Tuesday, January 6, 2015

Ghost of Christmas Past: Looking Behind to Look Ahead

Stock markets are up then down. The value of the dollar is soaring while the ruble and many other currency values plummet. Are we going back to another recession? Didn’t we just get out of a recession? Are we doomed to decades of slow growth? Was Elvis a transsexual? These are just some of the questions being asked these days.

To oversimplify what is going on now is risky but why have a blog if you aren’t willing to stick your neck out? It seems to me that what is going on today reflects an ongoing evolution of the global economy. In the rich places of the world we are playing out a dramatic financial evolution. In the wanna-be-rich places of the world we are seeing the results of logical but unfortunately dangerous economic development policies.

Whether we focus on Russia or Venezuela there are similarities. These countries are trying to catch up to their richer neighbors. Impoverished by rigid autocratic and socialist policies before the 1990s, these and other so-called emerging or developing countries plunged into less regulated and more market-oriented systems. Just as when an old man tries to learn to play the guitar, the physical, cerebral, and other transitions required in such a transition are slow and painful. No country found transition easy and no country did it the same way. But by the dawn of the 21st century many were finding success in global capitalist markets. And some of the ones with the most startling successes were those that chose to specialize – or build their new economies around one or a few industries often featuring the exportation of commodities like oil, copper, and aluminum.

And so it was in 2007 when the signs of economic slowdown first became apparent, a catchword was "decoupling". That is, the developing countries had advanced so far that even if the US or other rich countries experienced recessions – the developing countries would be fine. They had decoupled their economic growth from industrial world. Well—that was optimistic and mostly wrong. Just as a one-handed juggler of flaming knives finds out – when the going gets rough it helps to have two hands! Building your economy on only a few sectors means you have nothing to fall back on when those sectors experience difficult times.

Human nature and politics suggest that we should not be too critical of developing nations. It is not easy to dig from the ruble of failed socialism and build a broad, dynamic for-profit economy. And once you get a few sectors humming, it is tough to divert resources away from the successful ones to build the lagging parts. Critical or not, as the world languishes in slow growth, these one horse countries are not going to quickly or easily return to the heady days. One reason is that world growth may take awhile to recover. The other reason is that bad policy seems to follow bad policy. 

Excessive debt and inflation hamper what can be done with traditional Keynesian policies. Most of these countries are raising interest rates to defend against currency depreciation and inflation. Many are going through fiscal contraction because of excessive debt. They are between the proverbial rock and hard place.

This brings us to a JD break and a brief discussion of the other countries – the rich ones. These countries might be richer but they are not necessarily smarter and are not immune from historical evolution. They may not have one-horse economies, but as Brian Westbury often writes, they have created plow horse economies. Perhaps in the name of “progress” or because of sophisticated caring for people and resources – the richer countries have saddled capitalistic engines with more regulations, higher taxes, higher government debts, and uncertain business environments. It is interesting that while an energy revolution has finally strengthened the US in economic and security terms – there are those in politics who want to throw even more regulations, costs, and uncertainty on US firms.

To bring this all together, it is unexplainable that the rich and not-so-rich cannot learn from each other. The rich should vividly see that too much debt and regulation can virtually destroy a country’s economy and leave it with no good policy alternatives.  The less-rich need to see that reforms to widen the economic base are necessary for future growth.  The past should inform us.


  1. The "not-so-rich" are too absorbed with income equality to see the forest for the trees.

    1. Many not-so-rich are too busy to even worry about forests and trees. They are "lucky" to have Harvard grads who "help" them.

  2. Dear LSD. Hope you are enjoying the warmer Florida weather.

    It’d be wunnerful if the rich and not-so-rich could Kumbaya and agree to learn from each other . . . but, as you know (really), it ain’t-a-gunna happen. Folks ‘round the wirld know capitalism is the best economic system but most don’t/won’t acknowledge that—despite the failures of dictatorships and attempts at socialism and communism. The current exception is, of course, China that combines central planning with smidgeons of capitalism here and there—but I wud argue that China’s acquiescence to capitalism is prime evidence that it sees it as an economic winner . . . particularly watching Taiwan’s and Singapore’s success in pursing free(er) economies.

    The rich and not-so-rich countries won’t be singing Kumbaya not because of economic philosophical differences but because the latter mostly lack (1) abundant natural resources to covert to wealth, primarily, and (2) the governance/management to convert those resources to tradable products and services, secondly. Russia is a poster-boy for that—it has beaucoup resources but dysfunctional governance/management. China is progressing, however.

    Even if the latter pursued classical free market economy they’d be limited by natural resource constrains. Those countries/economies don’t have the natural resources to diversify, leading to as you say one-horsey doo-da’s. There’s really not much they can do once their limited or sole means of wealth creation deplete. So, eternal debt to feed the masses is probable for them—unless of course, the IMF, USA, UN, et al continue eternally to bail them out—or refinancing sovereign bonds like ground hog day and déjà vu over and over again. It’d be difficult for them to write and sell sufficient poetry to keep their national coffers supplied, particularly where the populace has graduate degrees in parapsychology, ufology, phallus, surfing, art history, Inca blog chronicles, (yes, those are ackual degrees) etc.—you git my drift, I’m shure. Advanced degrees that don’t shake hands with the skills/knowledge an economy needs to grow can’t produce enough poetry or woven baskets to feed its populace.

    1. There are a lot of emerging market countries that have pretty much embraced capitalism so it is not an either/or question. They are doing it. But in doing so they often stall out on the reforms because the latter are difficult politically. I disagree that these countries are generally resource poor. And keep in mind that not all will want to be or should be manufacturing centers. There are other ways to diversify their economies through tourism, finance, etc. Just replacing imports with domestic goods and services would help them diversify. Your last paragraph suggests that we may be speaking of a different set of countries. I am not referring to the world's poorest countries. I am speaking about places like Brazil or Poland -- countries that have embraced market reforms but basically need some political will to move faster along the reform curve. They have a chance to improve things...

    2. Otay . . . Brazil and Poland. To yer point of learning . . . simply . . . . they can look to two U.S. examples . . . . Reagan and Obummer for stark contrast. However, those “lessons” can only be successful if the students have open minds and willing to learn . . . . but Brazil’s left-wing president, Dilma Rousseff, and the socialist pull of the EU on Poland will test political will.

    3. That's all true Tuna. But it ain't hopeless...Socialism is a false promise for these and other developing countries.