16 July 2009

Mythbusters: Truth and Beauty via the Russian perspective...

Myth Busters

A number of our peers have recently taken to deflating urban myths, also a favourite pastime of T&B. Furthermore, and perhaps more to the point, it is far
less demanding of time and effort to simply enumerate one’s major points, rather than trying to spin them into a coherent and compelling narrative…and it
is, after all, summer-time!

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-“Decorrelation is Dead”

• Whilst “decorrelation” did not function in precisely the fashion that many observers – T&B included – had expected, i.e. sheltering the emerging
financial markets from global volatility, in fairness, no one had expected that the world’s largest economy would come close to outright collapse, creating
unprecedented economic disruption. Nevertheless, the current crisis confirms the decorrelation hypothesis, rather than debunking it. As the G7 slumps into
recession, the differential between growth rates of the largest emerging economies and the developed world is widening – not shrinking. In particular,
China is gaining ground by the day…

-The United States economy is twice the size of the four BRICs put together (and/or this has some conceivable

• Expressed in volume terms, i.e. PPP, their combined GDPs are not far from that of the US; more importantly, as G7 output shrinks, the share of the BRICs
in global growth is a now large multiple of that of the developed economies. Taken together, the “developing” economies now account for more than 50% of
global GDP.

-The burgeoning US budget deficit is the fault of Obama/of generous social spending/is going to be brought under control

• For shame! It is estimated that the Iraq war alone will ultimately cost some $3 trillion dollars (including interest on the debt, lifelong care for blast
victims, etc.); add a few trillion more for Afghanistan, missile systems, fighter planes which will never fire a shot in anger, and pretty soon the recent
bailouts aimed at attenuating the massive social dislocation arising from a deep recession begin to look like a rounding error. And, as for the budget

-The increase in US domestic savings will allow the budget deficit to be safely financed by domestic savings

• The increase in US consumer savings is simply the mirror-image of the increase in government dis-savings -it will not begin to restore balance, even
before taking into account the huge increases in spending which will be required to rebuild the bankrupt social insurance system.

-Economic growth will rebalance the US budget

• For the past two decades at least, economic growth has been driven by increasing credit creation; as this credit is now being withdrawn, the state has
employed massive deficit spending as a substitute. This may provide a temporary fix, but it certainly does nothing to rebalance the budget – a feat which
would likely require a decade of austerity to accomplish. It should be intuitively obvious that deficit-fuelled growth cannot yield taxable profits
sufficient to balance the very deficit spending which sustains said growth!

-The commodity super-cycle is dead

• It’s not even sleeping – if globalization has done one thing, it has been to draw billions of new consumers into the global economy. These new consumers
crave cars and coolers and washing machines – not internet protocols and nursing care. Industrial output will thus resume its secular rise, inexorably
increasing the demand of commodities. As for oil, the story is even simpler: they aren’t making any more of it – quite the opposite; and despite all of the
warnings, we see no signs of it going out of fashion. © Eric Kraus krausmoscow@yahoo.com & OTKRITIE Financial Corporation www.open.ru 01 July 2009

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-There is no substitute for the dollar

• Perhaps there isn’t – yet – but as day follows night, one (or several) partial solutions shall soon enough present themselves. The ball is in the
Chinese’ court, and suddenly, they are being uncharacteristically aggressive in this matter; as the owners of the world’s largest reserves, their views are
to be taken seriously. At every crucial turning point in history, pundits will reliably be found to assure us that things will never change – meanwhile,
the very earth is moving under their feet.

-Oil is dead – prices will never again revisit their recent peaks

• A choice bit of idiocy, most recently retailed in a cover story in Newsweek magazine. In fact, with energy-intensive growth in the emergings, the
depletion of existing hydrocarbon reserves, the sharp cutbacks in exploration budgets and rig counts, and the increasingly vulnerable dollar, it is only a
matter of time before oil prices once again spiral out of control. Our best guess for the timing of the next run is late-2010, but it is only that – a

-The Chinese do not/cannot/will not consume

• Anyone who has visited Hong Kong or Macao (or, for that matter, Bangkok or Jakarta) may beg to differ. Mainland Chinese consumption has been growing by
about 10% per annum however the even faster increase in Chinese exports has masked this phenomenon in the GDP accounts. Simple logic suggests that there are few tasks easier for a government than to convince desperately undersupplied consumers to purchase more tangible goods – provided, of course, that the goods and the income/credit are made available.

-The entire planet yearns for European/American style liberal democracy

• The perceived failure of global capitalism, the rise of militant Islam, as well as the success of states using a more nationalistic model (China, Russia)
suggest that the West would do well to stop flattering itself that its model is universally admired. Multipolarity extends to political systems…a very competitive market.

-As Correlation proves Causation -Superposition proves Analogy

• We have seen numerous charts purporting to demonstrate that the current economic crisis is analogous to – or even worse than – the Great Depression.
Quite frankly, this is nonsensical. At some point, the charts for any two economic downturns will likely look similar, and, ugly though it may be, the current global context is utterly dissimilar to events of 80 years ago. Whatever happens – a replay of the 1929 depression is no more to be feared than a return to the Great Spanish inflation of the seventeenth century! Full of sound and fury – but signifying nothing…


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