.

He adds international experience shows that developers will walk when markets turn down, leaving banks, and often governments, to pick up the pieces.

Therefore, all this money has been thrown recklessly into the irish economy by Irish banks. Creating positions which were completely unsustainable, once the tap was closed off. Thus, the returns for developers will be significantly reduced and perhaps in some cases result in developers holding loans greater than the returns possible in the current market conditions.

There will have to be major movement in the coming months in the economy for us to reach a position where the equilibrium is based on real market fundamentals and not on speculators greed.

Prolegomenon

There is a beauty associated with objects and systems being in a state of equilibrium.

This is well represented by jeff Koons two ball total equilibrium tank. It displays the serene nature associated with systems and objects being in a state of equilibrium. There are no victims, no damage is being done.

When objects migrate towards unequal states, it is dangerous and perilous. There is hurt and pain being inflicted a upon someone. Sometimes under the surface, that only becomes visible when the system moves towards a more equal state or when "when the tide moves out".

A healthy and happy individual is one that in balance. They are not overweight ( a condition that can cause insomnia, diabetes and cardiovascular disease), they are not underweight( a condition that causes clinical depression, reduced immune system function and headaches), they do not receive small amounts of daylight (sunlight deficit disorder) or consume large quantities of drugs.

Additionally, many injuries that the human bodies undergo are caused by certain muscles being stronger than other counteracting muscles. Once, the initial injury has been rectified, long term avoidance of the injury can only be secured by ensuring that the weaker muslces become stronger so that they are in balance.

There are countless other adverse effects of unstable natural systems. For examples earthquakes, hurricanes or landslides.

The danger of unequal systems is represented forcefully in the economic world. For example, recently there has a huge push towards increased oil seed production in the west to meet its growing demand for biofuels. This has resulted in large increases in rice and corn prices, resulting in riots in Haiti and increasing hunger and poverty in developing countries.

The effects of this increased demand for wheat is now beginning to be felt in the west with Wal-Mart introducing a rationing scheme for rice in its stores.

Moreover, as the production of biofuels requires a huge amount of resources from land, labour, raw materials and capital. The use of biofuels to limit GHG emissions will become a zero sum game, as the large amounts of GHGs will emitted in the actual production of the wheat. This is recognised by many, and thus the search for cellulosic ethanol technology.

Currently, the stock market and many other economic indicators such as employment, house prices and are falling. These falls are heavily associated with financial institutions closing the credit taps which have been flowing in recent years. The large amount of lending by financial houses in recent years has allowed states of equilibrium (i.e high stock and property valuations) to develop which were not based on any economic foundation but cheap and easily available credit. This easy credit has pushed up living standards, produced low levels of unemployment and allowed people to become people to become house owners who would have previously of only dreamt of it. However, it was unsustainable and resulted in a state of equilibrium that entirely unstable.

Hopefully in this blog, the nature of equilibrium, how little movements can result in the creation of an entirely new balance and the positive/negative outcomes of certain unstable systems will be examined.

Finally, music and film will also be highlighted.