December 28, 2015
Economic lessons from the age of the PharaohsPosted in Sunday Business Post · 31 comments ·
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?