Donnerstag, Mai 07, 2009

Silliness and Capitalism...

This article stands as a proxy for many others.

While I won't get into a complete fisking - not worth it - there are some memes here that bear analysis:

First and foremost lies a failed understanding of how the world economy actually works:

The entire contemporary financial system was based on the assumption that financial markets were always efficient and rational. That idea fell off the cliff along with the world economy that it helped to wreck.

Wrong. The contemporary financial system was based on the knowledge that financial markets were always efficient and rational. Not the assumption: what went wrong was that governments, in their *infinite* wisdom, gamed the system to move investment in the ways they wanted them to be moved. The markets have punished this stupidity. Failing to understand this lies at the core of the following errors and silliness...

Let me reiterate a God of the Copybook Headings: Markets are ruthless, impartial and deadly. Make a mistake there, misjudge the market, and you will be punished by failure. Do your homework and dot the i's and cross your t's and you will be rewarded by success.

Government manipulation of markets for political gain is always punished by the markets. Some of the time this is painfully obvious, such as now. Most of the time the political gains are greater than the financial losses, which is why politicians love screwing things up so badly.

Three broad steps must be taken to remake this failed, unstable model: one, regulating global finance; two, correcting global economic, social and environmental imbalances; and three, devising ways to make sure economic progress is aligned with social needs.

See what I mean? There isn't a single economic or financial point to the analysis. To paraphrase a Rahm Emanuel, a crisis is a terrible thing to waste. The arguments here are basically this: we must fundamentally change world economics in order to achieve the political goals that I want to have happen. This ignores the basics of the world economy, in the mistaken belief that governments can manipulate them in order to achieve political goals. Like I said: government manipulation of markets for political gains is always punished by the markets. This sometimes takes a while, but it always happens.


For balance to be restored, two things must happen.

First, the United States—which has disproportionately served as the market for global exporters—must increase its exports, either through devaluation of the dollar (something dollar holders fear) or industrial policies that encourage exports (not of financial services, but of manufacturing), or both

Too simple a story. Right now, the only way to fundamentally change the US current account and trade balances from long-term deficits towards either surpluses or at least a balance is to make the rest of the world a more attractive place to invest their money. The current account deficit of the US is based less on the financial side of the trade imbalance - the US has one of the smallest net trade quota, measured as net exports as a % of GDP, of the industrialized countries - as much more the fact that the US dollar and the US economy is by far the most politically stable, financially attractive and industrially productive countries around, making it the goal for those interested in both a safe haven and as a place to achieve the best returns on capital with the lowest risks.

Merely increasing exports doesn't change that. It's indicative of understanding symptoms and not first causes. Classic trade economics would indeed call for the US to massively increase its exports to much of the world, but this can only happen if two things happen: the dollar is devalued severely and the US decides to subsidize its export industries in order to compete with locally-made products. Neither of these "solutions" can happen without the government intervening in markets, and we know what happens to that.

And second, export surplus countries, particularly China, must raise wages, expand social safety nets and increase domestic demand. China's stimulus program includes first steps in this direction, and its proposal for a global currency would also help redress financial and trade imbalances.

Sigh. Looking at US trading partners, he chose the one that appears to fit with his solution: there are plenty of export surplus countries, especially Japan and Germany, who cannot do this. They already have high wages, extensive safety nets and domestic demand is, due to demographic developments, simply incapable of being increased. These economies, whose economies are severely distorted due to the steroids of both competitive advantage and export dependencies, are fundamentally not in equilibrium with their domestic demands, the inverse of what the author is arguing for.

Fundamentally, the world is slowly heading to a Heckscher-Ohlin equilibrium where comparative advantages will determine the economic health of any country: put simply, any one country's ability to excel in production of specific goods and services will reflect their ability to trade those goods and services world-wide and, in the case of developing countries, be able to finance the development of other developments.

World leaders must address other, related global imbalances with a combination of global and coordinated national policies, not leave solutions just to markets. In addition to being unfair and politically destabilizing, wildly uneven patterns of development, including rising inequality among nations and within most nations, threaten the global economy. The imbalance between growth and the environment, most critically manifested in global warming, threatens the planet. And the growing imbalance between the power of multinational corporations and workers endangers both popular democracy and wise regulation of the economy.

Sigh: again, the failure to understand that it was government interference in the basics of supply and demand was what created this problem, and hence cannot be part of the solution. The markets will always judge the solutions. The world economy is not threatened by markets: the politicians' political goals, to be achieve by manipulating the economy, are threatened.

As they should be. Big difference. Given the current quality of governmental interference in markets, to speak of "wise regulation" is a farce of the worst kind.

Resolving such imbalances and developing new mechanisms for control of finance ultimately requires finding new ways of making economic activity serve social needs, thus expanding democratic control of the economy. That means using markets, not being used by them. That means recognizing that markets are not the only mechanisms for delivering the goods and services people need.

Once again: sigh. Democratic control of the economy can mean only one thing: a reversion to command economy. The people hath spoken: I command the economy to make it so. Try to do this, and the markets will punish you the way they punish all who try a command economy. To reiterate: the idea that you can use markets is the fundamental reason we are where we now are. continuing to believe this is fundamentally silly.

Ultimately, trade is not an end in itself, but one means to the end—creating a better, more meaningful and stable life for all on a planet that is not endangered by the process. 

Yawn. While you're at it, I want a unicorn. And a pony for my girls.

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