SHAKING LANES AND ROUGH ROAD AHEADThe world has a lot of liquidity despite the credit crunch in America which started the process of adjustment towards a sustainable balance of opinions. What governs the economy these days is not so much anything that is solid, but which portfolio mix will satisfy your risk preferences. For better or worse, we live in a world of speculation and the roads that we normally follow are weakening and blowing away like the sands of a desert in a storm.
This is what happens in the mature stages of war economies. The authorities have pumped so much liquidity into the system to finance the war that they are addicted to their own form of speculation which says that the war must be won at all costs. More and more money is pumped into winning and the cycle becomes one of excessive speculation in an investment in war. A bad economy results from investment excesses as there is a day of reckoning when the war is seen as a bad investment, or at least not a very good one. Its all relative, for while America spends money on investing in the war other countries can spend money on investing in goods and services not attached to war efforts. China, India, Continental Europe, and Russia, if it is wise, can leapfrog into better commercial positioning for the peace that follows a bitter war.
They are, in a very real sense, investing in peace. Listen to what Clinton and Obama are saying. They are saying that speculation in the benefits of fighting the war have to end. McCain is still unsure, but he has a history of struggling through the worse of situations, a dogged fighter, a formidable foe! And, they are right, but the big question is how much is enough. Well, the hidden costs of fighting in the middle east are going to hit all levels of the economy as mugwumpers try to assess their complex speculative positions.
When one sees speculation in gold one knows something really bad is going down. Offsetting the speculation in wheat is effect of farmers realizing the potential gains of growing more grain. These have induced the farmer to sow an extra large seasonal crop. That's wonderful you say, the farmer is the seasoned veteran of speculations. Dealing all the time with changing weather patterns, wind, and water, wet and dry, the farmer, however, is in no better position to speculate wisely. What we often see when farmers speculate is over investment.
Its almost as if there is a disconnect between farmers and the reality of wild speculation as it emerges. The plain fact is that follow the buck speculation without any regard for historical patterns of excess leads to wild results. A solution to a problem, you might say, but what happens after over-investment is a long, a very long period of under investment, as those that have been burned hedge their bets. The key is to dampen speculation so as to bring about a more orderly mix of views that achieves a longer term investment path that is sustainable.