“Time is an illusion. Lunchtime doubly so.”
Douglas Adams, The Hitchhiker’s Guide to the Galaxy
In 2018, Carlo Rovelli published “The Order of Time”. In it, he advanced ideas first promoted by Aristotle, St Augustine, and Anaximander. In summary, these amount to “matter changes state” or, put another way, time is simply a means of our understanding the second law of thermodynamics. Hot things get cold.
This transition is the basis for our construct of time. Time is our attempt to make sense of the natural world, it is not a natural law in and of itself.
Speaking about his view, Rovelli often compares this application of time to nature as a “melody”. He argues that, given an historical reference and a starting note, we understand melodies as a construct. Within this construct, we expect the sequence to progress in a certain, predictable way.
This is understandable in that there are only 12 musical tones or notes from which to predict a sequence, and there is a finite number of outcomes given a known point within a historical continuum. And yet, the nature of a sequence is not determined solely by the parts contained within it. As Aristotle opined,
For example, the opening six notes of Pink Floyd’s “Wish You Were Here” and Rickie Lee Jones’ “Chuck E’s in Love” are exactly the same: G, A, B, D, E, G. However, they are played differently and, as a result, the melody sounds entirely different. The “Whole” may not be greater – that is a subjective opinion – but it is different from the “Sum of the Parts”.
Thus Copernicus who, in 1517, formulated the “Quantity Theory of Money”. This holds that the general level of prices in an economy is directly proportionate to the amount of money in circulation in the economy, adjusted for velocity or, critically, time.
MV = PT where M denotes total Money Supply, V the number of times this supply circulates in the economy, P the price of everything in that economy, and T the number of transactions which take place in that economy.
In combination, Rovelli’s and Copernicus’ theories suggest that we extrapolate from history and reality, which extrapolation must conform to a set of known relationships, in order to determine our choices for progress and growth.
Thus, we witnessed a substantial increase in the money supply (M) during the Pandemic and, latterly, we witnessed an equally significant increase in spending (V), notably on hydrocarbons. It follows that this equals a higher number of transactions (T) at a higher price (P).
That we know this to be self-perpetuating leads us to predict higher inflation, followed by higher interest rates, and, axiomatically, recession. However, given the same set of historic and actual economics, there is uncertainty as to how this will play out; in keeping with Pink Floyd and Ricki Lee Jones playing the same notes in a different way.
We can extrapolate from history and “know” that current inflation will force interest rate rises from Central Banks. History will tell us that such rises are commonly associated with economic entropy or, in another way, shifting the economy from “hot” to “cold”.
Yet the historical basis for economies as a collection of linear relationships may no longer hold true. The perceived basis of any industry is a set of relationships, determined individually, but assessed collectively to understand the value of these sets.
In our opinion, this linear approach to economics has been out of date for a number of years.
The advent of the internet, connectivity, and the evolution of digital goods and services fractures the historic linearity in today’s economy. In its purest form, this development has freed economics from the constraints of physical manufacture of goods and the limitations of service provided by employees.
In reality, the economics of the “real world” are now based on a series of inter-related actions and reactions which determine supply, demand, and, therefore, price. Supply is no longer limited solely by physical availability of raw materials, manufacturing process, or labour. There are clear signs that demand is being supported by alternative forms of income generation, increasingly driven by intellectual as much as physical properties.
As we enter what appears to be another recessionary phase in the global economy, it is worth considering that the emergence of economic ecosystems, replacing historic linear industrial relationships, may mark the coming recession as the last to be provoked by inflation and created by interest rates, at least as measured by current benchmarks.
We are not suggesting an end to boom and bust. We are predicting that a system-level break will occur, resulting in different economic relationships. So different, in fact, that we may need to produce new terms to characterize the cyclical development of our economies.
As we opened, so we will close.
Douglas Adams’ hero, Dirk Gently, solved mysteries by working with the fundamental interconnectedness of all things. In our opinion, this is as true as the Quantity Theory of Money. It is the basis, also, of Ecosystem Economics ©.
Scott Fulton is an economics graduate and a capital markets specialist. From 1988 until 2000, he worked within London’s equity capital market as an Extel rated analyst in the Building and Construction sector for, amongst others, Bank of America Merrill Lynch, Credit Suisse and ABN Amro. From 2000, Scott moved into financial public relations and investor relations (“FPR” and “IR”). He was the director responsible for IR and M&A at Financial Dynamics (now FTI), Citigate Dewe Rogerson (CDR), Just Retirement plc (now Just Group) and Asda Burson Marsteller (UAE). On returning from the Gulf in 2015, Scott re-joined investment analysis at Whitman Howard (recently sold to Panmure Gordon) before moving into Proxy Solicitation, specialising in M&A, at Equiniti plc. Through his professional career, Scott has focused on and developed skills in investor relations