Just what we needed.

Yet another commentator seeing the GFC through the prism of their own bias and prejudice. And true to form, not a single word of a) how it could have been avoided or b) what to do now that it has happened.

Economists cannot forecast the future any better than astrologers or journalists. The very best they can do is to shed a little light on the past - but even then, they cannot resist pushing their own particular barrow a little further along its path. The rationale in this article is on a par with Southern Baptists describing AIDS as God's punishment for sinful behaviour, or Ron Paul blaming the Federal Reserve for all the economic disruption in the US.

The basic analysis is sound, in that the three levels of activity - primary, secondary and tertiary as described by John Michael Greer - can operate independently of each other. What he fails to do however is to connect the dots: while they exist independently, there are also levels of interdependency between them that cannot be ignored, or discounted. While "you can’t eat money" is a handy sound-bite, as with most such trite truisms it serves to obscure, rather than clarify.

We, collectively, allowed the GFC to happen, by living under the illusion that there is no tomorrow, when borrowings from the tertiary economy need to be repaid. To blame this on the tertiary economy itself is to abrogate all responsibility for our own actions. It's like saying "it wasn't me who murdered Colonel Mustard, it was the gun".

While we all know that the blame-someone-else game is the mainstay of the US legal system - without it, there would be a third the number of lawyers there, for a start - it is not a solution, but merely a symptom of the problem.

Similarly, to offer "reducing dependence on the tertiary (or money) economy" as a solution, as the article's author does, is like saying that the secret to long life is to keep breathing.

I actually thought it was a great article.

One of the main reasons we have had a fiscal crisis, and it is going to get a whole lot worse, financial regulation has not been tightened and lessons from the past learnt, is because current economics fails to take into account externalities.

The typical Chicago School of Economics model is flawed, we have had a period, bascially since Nixon removed the Gold Standard, and the U.S. and the rest of the world have been on a faux economic ponzi scheme ever since.

Public debt in Australia is not a big issue at present, PRIVATE debt is! People are now deleveraging and as such we will see about 10 years of negative financial growth before imbalances are corrected. Governments and the markets are not used to this and will not be able to adapt. We need to face facts that growth in its current form is dying.

Pericles has some good points but I see little point in arguing with the main message in this article as Peak Oil is a reality and without cheap oil we cannot sustain our current economic model and therefore our current way of life. Get used to the change it is going to be with us for a long time.

Pericles,

"while they exist independently, there are also levels of interdependency between them that cannot be ignored, or discounted."

Are you familiar with George Soros's Theory of Reflexivity?

If I understand you correctly then his theory accounts for this gap where economists don't.

That's not quite what I had in mind, Neutral.

>>Are you familiar with George Soros's Theory of Reflexivity? If I understand you correctly then his theory accounts for this gap where economists don't<<

Soros talks about the sort of self-fulfilling prophecies that are created my individual behaviours in the market - for example, the lending to the housing sector, that itself drives up prices, when the subsequent higher "values" give the illusion of greater security on the lenders' books.

What I was thinking of were the crossover points between the three levels of economic activity, where "transformation" takes place. Where investment is needed to create agriculture (as opposed to stuff "just growing") for example. Or where a third-level, "purely-financial" market is created for commodity futures - while the market itself is purely to do with finances, there is still an underlying spot market without which the futures market couldn't operate.

Mr Leckie is unfortunately too fixated on the tertiary market being unregulated - which to some extent it is - but then instantly assumes his own pet bêtes noires - "fiat currencies, fractional reserve banking and exotic financial instruments" - are the sole culprits.

Which again, is to put the cart well and truly before the horse, blaming the system itself rather than the people who abuse it.

LOL Pericles,

You wrote:

>>Economists cannot forecast the future any better than astrologers...>>

That's being unfair to astrologers!

After all, by sheer chance astrologers sometimes get things right

Yes, well. Julius Caeser divided Gaul into three parts with some success, so I suppose economists may find it apropos to do the same for markets, but I’m not clear how that will explain, or cure, GFC MkII. A business can observe, orient, decide and act; economists only observe.

GFC MkI began with the collapse of property bubbles in the EU, primarily Britain -- some banks failed, others pulled their heads in, with unsurprising results for the economies. The US was particularly vulnerable to this sort of upset because Clinton had sought to increase home ownership(a social welfare measure) by reducing the equity required to buy a home, and restricting the equity lenders could recover to home equity. Millions lived in homes with almost no equity, and when tough time arrived they simply gave them back to the lender. The investment banks failed because credit seized up across the board. Collateralised Debt Obligations were the fig leaf which hid the embarrassing oversight: in which direction does a CDO trade when the collateral loses value? And when CDOs lose value, what happens to lending?

What lessons should we learn? First, economists are in no position to observe, orient, decide, and act in economically meaningful ways; only businesses can do that. Second, businesses can’t practice OODA when economists have conspired with politicians to legislate restrictions on their capacity to act creatively. Only productivity growth and population growth can expand the ‘tertiary’ market sustainably. In Europe, the US, and Australia, population growth is essentially negative.

So what have we done to stimulate productivity? In the US, some major changes have been rung in -- look at GM, for instance. In Europe, nothing. In Australia, we’re going backwards, fast. The US is at least trying to pay down national debt, or slow the increase. Europe can only agree to spend like topsy. Australia still pretends it’s heading towards surplus, but not even Gillard really believes that any more. We need to back OODA, and badly, Union opposition notwithstanding. That’s unlikely to happen soon, and until it does, we’re at risk.