Those are the words of Jimmy Hendricks, but I was tempted to use the headline: “I read the news today, Oh f***”, because I just opened the paper to discover that General Motors is now worth a mere $2.69billion, which is about the same that eBay paid for Skype. In fact, GM could easily be acquired by any one of the following companies, all of whom have a healthy cash pile: IBM, Microsoft, Google, Apple, Cisco (and others) – and they’d still have a healthy cash pile afterwards. It could be acquired for the amount of money that US spends every week or so in Iraq, saving Iraq from, er.. I’m not sure what.. but let’s not labor the point.

There are hundreds of economic pundits pontificating on what is and is not wrong with the world economy in general and the US economy in particular. Economics was called “the dismal science” by the Victorian historian Thomas Carlyle – a perfect articulation of a sad reality. The sad reality is that Economics is not very good at prediction.

Actually, Economics provides a wonderful area of study for Chaos Theory. If you don’t know much about Chaos Theory, it doesn’t matter, all you need to know is that it is about the mathematical modeling of situations that become unstable. It captured the imagination of the world because it gave the academics a set of mathematics that could be used to model instability. What generally seems to happen in the world is that systems remain stable and predictable most of the time, a little like a pendulum swinging back and forth. They exhibit change, but the change is within known and clearly recognized boundaries.

But there is also disruptive change, for example an earthquake, where stability vanishes for a short period of time and chaos reigns. When stability returns, as it inevitably does, the landscape has changed. And usually, the stability that returns is not exactly like the stability you had previously become used to. And that’s the problem with Economics. We cannot predict the outcome of what just happened – all we know is that a recession of some kind is coming our way.

Goodbye to All That

The economic problem that we are witnessing has two important aspects. One is that the credit market has frozen and the other is that the stock market has collapsed. These two things are related, of course, one being the cause of the other, but the impacts are different. The credit market has frozen because the “shadow banking market” was highly leveraged and in its unwinding there has been an understandable unwillingness to extend further credit.

The freezing of the credit market has the same effect as a heart attack, except that money rather than blood ceases to circulate (to businesses). Remarkably the government that has acted fastest was the UK government. By pumping money into the banking system (in exchange for preference shares) it has started to unfreeze the credit markets. The US is now going to do the same thing, but it should have done so a few weeks ago and- IT SHOULD NEVER HAVE ALLOWED LEHMAN BROTHERS TO FAIL. That is the single most stupid bit of inaction taken by anyone so far. If the US government had instead pumped money in Lehman Brothers it might have been able to keep the lid on the market.

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