03/09/2009 - 00:00

Wishing won’t make it happen

03/09/2009 - 00:00


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Confidence on its own will not sustain economic growth; we need to deal with reality.

Wishing won’t make it happen

PAROCHIALISM is a worldwide phenomenon.

The Icelanders, who saw their entire banking industry collapse last year, had their own Icelandic reason for thinking their economy was on a forever-upward trajectory. So did the Spanish property developers, while the Irish believed in the modern myth of their Celtic tiger.

Perth is currently subject to an online 'vote confidence' campaign, organised by a range of advertising and media industry groups.

As though we don't have our own parochial biases. We are being told that just by clicking ours heels together and trying really hard to believe, then the future will be different, better.

Perhaps the glass half full campaigners actually believe this stuff. Maybe they have been reading some George Soros material. George Soros, for those of you who haven't heard of him, is regarded as one the greatest investor/traders of all time. He has written many books explaining his profitably concept - reflexivity.

Reflexivity says that people interfere with the observations they make in a social science, like the economy.

Market participants can manipulate what it is they are observing by participating in the market, through buying or selling. By observing an opportunity, and acting on that observation, the opportunity is bid away.

He describes how, if there is confidence in a product or trade, that confidence will generate bids that will lift the price and generate further confidence. A virtuous cycle could ensue.

This little idea of his helped his fund generate returns of 35 per cent a year for 30 years.

You can do a lot worse than listen to what George Soros has to say about these matters.

Did the glass half full committee listen?

Not when he spoke to Bloomberg on July 8 and explained that the notion of an interrelationship between confidence and economic growth was not unencumbered by actual economic factors.

He said the Obama administration was relying too much on the relationship between confidence and outcomes.

There are real economic factors that impinge on the confidence trick, such as paying down debts acquired in 2006 when 2009 looked very different from the 2009 we can see currently.

The Wizard of Oz could give the Tin Man a heart, the Straw man brains and the cowardly Lion courage, because all they really needed was the confidence to see they already had these things.

But the Wizard could not get Dorothy back to Kansas, because even in fairy tales there is a limit to confidence.

The optimists point to the number of cranes in the Perth skyline to support their vision of a blossoming future.

These cranes are building office space in a city with one of the fastest growing vacancy levels in the world.

As they are finished they will add supply, which will further increase vacancy levels. Sure people might move into the CBD from less prestigious locales, but not without seductive rents.

This is a pretty common mistake. People often mistake the future for the past.

People are also temporally parochial. Not just through space, but through time. They fight the last war even though the historical context has changed.

Paul Keating, fearing inflation, gave us the recession we had to have in the early 1990s.

But he wasn't there in the 1970s when inflation was rampant.

The world at that time was just starting to experience the greatest disinflationary force of all time, the entry of 3 billion former communists into the global economy.

All Paul Keating needed to do was to provide a stimulus package.

Now, Kevin Rudd is giving us Paul Keating's stimulus package. But once again the context has changed. We aren't going to be globalising in the coming years like we have done since the fall of the Berlin Wall; we are substantively globalised.

We should take care to think appropriately and to learn as much as possible about the current historical context.

The glass shouldn't be viewed as half full or half empty, it should be viewed for what it is ... half a glass of water.

n Roland Nelson is a Perth-based economic consultant.



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