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Tuesday, May 8, 2012

Seven Key Diagnostic Measures

“Never in the times of financial crisis have so few, done so little, to assure the utter misery, of so many.” T A McNeil

Seven Key Diagnostic Measures

Indicators of Economic Health

There is little doubt that the global economic system is complex in nature, while our short-term minds are generally limited to operating with seven variables. Accepting these constraints, makes it useful for us to then develop a listing of seven key indicators to help promptly examine, evaluate, understand and project the overall state of these complex affairs. Bear in mind, any of the listed indicator's importance, inclusion and relevance also requires on-going evaluation, particularly when major changes occur in global conditions.

These key indicators or measures listed below, define a framework or aid that aims to particularly "better understand" the overall state, outlook and implications of the global supply and demand position. These two factors may also be described as: object resources (finite supply) and people (infinite demand) respectively, and both are the primary drivers behind the complex global economy. This concluding "qualitative understanding" may then be applied along with other concepts to formulate protective and progressive social, investment, economic or other related decisions.  

Here then are some suggested indicators to consider for your own list of handy analytical starting points:

Soft Commodities - The most essential real ingredients for immediate human existence, dramatic changes in the price, demand or supply of any of these key elements affects all aspects of human activity.

Prices and Supply of Oil – After food, the modern economic system is critically dependent on this cheap and abundant source of energy. It is also critical to the supply and distribution of food, as well as novelty goods and services.
Consumer/Business Confidence – Demand originates with people, so beyond the basics of food and oil, the need for novelty goods and services is profoundly affected by the state of confidence. Much of modern economic activity depends on novelty items, and thus the need for reasonably high feelings of security and well-being to sustain this demand.

Cost of Money – In essence a tool used to control abstract demand, largely associated with the demand for novelty goods and services. It also bears mathematical importance to inflating or deflating the value of capital assets. Particularly paper abstracts and object real estate, whose values also act as key confidence drivers.   

Banking and Markets – Of the two, banking is more critical as it acts as the arbitrator or facilitator for the flow of devices (money) used to actualize supply and demand transactions. The state of banking affects our abilities to transact demand and supply activities. Markets are secondary to real activity, although they do apply logic, mathematic and empirical devices; their essential value for overall analysis is in measures of confidence and outlooks.
Social and Political Unrest – Severe failures in the effective delivery of balance amoung the preceding indicators, will be demonstrated by people calling for strong corrective action. Usually the cause is related to an unsatisfied imbalance in the demand and supply of the essentials for modern human existence. Growth in unrest is a sure sign that serious failings persist that could lead to a wholesale change in leadership and direction.

Price of Gold – This is “the mother of all paradoxes.” It is largely irrelevant to real economic activity. It is purely an abstraction used as a proxy for currency, particularly when the value of paper abstracts (money) is feared to have diminishing value. Humans by nature, gravitate to “object physical abstracts” that purport to better symbolize stored value in times of grave uncertainty. So despite this real irrelevance, it is still an excellent tool to measure aggregate overall confidence.

Ironically too, “gold must still be converted to paper abstracts to practically acquire and consume real goods and services.” Gold is also always at "political risk" of losing its ability to convert to paper abstracts. Always - (a simple stroke of the collective pen by key Central Bankers restricting conversion) There is "intellectual risk" too - people collectively wake up one day and understand its actual irrelevance.

There you have it, a little diagnostic aid. This is not the only possible analytical framework, as there are many more objects or conceptual factors that may be added to consider and weight. Moreover, the above comments for each measure also are by no means complete. This type of aid is simply a handy starting guide to help achieve a better "qualitative understanding" for the state of the complex global economic system. Fostering perhaps, improved awareness, decisions and actions.

Such a list, with its analysis, evaluation and conclusions should also provide some sensible words to questions often posed in casual conversations, such as “What’s up Doc?” 

T. A. McNeil
First Financial Insights Inc.
Toronto, ON
May 8, 2012

@ FirstFinInsight