Sunday, November 28, 2010

“It’s the Market Process, Stupid.” – May 9, 2008

<Note: This article was written on May 9, 2008 by Luke Ho-Hyung Lee.

In order to avert a recession, the Fed reduced its key interest rate from 2.25% to 2.0 on April 30, 2008. The price of oil rose to a new record of over $135 a barrel (May, 2008), more than twice what it had been a year previously. The Dow was still hovering above 12,000 (a considerable decline from the dizzying heights before the subprime collapse), but the worst was yet to come. As the 2008 presidential election reached its climax, we were about to witness the nadir, a Dow in the 7,000’s by year’s end. This was not a time for hope and change, but one of fear and trembling.

Borrowing a phrase made popular by President Bill Clinton when he defeated George Herbert Walker Bush for the presidency in 1992 (“It’s the economy, stupid!”), I called this article, “It’s the Market Process, Stupid”. I was hoping that the candidates running for president would heed the warnings, but as it turned out neither of them did. In near exasperation, I wanted to call attention to the horrible state of the market structure. But nobody was listening. It’s time to make drastic changes, before it is too late. That’s what this article is about.>

Nobody will deny that THE current issue is the economy. But, politicians, take heed, it’s not the economy, stupid; it’s the market process. Even though a raft of more economic troubles seems to be coming, there is not the slightest sign of solving the present economic malaise that afflicts us. I’m referring of course to the financial crisis caused by sub-prime mortgage failures, and housing market troubles in general.

Most economic experts have identified massive monetary liquidity, formed in the market over the last several years, as the main cause of the economic malaise. They think that due to high monetary liquidity formed by aggressive expansionary fiscal and monetary policies, a bubble must have been built into the equity market across the board, such as in the housing market and the stock market. This bubble burst is thus linked to the collapse of the housing market. It is what brought about the failure of the sub-prime mortgage system and the turmoil of the stock market. Also, this high monetary liquidity could cause more serious economic troubles with the threat of inflation. Some economic experts even blame Alan Greenspan, former Federal Reserve board chairman, as a cause of the current economic troubles for his policies that caused this high monetary liquidity in the first place. While we’re at it, let’s blame the Bush administration for its support of high monetary liquidity by increasing government spending and adopting tax reduction policies.

In spite of these events, economic experts still cannot suggest clear solutions for these economic troubles. That is because most solutions they suggest are only expedients to escape from the most urgent risks and put off the real healing for the future simply by maintaining the status quo. It could be said that most of their plans contain more potential to amplify future problems, rather than get us out of this mess.

Even in this vortex of doom, many new opinions about causes have been appearing. They say that it’s low consumer spending, the negative employment condition, the credit crunch, the low consumer saving rate, the high trade deficit or even the high federal budget deficit. However, their recommended solutions still remain ambiguous and abstract.

Then what is wrong? Why don’t we find the clear solutions for these problems? The reason is that the supposed causes, which numerous economic experts have suggested until now, are not the real ones. That is, the causes they have suggested are not genuine causes, but simply the secondary results made by some other unidentified cause. Therefore, the solutions for these secondary results cannot solve the real causes, but only temporarily postpone the most serious risks.

Then, what is the real cause of the current economic breakdown?

It’s the market process.

I realize of course that what I’m recommending smacks of economic heresy. Nobody in their right mind has suggested changing the market process. Why now? Because the market process needs fine tuning for the changed market circumstances. It’s past the point where it will fix itself. The existing market systems, which support the present market process, are outmoded for the Modern Information Age. I do not believe in paying homage to sacred cows, like the so-called “Invisible Hand” everyone learned about in introductory economics. If you think I’m suggesting we re-think the market process, then that is precisely what I’m suggesting. Our economic future depends on it.

The Relationship between Communication Changes and Market Process

In the Agricultural Age, when communication was person to person, and transportation was still in a very primitive stage, transactions among people were mainly through barter or through the early village or town markets, which were formed locally.

In the Industrial Age, information sharing and exchanges among people were more widespread. Communications between remote areas were now made possible by the development of the telegraph and telephone, and were accompanied by revolutionary developments in transportation. With these developments, the economy took on a three-tiered functional market process. To manage and develop the economy soundly under this new market process, some of our basic economic principles demanded re-evaluation. It’s time to do that again.

This three-tiered functional market process continued to develop into the two-tiered functional market process, such as that exhibited by the big chain stores in the early twentieth century. These forerunners of the shopping center were made possible by the development of radio and television, by the continuous development of transportation, and by the revolutionary development of inventory control through a bar-code system.

These market processes reflected the new capability of communication and transportation. Accordingly, they could provide relative efficiency and effectiveness. In realizing this, they also created new businesses and jobs to the degree we take for granted today.

Because these market processes were developed with locally restricted, single-source based communication, their development and operation were installed relatively easily. That is, because the effects from them were relatively simple, the business estimate for them was relatively easily and accurately gauged.
Fast forward now to the Modern Information Age. Communication has been transferred from existing single-source based communication to multiple-source based communication. Moreover, with the development of networking technology, these multiple-source based communications could be integrated. Because this multiple- source based networked communication is very economical all over the world, and also possible in all directions, its impact was far greater than first imagined. The result is a new paradigm, which could create far greater effects on efficiency and effectiveness than the existing one could ever make. That is, the single-source based communication, from which only simple arithmetical changes could be expected, had developed into the multiple-source based networked communication, from which geometrically progressive changes could be expected. Moreover, by breaking down the existing local restrictions through the development of the World Wide Web, it could be said that communication was no longer restricted by time and space.

Despite the advantages, these communication changes may have in a sense occurred too rapidly and abruptly. Insufficient thought has been given to how to apply them to other areas, especially to the market process. As a result, we have lost a propitious moment to apply them to the market process, and numerous abnormal phenomena have accumulated in the market and society as a result. What has resulted is the current economic malaise we find ourselves in.

The Role of the Existing Functional Market Process in the Modern Information Age

The existing functional market process is built on a single-source based communication foundation. As such, only simple arithmetical changes of effects on efficiency and effectiveness can be expected from it. Moreover, the creation of new businesses and jobs in an arithmetical way is all that can be expected. We need to fix that. We start by looking at what happened when communication developed from single-source based communication to multiple-source based networked communication, while at the same time the functional market process remained unchanged.

The paramount factors are these – and notice how they are interrelated and interconnected:

  1. The existing functional market process could not have provided satisfactory consuming effects structurally to the market. This is because only arithmetical changes of effects on efficiency and effectiveness could be expected from the existing functional market process. On the contrary, the market, which has been directly influenced by the new communication paradigm, has required more multiplying or geometrically progressive changes. Thus there must have occurred some gaps structurally between the consuming effects provided by the existing functional market process and the market requirement.
  1. Theses structural gaps must eventually have appeared as the missing phenomena of consumer spending in the market. That is, because consumer needs and wants increase faster than consuming effects, consumer spending will eventually be curtailed.
  1. Because the existing functional market process could create new businesses and jobs only in an arithmetical way it could not create enough income to satisfy existing market requirements. It’s as if consumer spending was held back due to the limitations of the market process.
  1. This curtailment of consumer spending must have caused an abrupt increase of consumer price sensitivity, and this must also have caused the abrupt increase of excessive price competition in the market. This situation must have developed concomitantly with the rapid expansion of efficiency-increase-oriented (cost-oriented) globalization activities such as off-shoring and outsourcing toward foreign countries with lower labor costs, and this must also eventually have been directly linked to the decrease of jobs or the reduction of income for lower- and middle-income people in the domestic market. Accordingly, the inequality of earnings between affluent and poor was aggravated.
  1. Moreover, because the existing functional market process has a fixed and closed marketing channel, it could not have handled all products or services. Keep in mind that there has been an vast increase in numbers and kinds of new products and services in the Modern Information Age and this should have required more marketing and distribution costs for new products or services. What this means is that the existing functional market process has actually impeded the creation of new businesses and jobs in the domestic market.
  1. If this situation continues, a vicious cycle will persist between the supply side and the demand side in the domestic market.

Finally, the government has adopted very powerful and ambitious economic policies in an effort to prevent this vicious cycle from occurring and attempted to revitalize the economy. However, it could be also said that the effect of many economic policies, adopted without having made changes in the existing functional market process, will generate little improvement.

The Role of Economic Policies with Existing Functional Market Process in the Modern Information Age

The prevailing free market paradigm has been predicated on the so-called 'Invisible Hand', because general factors, such as interest rate, money supply, tax, employment, and so on, could have chain effects that were easily traceable, and easy and accurate to estimate. Under these circumstances, it was possible to estimate how these general factors influence demand and supply. Therefore, the problems of demand and supply in the economy could also be solved by the fine tuning of these general factors.

The rapid development of the Modern Information Age over the last 20 years has quite simply changed the preliminary conditions for the efficient and effective estimate of a market economy, as follows:

  1. A perfectly competitive condition has been changed into an excessive and severe competitive condition, especially in a price-oriented competitive market.
  1. Due to globalization, the meaning of the efficiently restricted market range was curtailed. In other words, the market range has already spread to the whole world, and thus the restriction for communication and transaction is rapidly becoming meaningless.
  1. Due to the development of multiple-source based networked communication, the estimate on chain effect has already been reduced to near nonsense, and the role of autonomous systematic discipline for the market or economy has been lost.
  1. Therefore, it could be said that the role of dominant economic theory has been already shrunk to the extent of being meaningless in its predictive powers for the new globalized world.

Yet, even though conditions have changed, we have still stood by the economic policies of the past, despite the adverse impacts that can now be plainly seen.

While expansionary economic policies have served us well for directly maintaining or increasing the level of consumer spending, they have done nothing to stimulate economic revitalization. Due to the continuation of these policies, numerous abnormal phenomena and problems have accumulated in the market.

The recent high federal budget deficit, high monetary liquidity, high trade deficit, high inflation potential, and low consumer saving rate are the results from these accumulated abnormal phenomena and problems.

It seems that economic experts still do not recognize the reason and necessity about why the existing market process should be changed, and as they try to find solutions, they compulsively stick to their existing assumptions and principles. Their theories are rather becoming more complicated, ambiguous, and abstract.

Conclusion and Recommendation

The first step to get the economy back on track will be the construction of a stable relationship between the changed communication scene and the market process. That is, efficiency and effectiveness cannot be derived from them until they develop a mutually proper communication to go with a stable market process. If they do not, then the kinds of abnormalities and what economists call externalities (i.e., unintended consequences) cited above will persist.

In looking back at the last 20 years, I believe that communication has developed rapidly through the digital revolution and internet revolution -- from the existing paradigm of single-source based communication to the new paradigm of multiple-source based networked communication. But at the same time, the market process has remained virtually unchanged. For this reason, the variegated abnormal phenomena and problems we are experiencing now can hardly be surprising as we look back at economic events just over the past year.

By implementing the existing expansionary economic policies where the mutually “improper-unstable” relationship between the changed communication and the existing market process has remained in place, it seems that government decision makers have served to institutionalize abnormal phenomena and problems in the market rather than to revitalize the economy.

Therefore, it can be said that the real cause for the current economic malaise will be found in the market process, which is not equipped to handle the needs of the Modern Information Age. For that reason, it can also be said that the development of a new market process with more suitable market systems to the Modern Information Age must be the starting point to solve these numerous economic problems. If a new stable market process is not developed soon, economic problems will persist; and accordingly, national competitiveness, national prosperity, and the welfare and safety of the nation will fall into a graver danger.

Because the development of this new market process will eventually require changing the paradigm of the existing market process, resistance to such changes must also be expected. In addition, the development of new assumptions and principles for the changed new economic circumstances will be needed, and a re-thinking of old economic theories into new ones.

On a positive note, the conditions and circumstances for the development of a new market process are already in place. If decision makers are willing to make the hard choices, it will be relatively easy to implement.

Therefore, we recommend that all government, academic, and corporate heads should work together to find a solution to our economic revitalization through the development of a new market process better suited to the Modern Information Age. This means the development of more effective economic policies for the Modern Information Age. Especially, this means the active assistance and support from the government. New political leadership in January 2009 will be a good time to start, and none to soon. To all who are running for president, both Democrat and Republican: It’s the market process . . .

Written by: Ho-Hyung Lee ( - Ho-Hyung (“Luke”) Lee is by training a lawyer, an international businessman and entrepreneur – and an inventor. He is currently the CEO of UBIMS, Inc. ("Ubiquitous Market System").

Saturday, November 27, 2010

The Economic Paradox: The Real Causes of Current Economic Malaises and the Solutions - 3/28/08

<Note: This article was written on March 28, 2008 by Luke Ho-Hyung Lee. 

While John McCain won the Republican nomination for president on March 4, the markets were slumping on March 17 due to banking worries, and on March 18 the Fed lowered interest rates by  75 basis points.   

Pushed to the brink of collapse by the mortgage crisis, Bear Stearns – with prodding by the government – agreed to be bought by J. P. Morgan at a fireside sale of $2 a share.   Bear Stearns had a terrible choice:  sell the firm at any price or file bankruptcy.  This was one of many banking crises that indicated that the worst financial crisis in history was far from over.

I wrote this article during this time.  Some were still reluctant to use the word “recession” at this time, but it was clear to me and a few others like Nouriel Roubini that we were not only in severe recession, but were headed for a hard landing.  Again, it was the minority that had it right.  In that article I was very skeptical of the economic stimulus packages that had been undertaken; I didn’t think they would work.  It turns out they didn’t.

Once again, I reiterated in this article what I thought was the heart of the problem.  I felt we needed drastic changes to the market structure, just as I’ve been advocating all along.>

Federal Reserve Chairman Ben S. Bernanke keeps signaling the U.S. central bank is prepared to lower interest rates again even amid signs of accelerating inflation. Recently, he also endorsed the $168 billion stimulus package enacted by Congress and signed by President George W. Bush.  Moreover, he said continued gains in exports should help growth.  Nevertheless, fears of recession in the United States persist.

Some economists, such as Professor Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor, expect a severe US recession.  He, along with other economists, see recoupling of the rest of the world with the U.S.’s hard landing, a continued severe credit crunch, and the risks of a systemic financial crisis.  Still, nobody can suggest any positive solution out of this mess.

What is wrong with our economy? Isn’t there any way to avoid recession? What are the real causes of the current economic malaise?  I believe that before we can get the economy on the right track we must first understand the causes of the crisis.

The role of stimulus economic policies

In order to stimulate the economy, we tend to promote business investment and consumption to increase jobs with expansionary stimulus economic policies. When the sum of increased consumption and increased consumer confidence by job growth is larger than the promoted consumption increase, the economy should be stimulated and revitalized, so the argument goes, and a positive cycle for economic growth could be achieved at last. Therefore, it could be said that the stimulus economic policies are just a means which could be used only temporarily and in a limited way for inducing this positive economic cycle.   

The changed economic circumstances

Yet, no matter how powerful the stimulus economic policies adopted, we will fall short. When the degree of job growth created by the stimulus is weak, and the sum of increased consumption and increased consumer confidence is less than the promoted consumption increase, the economy cannot be stimulated.  However, even in this situation, if we had not adopted the stimulus economic policies, a vicious cycle between the supply side and the demand side would have been perpetuated in the economy.

It seems until now, most economic experts viewed the advances in information technology only in terms of technological progress, with little downside.  That is, even if there is a direct job reduction, more indirect jobs would eventually increase due to innovation. However, in the real situation, the advances in information technology have done the opposite.  Rather, there has been little room for indirect job creation in the market and/or society. (Japan experienced this change earlier than others, because they had faster developing capability of productivity and commercialization mainly due to the rapid development and spread of a lean production system like Toyota’s production system and by the broad automation process.)

The paradoxical economic situation

Under these changed economic circumstances, we have had to adopt stimulus economic policies to avoid the vicious cycle in the market or economy, without finding any other alternatives over the last several years. Moreover, as globalization activities such as importing, outsourcing and off-shoring have been activated, we’ve had to increase the degree of the stimulus economic policies to an extreme degree. 

To make matters worse, financial deregulations have been excessive and abrupt, and as a result, the weight of consumer debt in consumer spending has been rapidly increased.

One could argue that the sum of increased consumer debt, increased consumption by job growth and increased consumer confidence was similar to, or larger than, the promoted consumption increase.  Yet, to so argue is to ignore the creation of numerous abnormal phenomena such as the weakening self-generation capability, not to mention the further losses to the “Missing Class.”  That is, even though the stimulus economic policies were adopted to stimulate and revitalize the economy, they have rather created a paradoxical economic situation, as only abnormal economic phenomena were intensified instead.  (The “Missing Class” is Princeton University sociology professor Katherine Newman’s term for the near poor who are technically above the poverty line but still far from a middle-class standard of living.)

This paradoxical economic situation has now lasted over the last several years, and the national competitiveness has steadily weakened, while the safety and welfare of the nation has been worsened.  Moreover, many unusual economic problems such as sub-prime mortgage failures, vast financial meltdown and credit crunches, etc. have now worsened economic conditions.  We should expect many other economic and social problems will be coming in the very near future, if we do not correct this paradoxical economic situation. 

What are the real causes of the paradoxical economic situation or the current economic malaise?

Plain and simple, it’s the market structure.

It is now widely recognized that modern information technology has been a boon to modern society.  However, not everyone has benefited.  Moreover, the market structure has suffered. That is, a situation has been created in which some have benefited more than others.  But, more importantly, the reduction of jobs as a whole has been a structurally unavoidable phenomenon.  No economic stimulus is sufficient to offset that decline in job growth.  Rather, paradoxically, only economic abnormalities have been created by these stimulus measures.  This time will be no different.

The solutions and the recommendation

I believe that the economic and social conditions which have come about in the modern information age require changing the existing outdated market structure to a more flexible and open new market structure, which is better suited to the modern information age.

Some people might think what I am recommending smacks of economic heresy.  Why change the system, they say.  Why not leave things alone, and they will correct themselves, as they always have?  No, they will not correct themselves.  But we can take comfort in the fact that our free market system could already provide all the necessary conditions such as information technologies, facilities, devices, and people for the development of a new market structure. It is restructuring, not changing all.
The new flexible and open market structure I recommend will increase job growth and also the consuming effects on efficiency and effectiveness in the market, and accordingly it will provide a policy for better working conditions, solve numerous economic and social problems, and eventually stimulate and revitalize the economy. The increased consuming effect on efficiency will also lessen the inflation pressure.

I believe our current malaise is not just the United States’ problem, but also a problem for most Western countries, including France and Germany, and Japan and Korea.  It is the most urgent issue we face, if we are to save the world economy. Therefore, I strongly recommend the governments and leaders of the Western countries initiate the urgent development of a new market structure, and provide the active assistance and support necessary to revitalize their own economies and also the world economy soon.   

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).

Friday, November 26, 2010

It’s Time to Change the Process - 2/11/08

<Note: At the time this article was written, the 2008 presidential campaign was in the early stages of the Republicans and Democratic primaries.  Both McCain and Obama were gaining early leads for their partys’ nominations.  The Dow Jones was in the 12,000’s, a considerable drop from its lofty perch above 14,000 a year earlier, but not as bad as things would become as the election approached in November.   Voters were decidedly worried about the economy by election day.  They had good reason to be worried.
The candidates were giving lip service to the issue of economic change – both of them.  Neither of them understood the kind of change that would be needed.  I thought we were in economic trouble then and still do.  The sub-prime mortgage failures and the housing market collapse were cause for concern.    In order to improve employment and promote investment, the Fed was lowering interest rates and the economic stimulus was in full swing.  I didn’t  think then they would work; it seems they haven’t.  Some people were still not comfortable calling it a recession yet, but I knew better.  It turns out I was right.  But in one area I haven’t changed.  The kinds of change I was calling for then are still the kinds of changes we need nearly three years later.
I advocated wholesale changes to the market process then, and still do.  It is a theme I would come back to over the next several years.>

For voters, “change” has become the byword of this presidential campaign as it moves towards its conclusion.  But all too often, when politicians call for change, it is not always clear what changes, if any, they have in mind.  Yes, change is in order.  But none of the candidates I’ve heard so far are offering the kinds of change we desperately need.  They’re offering quick fixes – which is exactly what we don’t need.

We are in economic trouble.  You can call it “downturn” or “slowdown” if you want to, or even call it what it is – a recession.  But even that would not capture the kind of economic troubles that lie ahead, if someone doesn’t do something about a market process that caused the current economic malaise.  No quick fix will repair the damage this time.

When someone aspires to the presidency and calls for change, one hopes that he or she has “vision.”  Otherwise, change for change’s sake is useless.  That being said, none of these candidates offer a vision for the Modern Information Age.  The Fed’s lowering of interest rates and the economic stimulus package will not forestall the inevitable catastrophe.  None of these actions – let alone wishful thinking -- will do any good if the market process is not overhauled, and overhauled soon.

The rapid spread of information has brought major changes to the qualitative lives of individuals over the last twenty years.   But this is misleading, for the gains are rapidly being overtaken by the costs to society as a whole.  Weaknesses in the overall efficiency and effectiveness of the process call into question those who like to sing the praises of the internet and the shrinking of the world from globalization.  With no changes in the accompanying market process, these gains can no longer be sustained.  If the economy collapses, then all of those gains will have been for naught. 

With this in mind, let’s see what has happened in the market and society for the last twenty years, so that we can avert the collision course we are on.

With the rapid and economical spread of information, all of the individual units on the supply or social service provider side greatly increased their productivity and product or service development capability. On the demand or social service (beneficiary) side, all individuals’ knowledge has increased greatly, and this must have been directly linked to the escalation in the needs and wants of consumers (or social service beneficiary).  This is what the Modern Information Age has spawned – and it has also given us a false sense of security, too.

Since the market and/or social process, which comprise the systematic series of individual actions, have not been changed significantly, some abnormal and unbalanced conditions have occurred in the market, such as:

  1. While the needs and wants for consumer spending and social services have rapidly escalated, the consuming effect of products and services supplied from the supply side and the social service effect of services provided from the social service provider side have not increased much. That is, the desire for more consumer spending power along with increased consumer price sensitivity must have been raised significantly, while satisfaction for the social services side must have de-escalated significantly.

  1. The employment situation has been aggravated at the same time, and this must also have worsened the situation of consumer spending capability on the demand side and increased the demand for social services. 

  1. As a result, a serious imbalance and a vicious cycle between the supply or social service provider side and the demand or social service beneficiary side also occurred.

To overcome this situation we have adopted a series of economic stimulus policies (nothing new here) to improve the employment picture by promoting investment and consumption, rather than trying to change the outdated market and/or social process. Ironically, these measures have not only been ineffective in stimulating the economy, but also created numerous abnormal phenomena in the market and society. These include an abrupt increase in the bubble phenomena of the equity markets across the board, and an increasing economic strain on those in the lowest income bracket.  These phenomena will continue bringing numerous economic and social problems like the sub-prime mortgage failures we have witnessed in the past year.

The ratio of employment to investment and/or consumption has been rapidly decreased in the Modern Information Age. The employment figures improved by temporarily promoting investment, while consumption could not have been increased as much as desired. 

The recent economic stimulus policies of the Bush administration have been enacted mainly to increase monetary liquidity and the net wealth effect in the market or economy, instead of stimulating the economy itself as it proposes to do. The necessary level of consumption could have been relatively easily maintained to ensure what seemed a sound economy by using easy credit, that is, by increasing the debt.  On the other hand, the economic self-generation capability of the market or economy has been weakened seriously, and numerous potential economic and social dangers have accumulated.

Now, we are facing new economic problems such as the sub-prime mortgage failures caused by the housing market collapse and the credit crunches of financial markets.  To overcome this situation we persist in enacting ineffective economic stimulus policies without trying to restructure the outdated market and/or social process.

Let’s summarize our present market situation:

·      The inflation possibility is increasing seriously.
·      The net wealth effect is rapidly diminishing.
·      The credit market is tightened significantly.
·      Consumer saving rate is almost zero or in a minus situation.

Even if the Bush administration institutes the aggressive economic stimulus plan and the Fed keeps the interest rate at its current level, it will not stimulate or revitalize the economy.  Instead, other unrealized economic and social dangers such as inflation and social unrest might take their toll.

Therefore, to minimize further economic and social damage and to revitalize the economy, we should start finding ways to change the market process as soon as possible. Market process comprises the systematic series of individual economic actions that are the market systems. That means, we should start developing new market systems, which are more suitable for the Modern Information Age, as soon as possible.

The new process with more suitable systems for the Modern Information Age we develop will significantly increase the consuming effect and the social service effect. It will greatly improve the ratio of employment to investment and/or consumption as well.   Information technologies, facilities, devices and people are already in place to develop these new market systems.  Now is the time to change the market process. We should not let this opportunity slip away.

Therefore, I strongly recommend the presidential candidates and the outgoing administration focus on developing a new market process.  This should be their primary economic focus. 

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).

Wednesday, November 17, 2010

A Real Market Revolution as a Solution for the Current Economic Crisis: A Reappraisal of Current Forecasts of Upcoming US Federal Deficit and Employment

                                      (Click on slide to enlarge image)

The American economy has been driven the past thirty years by technology.  It’s been a great run – at least until 2007.  Some of the milestones include the advent of the internet, proliferation of digital devices, advances in networking technology.  (See the chart above.)  But our irrational exuberance has hidden some fundamental flaws in the system in which our future now depends.  (Now look at the chart for 2009-2010.)

If we don’t correct those flaws soon, the entire edifice will come crashing down.  Of course, we sensed something was wrong in 2008; the financial meltdown drove home just how vulnerable we are.  But now that we are in “recovery”, we’ve put the blinders back on over our eyes.  For over five years now I’ve tried to show exactly what the fundamental flaw is – long before the meltdown, I might add – and once again I will attempt to show by a brief recounting of the past where we are now, and why we must now take drastic steps to change the system .  Do not be deceived by the “recovery”.  We are in grave danger.

Economic macroadvisers said on October 27, 2010 employment would not likely recover until 2013. As they expressed it, “We anticipate that job gains will continue at a moderate rate, and that the pre-recession peak in private nonfarm payroll employment won’t be reached until 2013, nearly 4 years after the recession ended.” (Macro Musing: Are We in Another Jobless Recovery?) (Shape [1]) <Hereinafter, Shape [1], Shape [2], etc. refers to the graph above.>

Contrast that with Mark Thoma, Professor of Economics at the University of Oregon, who said “I made the same forecast about a year ago, but full recovery by 2013 is looking optimistic now. I wouldn't be surprised if it takes even longer than that.”

Do you agree with either of them? I simply don’t. I will tell you why, but first some background.

I am not a trained economist; I am a businessman. But I think my business experience gives me a unique insight into our economy that most academically trained economists don’t have. Albert Einstein once said “We can't solve problems by using the same kind of thinking we used when we created them.” Some less well known sage observed, now a cliché, “You need to think outside the box.” Both capture what I am attempting to do here. Indulge me for a few moments more while I briefly review our economic history of the past thirty years – a time we’ve come to identify as the Modern Information Age.

We had a severe recession in 1981-1982. Many people still believe that the so-called Reaganomics (i.e., Supply-Side Economics) saved our economy at that time. It might have done so to some degree, but we should also remember that the Digital Revolution also started from the early 1980s, beginning with the proliferation of PCs. The great increase of efficiency and universal application capabilities resulting from that made possible the development and spread of many digital devices. And that led to huge economic growth in the technology and manufacturing sectors, which led to the improvement of employment conditions in the market as a whole.

But just when things were getting better, we faced yet another recession in 1990-1991. We produced too many digital products and there were not enough consumers to buy them. To prevent a worsening of the employment situation, the government elected to increase its spending in 1990-1992. Fortunately, the Digital Revolution also contributed to the development and expansion of IT and computer networking technology; and, finally, the huge IT progress and Internet Revolution that followed easily consumed the over-produced digital products.

This IT progress and the Internet Revolution eventually led to huge economic growth in the technology and internet sectors all over the world with the popularization of the Internet in 1996. The Clinton Administration (1993 – 2001) encouraged job growth and business expansion through expansion of information age businesses, including developments that led to the Dot-Com burst of activity. Accordingly, Clinton's administration significantly increased tax revenue. In the end, it produced a federal budget surplus. However, the development of the Dot-Com economy between 1997 and 2001 failed to make profits or enlarge economic gains, but rather formed a bubble economy around profitless companies. Even if numerous jobs were created in the technology and internet sectors, the employment condition for middle- and lower-income workers in the other sectors of the market severely worsened. But nobody had seriously considered this at that time.

When the Bush Administration took office in 2001, a recession, which began in mid-2000, became intensified with the Dot-Com bubble collapse. Its shock was intensified by the 9/11 terror attack. To solve this abrupt shock of recession, the Bush Administration adopted powerful and ambitious stimulation measures while the Federal Reserve Bank adopted expansionary monetary policies in support of them. Because of the increases in government spending, and the reduction in tax revenue, the federal budget showed a deficit once again. The FRB also felt that the revitalization of the economy required decreases in the interest rate for the next several years. However, contrary to expectation, the economy did not improve that much, especially in terms of wages.

More than that, we did not effectively regulate sub-prime financial products, as it was felt they contributed to reviving the economy – this in spite of the fact that economists and policy makers knew the potential risks of those products, and probably knew real growth would not happen. That was a portent of things to come.

Things remained steady for a while (2004 - 2006) as shown in the graph. We could lower the federal budget deficit and create many jobs. Interest rates could even be raised to offset inflation. But the truth was that actual economic growth this time was mainly hidden by the bubble effects (i.e., the debt and wealth effects) due to excessive liquidity and sub-prime mortgage products, but real economic activities languished. Various economic bubbles and other abnormal phenomena increased and accumulated in the market to a level where they were difficult to control. Finally, from the housing market bubble burst to the eventual financial meltdown, the economy plummeted to a perilous level.

When Barack Obama was elected president in 2008, with the powerful slogan “change” in 2009, people were excited. Even if he inherited the worst economic crisis since the Great Depression, as well as a serious federal budget deficit, people thought he offered a visionary change we desperately needed. He and his economic team have taken nearly every step possible to prevent another depression and revitalize the economy, such as the stimulus package, together with a backstop of the financial system, low rates, and quantitative easing from the Federal Reserve, but it seems all to no avail. As a result of the electorate’s disappointment, Democrats lost big in the 2010 midterm elections.

People have been asking themselves: What is wrong with our economy? Why can't we revitalize the economy? Have we misdiagnosed our economic situation and prescribed the right economic policies? For if it’s the past we are talking about, obviously we’ve failed in our diagnosis. Then, what are the real causes of the current economic malaise? The Federal Reserve decided on November 6, 2010 to purchase $600 billion in Treasury securities through the end of the second quarter of 2011. Will this second quantitative easing be effective this time? I believe we still need to do some “thinking outside the box” to get the answers for those questions.

Self-Generation and Recovery Capability of the Market

A good doctor does not simply prescribe medicine for a disease. He or she first must understand that the medication is only a stimulus to support the self-generation and recovery process. If s/he finds the body has a weak self-generation and recovery capability, the doctor tries to restore that capability first and then adjust the medication according to the condition of the patient, because s/he also knows that a medicine could also be a poison.

Likewise, I believe our market economy has its own self-generation and recovery capability. If it is seriously damaged, the treatment consisting only of stimulus policies could actually be harmful to the economy, contrary to their intended purpose. That being said, it seems that we have adopted a series of stimulus economic policies without properly weighing the condition of the self-generation and recovery capability of the market or economy. In my view, the self-generation and recovery capability of our economy has steadily worsened over the last twenty years of the Modern Information Age. That’s the real problem that has to be addressed.

In my view, the existing market process has been too efficiency-oriented to the point where it has not created enough businesses and jobs to keep consumer spending at the desired level. This is strongly correlated with the worsening of the self-generation capability of the market.

Thus, we have continually adopted excessive expansionary economic policies and enacted stimulus plans to stave off recession over the last eight to nine years. This has only postponed the inevitable deep economic decline into which we have now descended. Is there a way out of this maddening spiral?

If we do not change this existing efficiency-oriented market process soon to a more effectiveness-oriented market process -- that is, if we do not break down the logic of the existing economic condition -- I strongly believe that this economic tailspin cannot be stopped. At the very least, as long as the current conditions remain, we cannot achieve sustainable economic growth. All of this calls for radical intervention.

Forecast of Job Recovery

Even if it is very difficult to prove with econometric data, for no such data exist, it is clear that the self-generation and recovery capability of our economy has already been seriously damaged and weakened.

I believe the forecast of Shape [1] (See graph at beginning of this article) was made without considering the condition of the self-generation and recovery capability of the economy. We have already had a series of powerful economic stimulus packages with high expectations when they were adopted over the last several years. All of them looked effective in the beginning, but disappointed before long, as players learned to game the new system.. Then, when the self-generation and recovery capability worsened, even if we could have had a US Federal Deficit like Shape [A] through more economic stimulation, could we then confidently forecast that the employment figures would be like Shape [1]? I believe that is too optimistic. To make that kind of shape, probably it would take adopting more stimulation such as third and fourth quantitative easings.

What will happen if the US Federal Deficit is like Shape [B]? As Nouriel Roubini stated on Friday, October 29, 2010, “Sadly, this has not happened. In fact the opposite will now take place. The term stimulus is already a dirty word, even within the Obama administration. After the Republicans make significant electoral gains further stimulus is even less likely. Medium-term consolidation, meanwhile, will be all but impossible as the 2012 presidential election begins to loom large.” (“Presidency Headed for Fiscal Train Wreck”, 10/28/2010,

I believe the employment figures will unavoidably be more like Shape [2].

A possible scenario also runs as follows:

Various economic bubbles in the equity market have not been removed and still remain in the market. Potential fiscal risks such as high deficit problems have been significantly aggravated in many countries, especially in Japan and many European countries. We cannot imagine when they will burst again and where the trigger will be squeezed. In other words, the possibility for these to be an economic tsunami is very high. In this case, employment will plummet, as indicated in Shape [3], and the US Federal Deficit will skyrocket as in the steeper Shape [A]. It could be another Great Depression. This is the worst case scenario.

What should we do?

We had the Digital Revolution in the 1980s and IT Progress and the Internet Revolution in the 1990s. The market had self-generated from those in time to accept challenges (i.e., recessions) and effectively rejuvenate economic growth. Then why didn't we have that kind of self-generation in the 2000s? What should we have done at that time?

The Digital Revolution was achieved by the development and spread of many digital devices, and IT Progress and the Internet Revolution were realized by developing numerous software applications in information, which improved the use of digital devices through the development and expansion of IT and computer networking technology. What should have been the next development? I believe we should have found a way to facilitate the use of both digital devices and software applications at that time. More strictly speaking, our development should have been extended to the real market, which was the only place left to realize the earlier gains. But for some reason, we failed. This was a serious mistake made in the real market process, and I believe that’s the real reason why we are unable to face the challenges we are facing to this day.

It is my strong conviction that a serious mistake has been made in the development of real transaction systems and applications through the use of IT and networking technology over the last twenty to thirty years. Real transactions are directly restricted by time and space, and there have also been many divergent and complex rules and standards in real transactions across the world. So, in developing those systems and applications, we should have simplified them and constructed a fair rule and standard for e-commerce by directly overcoming the restriction of time and space with IT and networking technology, instead of just simplifying them by manipulating the constituent factors of transactions, such as products, services, providers, and customers. These last increase the efficiency and productivity of real transactions only to a limited degree. Unfortunately, no one has devised a system to overcome these defects – until now. That’s what my company, UBIMS, intends to remedy. Because we believe that this is one of the most serious mistakes we have made in the Modern Information Age, we are designing platforms for correcting it, chiefly by reducing the constraints of time and space upon local economic activity. You will find few if any who acknowledge the mistake our country has made in developing those prior systems and applications.

Because of the fact that the more the Information Age has progressed, the more the employment situation has worsened, policies aimed at the improvement of the employment situation have been unsuccessful. No matter how powerful the adopted expansionary economic policies and stimulus plans were, they have been ineffective and useless. If we do not fix that mistake, I strongly believe that this economic and social tailspin cannot be stopped. It could develop into a worse crisis, even into a full-fledged depression. I believe that mistake is the real cause of the current economic crisis.

So, what should we do? We should make a decision as soon as possible that will significantly facilitate the use of both digital devices and software applications in the market.

But, how? It’s so simple! Just fix the mistake.

If we correct that mistake quickly and effectively, I believe we can restore the self-generation, recovery capability of the market or economy, and induce a revolution in the real market. Such a revolutionary step would change the existing outdated market paradigm to a more suitable market paradigm for the modern information market, and solve major problems of the current economic crisis, such as unemployment and lack of consumption. Then, the US Federal Deficit would significantly be reduced as in Shape [C], and the employment figures would rise, as depicted in Shape [1]. I believe this is the most viable and effective solution for the current economic crisis.

The current economic crisis is worsening week by week, moving inexorably toward economic depression. We do not have much time left. To stave off this worsening crisis and to revitalize the economy, I strongly recommend the nations of the world and their government leaders initiate and support the development of this new real market revolution as soon as possible—before it is too late.

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