Economic policy and politics need to meet in the middle
While economic policy and national politics have always been a couple, sometimes the relationship can be strained by the injection of partisanship. The current crisis requires insight into the actual issues to make policy suggestions. The United States is running a risk by having its economics so colored by bitter partisan divisions, as this is one area where there needs to be solidarity.
In a thought provoking GPS episode, Fareed Zakaria interviews two very different schools of thought on the actions necessary. His conclusions are that we must meet in the middle of the political agendas and look at the economic possibilities. Essentially, his view is that the U.S. government needs to spend more now while also reviewing entitlement programs to make sure each dollar is spent in the most efficient manner – a classic centrist approach.
It is always a risk for a country when political in-fighting colors international economic policy. That is true for Greece, Spain, China, Iceland, and, of course, the United States.
Homo economicus mortus est? (Who needs economists?)
by Eric Garland
Does anybody need economists?
This is the subject of a fascinating polemic raised by our colleague Gregor MacDonald. He notes, in an incredible understatement, “economists don’t ‘do’ energy.” They are content to set Keynes and Hayek in a never-ending cage match over monetarism versus free markets, while petroleum dwindles, Boomers retire, technology flattens work hierarchies – while real things are actually happening.
Some of the debate is set off by the paper embedded below by a Federal Reserve Bank economist. As the title indicates, he doesn’t think much of the input of non-specialists. We then have a similar question for his profession – how is it that we all participate in economic activity, and only you feel qualified to comment on it? And while we’re on the subject, why didn’t you predict an absurdly obvious bubble and subsequent crash?
Some things are too difficult for the laity to understand. Most of the hard sciences are really impossible to comprehend to outsiders, and news reports on their breakthroughs are often comically misunderstood. But is economics a hard science? Isn’t it a social science based around people trading things? Can we discuss our economy without the need for technocrats of this sort?
Failed states are great for the Chinese economy
by Eric Garland
Go to your newsstand and pick up a copy of Foreign Policy magazine’s July/August 201o issue entitled “The Committee to Destroy the World.” It’s a fascinating, broad analysis of all those countries who don’t play by the rules set out by industrial powerhouses – and why they don’t. If you sweat about the failure of American pension funds, Icelandic treasury bills, or German austerity, then cast also an eye toward North Korea, Zimbabwe and Iran for contrast.
One particular item of interest – failed states aren’t all bad, according to the magazine. They make for cheap and pliable partners for China when it comes to natural resources. We reported on this trend back in 2007 with our STEEP Report series, how China’s massive investment in infrastructure requires a broad range of partners, most of whom then become warmer to the rest of the Middle Kingdom’s strategic goals.
Click on the image for a map of China’s investments in natural resources.
If Machiavelli was revaluing Chinese currency
The US has come close to labeling China as a manipulator of exchange rates. The undervalued renminbi allows for cheap exports, especially into their largest market: the EU. The last G-20 talks were a concerted effort to pressure China to allow the renminbi to rise, and last week the US got some, but not nearly enough. China has opened up to a crawling peg: a feckless economic move but a highly deft political move.
Since the last G-20 talks, the EU was emasculated by the Greek and Spanish crises, to which the US had to divert efforts away from nudging the Chinese into a more buoyant exchange rate. Even before loosening the exchange rate the renminbi had strengthened to the euro. Why would China allow their exports to become more expensive to their largest markets? China now has left the US flat on its heels with only a week to prepare complaints about the actual topic at hand—doing business in and with China—before the G-20 talks in Toronto, June 26-27. Brilliant timing.
Now, what is China’s end game in this? Obviously, the value of its currency is merely a tool in its larger political and economic strategy. So what does this mean and where is China going?
Brazil: A bright future overcomes inflation fears
Welcome to my first of many dispatches as director of economic risk analysis at Competitive Futures, Inc. I look forward to sharing with you some the insights we provide clients on current economic trends from around the world. Jumping right in: Is Brazil’s economy too hot?
These days, the orthodox view is that economic growth is GOOD, inflation is BAD. Most countries around the world have too little of the former and risk far too much from the latter, mostly from profligate spending and “quantitative easing.” Which is why it’s easy to see Brazil as a bright spot in the global economy. Brazil’s GDP growth is at a scorching 9%- which would normally be so hot as to cause worry of inflation. But wait – Brazil’s inflation won’t cause the same problems that the world will see in all the other countries at risk of inflation due to monster deficits. The land of futbol, caipirinhas and Copacabana is more dynamic and innovative than ever before, and will overcome inflation through investment.
Inflation in hot economies is often caused by a lack of sufficient infrastructure to meet growing demand. In Brazil, this won’t be a problem going forward, to listen to the country’s forward-looking economic policy makers. The country’s economic future appears to be poised to grow past any inflation concerns. The consumer market has grown exponentially for the past 15 years; massive investment opportunities such as the 2014 World Cup across Brazil and the 2016 Rio Olympics will see inflows from across the globe; and mass infrastructure projects in energy, transportation, and extraction (Franco fields and Tupí finds) are increasing. In a world where North America and Europe look backward to find their Golden Age, Brazil is looking at the next decades.
Imagine businesses looking for growing seeing Sao Paolo as a better bet for stability than the ailing eurozone or deficit prone North America. Brazil won’t be “one of the BRIC countries” it might be “where we have our headquarters.”
“This isn’t about growth, it’s about fragility”
by Eric Garland
We couldn’t love Nassim Nicholas Taleb’s work any more here at CompFutures. His book The Black Swan has become an instant classic for its application of scenario planning to financial markets, showing us that humility and constant skepticism are our constant allies when thinking about future. His work shows us that past performance is not necessarily future reality, and that we probably aren’t as smart as we think we are when making predictions about an ultra-complex, superconnected world.
Plus, he called the financial crisis well before 2008. It’s a small group of contrarians who got that one right. (Ahem.)
For a while, Taleb was in a self-imposed media blackout, terribly weary of having expressed the same ideas time and time again about how “eternal growth” isn’t the only scenario nations and companies should expect. Black swans, he contended in endless interviews, were still on the horizon, circling with plans to challenge the orthodoxies of Keynesianism, Hayekian free markets, or any other old fashioned 20th century notions.
With the new round of economic stimulus, bailouts, and other such faith-based superstitious economic rituals, Taleb is back on the scene to discuss why, contra Krugman, debt-based stimulus packages are making us less safe, giving us growth wrapped in a dangerous package of fragility.
A wonderful, weary, frank interview.
The Greeks caused the oil spill in the Gulf (or something like that)
by Eric Garland
My latest interview with Pam Atherton of A Closer Look Radio, covering the superconnection between peak oil, European fiscal crises, local economics, and even the iPad. It’s all about institutions in transition and what you will do to assure your future success.
The stakes of the Euro’s survival
I spoke recently with an American diplomat who outlined the larger importance of having the European currency succeed. Her concern is for the geopolitical balance that will be affected if the eurozone is not stabilized.
“Think of the Euro currency as the first baby in a marriage. Sure, there’s a difference between marriage and dating, but a baby is a real, concrete, serious output from that union, a tangible expression of your interaction. Think of the countries of Europe as participants in a somewhat new marriage. Right now, if the euro turns out to be a failure, if it is no longer considered as a reserve currency, it will be significant embarrassment on the parents – sort of like if their first kid ends up in prison.
Before, the European nations were just dating, nothing serious. They allowed passport-free travel between countries; they liberalized trade policies and labor pools; they didn’t go to war for the first time in a while. This currency has been their first major project as a group. Even their military assistance in Afghanistan isn’t truly an expression of Europe as a force – it is a NATO action. The currency, on the other hand, is designed to show Europe as a major economic counterbalance to China, Japan, and the United States. If that currency fails on the first try, essentially the rest of the world may – rightfully – see Europe as a collection of diverse states that are not able to coordinate even simple policies.
The world may be left with a more bipolar world between China and the U.S., with Europe left as nothing more than a tourist destination full of aging populations and delicious cheeses.”
Time to put your scenario-planning hats on, especially if Europe figures prominently as a market or as a supplier for your organization.
Update: Scenarios for Greece
Egads, Reuters has a really great set of scenarios for how the Greek crisis could play out.
Good stuff, very positive to see in major media.
Sovereign debt underlies a new era
We’ve been sitting back, examining the situation of sovereign debt in Europe and watching its impact on global markets.
Today, Greek debt is reduced to junk bond status, and a two-year bond’s yield has reached 26%. It was 18% yesterday.
As much as European officials say that this won’t have any systemic impact, that is often what people say when they don’t want it to have impact.
Think of multiple scenarios for this outcome. Use game theory, scenario planning, or old-fashioned guessing – but think it through.
About Eric Garland
Eric is one of the world's pre-eminent thoughtleaders in forecasting and strategy. He helps leaders of business and government make critical decisions about their futures.Connect with us
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