The myth of stability and certainty

And where to learn the truth of what we have instead

Minsky on Stability

Whatever your interest (or leaning) in politics you surely, cannot have missed Theresa May’s promise of stability and certainty in the recent election campaign.

But if you did miss it (or even if you didn’t) – here’s a funny reminder

Of course, Mrs May gave up on her ‘Strong and Stable’ mantra after this ridicule some time back.

But then immediately replaced ‘stability’ with the word ‘certainty’ in her speech in Downing street the morning after the election.

You might wonder how she could genuinely believe in ‘certainty’ after her ‘certain’ victory in this election vanished into thin air over the past 7 weeks.

But there you are, that’s human nature for you.

When people ‘believe’ in something – they don’t let go of that belief easily – regardless of the evidence in front of them.

Now, to be clear – this is not another ‘Tory’ bashing blog

I’m certainly not here to defend Jeremy Corbyn who is equally guilty of promising the impossible.

According to him  – in his overconfident interview with Andrew Marr on the BBC this morning – we can all have ‘stability’ if we’d only put him into power. You’d be forgiven for thinking he’d just won the election!

And let’s be honest here.

Corbyn went on a ‘shopping spree’ to buy votes at this election.

He bought thousands of votes amongst the young – with a promise of FREE University Tuition fees.

And he bought back millions of older votes with two more promises.

That there’d be no extra personal cost towards long term care – regardless of wealth – a most curious promise.

And a stupid promise on the triple lock for state pensions. (The triple lock is where pensioner’s income rises by 2.5% p.a. even if earnings are flat for everyone else)

Make sense?

Well, it does if you want to buy votes with promises of FREE stuff.

But, as I’m sure you know, there are NO FREE lunches in the real world.

These promises would cost a fortune to deliver and the people who would pay for them would be hard working middle Britons as always.

But let’s get back to the bigger question . . .

Can politicians deliver ‘stability or certainty’?

Well of course not.

Indeed, I’m quite amazed that they even dare utter those words.

After all, it’s still less than ten years since the last financial crisis – which arrived under the stewardship of Mr Prudence and Stability himself, Gordon Brown.

Politicians keep making this promise because it’s what a lot of people want to hear.

They (or their PR advisers) know that growth and stability is what people yearn for.

And yes, it’s an attractive idea that a politician might have the power to conjure it up for us.

But just saying they can do so – doesn’t make it real!

The plain truth is that political and economic systems are unstable by their very nature.

They are driven by our natural ‘herd like’ animal behaviour and our collective mood swings (worldwide) between optimism and pessimism.

As to which politicians we follow? Well, that depends on their promises of course – and on our collective belief swings between various economic schools of thought.

What’s interesting is how the preferred school of thought – moves around like wildebeest on the East African Serengeti.

That’s the excellent analogy from Dr George Cooper in his book, ‘Fixing Economics’ 

And if you want to get your head around this subject – that book is the best place to start and you can find it with some of my other favourites here.

Here’s an extract from George Cooper’s book

The very fact that there are so many disparate schools of economics both on and off our economic plane is a symptom that all is not well in the field of economics.

A further aspect of the problem is inconsistency over time. Up to this point I have described the neoclassical school as the consensus opinion. This is true today, but it was not always the case.

We could imagine the economic plane as a real plane populated with all of the economists in the world.

Over the last century or so there would have been some considerable migrations around the plane – I have in my mind’s eye something that looks like the herds of wildebeest on the East African Serengeti.

In the 1930s through to the 60s, the bulk of the herd would have been clustered around the Keynesian school, with substantial populations in the Marxist, Austrian and neoclassical quarters.

In the 1970s, there would have been a migration away from the Marxist and towards the monetarist areas.

From the 1980s onwards, the drift would have been increasingly toward the entire herd moving into the neoclassical quadrant.

In 2008, as Lehman Brothers was failing, there would have been a stampede away from the neoclassical quarter towards the Minsky zone as everyone suddenly rejected the silly notion of an inherently stable economy and embraced Minsky’s idea of an inherently unstable economy.

It was around this time that the term “Minsky moment” became briefly fashionable.

Then in the years since 2008, Minsky has been forgotten and the herd has quickly drifted back to recolonise the neoclassical zone, conveniently forgetting that it ever left.

So, who is Mr Minsky?

Well, I urge you to read George Cooper’s book to learn more about Minsky’s and the other schools of Economic thought.

But in a nutshell, what Minsky realised is this.

During periods of ‘stability’ people gain confidence and start borrowing more and spending more.

This leads to a stronger economy and more confidence and more borrowing until the borrowing gets out of hand and the system goes into reverse.

Sound familiar?

Yes, so in other words, as Minsky himself said, ‘stability leads to instability’

Okay but what has this got to do with your money?

Well, unfortunately, there some investment advisers who believe that our economy (and the markets) are fundamentally stable.

And whilst they accept that markets may ‘wobble’ a bit – from time to time  – they ‘believe’ that markets always ‘right’ themselves in short timescales and carry on upwards as before.

So, they say, you can pretty much ignore the wobbles.

These are absurd beliefs that are simply not born out by the evidence.

Sure, there are a lot of markets where historically there have been long periods of growth with only minor wobbles.

But most developed markets have also experienced times of severe 50%+ falls from time to time.

There have been 3 such falls in the UK Stockmarket in the past 50 years and two of them in the past 17 years.

So problems tend to cluster also – something noted by Benoit Mandelbrot a long time ago and beautifully explained to an FT journalist here.

The longer term tidal flows of economies and markets do not stop simply because a single politician demands stability or we ‘like the idea’ of believing that we can can have it.


So if you hear a politician or an adviser promising you ‘stability or certainty’ . . .

. . . you should ‘tune out’ and start listening to someone else.

And please take care out there.

Paul

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