Through the eyes of a Foreigner
By Andrew Engel
Catching Smoke
Earlier last week I had roughed out the draft of an article on how the US debt crisis may effect average Filipinos.
I had a structure in mind and I hoped some useful insights, including the impact of an appreciating Peso on remittances from OFWs and those likely to gain or lose from improved terms of trade. The working title was winners and losers.
I had even managed to turn some economic gobbledygook into plain English, without the need for clichés or the use of vehicle part analogies.
In the process, I was also playing around with the idea of saying something on how incomprehensible economics is for most people. That an economist might as well be speaking in Swahili as far as Joe or Pedro public were concerned: firstly, because economic jargon is a foreign language and secondly, because economics is a convoluted and complex discipline.
I had written the follow sentence as part of the point about economics being little understood by laypersons; “as for the so-called ‘dismal science’, there are multiple determinants to consider, rarely do these work in harmony, there are pressures exerted in opposing directions, indeed in all directions and future events are mostly if not entirely unpredictable”.
That was on Monday, when the US debt crisis was the only game in town. Moving forward, the US debt crisis was avoided with a last minute deal, the world sighed with relief and the dramatic and breathless minute by minute media coverage of an approaching Armageddon ended, to my delight. Phew, lucky they fixed that right?
Wrong! Before the working week was over, the stock markets crashed around the world, pundits predicted a double dip recession for the US, while basically saying the biggest economy in the world is tanking. And, of course, bearing in mind that the US economy had been given a D (for dud) by every economic commentator or expert around the world, the US dollar appreciated! Go figure.
My draft went in the bin as well. All I was left with was the Swahili idea.
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Of course, any economist can tell you why the US dollar can appreciate on the back of the US economy being publicly declared a basket case. Here’s where you need to put common sense on hold, particularly if you think it should have been the other way around. When stock markets crash, people get nervous and scared (a loss of confidence in eco speak) so they race out and buy US dollars because it’s the reserve currency of the global financial system. It represents safety! See, easy, clear as mud isn’t it.
The Economist ran an article on 8 August “Guessing in the Dark” which provided further clarification. The gist of the piece was that markets fall if you have more sellers than buyers, and that it will be a week or two before we find out that there was a forced seller behind the collapse. It was “a non-economic reason” (sic), part of the market’s dynamics, according to The Economist.
Whoa, wait a minute, it’s not economics based?
Even if that’s right it is a damn convenient argument for economics. Correct me if I’m wrong, but that is saying stock markets don’t operate with economic good sense doesn’t it? That market “dynamics” are in some way not economically rational. So, rather than apply economic logic to the strength or otherwise of national economies, sellers and buyers will be guided by irrational thinking. So it’s not real economics at work. Mmmm, so remind me again, what’s the point of teaching economics?
In this context irrational thinking is being used as a get out of jail free card. Even though it is what economists refer to as “animal spirits”. The phycology of people as they swing from optimism to pessimism when considering, among other matters, their investments and the risks they face. The pejorative reasoning is that the human mindset veers from confidence to fear and that we are driven like cattle and spooked by the reaction of a few in the herd.
As usual, I’m oversimplifying, but here I was thinking economics and markets were all part of the same game. That it’s all part of economic thought and reasoning and that human behaviour was a chunk of the explanation for market collapses, indeed it is very often the reason that the neat and tidy economic model breaks down. If there can ever be a totally effective economic model.
My mistake and clearly I’ve confused the matter and am not about to question a peer economics publication. But it does help me make my point about how confusing it all gets.
I have to come clean and admit I consider that economic predictions are a bit like trying to grab smoke. It doesn’t stop us, however, and there are thousands out there running around with their arms flaying trying to do just that, and making a tidy living out of it. When you ponder the futility, some of the time, of the process it can seem a bit silly (Ok, before you have a heart attack, I have left out all the valuable work done and the contributions to humanity of every scholar since Adam Smith).
So where do we go now? Well let me try and catch some smoke.
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In the grand scale of things, the impact on a majority of Filipinos of these latest events is likely to be minimal.
With 41% of the Filipino population being described as “vulnerable” (a quaint use of the word that only an economist could come up with) and 26% said to live in poverty (both ADB estimates), there are at least 40 million Filipinos who probably couldn’t care less about a debt crisis in the US or Europe, or a stock market “correction”.
Add to that the number of “employed” who barely make enough in wages to survive and the figure jumps to…who knows what, perhaps 60 or 70 million. (And bear in mind that the official unemployment rate is 7.3% - which doesn’t seem too bad until you understand how it is calculated.)
So we have more than half the population, arguably much more than half who struggle just to get by every day. Their lives will not change dramatically, whatever the consequences of the US or global economic headaches.
While I hesitate to say this, the one good thing about being poor, is that you don’t stand to lose much if the world economy tanks, or big players lose their shirts.
One thing I am certain you can predict is that we are going to hear a lot more about economic prospects over coming weeks, and most of it will be scary as hell.
I hope you can make sense of it and what it means for you personally, if it bothers you at all.
(Comment or write to Andrew at engelmint@hotmail.com)
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