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Wednesday, October 01, 2003

Answer Time

Your second question about investing and the dollar are very important. First, the simple
but disappointing part is that there are some big wildcards in the global economy that make any fixed investment approach highly dubious. Most investing that I am doing is similar to my trading, things are done on a contingent basis. Adaptations are built-in, if this - then do that...
Currencies and money are one of the economic subjects least understood by both policy makers and economists. This is a very good article in, I highly recommend it. As for the dollar, it may fall much further but nothing is cast in stone. (Even after the dollars' fall of the past year it is still around the average level of the past 15 years against most major currencies. Are we supposed to panic over this? Notice that reports in the financial press talk about a rising,falling,strong or weak dollar. They do not talk about a sound dollar because they do not know what that means.) Currencies are traded but they are somewhat manipulated. Central banks sometime intervene. Tax, regulatory and interest rate policy can be changed in ways that alter the demand for a currency. Governments through their central banks are largely monopoly suppliers of a currency. If there is a desire for additional reading material I will provide it. Personally, I would prefer that China was encouraged to strengthen its financial system before policy makers start jawboning exchange rates.

The first question about growth and demographics practically begs for the examination of some imbedded assumptions. (Do you remember hysterical pronouncements about the population explosion? Those people are hanging out with the doom-and-gloomers Bret mentioned in one of his earlier posts.) Japan and several European countries are way ahead of us demographically so we get to watch them grapple with these issues first. My hunch is that boomers will neither be able to nor want to retire as early as some people are projecting. Their aggregate demand will taper as they age but by less than in previous generations. Again, this is just a hunch. The kind of early retirement of the WWII generation is anomolous within human experience. I also don't want to place too much emphasis on the aggregate demand issue. As I hope to discuss in a later post, The Myth of Macroeconomics, aggregates can be very misleading. Innovation and adaptation to change are the driving force of economic activity. Technological change is just a part of the process. Supply and demand work together, but demand is of less consequence in driving longterm change. Always it is the unknown! That is why helping and not hurting the adaptability of economic players is so important. In an earlier post you implied that a free market system caused hardship for some people and also did significant environmental damage, or I inferred this. If this is a fair characterization, you have much company in what I believe are misunderstandings. As for the environmental question, did you ever wonder why the greatest ecological disasters occurred behind the iron curtain and not in the west? The hardships of what the system does to people is also a misperception. Poverty is man's natural state. Poverty does not have causes, wealth creation has causes. I address this because through a better understanding of the adaptive powers of a free market economy counter-productive policies can be avoided.

Let me quote from one of the greatest defenders of Liberty and the free market system, F.A.Hayek
"...civilization has formed by man learning to conform to rules of action, the effects of which were far beyond his vision. I've just come up with a new formulation which I rather like, that the invention or the development of the market amounts to the invention of a new sense organ in effect, similar to the evolution of sight in addition to the sense of touch. The sense of touch gives information only about the immediate environment as far as we can feel. The formation of the sense of sight in the evolution of animals enables us to take account of a much wider environment, but one still visible to our senses. Now, the market has become a sort of, as the biologists call it, extrasomatic or external sense organ, which informs us of things of which we are not aware physically. We cannot see the benefits of our action. We cannot see where our benefits come from, but we have developed a mechanism that serves as an organ of information operating very similarly to the sense organs, but enabling us to adjust our action to events which are beyond our sensory perception."

This is a blurb about the value of adaptability and resilience - author unknown.

A strategy of resilience, on the other hand, requires reliance on experience with adverse consequences once they occur in order to develop a capacity to learn from the harm and bounce back. Resilience, therefore, requires the accumulation of large amounts of generalizable resources, such as organizational capacity, knowledge, wealth, energy, and communication, that can be used to craft solutions to problems that the people involved did not know would occur. Thus, a strategy of resilience requires much less predictive capacity but much more growth, not only in wealth but also in knowledge. Hence it is not surprising that systems, like capitalism, based on incessant and decentralized trial and error accumulate the most resources. Strong evidence from around the world demonstrates that such societies are richer and produce healthier people and a more vibrant natural environment

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