Speech by Enzio von Pfeil, Chief Executive, Commercial Economics Asia
Download this speech in PDF format

INTRODUCTION

Economics. We are commercial economists.

Western. We dislike the western root of the word "economist". It stems from the Greek word, "oikonomia", meaning "household" or "housekeeping". Well, that mindset boils down to telling you the time by looking at somebody else’s watch. Which is pretty useless: all of us in this room can read and think.

• That is why we are not going to regurgitate all of those numbers that everyone else has been talking about: you know them at least as well as I do! Instead, we want to see what etymology and psychology tell us about where economies and thus markets are headed.

Chinese. I always have preferred the Chinese root of the word "economist": my Chinese friends tell me that its characters can translate into "process and benefit", so that in the Chinese mindset, economists deliver beneficial processes – or perhaps less subtly, they tell one how to make money. That is our approach at Commercial Economics Asia.

Before suggesting what the impacts of terrorism on the U. S. economy might be, where we are coming from has to be stressed: we are optimists.

• Military outcome crucial. The ultimate result is dictated by the military response and outcome. Nobody knows these, and nobody knows the time frame of them. Eden Woon can tell us much more about the military outcome than probably any of us here, on account of his past career. Whether he is at liberty or even wants to is, of course, his decision!
  
• Natural disaster. Who here gets the Economic Report of the President? It provides a marvelous annual US economic history. You may recall that the World Trade Center was bombed in January, 1993. So naturally I read that year’s report – very much looking for a mention of the event. There was none! Instead, there was an article on the "Economic effects of Midwest floods in 1993". I tend to see the tragedy of 11 th September similarly: terrorists cannot sustain attacks of the magnitude of that day. I do not stand alone in assuming that more attacks will follow. But they, too, will be sporadic. Hence, equate them to natural disasters.
  
• Not different. Many people say that we cannot know anything because "this time, it’s different". Were these perhaps the same people telling us before the last bursting of the bubble that the business cycle was dead – that "this time it’s different"? My view is simple: emotions, policy responses and economic consequences do not change! The only thing that remains an unknown is the timeframe.
  
• There are two specific things which always remain the same in times like these: psychology and policy response.
  
  A) Psychological Sameness. As a matter of interest, it always is useful to look at the origins of words just to construct a mindset:
  * Terror: stems from the Latin word, "terrere". It means "to frighten away".
  * War: has many origins, one of them being the German word, "wirren". It means "to confuse".
  * Crisis: stems from the Greek, meaning "the decisive moment" or in a medical context, "the turning point of a disease".

I think that you get my point: the psychological mindset of all of us is one of fear. And I cannot imagine that ever in history, people have NOT been scared of terrorism or war – or of fear and confusion. And that is precisely when they batten down the hatches and don’t shop: witness the current crash in consumer confidence!

B) Response Sameness.
Next to the psychological sameness encountered during terrorism, war and crises, there is something else which is NOT different – at least since the Great Depression: the policy response. Totally unsurprisingly, in line with increased democritisation, governments have to keep their constituents happy. Obviously, the economy is crucial. And for the past 200 years, some pretty big economic brains have figured out how to weld monetary and fiscal policies into a powerful weapon that combats terrorism and war – or fear and confusion.

• Precipice. Finally, each of us has a choice.
  * Negative. We get to see this disaster negatively or positively. For those who insist on seeing it negatively, discard the economic thought of the past 200 years – and pile straight into cash and stay there. Never ever apply the simple laws of economics again. And perhaps, move to the medieval ages – for instance back to Afghanistan.
  * Positive. For those who want to see this decisive moment, this turning point, as an opportunity, you are accepting that economic policy responses do work, that they will be applied again. Or that, fundamentally, mankind never stands at the edge of the precipice. He/she always figures out the solution and moves on. And this is what I believe. Look at how:

  •Americans are returning to the airports and shopping malls, and even going on strike in Orange County – and

  •Economic policy makers are forging the weapons with which to combat fear and confusion.

WHAT WE WANT TO SAY

Pattern predictions. So we believe that neither psychology nor politics change during times like these. Only time frames do. All of which suggests that we can use historical analysis to get what Sir Karl Popper called "pattern predictions". We now want to demonstrate how the U.S. economy has performed during past phases of fear, war, or confusion. We will demonstrate this by studying the history of America’s five last wars:

World War II (1941); Korea (1950); Viet Nam (1964), the Gulf (1991), and Kosovo (1999). We look at three things:

•The policy response
•The economic response, and thus crucially for us commercial economists
•The market response.

Below we outline our findings, which we express as average annual percentage changes. We highlight in which year the particular variable peaks.

THE POLICY RESPONSE

Fiscal spending – obviously defence – peaks at an annual real rates of 31% in the second year of the war.

Monetary growth peaks in year four at real rates of about 8%.

THE ECONOMIC RESPONSE

Monetary economy:
o Inflation peaks in year two – in line with fiscal spending peaking in that year. It remains tame until year 5, when private consumption and investment kick in again – driving inflation back up.
o Monetary growth peaks in year four, as we just mentioned.

"Real Economy
o As expected, government consumption peaks the earliest, in year two, along with imports (which is good news for Asia’s tech companies).
o GDP also peaks in year two – in line with very hefty government spending
o Private consumption and private investment peak in year 5.

THE MARKET RESPONSE

It peaks in year three – just after the peak in growth and fiscal spending, and in anticipation of stronger private consumption and investment (which happens two years later).

Closer to home: how has the market behaved just before and just after the outbreak of hostilities?

o Before outbreak. In each of the 5 wars which we studied (WWII, Korea, Viet Nam, Gulf and Kosovo), the market wobbled down in very volatile fashion during the 30 days leading up to the outbreak.
o Upon and after outbreak. On average, the market wobbled in a directionless fashion for the first 18 days and then powered up – in line with people’s fear and confusion subsiding.
o Old vs new. Interestingly, only in the oldest wars – World War II and Korea, did the markets actually fall upon the outbreak of hostilities. During the most recent wars – Gulf and Kosovo – markets actually started rising at the outbreak of hostilities. Indeed, markets rose immediately upon the start of the two most recent wars – the Gulf and Kosovo!

CONCLUSION

In other words: the policy response effects what it is supposed to:
In order to fill the void of people who are scared and confused and thus who are not consuming and investing, the government jumps in, especially with fiscal spending and with a steady increase in monetary growth.

The market performs the strongest in the middle of the transition from a peak in government spending (year 2) to one in private investment and spending (year 5) – by peaking in year 3.

We have suggested that fundamentally, the turning point which we are going through is NOT different: the psychology of fear and confusion are immortal, and the necessity of powerful policy responses are crucial in democracies.

So do NOT throw your textbooks away: things are NOT different. Fear and confusion produce positive turning points!

In closing, underlining our optimistic view of life in general, we conclude with a story of a Chinese farmer who lost his horse.

Upon losing it, he cried: "what bad luck."

A week later, his horse returned – with another horse. The farmer exclaimed, "what good luck."

But a day later, the farmer’s son fell of the horse and broke his leg – and the farmer fumed "what bad luck."

But then, a week later, the Emperor’s soldiers came to his village looking for conscripts. His son’s broken leg made him unsuitable. The farmer celebrated with "what good luck."

I think you get my drift: it depends on what you do with what has happened. Back to etymology: in the West, the word crisis derives from "decisive moment" or "turning point". In Chinese, it stems from danger – the negative view of current tragedy – and opportunity – the positive view of the current tragedy. We take the positive view.

Thomas Edison once was praised for having invented the talking machine, the phonograph. "No," Edison said, "God did that. I just invented one that you can turn off."