Like an earthquake


Every day starts with open eyes.  If you’ve had what you need to keep going, the world has been turning for about 8 hours and the news stories piled up around our humble ball that is spinning and pitching through space.  This information comes to you over airwaves or the internet or a newspaper that greets you on the porch, however you choose.

When the world is close to equilibrium, the news stories are easy to understand.  We all have our own frames that allow us to filter our world and make sense of it, assuming that today is a lot like yesterday and tomorrow won’t be that different.  The institutions that keep the world truckin’ on while we sleep operate more or less the same way.  But what happens when an awful lot happens at once?  That depends equally on the events of the day and the smugness that we greet it with.

Today is one of those days.  An awful lot is happening.

Longtime readers know that I deliberately wait before writing a piece on big news stories.  I can’t possibly compete with reporters in the field as stories “break” – the best I can hope for is to provide frames that allow any of us to digest it all.  I’m going to break with that today because, frankly, the assumption that we can make sense of everything we hear is silly at best.  Here is a sample of the last few days’ events:

  • Protests continue to sweep the Middle East, today hitting Arabia (I refuse to call it “Saudi”)
  • Oil futures continue to bounce around in response, generally higher.
  • China announces a trade deficit with the world
  • A massive earthquake hits Japan

I’ll leave aside for a moment the terrible loss of life that is still being compiled from the earthquake, though I wish them all the very best.  I’ll leave aside the situation in Wisconsin completely because it is still unfolding.  The items I listed have a direct affect on our daily lives in the price of gasoline and the gradual “recovery” in our economy.

No one can predict where it’s going right now.  There’s just too much news and too much of it is very new.

The modern Free MarketTM is based on a lot of assumptions – some of which are usually true and a few require a lot of cooperation.  One of these is that risk can be managed and investment will bring a positive return.  After World War II things were generally set up to create a steady equilibrium where this huge assumption true.  Government was professionalized in “City Managers” and Independent School Districts that took the “politics” out of operations.  Currencies were managed by big Central Banks that kept it all on an even keel.  The Cold War itself was fought almost entirely on the fringes of the developed world.

A culmination of this can be found in the Black-Sholes-Merton theory which states that risk can be managed to the point where it is completely taken out, guaranteeing a properly hedged investor a decent return with no effort forever.  As long as everything remains close to equilibrium it’s economic paradise.

Then, everything broke.  It’s always the assumptions that kill any good theory.

Today’s news shows how much turmoil there is around the world.  There are forces pushing the price of oil up and down rapidly, meaning that the juice that keeps us all moving has become terribly unpredictable.  It’s hurt the Chinese economy, which in its centrally managed quiescence has responded to a potential currency war by boosting workers’ salaries 13% per year, increasing demand.  Concerns about deflation that were quite serious just a year ago have fallen down completely.

How can anyone make sense of all this?  We can’t.  There is far too much happening to know just how it will shake out, especially if Japan is badly damaged.  Any ordinary consumer of news may be used to this feeling, but worldwide markets are not.  There is no equilibrium and the fundamental assumptions just aren’t going to work too well for a while.  That makes the risk look higher, which causes prices to rise, which then feeds into general turmoil as everyone scrambles.

That is the real story on a day like today.  It’s all a matter of how fragile the economy is in the first place and how much faith everyone has in it.  It’s a lot like waiting for news from loved ones after a disaster like an earthquake.  If you’ve ever been in that situation you know that life closes in as you close your eyes and remember what it was like when you went to bed thinking everyone was safe.

That’s where the world economy is right now.  It’s not a good thing.