Monday, October 13, 2008

Market Is A Chaotic System

I had read this many years ago. The inventor of CFC (the coolant that was used in refrigerator) put his head into a chamber o CFC and breathed it in to show that it is absolutely harmless. CFC is odourless, colourless and harmless. It was wonder-gas. And yet years later it was found to endanger our very existence by creating holes in earth's atmosphere.

Why am I narrating this? Because impact on chaotic systems is difficult to predict. Earth's atmosphere and weather system is a chaotic system. And so is the market.

The market as practiced in free societies evolved over many decades. It is extremely complex not because it is difficult to understand but because it is chaotic by nature. There are just too many variables. A well designed system should have corrective mechanisms. In some case the corrective action appears as deterioration. At least on the surface. But it need not be bad.

Take the human body as a system. Fever need not really mean bad. It just means the body is trying to fight the infection. What happens if we take a dose of a over the counter medicine. It has side effects. In some cases may lead to complications.

The down swing of market may not necessarily be bad. It just means it is going through a correction. Companies that make bad decisions die out. Other smarter companies take their place. Yes, a severe pathological case will require intervention. But as long as we are not merely treating the symptoms, we should be fine.

Besides, treatment should not change the very nature of the system being treated. Let us consider the actions that have been taken in the past few weeks. Banning short selling, desire to take over toxic investments, nationalisation. These are changing the very nature of a free market. These actions may help in the short term but are most likely to have impact long term in some form or other as these are un-natural.

Governments control monetary policies. Use that to stimulate demand and improve confidence. I am sticking my neck out here but one day we will look back and with the advantage of hind sight we would say we did wrong.

Market, being a chaotic system should be allowed to recover on its own. If it is a robust system it will recover. If it doesn't, it was never meant to be.

Note: The picture used here belongs to Andres Virviescas. Please visit here for more such photographs.

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