Sunday, February 1, 2009

Stagnant pools in the remains of the economy?

I found a metaphor for the financial crises and looming recession that explains why I'm pessimistic. I see the change in the flow of money in the same way that I see the gulf stream affecting and stabilizing the world climate.

Many people I talk to seem to view this recession like all others -- companies got sloppy, overbuilt, over-hired, began to tolerate inefficiency, etc. But I see it as more systemic. The entire ecosystem will change as the flow of money changes. A couple years ago, money moved from saving nations to the US (as a borrower nation), into individuals' bank accounts, and then out to... well to whatever   people   buy when they have an extra couple hundred thousand in the bank. Along the way the great flow of money branched a couple times, with financial wizards and real estate brokers siphoning off a good bit. In turn, they did whatever they do with a couple hundred thousand extra in the bank.

Of course it was ridiculously overinflated home prices that made the whole system work. Nobody would otherwise let the money flow from the bank to the homeowner, or onto the secondary markets, or provide the financiers and brokers an opportunity to take a cut ... and now many of these parties refuse to do it anymore.

But the point is that I now have a metaphor for this. As an old professor of mine taught, a physical model for a sociological process is a great way to generate insight. When the gulf stream stopped about 12,000 years ago, it reallocated heat from Europe to the rest of the word in addition to causing global cooling. From this observation of the physical model, we hypothesise (but not conclude!) that the shift in financial flows may both dampen the world economy and reallocate money around the globe.

Another insight from the phsical model comes from looking at what happens when rivers change course. "River species may become locally extinct and are replaced by species that can survive in the stagnant pools left behind. "