Tuesday (and Minsky)

Umm…hello…

This is my first post on here…previously I know nothing about this place, until in unproductive time during working hour, I accidently find this place…(without my boss knowing my unproductive stuff).

Actually I didn’t know what I’m going to do with this thing. I’m not good with writing (that’s why you wouldn’t find my book in your nearest book store), nor I have something good to share. But to think of it, I might use this opportunity as a note (or maybe short notes compilation) of what I learn on the field I currently involved with, which is economic & finance (yes, it’s boring stuff).

And again, today, in my unproductive time during working hour (I honestly “copy” and “paste” my previous passage) I try to read something useful: a paper….no not that newspaper, but a journal by Omar F. Saqib titled The East Asian Crisis in Kindleberger-Minsky’s Framework. The paper try to analyze Asian Financial Crisis in 1998 using Kindleberger-Minsky model. The model try to explain the crisis anatomy in five stages: displacement, boom, overtrading, revulsion, and tranquility. Although the model is more to qualitative (behavioral approach) rather than quantitative, but the beauty lies in its intuitive sense.

Here’s the complete stages:

1. Displacement: A situation come from external shock which opening profit opportunity (may caused by asymmetric information) in at least one economy sector.

2. Boom: The displacement stage paves the way to “boom” thus increasing the money supply and usually followed by rising credit.

3. Overtrading: This may come in form of: over borrowing, over investment, and over consumption which lead the price increase and creating profit (capital gain).

4. Revulsion: At this stage, some insider trading start to realized their gain (taking profit). At some point, the market start to realize that current situation can’t go any higher. Then the crisis break out and begin the panic selling.

5. Tranquility: When the selling pressure come down, low prices tempt people to move to less liquid asset, they’re cutting off trade, and lender-of-the-last-resort convinces the market of sufficient cash (government intervention).

The above stages is very common sense (in my opinion though), that can be applied to any “crisis” or “big stuff” happening around us. In my place (not very common place on earth, and categorized as developing countries by World Bank), the latest “hype” among people is the trend of collecting a “stone ring”. It’s not a ring made of stone but a stone that attached on a ring, which may look like you carry a stone (or lizard’s egg) on your finger. The displacement stage happen when my sixth president give this “stone ring” to President Obama as a gift. The narrative then follow that this stone ring is a valuable jewels, maybe same as a diamond or gold. The snowball effect keep rolling (boom stage) and now people are over consuming it (Gollum Syndrom if I say). They start to collect this ring from the cheapest one (around US$20) to the crazy expensive one (may reach US$15,000–20,000). So far, the revulsion stage is still not detected. Based on my guess, the revulsion may not be visited due to “illiquidity” in the secondary market. Unlike valuable metals like gold or diamond, this stone ring doesn’t have a “market” price. When people think this ring is not valuable as it was think before, no one wants to buy it anymore. When this happen, price will drop due to demand disappearance and tranquility stage comes in.

Bottom line: what I love about learning economic is, it helps to explain how this world works (in some way). And it give you framework to think rational (as many economic text book assume that all people are rational) and then by understanding it you’d know the reason of irrational behavior around you.

— -end of post #1

P.S. If you want to know what this “stone ring” look like, try to google “batu akik” (but don’t expect it would be the ring to rule them all).