January 30, 2008 | Ronda Jambe

Confusion by design?

Trust in the markets is a brave thing, yet most people I have spoken to about the recent turbulence have voiced that view: in the longer term, the stock market only goes up. Of course, there are glitches and some losses when big companies collapse, but overall one can expect to make money on the markets. They conclude that an allocated pension drawing down a modest 4 or 5% tax free, with their money making maybe a modest 10%, is a safe bet. In any case, it appeals more than making 6% in term accounts or rentals, which get taxed. All reasonable, based on the best knowledge and understanding they have at hand.
I have always believed that policy complexity is, of itself, a design flaw. The tax system is now more than epic, our social security system convoluted. At what point do these circuits become so dysfunctional that ordinary people no longer know what path to take? The intricacies of financial instruments like Collateralised Debt Obligations, and other exotic futures and derivatives seem to have masked the real underlying issues. These generally turn out to be more mundane and familiar: greed, stupidity, and regulatory passivity. In my own way, I fell for all the promises, eyes too big for what needed to be digested.
But what if the fundamentals are really changing, and this volatility is just a precursor? But, these optimists say, no one has a crystal ball and even property can crash.
Regarding the ‘R’ word, Harvard economic professor Martin Feldstein, writing in the US magazine Foreign Policy (
http://www.foreignpolicy.com/story/cms.php?story_id=4143&page=0) is sceptical that Bush’s package of handouts to households will be effective. He says that aggregate demand is not the problem. He thinks the challenge is to grow the economy through ‘more investment in capital equipment, people working harder, more innovation…’ Feldstein thinks there is a more than 50% chance that the US is already in recession. Well, if a leading economist has that level of confidence, why should we kulaks even think we know anything? (Kulak is a lovely term the Russians used for ‘rich peasants’, really subsistence farmers, around the time Stalin stripped them bare and carted them off to Siberia. Kalashnikov was a rich peasant, and the book about the social history of the AK47 by Michael Hodges is a fascinating read. Now at least I know my social class.)
A little squeak of common sense would lead you to agree with Feldstein that cash to individuals won’t fix the underlying problems. It also doesn’t make sense to think that more junk floating into people’s cars, houses, mouths, etc. is advisable on any other level. That much is clear, at least to me.
It has now taken me and my spouse several hours to work out how much I actually lost from my super account. Various statements finally led us to understand that between what I put in, the 15% taxes, what the fund earned, the fees, and then the losses, it was not a good strategy, from either a tax or an earning perspective. Luckily, my hit was not mortal, unlike stories I have heard of people in self-managed funds who have lost 150K and are now forced to return to work. Such individuals will be very interested to know if the losses can be claimed against future capital gains.
It is not just my super statements, but even my phone, internet, electricity and every other bill that leaves me in confusion these days. Why can’t I easily fix my mobile phone settings so that it doesn’t go to ‘missed call’ if I don’t answer within 2 rings? My paranoid side says this is a ploy to increase the number of calls and therefore the phone company’s revenue. Another interpretation is that I am an idiot. But perhaps there is method in their inefficiency. Who benefits from such administrative leger de main? When Societe Generale finds it too difficult to maintain an administrative structure that detects a loss of $8b over several years, then perhaps it is time for a rethink. According to the Economist, Societe Generale had a risk management reputation second to none. Makes you wonder how bad ‘none’ could be.
But these musings (well, maybe they are ravings, you have a point there) are a side show compared to the skullduggery of international relations. I strongly recommend this book to those who are interested in how terrorism took root in the last few decades:
House of Bush, House of Saud, by Craig Unger. (Gibson Square Books, 2004).
Unger has carefully deciphered the documents, media reports, government policies and public statements of a long trail of intimate friendship and business dealings. In itself the theme of Bush family involvement with the Saudis is not a secret. It was noticed when members of the Saudi ruling class, including members of the Bin Laden family, were whisked out of the US without questioning after 9/11. I’d heard of the aggressive Project for a New American Century, but I had missed the Carlyle group, that actively leverages political connection into military funding and profits.
Some of this was hidden in varous US bills and defense appropriations, some was more obscure. A media desperate for access backed off from asking tough questions of Dubya about funding terrorism through the Saudis. Little fuss was made when the Saudis poured literally billions into building mosques in the US, some headed by extremist muftis.
The upshot is that the US pretty much was a midwife at the birth of Al Quaeda, through their good friends the very nasty, repressive, corrupt, anti-democratic and Wahhabist Saudis. No need to chase them out to bring democracy, they go hunting with the Bush dynasty.
And let us not forget that the Keating mob allowed our own ‘women are like uncovered meat’ mufti to stay in Sydney, against the warnings of ASIO. In writings about ‘the risk society’ there is a stream that says the evidence of people on the ground should be taken carefully into consideration when designing policies and regulations. This is the approach that underlies the open source philosophy, as applied to software, journalism, and Wikis.
My ears hear concerns about sustainability, not cries for more passwords, unusable features on electronic gadgetry and innovations in softdrinks. In the financial world, soothing homilies remind me of the fox in Brer Rabbit. For a while, I played the rabbit, now I’ve hopped away scared, but also confused. Someone is poised to profit from every foolish or confused investor.
Who, indeed, do you trust? From which sources? And what do you really understand about the global financial dynamics?

Posted by Ronda Jambe at 12:34 pm | Comments (6) |


  1. A lot! And if the US gets out of this one, then Houdini is passe!
    The Australian economy is ‘strong’? Which sector?
    Looking around at the small businesses in our area I don’t see any evidence of it.
    Australians have massive personal debt, and costs are going up across the board. Clear whatever debt you can, cut your ongoing expenses as far as possible and sit tight.
    I believe that this is just the beginning,that the bottom is far, far away, and when it settles the Euro will have supplanted the $US, the US’s creditors will have called in their debts and the only ‘assets’ the US will have is a pile of obsolete scrap.
    High tech weaponry and defence, like armour in the past, has had its day. It offers no defence against those who would smuggle in a nuke and truck it a city centre in a truck.
    We live in interesting times!

    Comment by peter hindrup — January 31, 2008 @ 10:31 pm

  2. The personal debt is a real worry.I hear today that our total debt is a one trillion dollars.This is one yrs GDP.This is scary stuff if the figures are correct.I know the balance payments deficit is about 540 million so the rest must be business and personal debt. We have no way of repaying this on a per capita basis.
    The share market debacle has not finished.It will slowly lose value in the shape of a sine curve, suffering peaks and troughs.Pumping more money into the system may just be delaying the inevitable.Western countries have serious structural problems of importing more than they export.We don’t actually make anything,so we end up with economies based on froth and bubble.High taxing big Govt,service industries that cater for wants rather than needs,and a system that neuters small business innovation.
    No body really wants to employ anybody because of the legal, Govt and union BS.
    We flog off all our resources so the Govt has a super abundance of wealth which it cannot redistributed because we don’t have the skilled labor force to use this excess money.So to keep inflation down the Reserve Bank increases interest rates.Rather than selling our natural gas cheaply to China,wouldn’t it be better to consume it at a lower price here to keep interest rates low,so the RBA won’t have to increase rates?The world has gone mad!I don’t think that our Govts or financial institutions have a clue.

    Comment by Arjay — February 1, 2008 @ 8:43 pm

  3. does the market really go up? or does the money go down?

    Comment by al loomis — February 4, 2008 @ 11:02 am

  4. Spot on, and I have cleared personal debt, but might borrow again if it suits me.
    A friend said two relatives working in the financial sector, one in NY and one in London, have both independently warned that the US problem is much bigger than they are letting on.
    The problem seems to be the tentacles that infiltrate all areas of the economy, here and elsewhere. And of course the Chinese themselves are heading for the limits of their growth.

    Comment by Ronda Jambe — February 9, 2008 @ 9:03 am

  5. Yes Rhonda, trusting in the markets is the hallmark of an optimist and will most times work out for the best, but not all the time.
    Are the fundamentals changing? It appears to me that collectively we (all world markets) have overshot the mark with exuberance. Exuberance is not a bad thing at all and is indeed a fine quality to find in a person, so long as it is manifested in positive direction. Gambling on 10 – 20% growth in asset prices, year out year, with no tangible productive output (other than a few chunks of iron ore and a few boats with LPG) however may be overly optimistic for Australia.
    Time will tell.
    Thanks for the book recommendation, but I think I have found a better one (article actually). If you would like to understand the root of the problem from someone who had a wide and clear vision I can recommend the following – go to website of Barry Long (1935 –2003) http://www.barrylong.org/ and go to the articles link. Barry Long was an spiritual teacher (Australia) with such an insightful way of getting to the core of any issue. Rather than my describing who he was it is better if you check. You may or may not like it, it depends on where you are at.
    You ask ‘who do I trust?’
    That is a good question, and reminds me that it is almost time to meditate again.

    Comment by mr_nobody — February 9, 2008 @ 2:23 pm

  6. Thanks for the ref to the site, will check it out when I get home.
    A new financial instrument causing problems has come to my attention: Contracts for Difference. According to the weekend Australian, betting on these has worse odds than putting it all on the red at the casino.
    Not only that, but it has highlighed the conflicting dual role of the ASX as both a money-makaing enterprise and a regulator, a sure recipe for disaster in terms of governance.
    Meditation may help, I guess my version of that is doing green things, perhaps futile, but it helps to know a) I have a conscience and b) am capable of acting on it as best I can.

    Comment by Ronda Jambe — February 11, 2008 @ 9:56 am

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