The human race is an inherently emotional species. We were told that our origins are to be found in the “homo sapiens”, but, regrettably, no definite proof has been found. What’s more, anecdotal evidence piles up every day to suggest otherwise. We still have a ways to go before peak knowledge, but peak wisdom is, without doubt, something of the past. Let’s see if we can make wisdom a bullish market again, sometime after this effervescent madness settles down.
Herd behaviour, groupthink, and emotional conduct, are the pillars of our daily activities and desires. That is the main reason to be mindful of the consequences of shouting “fire” in a crowded cinema. Not one out of every ten will try to corroborate the information. Provoking stampedes is easier with humans than it is with Buffalos. Herd and human behaviour are becoming a synonym.
Politicians are aware of that, so they talk soft, and use whatever information they get from the market (well, nowadays the daily price fix of goods or investments that simulates a market), or society, to their convenience. And their convenience is “extending and pretending, as much as they can, for as long as it lasts”. They are not wise or honest, but they are not stupid either.
Politicians and Central Bankers are cognizant of the structural weaknesses of their model. They know the issues that can spoil the “extend and pretend common knowledge” game they are in:
- Inequality and the ensuing social upheaval to cater for.
- A domino of debt write downs, if the sustainability and thus validity of debt as an asset in balance sheets, is put to question.
How are they handling them?
- Inequality and poverty have to be kept at bay. Entitlements and welfare are the drug that masks the symptoms of a notoriously unfair society. They can’t afford to mark them down to market (tell society that there is no way that the actual economic output will be able to finance those future costs, and has to lower them).
- Debt has to be perceived as sustainable, so they have to print to death, and preserve the ZIRP and NIRP environment that keep the financial costs of the unpayable debt as low as possible. Printing also collaterally serves the purpose of helping finance the subsidies and welfare they need in order to ward off public protest and violent mass behaviour.
- Markets have to be tamed (read supressed), to prevent their instability, and continue to keep alive the positive message embedded in the common knowledge game: CB’s will assure us endless prosperity no matter how much they have to print, or NIRP around. Or do whatever it takes.
- Volatility and risk premiums should be outlawed, and while they are at it, supressed in practical terms.
Greece is the poster child for the developed world. In a nutshell, the second Versailles treaty in history is the victory of the policies that protect the second issue (debt sustainability), versus policies that protect the first (subsidies and entitlements well above society’s means). It’s not that one flank is more strategic than the other. The real Greek drama is that debt sustainability is in the interest of creditors, while fairness and social peace is in the interest of common people. Needed to know who would prevail?
It is to be expected that, in exchange for conceding to “extending and pretending” the sustainability of Greek debt, creditors are aware that they will have to give the mob some “bread and butter” in order to feed them, and pay for the maintenance of the status quo. Let’s hope there is still some memory cells left in German brains. I doubt it. Human memory is short lived. I expect no more than a few token financial aid kits. It would be the same result, the other way around, because magnanimity and wisdom usually pair together, and we are definitely short of them both, regardless of who happens to be at the top of the food chain at that particular time in history. Continue reading