December 28, 2015

Economic lessons from the age of the Pharaohs

Posted in Sunday Business Post · 31 comments ·
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The Pharaoh awoke petrified by a dream. None of his holy men could interpret it. The Pharaoh dreamed that he was standing by the Nile and that seven cows “attractive and plump” came and fed in the rich grass by the waters. But soon these beasts morphed into seven skinny, ugly cows and they proceeded to eat the fat cows. But having eaten the healthy ones, the cows remained skinny and ugly. The Pharaoh woke up in a sweat. In time he fell back asleep.

 

Then in his second dream he saw seven ears of grain “plump and good” growing from one stalk. Yet again, he saw seven thin sickly ears of grain emerging and, in front of the Pharaoh, these thin ears swallowed up the healthy ones.

 

The terrified Pharaoh called for Joseph – yes, he of the technicolored dreamcoat – who had been known to have a talent for deciphering dreams. Joseph explained to the Pharaoh that the dreams represented the fact that seven years of plenty tend to be followed by seven years of famine. The cows and ears of corn represented the good times, followed by the bad times.

 

Joseph urged the Pharaoh to set aside one fifth of the crop in the good times and store the grain to ease the famine in the bad times, because if he didn’t do that, the good times would be forgotten and all the people would remember was the bad times. This wouldn’t be politically good for the Pharaoh.

 

In Genesis book 41, verse 36 Joseph states clearly to the Pharaoh: “That food shall be a reserve for the land against the seven years of famine that are to occur in the land of Egypt, so that the land may not perish through the famine.”

 

There in one sentence is the first macroeconomics ever written. We have Joseph, the first ever truly prudent finance minister, explaining a seven-year economic cycle, the type of which we are used to in the western world.

 

We also have him suggest that the Pharaoh should try to smooth out this economic cycle, precisely because the good times are times of excess, followed by bad times, which the punters will remember and they will remember more the hardship than the opulence, which is easily forgotten.

This is now known in economics as countercyclical policy where you take the steam out of a boom and then use this resource to cushion the subsequent slump.

 

Joseph is also implicitly the originator of the first ever sovereign wealth fund. What else were the full stores of grain but an ancient sovereign wealth fund, with wealth squirrelled away in good times to be used when the economic climate changed?

 

This is where economics began, on the shores of the Nile. This is where the Hebrew Joseph began to interpret the dreams of the Pharaoh, claiming that the economy moved in cycles. This was also the birth of the seven-year business cycle, plus countercyclical macro policy.

 

Isn’t it interesting now three thousand odd years later that the world is also at the end of a seven-year macro-economic cycle?

 

Last week for the first time in seven years, the Federal Reserve in the US began to raise interest rates, which had been at zero since 2008.

 

This is a valedictory moment for the US because it means that they have managed to drag their economy out of a liquidity trap without the government spending hugely.

 

The US has escaped the trap using monetary policy alone. Most economists said this couldn’t be done, but the US has done it.

 

However, like most successful policies, the seven-year policy of ZIRP (zero interest rate policy) has brought with it some enormous, unintended consequences. The main one of these being a period of enormous debt accumulation. Some estimates suggest that global debt is now 30 per cent higher than it was in 2008 when the world stalled as the result of a panic that was caused by too much debt in the first place.

 

The heavily indebted nature of the global economy as the world heads into another cycle where interest rates may be raised across the board (because typically the developed world follows the Fed), suggest problems ahead.

 

Also, rather than storing up wealth in the good times, most countries remortgaged their balance sheets between 2008-2016, so that they have higher debt to GDP ratios than they has in 2008. The most conspicuous example of this is China.

 

So where does all this leave the world as it goes into 2016?

 

We have the eurozone where everything in the past 12 months has gone from bad to worse. The EU is incapable of taking any concrete decisions and the refugee crisis simply underscores how the botched reaction to the eurozone debt crisis wasn’t a one off. Botched responses are what the EU does. Seven years after the first debt/banking/bond crisis, none of the underlying causes have been addressed.

 

China has had a torrid year and there is still no real certainty as to what is really going on in the economy other than the cast-iron economic certainty that if a country incurs too much debt and the economy slows, bankruptcies rise.

 

This inevitability is unfolding in the Middle Kingdom. Seven years after turning on the debt spigots, many dodgy investment decisions are coming to light.

 

And of course, the US is seeing the ending of one seven year cycle and the beginning of another – possibly truncated – cycle.

 

However, the US has not “put aside” for the rainy day in the US. In fact, debts have risen, not fallen.

 

So globally, we go into the New Year with many conundrums to solve.

 

If you were Joseph and the Pharaoh came to you with dreams like that, what would you advise?

 


  1. Mike Lucey

    “If you were Joseph and the Pharaoh came to you with dreams like that, what would you advise?”

    Save for the rainy day of course but also building on high ground in the first place!

    Subscribe!

  2. Irish PI

    My advice …Lay off the cheese before bedtime O Pharaoh! Thats what usaually caused trippy dreams with me.

  3. michaelcoughlan

    Hi,

    Thank god a commentator of substance has begun the narrative of talking about the elephant in the room aka too much debt.

    The US didn’t just use monetary policy it used military expansion remember the resources in occupied countries wind up on the balance sheet of US companies.

    You never mentioned the massive carry trade which must be taking place borrowing in euro to invest in us securites and properties keeping the bubble inflated indicating a combined effort by the ecb and us CB to stop the derivatives bubbles from deflating.

    Joseph advocated Austrian economic policy savings from crops produced already. If he were to think like a western economist he would have said to the pharo let’s write a promise to put away a share of the future crops produced and sell it now to get the moola to sort our dilemma. Of course taxes would rise to pay interest on the money borrowed and the farmers could produce less grain this year as a result and even less again next year due to compounding. The pharo then would have to invade his neighbours to steal their assets.

    The

    • I would advise the USA to invest in huge infrastructural improvement projects, properly researched and transparently budgeted for on a federal level – not local pork barrel projects.

  4. And of course, according to Ben Carson, the grain was stored in the pyramids.

  5. michaelcoughlan

    The solution to the problem is simpler than you think but needs honest appraisal of the status quo. The us policy is in fact abject failure. Insolvent busnisess Investments and countries need to go bankrupt.

    This will allow assets to go to wealth creators and not speculators.

    Ramp up crowd funding and take payment in bitcoin. Have 10% of the national reserve in physical gold. Build a new economic system and let the old one die so that their can be as painless as possible a transfer of one to the other.

  6. StephenKenny

    “If you were Joseph and the Pharaoh came to you with dreams like that, what would you advise?”
    Well, one thing I would advise against would be the creation of a huge market of wheat derivatives, with every tonne of actual wheat leveraged to 100 tonnes of wheat contracts, and then calculate the amount of wheat necessary to store base don the price of these virtual wheat contracts.
    Although all would be great, and highly profitable for the wheat derivatives traders, things could get as ugly as the cows when the ‘real’ wheat yields fell. The confident but starving population would turn up with their wheat contract, confident of getting one tonne of wheat, and might not be too impressed with the ten 1 kilo bags they were handed instead. Of course, by that time, the price would have gone so high that only the wheat derivatives traders could afford to buy any.
    Have I missed anything?

    • michaelcoughlan

      Yes you have missed something. You could convince the pharo that the smell in the pyramid deriving from the flatculence from his cosseted arse is in fact a WMD from his neighbour. Then put your youngfella in a uniform to cross the valley Into the neighbouring country and steal all their wheat.

  7. Mike Marketing

    “If you were Joseph and the Pharaoh came to you with dreams like that, what would you advise?”

    New Year Resolution No1:

    Ditch the false mantra “A rolling loan gathers no loss.”

  8. [...] IMPORTANT ANALYSIS Economic lessons from the age of the Pharaohs – David McWilliams [...]

  9. [...] David McWilliams looks ahead at the effects of enormous debt accumulation in a world where another seven-year business cycle is ending. The full article can be read here. [...]

  10. [...] David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where another seven-year business cycle is ending. The full article can be read here. [...]

  11. [...] broadcaster, bestselling author David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where another [...]

  12. [...] broadcaster, bestselling author David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where [...]

  13. [...] broadcaster, bestselling author David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where [...]

  14. [...] broadcaster, bestselling author David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where [...]

  15. [...] David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where another seven-year business cycle is ending. The full article can be read here. [...]

  16. [...] (David McWilliams)—The Pharaoh awoke petrified by a dream. None of his holy men could interpret it. The Pharaoh dreamed that he was standing by the Nile and that seven cows “attractive and plump” came and fed in the rich grass by the waters. But soon these beasts morphed into seven skinny, ugly cows and they proceeded to eat the fat cows. But having eaten the healthy ones, the cows remained skinny and ugly. The Pharaoh woke up in a sweat. In time he fell back asleep. [...]

  17. [...] David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where another seven-year business cycle is ending. The full article can be read here. [...]

  18. survivalist

    “However, like most successful policies, the seven-year policy of ZIRP (zero interest rate policy) has brought with it some enormous, unintended consequences. The main one of these being a period of enormous debt accumulation”

    I would consider a re-wording to; “The great success of ZIRP has been a period of enormous debt accumulation” borrowed at a fraction of the interest soon to be demanded in return.

    As for the great leaders strategy I would recommend:
    Drive down wages, cut funding to health, education and the like, make debt necessary have one interest rate for the people and a lower one for the companies lending it, annihilate the unions and cripple labour-hire a PR company to sell it like its medicine, hand the keys over to big business walk off and collect a pension. Good job all round.

  19. [...] David McWilliams looks in the past and ahead at the effects of enormous debt accumulation in a world where another seven-year business cycle is ending. The full article can be read here. [...]

  20. McCawber

    There is an old saying “Be careful what you wish for because you might just get it”
    When Tony, for example, wishes for a return to the gold standard, what exactly is he wishing on the individual citizen.
    Three examples of citizen-
    The one who has nothing and so has nothing to lose and everything to gain?
    The one who has everything and so has everything to lose?
    The one in between – could go either way or no change?
    So the obvious question.
    Who are the winners and losers if the gold standard is re-adopted.
    I’m talking individuals her, not corporate or sovereign.
    And what is the time scale of the effects?, immediate?, gradual?

    • StephenKenny

      The introduction of a gold standard (or any other currency backing) isn’t about a new currency, or about redistribution, it’s about the future of the currency.

      The amount of currency would be set as a fixed multiple of the amount of gold held by the government. So to increase the amount of currency, you’d need to increase your gold holding, or change the multiple – either way, it would be clear what was happening. The market would be transparent and everyone would have enough and accurate information about the currency/gold ratio, and therefore relative value of the currency they had.

      Gold and silver make good currencies for a number of reasons: they don’t rust, there’s always been about a 2% per year growth in the amount of gold (i.e. mining); it’s hard to forge; they’re quite rare so it’s portable; there’re no significant other uses for it (especially in the case of gold); it’s found all over the world, so almost everyone’s used to it; and they’re probably some others I’ve forgotten.

      It’s why civilisations throughout history have used them as currency (generally as coins). Some places (e.g. some tropical islands) have used other things – special kinds of sea shells have been used. But it’s difficult when someone arrives from somewhere else to trade, and you offer them seashells in payment, and they offer you gold.

      The losers are those who make a living from manipulations in base value of the currency, so all forms of asset speculator.

      The winners are those involved in wealth generating business, as they can have a lot more confidence in the future value of the currency over the lifecycle period of their business production processes (making a widget, or making a film, dealing with suppliers etc).

      It’s been pointed out that there were spectacular crashes when currencies were on the gold standard (as it’s called) but these were generally asset speculation manias (property, flowers, exploration, banks etc), but there isn’t a lot you can do about the ‘madness of crowds’, except make better and more accurate information more widely available.

      It’s unpopular with governments because they can’t go insane and start funding endless foreign wars etc without everyone understanding the reality of the costs.

  21. McCawber

    To continue
    Not long before the break up the Soviet Union, a couple in Moldavia sold a farm and banked the proceeds.
    They were well to do (for communists) with one daughter and one son.
    The father was a professor in the University and the mother was a specialist in the hospital so they had a decent standard of living.
    Shortly after selling the farm, the Soviet Block collapsed and the Moldovan powers that be created the Leu as their currency.
    As a consequence of this sequence of events the money in the aforementioned family’s account became worthless.
    Now people ponder that little story while you wish hell and damnation on us and perhaps even yourself.

    May you all live to see me proved wrong.
    Drink sensibly this coming New Years Eve but make sure you enjoy it.

  22. McCawber

    Getting back to the Pharoah.
    The key thing about the story is that somebody (probably not the main man himself but one or maybe even two of his trusted advisers) listened to Joseph’s explanation and advice, understood the underlying economic wisdom of what he was saying and persuaded the Boss man to act accordingly.
    One of those advisers was one, Ebenezer Maccabee
    (In modern parlance Micawber)

  23. McCawber

    “If you were Joseph and the Pharaoh came to you with dreams like that, what would you advise?”
    Austerity – It worked for the Pharoah – He and his people survived.
    Or, as Machiavelli would out it.
    In times of plenty prepare for famine.
    In times of famine prepare for plenty.

    • Mike Marketing

      The key government goals for every citizen must be:

      1. Survival.
      2. Creating stability and
      3. Establishing confidence and belief in the future.

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