Global agenda: The tipping point

Markets and economies are all about tipping points and enormous efforts are expended in trying to predict them in advance.

global agenda 88 (photo credit: )
global agenda 88
(photo credit: )
A tipping point may be defined as the point at which a process that has been underway but was hitherto unfelt or overlooked, achieves sufficient strength or momentum to overwhelm another process or processes, thereby causing a change in the overall environment. This may sound convoluted, but it's really quite simple. Think 9/11: the al Qaeda threat to the US and the West had been developing for years and was not a secret, although most people paid no attention and refused to "connect the dots." Then, by hitting the Twin Towers and the Pentagon, al Qaeda created a new environment in which it was no longer possible to ignore the threat and in which it became the single most prominent issue on the public agenda. That makes 9/11 a classic tipping point. Markets and economies are all about tipping points and enormous efforts are expended in trying to predict them in advance or, at least, to identify them in as near to real-time as possible. We now know, for instance, that there were at least two critical tipping points during 2006 - in the US real estate market and in the global oil market. True, the exact point in time when the Great American Real-Estate Boom finally ended can be variously defined, depending on which indicators are used. But in a slow-moving and diverse sector like real estate, that's what you expect. But given the difference between the state of the market in January and in December 2006, there is no doubt that along the way the basic trend changed direction. In the energy sector, where trading is conducted almost around the clock, that change can be pinpointed almost to the day and hour. But the more complex the mechanism being observed, the more difficult to track the various forces at work and thereby identify - ex ante where possible, otherwise at least ex post - when they will/ have create/d tipping points. That's why it has proven so difficult to predict, or even explain after the event, the way entities the size of the US or even the Chinese economies have developed. Many predictions have been made that that one or the other of these would change direction as a result of a particular factor or development - in other words that the factor in question would create a tipping point - only to find that the development occurred, but not so the tipping; the economy carried on more or less regardless. An obvious example of this is the interaction between the real estate market and the overall US economy. Many predictions were based on the idea that the real estate market was so important within the economy that a change in its direction would feed through to the economy as a whole. But that clearly has not happened - at least not yet, and the longer the gap between the tipping point in the real estate market and any downturn in the economy, the less plausible a direct cause-and-effect relationship will seem. Extending this analysis, we could say that the tipping point in the real estate market - something which did occur - was the result of one or more factors at work within that market: when one of these trends finally overpowered the others, the market tipped and so on, through sub-factors and sub-sub-factors. The result, of course, is to make everything very complicated, to the point that it becomes very difficult to trace definitive causative relationships over time and across sectors and countries. However, there is a solution to this difficulty, called money. Money is the common denominator of all the forces at work within a sector or even an entire economy. That's the whole point of using it - it puts apples and oranges on the same plate. If we know what's happening to money, we should know what's happening - and even what's likely to happen - to the whole economy. So tracking the quantity and cost of money is viewed as the short-cut to understanding the full picture - and following the guys who actually control the quantity of money and thereby fix its price, becomes both obvious and essential. Fortunately, in modern nation states, the function of controlling the quantity of money has been made into a legalized monopoly of the central bank. That's why all economic analysts spend so much of their time and efforts figuring out what the central banks are saying, doing and planning - because they supposedly make decisions that will create tipping points and then tell everyone else. However, as we shall see, it's not quite so simple.