This is the fundamental insight of the Austrian school of economics. Economists had fixated on finding predictable mathematical relationships between observable macroeconomic variables: Laffer curve, Phillips curve, etc. Mises said that ultimately the economy can not be modeled from data because human behavior is too dynamic.
History has proven him correct. The econometric discoveries once heralded as potential "laws" of macroeconomics have all faired poorly against the data over time. His own insights derived from praxeology have held up well.
This failure of econometrics is at the root of the current crisis. All the model based derivative valuations and risk management tools worked ... until they didn't. Same thing with the LTCM crisis. You just can't substitute regression analysis for thinking.
"Essentially, it says that financial markets have built-in biases which have an impact not only on prices but also, in extreme times, the fundamentals themselves. In such moments, market events affect as well as reflect supply and demand."
"But this crisis is profoundly different from its predecessors, he argues—at least, all those since the Depression—because two bubbles are coinciding: a “straightforward” one in housing, pumped up by low interest rates in the wake of the dotcom collapse; and a longer-term, more complicated “super-bubble” fed by globalisation, deregulation and decades of credit expansion, which is taking in commodities, currencies and more besides."
“[S]hort US and European stocks, US ten-year government bonds, and the US dollar; long Chinese, Indian and Gulf States stocks and non-US currencies.”
I always took it for granted economists believed people's attitude had a significant influence on the market. In fact, this is probably why they say the opposite, so people don't go crazy. Similar to how telling people they don't have free will makes them more complacent.
Interesting how the feedback loop goes both ways so reality resembles what people say. An argument can seem self fulfilling.
However, this is not po-mo in the sense that reality is what people think it is, though, because people don't really lose their free will.
"In the short run, the stock market is a voting machine. In the long run, it's a weighing machine." -- Benjamin Graham
There's quite a lot of evidence that people's attitude affects the economy in the short run. The whole investing discipline of technical analysis rests on this, as do the schools of Keynesianism and Austrian macroeconomics.
But in the long run, people's basics needs always win out. You may believe that prices are going to fall and so it's better to spend your money later rather than sooner, but eventually you still have to eat. Or you might figure that stock prices are falling, yet companies are now spinning off so much in dividends that it's worth investing just for the dividend stream. These effects tend to put a floor (or ceiling, for bubbles) on any short-term psychological movements.
The tricky part is figuring out where the short term meets the long term. If people could do that reliably, they'd be millionaires in short order. But it's very difficult to time the point where "Everybody else expects prices to go down, so they will" meets "But they're really low, so the fundamentals look too good to pass up."
That works as long as a panic attack doesn't cause any kind of irreperable systemic shock. But I guess such a thing is unlikely. Such an event would have to be worldwide, otherwise the equilibrium you mention results.
I basically agree with the Soros thesis. The fact that it has dire implications for many of us should not blind us to the reality of an out-of-whack global economy. To give one indication of the scale of imbalance, global reserves of dollars has gone up several fold, to $5+ trillion in the past few years. This is about the clearest evidence of the US devaluing its reserve currency status, through excess issuance of paper claims on itself.
Wouldn't another explanation for a bubble in housing be the demographics behind the baby boomers selling their homes and moving into retirement communities, or even (I am not gloating) starting to die?
T. Boone Pickens, an oil-made billionaire, has been saying that daily global oil production has peaked. He's been right (and made hundreds of millions off his predictions) before.
The direct income that he'll receive from this book won't even register as a tenth of a percent on his income statement. So clearly, he's not doing it for pure sensationalism. I actually think he believes what he's saying.
Yes, yes, but the parent commenter is right in spirit. Soros is richer than god, so he's working to satisfy other ambitions now. From the economist article mentioned below:
The 77-year-old hedge-fund supremo and slayer of sterling has nothing to prove financially (he is worth upwards of $8 billion). Intellectually, however, he has long been frustrated at not being taken seriously. Just as he was about to give up, along came a debacle that, he believes, validates his Weltanschauung.
That fits pretty well with the carefully hidden acknowledgement that this isn't news:
And yet this is not the first time that Mr. Soros has prophesied doom. In 1998, he published a book predicting a global economic collapse that never came.
This article is about two things: the general hysteria of a generation of workers who have never seen a real recession; and a rich man in his final years trying to leverage his wealth into a legacy. They're both pandering.
The direct income that he'll receive from this book
Two commenters now seem to think that Soros wants to sell books for money. No, he's going for his shot of glory--the guy who predicted the apocolypse. Trouble is, everyone's doing that lately...
He's going a lot further than the rest: acknowledging that the fundamental driver of economic growth for the past few decades (cheap money) is unsustainable.
Most people are predicting bad things about the housing market and the credit system, but stopping short of analyzing the implications; Soros is one of the few people taking the next logical step.
Soros is saying that "cheap money" in the US has been caused by a ponzi-scheme in US asset markets. Capital inflows pushed up prices and attracted more investment, which pushed up prices and attracted more investment... Now that people are taking money out prices will fall and obliterate a lot of wealth that exists only on paper.
There's no question that what he's describing has happened. The real uncertainty is over the scale. This could be very significant, or it could be insignificant. Soros is implying that this sort of speculative investment dominates US markets and is the reason the USD hasn't followed fundamentals for the last ten years.
Not much mention of this in the news, but Hong Kong and Singapore have just adjusted their basket peg to the USD. Reduced demand for USD by major debt-holders means reduced demand for USD assets.
Unlikely. Debt we owe china is leverage we have over them. If they tried to use it for political purposes, all we need to do is say "we're not paying." For bonus points, we can also say "100% tariffs on chinese goods."
All of a sudden, $900 billion of China's assets are toast. This will hurt their credit rating as much as ours (do they have any collateral anymore?).
Debt between nations is not the same as debt you owe to the bank.
Plus I don't think he can be faulted for thinking a recession was coming the first time he predicted it - maybe the signs were there that one was coming, but just didn't happen, or was delayed until now when it will finally hit harder.
It's testable in the long run. Considering he wants to be remembered as an intellectual, it'd be a bad move to purposefully make a big claim that's quite likely to be false.
As for selling books, the guy's one of the richest people in the world...
He makes a fantastic prediction. 10% chance he is remembered forever (he predicted a black swan, what foresight!), 90% chance of nothing.
He makes no fantastic predictions, just "the future will probably be much like the present". 0% chance he is remembered forever (he predicted no major change, big whoop).
10% > 0%.
It may be a very good move to make big, ridiculous claims.
Only if he attaches a specific time frame to the prediction. In the long run, "we're headed for doomsday" is a tautology, if only because of the eventual heat death of the universe. But unless you can say "Doomsday will happen in the first quarter of 2012, and the market will continue rising until then", it's not much of a prediction. A broken clock is right twice a day.
> How to sell books: attach vague, untestable doomsday claims to it
Perhaps true now, but not true three years ago. Three years ago all the people who saw a crisis brewing were completely ignored. If you wanted popular attention you had to crow about making fast money in finance or by flipping houses.
I find it astonishing that many here seem so ignorant of the looming crisis and the consequences. In a twisted way I actually welcome the turbulence that it will bring, many have been in recession for years, so it wont make much difference to them, but all you who are looking forward to VC backing should be a little more concerned. Mind you, most of the ideas that are currently being backed seem little more than pipe dreams, and as for a 15 billion dollar valuation of FB, I think that has some merit, of course I also predict that a couple of years where inflation of US dollar outstrips that of zimbabway.
Talking about a large-scale financial crisis that you have long foreseen unlike everyone else and failing to provide any supporting evidence (or even analysis) makes you indistinguishable from a crank. If you are not a crank, you're going to have to provide more evidence or analysis to be taken seriously.
I've also seen it coming for a long time and can point to every friend and relative as a reference. That whole time, for the last year and a half especially, I was always thought to be a crank. Now that it's happening, I'm a crank because it seems impossible to predict?
Remember, a black swan isn't unpredictable; it's only unpredictable to the majority. The turkey spends two years thinking the butcher is the greatest guy in the world, until the last day -- the black swan. But to the butcher, it's not a black swan at all.
I don't know about agentbleu, but I don't have evidence to support my conclusion. I only read the news and used Google. I assure you that Soros has it right and this will end up being worse than the Great Depression.
1) Black swans, according to Taleb are not predictable. That's what he keeps repeating. He doesn't lay any claim to superior prediction capabilities. He merely says that they occur more often than people think, and invested accordingly. He does mention that some are predictable for some people, but I don't think financial markets fall into that category outside of special cases like insider trading.
2) How can people vote up and take seriously a comment like "where inflation of US dollar outstrips that of zimbabway." [sic] ? Do you really believe that?
I too vote: "not hacker news". Other sites have plenty of "doom! gloom!" stories if that's your thing.
I'd like to think that hacker news is an upbeat site. If the world catches fire, we're the guys who will be making fire extinguishers.
Perhaps it is me, but I like to think of starting a new venture to be an upbeat, positive, optimistic way of life. Observations about the state of the world or the economy are interesting only so much as they fit into startup plans, and time has shown again and again that you can run a startup in any environment.
What seems to drive a lot of these "sky is falling" stories are people's political or economic beliefs. "Look, Bush screwed up!", or "Ron Paul was right!", or "Marx called it all along, capitalism is broken!". So naturally talk soon turns to politics and economics, and you get everyone peddling their favorite weird theory, and the net.kooks who weren't really interested in startups or tech start popping up because they smell blood in the water.
That's my two cents, and why I would nuke it, and stories like it, from orbit - "because it's the only way to be sure":-) There are plenty of other places to talk about stories like this.
I agree that if you're starting a new venture and you don't have optimism, you won't get anywhere. But if you also hide from reality, you're toast as well. This stuff isn't from 'sky is falling' kooks -- it's from Warren Buffet and Jim Rogers and Paul Krugman... a long list of the great financial and economic minds. Here it's Soros. But they'll all be ignored until it's too late. People don't want bad news, just good news.
In my mind, that's why this is, actually, hacker news. A start up is a little boat. We need to know when the storm is coming earlier than others and take action:
http://avc.blogs.com/a_vc/2008/04/battening-down.html
David, the turkey and the butcher story? That's Taleb's story, not mine. And it's important because it shows that to see a black swan coming, you often have to look at things from a different perspective.
Second, sure the US dollar won't be as bad as the Zim dollar. That's hyperbole, but the truth is that it's going to get much worse before it's over. That's doom and gloom, but it's less so when you raise yourself above turkey-level and at least attempt to manage around it.
The ironic thing is he speaks a lot about reflexivity, where market's participants views on an outcome actually end up affecting that outcome itself.