Predicting the Future

I just finished Making Globalization Work, which I highly recommend, and have a few final thoughts about it before I move on to another book.  It was written in 2006, so it doesn't take the latest stupendous collapse of the Western economy into account, but the macroeconomic discussion does a good job of identifying some problem areas that led to the collapse, particularly in the chapter about the global reserve system.  In discussing the move away from the US dollar as the reserve currency of the world, Stiglitz notes

...perceiving the riskiness of the dollar, more and more investors will decide to shift more and more of their money out of dollars into euros, yen, or where possible, the yuan...As this happens, more and more downward pressure is put on the dollar.  Simultaneously, as investors pull their money out of American securities, stock prices will fall or stagnate...The consequencs of increases in medium- and long-term interest rates may be particularly serious, given the high level of indebtedness of individual households, many of whom took out large mortgages in response to the unusually low interest rates.  What matters is not the average level of indebtedness but the number of households that will face difficulties in meeting their debt obligations.  The increasing frequency of mortgages having interest rates that are variable makes this particularly worrisome.  The march out of the dollar may be orderly and smooth...Or it may be disorderly, in a crash.  

Although Stiglitz is not specifically bearish about the housing market (bubble), he does note that broader economic forces were shaping what, in hindsight, turned out to be a disastrous lending policy with large-scale effects.  Regarding the effect that an increased shift to the euro as a reserve currency will have

As central banks hold more euros as reserves, the value of the euro will increase, making it harder for Europe to export and opening it up to a flood of imports.  It will have an increasingly difficult time maintaining full employment.  And with unemployment already so high, and with its central bank focusing exclusively on inflation and not at all on unemployment or growth, there is good reason to be worried about Europe's macro-economic prospects.  

These quotes come in the context of a larger discussion about the problems with reserve currency.  Apparently, the reserve banks of foreign countries purchase treasury bills against a currency, the US dollar or the euro in the above examples, which is in essence loaning money to the US or Eurozone.  Stiglitz talks most significantly about the dollar, inasmuch as it has been the reserve currency of choice for several decades now, and argues that treasury bills were essentially a low interest loan to the US that was used to finance large scale deficit spending and was inextricably tied to the US' status of default consumer for the world's goods and our perpetual trade deficit.  


The point that I gathered from this is that crises are predictable, but these predictions share Cassandra's curse inasmuch as they are largely disregarded for ideological reasons, and because the preventative measures required to stave off the crisis are either generally unpopular or harmful, in the short term, to major corporate interests.  In short, governments are neglecting their role as the defender of the common good.  Without some authority to keep them in line, corporate interests will always pursue a selfish course that fails to take the grand scheme of things into account.  Theoretically, Adam Smith's invisible hand should prevent this from creating a problem, but for a free market economy to function the way it is alleged to function, perfect information, perfect markets, and perfect competition are required, and all of those things have never and will never happen.  Moreover, corporate money is consistently used to weight legislation, trade agreements, tariffs, etc. in their favor, limiting the freedom of markets even more than the reality of circumstances.  


Another, and related, point that I drew from the book is that there is a strong relationship between social justice, economic policy as regards globalization, and the stability of domestic economies.  Many of the policies that Stiglitz advocates in his book are clearly argued primarily because they are socially just policies.  Many of the policies he advocates will not be immediately beneficial to the US.  Ultimately, however, the interconnectedness of the global economy has shrunk the world to the point that socially just economic policies that defend the least powerful of the world's citizens benefit us all in the long run, and will have powerful stabilizing effects on not only the economies of developing countries, but also on the US economy.  


Stiglitz realizes that some of the policies will be politically challenging and face significant obstacles.  Herein lies the ultimate failure of our governments:  they are unable or unwilling to convince us to pursue a course that is in our best interests, even if realizing those interests will take decades and even when that course doesn't pass the sniff test of the everyman's common sense.  We have politicians, not leaders, and they legislate and bicker and take the easy path to reelection rather than persuading and inspiring and making substantial changes in pursuit of the common, and sustainable, good.