Friday, September 24, 2010

An Economic Tsunami is Coming

By Luke Hohyung Lee in August, 2009

In October 1962, we came close to nuclear Armageddon.  When the threat subsided we enjoyed a momentary euphoria.  Then, within a year it dawned on everyone that we still had to face the realities of the nuclear threat that has never entirely gone away.  In October 2008 we faced down another near catastrophe – the financial meltdown and accompanying severe recession.  Yes, we’re glad the worst is over – but is it?  Just as we felt a momentary elation after walking back from the brink of nuclear catastrophe in 1962, we are seeing the summer market rally and deluding ourselves into thinking the recovery is at hand.  Recovery is not at hand.  We now face a more severe danger unless we act now.

Most people look at the improved leading market indices and fail to look at the whole economic environment.  When they are shown some improved economic reports, they have too easily concluded that the whole economic outlook has also improved, and ignored the fact that behind the improved economic reports hide some serious problems.      

Over the last several years we have thought that it was only a weak economy without considering the changed economic environment. But, our diagnoses and prescriptions for improving the economy have ended each time in failure; rather, they have created numerous abnormalities in the market. 

We are missing the overall picture if we think that we are going to get back to the halcyon days of the past.  I believe the real problem is the market paradigm. That is, I believe that only if we fix the problems in the market paradigm, the problems in the whole economy would be more manageable and solvable.  If we focus on stimulus packages and monetary policy alone, we will be even worse off than those terrible days of last October.   

Recognizing the changed economic environment and where the problems come from

The development of the modern information age over the last 30 years has brought big changes to the market and society through the digital revolution and the internet revolution. But, strangely enough, the market paradigm has changed little.  The existing market paradigm which was developed in the industrial age has remained and operated without much effect in the current market.

While the existing market paradigm has remained, other major changes have been made in the whole market and society, and our economic environment is now in a much different position from the past one.  

In the supply side, the following have occurred:

l       Sharp productivity increases from IT progress;

l       Increased off-shoring and outsourcing toward lower-labor cost countries;

l       Broad adoption of automation processes, equipped with information devices.

But these changes have also resulted in increased difficulties of job creation for middle- and lower-income workers and the intensification of the polarized gap between poor and rich.

Moreover, efforts to reduce the number of transactions and functions in linearly constructed transactions and due to the increasing of the efficiency of a function itself by collaboration, the existing functional market paradigm itself has actually resulted in the worsening of employment conditions in the market as a whole.   

Because of the established mutually complimentary relationship between the supply side and the existing functional market paradigm, job creation for middle- and lower-income people has been more difficult. 

These mutually complimentary phenomena that led to the worsening of employment conditions have operated as a force to lower the level of consumer spending over time.  (Let’s call this Force [1])  This has been a major factor for the recession.   

While the old market paradigm has remained in place, to promote the level of consumer spending, there seemed to be no other choice but to adopt expansionary economic policies (i.e.: expansionary fiscal policies and expansionary monetary policies) and stimulus economic plans to keep it going. That is, they have tended to act as a force to increase the level of consumer spending (Force [2]), to promote growth and prosperity.

When Force [2] is more powerful than Force [1], growth could appear in many parts of the market. But, the problem is that Force [1] is a continuous force, and Force [2] is only a temporary one. That is, when Force [2] disappears, and due to the continuation of Force [1], the economy pulls back to recession. Thus, we have continuously adopted excessive expansionary economic policies and enacted stimulus economic plans to stave off the recession over the last 8-9 years.  But this has only postponed the inevitable deep economic malaise we have now descended into.

Because we have adopted these excessive expansionary economic policies and stimulus economic plans as a stopgap too often, we have experienced some additional serious side effects in the market:  (1) a federal budget deficit that has increased significantly, (2) Due to monetary liquidity increase, various economic bubbles increased all over the market, and inflation increased, and (3) Other various abnormal phenomena were accumulated in the market.   These contained a huge risk to lower the level of consumer spending suddenly to force the economy into recession.

More serious was that we didn’t effectively regulate the creation of numerous sub-prime monetary products.  In other words, despite the potential risks of these products, we went ahead anyway as it was felt they contributed to increase the level of consumer spending.  So, to our peril, we didn’t put a stop to what we now recognize as a very dubious policy.

Finally, beginning with the housing market bubble burst to the current financial market meltdown, the economy has now plummeted to the level we find ourselves in now.  

What, then, could be the real cause of the current economic and social crisis? The conventional answer is that it’s the housing market bubble burst or the sub-prime mortgage system failures. But what underlies those?  It’s the existing functional market paradigm itself. The existing functional market paradigm is no longer suitable for the modern information market.  A new market paradigm is needed. 

An analysis for the current economic phenomena as of August, 2009 -- and an outlook

In the past few months, improved economic reports, including increased corporate earnings, and better than expected employment reports have propelled the Dow Jones upward, and many experts are predicting that the recession is over. 

Even though some experts such as Prof. Nouriel Roubini are still warning of the possibility of a double-dip recession, because the hope for the economic recovery is too high, most of their warnings are being reported but ignored. Moreover, even a dispute over when the exit strategy for economic stimulus has started.   

I see those improved economic reports as stemming from the temporary effects made by the recent powerful expansionary economic policies and stimulus economic plans, and the cost reductions through restructuring.  If these temporary effects disappear, the economy will be aggravated again to further recession by the continuous Force [1] (cited above). Therefore, to maintain the improved economic trends like the ones mentioned, the second and third adoptions of powerful stimulus economic plans will be necessary.  Also, no matter how high the possibility of increased inflation, the exit strategy which lowers the level of consumer spending cannot be executed without adverse effect.     

The unavoidably worrying fact is that even if we can delay the continued recession through a second and third adoption of powerful stimulus economic plans and maintaining of the existing expansionary economic policies, we cannot prevent the increase of the potential risks such as the serious increase of inflation, the creation of new economic bubbles, and the accumulation of new abnormal phenomena in the market, -- all of which can lower the level of consumer spending even more.  Moreover, due to the recent powerful stimulus economic plans and expansionary economic policies, future economic bubbles and potential risks such as a commercial real estate bubble have not been removed and still remain in the market.  In other words, these have been significantly aggravated; and we cannot imagine when they will burst again.  In other words, the possibility for these to be an economic tsunami is very high.  

If we do not change the existing functional market paradigm to a new market paradigm, I strongly believe that this economic and social crisis cannot be stopped. It could even develop into a bigger crisis.  As long as the current conditions remain, we cannot achieve sustainable economic growth.

The possibility for an economic tsunami within a short period of time is very high. We will not simply experience another recession (double-dip) but will have an economic catastrophe (“depression”) on our hands.

A New Synergy Market Paradigm as a Suggested Solution – and a Recommendation

Geometrically progressive market changes have already been made by the rapid growth of synergy software applications (i.e., three-dimensionally integrated information systems) over the last 20 years. Yet, the market results made through the market paradigm (or process) that comprised existing functional market systems could only have produced arithmetical changes.                             

As market changes could only be satisfied through the existing functional market paradigm, “a structural gap” has existed in the market. As I show in detail elsewhere, this is the real cause of the economic and social malaise which currently afflicts us.        

I believe the only viable remedy for this structural gap will be by intentionally inducing synergistic (or geometrically progressive) market results in the market paradigm (or process).

I would like to suggest a new synergy market paradigm for the current economic and social crisis and to prevent an imminent “depression”. (Details for a new synergy market paradigm or system are shown elsewhere.)

If a new synergy market paradigm is introduced and fully implemented in the market, the existing comparative competition paradigm would be changed to a new absolute competition paradigm, and the centralized communication, volume and distributed expense would induce the voluntary participation of all members of the market. This would significantly contribute to the improvement of employment conditions in the market as a whole.

With the influence of the new synergy market paradigm, also in the supply side, the existing competition by size would be changed to a competition by quality and service, and the existing efficiency-oriented mass production and mass consumption would also be changed to a more effectiveness-oriented, diversified or individualized production and consumption system. Due to these changes, local employment conditions would be improved considerably, and the business environment for middle- and small-companies in the domestic market would also be improved significantly.

As a mutually complimentary relationship between the supply side and the new synergy market paradigm is established, job creation for middle- and lower-income people could be more activated, and the polarized gap between poor and rich could also be more moderated.

These mutually complimentary phenomena for the improvement of employment conditions made from the changed supply side and the new synergy market paradigm could be finally transferred to a structural force to increase the level of consumer spending, and will also be an initiative force for economic recovery and revitalization.

Under this situation, a policy for a working economic environment would be established, and no more excessive expansionary economic policies would be needed. Thereafter, the federal budget deficit could be reduced, and many economic abnormalities could also be resolved naturally.

I strongly believe that this is the most effective path to get out of the current economic and social crisis and revitalize the economy.

People might think that it will be impossible to change the market paradigm, or it will take too much time, even that it is desirable.  But, I believe the conditions and circumstances for the development of a new synergy market paradigm are already in place. That is, information technologies, facilities, devices and people are already in place to develop this new synergy market paradigm.  The only issue remains how to develop it.  I believe that solution is also already available.  It only needs to be implemented. Therefore, if decision makers are willing to make the hard choices, it will be relatively easy to implement, and it also won’t take long to see positive effects.

Moreover, this new synergy market paradigm will powerfully induce the voluntary participation of all members of the market by providing various economic benefits to them – and, especially by creating many jobs in the market. I’m not just talking about thousands of jobs, but millions of jobs.

The current economic crisis is now getting worse day by day moving inexorably toward a depression. We don’t have time to delay action any longer. To stave off this impending crisis and to revitalize the economy, I strongly recommend the government initiate and support the development of this new synergy market paradigm and realize it effectively in the market as soon as possible – before it is too late.                                                           

<Suggest also to see: Overcoming an Economic Sisyphean Task – Or, the Tr...>

Author: Ho-Hyung Lee ( - Ho-Hyung (Luke) Lee is by training a lawyer, an international businessman and entrepreneur and an inventor.  He is currently the president of Ubiquitous Market System, Inc. (UbiMS). Ubiquitous Market System is nothing less than a new synergy market system that will put us on the real path to prosperity. (8/18/09)

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