Thursday, June 28, 2012

The occidental decline

In 2003, Mary Poovey wrote a disturbing analysis of modern financial culture, Can Numbers Ensure Honesty?. Published in the Notices of the American Mathematical Society, it's unlikely that many politicians, journalists or bankers read it, and even if they had, it's fanciful to think that it could have changed the course of events.

Poovey pointed out that "the International Bank of Settlements estimates that in 2001 the total value of derivatives contracts traded approached one hundred trillion dollars, which is approximately the value of the total global manufacturing production for the last millennium."

A decade later, here's the national debt league, as a percentage of GDP:

Greece 153%
Italy 123%
Ireland 113%
Portugal 112%
United States 107%
Great Britain 88%
Japan 236%

The good news is that China has more than a trillion dollars in foreign reserves, and "could buy all of the outstanding sovereign debt of Spain, Ireland, Portugal and Greece, solving the euro area’s debt crisis in a trice. And it would still have almost half of its reserves left over."

So what the banks and the financiers and the politicians have done, is to hand long-term economic dominance to the most powerful hive-mind in the world.

On the quantitative financial methods underpinning this disaster, Poovey wrote: "the mathematical model has to assume that no unprecedented economic events or conditions will intervene or disrupt the pattern graphed by statistical probability. In other words, in order to work, the mathematical model must assume that a limited and stable set of factors will be at work in the market and these will generate a normal distribution about a mean...

"Very few people inside or outside the global financial community question whether the foundational assumptions implicit in financialization are true...what if markets are too complex for mathematical models? What if irrational and completely unprecedented events do occur, and when they do - as we know they do - what if they affect markets in ways that no mathematical model can predict?"

Too late now.

1 comment:

Gordon McCabe said...

I managed to inadvertently delete this comment from Corner1:

separating markets from the economy,
some market models are better than others: