Thursday, June 12, 2008

Why I Heart PoMo

Discovery of the day - Donald Mackenzie, a scholar who specialises in the social science of finance. Wow there is such a thing. Here is where the hard science that is applied mathematics bleeds into the human science that is sociology. For example this essay entitled "The Material Production of Virtuality: Innovation, Cultural Geography, and Facticity in Derivatives Markets" has me itching to consult my best friend who has an MS in Finance, just to cut through the jargon.

I have been obssessed with the political economy of debt since the 1997 Asian financial crisis - mainly because it spelled the beginning of the end for this country. In my old discipline, so preoccupied with 'security', threats are always seen as physical. But for an archipelagic nation with no national enemies (i.e. other sovereign countries), our biggest external worries are the intangibles - things we cannot mount an army against to exterminate. Soaring prices of basic commodities, financial turmoil etc. etc.

Oil prices go up almost every day now. Last I checked it was P55. Tomorrow will it be P56? Jeff Frankel explains the sharp rise of agricultural and mineral commodities due to low interest rates which in turn encourages speculation.

Here Frankel outlines the ways in which low interest rates drive prices up - low interest rates increase tendecies to hoard storable commodities (i.e. oil), and decrease incentive to produce today - speculating that prices will increase tomorrow. Frankel then suggests that King Abdullah of Saudi Arabia is a major hoarder - keeping production to 12.5 mbpd in the forseeable future, i.e. hoarding his Kingdom's oil underground. The monarch's quotable quote: "I keep no secret from you that when there were some new finds, I told them: ‘No, leave it in the ground, with grace from God, our children need it’." Now who can argue against his logic? Flashback to a snippet of a conversation I had with a Kuwaiti I met in Bond, who kept harping on the GCC's 'oil weapon.'

Butch has twice asked me why I thought oil prices were going berserk. In the modern old world prices are determined by supply and demand. But here is an excellent example of how today's weird world of high finanance - conducted entirely in complicated maths and in virtuality - is nevertheless causing real-world misery.

See also:

Third World Financial Crises


postmodern mathematics said...

"the end for this country"
Do you live in the USA?

"my old discipline" = military studies or something?

postmodern mathematics said...

Bond = where?

Totally agree with King Abdullah -- what's the point of purposefully knocking the price down, rather than rationing / being prudent / not acting like the oil will be there forever?

If you read Nassim Taleb maybe you will have the same thought I'm having re: robustness. If Abdullah unloaded oil onto the world, drilling at top speed until it was all gone, that would (a) disincentivise research into alternative fuel sources; (b) throw a massive delta wave (price shock) onto the world market ... No, not even a wave, just a sudden and permanent down-ratchet.