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.

1 comment:

  1. genius; how about the bottom line? Would if the state took back currency creation from the banks?

    (stop letting the Federal Reserve print THEIR money with US mints and go back to printing US notes in our mints)