Hysteresis

Nov'08, we have seen the effect of the subprime crisis on banks collapses and now on the so-called real economy, and now, we are trying to undertake correcting measures (governmental of which we do not know the final effect, in the meanwhile, the systems seems to go on, as irregular as before... If we see the financial system and the economy as an eco-system, I suppose we can say that there is hysteresis in the system.

Hysteresis is a technical term that I discovered in my electronic classes at High School or maybe during my first years of university. Hysteresis describes an electronic system for which the output signal does not follow in a continuous function the input signal.

Basically, unless you know the inner mechanics of the system, you cannot contemplate in advance what will be the effect of a variation of the input signal. One can also consider that there is a delay between a cause (input signal) and the effect (output signal).

When I first heard about the Subprimes, it was in March 07. I was having lunch with a colleague, Alex, on a spare sunny day in a small square nearby St Paul church in London. Alex was following the economic & financial news thoroughly and he had heard about what was happening in the States. The burst of the real estate bubble, the beginning of some kind of crisis there, accross the Atlantic. I was there, having my slice of pizza, listening to him, both amazed by his awareness and ashamed of my lack of outlook and background. I was working in the financial sector, specifically in the Oil & Gas sector. I was beginning to get grips on the geopolitics underlying the mechanics of the oil prices and new oil projects but I was unaware of the rest of the financial system. Like a prophet, Alex told me: "You'll see, what is happening in the States now, will arrive in Europe in 6-months' time...".

In fact, it arrived even earlier. The first news about the Credit Crunch, liquidity crisis and the stock-exchange fall were announced during the summer 07. End of July- early August, the UK was rocked by the Northern Rock demise and the ultraliberal moto of Great America began to be shaken with the nationalization of Indymac, an institution specialised in real estate mortgage in the USA. Observers and experts then said that investors no longer trusted each other as they could not know who held toxic assets or not. Liquidity was scarced and banks no longer lended to each other. In an effort to pour liquidity in the system, Central banks cut interest rates on a regular basis... So,when will all of this end and everything be right again...?

Spending lavishly or saving up?

Well, now it's crisis time.

People are saving up every single euro cent or dollar. There is no little saving. Why? Because of the Crisis. Eventhough politicians try anything to convince us that it is not the case, people see it, feel it. Fear to lose one's job, mainly and no longer be able to join the two ends. Well basically, that's a good reason why. But is it so wise?

Been thinking for some time, not really in depth, that if my bank goes bankrupt (relatively unlikely scenario), the savings of my life (not that much since I only began working just two-years ago or a bit more, and I include my internship period - well-known for not being the source of money for extra-savings) would be lost (more or less, given governmental guarantees and the potential difficulties to enforce them). So, why not using this money now in useful or simply desirable items that I can enjoy during hard times, instead of whining because I have lost everything. This would at least give me the opportunity to enjoy the fruit of my savings and it would have the positive spillover of not stopping the economy because of savings. Let's say that it is quite a tentative way attitude, although I find it quite hard to follow (fear of the worst What If scenarios and reason too).

So, it came to me as a surprise when I saw this article in the NY Times: Some Purchases may still be worth the Price! Ok, the tone is different, doesn't envisage the bankrupcy scenario, but still, it contemplates the option of chosing to spend money instead of saving it. All is about considering spending as an Investment. Not an investment that would be profitble in terms of money, but in terms of well-being, social relationship, memories and so on. All these little things that make up what we are and that make it so special.

Well, before reading the NYTime's article, despite the financial crisis ghost that haunted me, To and I had decided to buy a TVset... I am sure we'll find out a way to make it "profitable".