Economic Dreams - Economic Nightmares

Bernanke's Puzzle

Over at Econbrowser, James Hamilton suggests that the Fed may have trouble preventing cascading liquidity problems now that support for the dollar is so fragile. Such trouble could be close at hand given the unfolding subprime mess. Hamilton leads off by explaining how the Fed has averted past panics, but then goes on to explain how such power may not be available in the future. Hamilton's arguments on both fronts are worth a look:

Financial Crises, James Hamilton, 3/6/2007: … [W]hen the World Trade Center towers collapsed on September 11, many of the financial institutions [PDF] that played a key role in trades of government securities and interbank loans were wiped out or incapacitated, posing potentially huge liquidity problems [PDF]. The Fed reacted with an extremely aggressive temporary creation of reserves, which prevented those liquidity disruptions from having major consequences. Americans were appropriately focused on other concerns that day. But we can thank the Fed that among those concerns was not a financial panic. …

So does this have anything to do with current concerns about subprime mortgages and interlayered hedge fund risk? I would take away two points from this discussion. First, insofar as we are talking about solvency problems, there is little the Fed is able to do to prevent those— some subprime mortgages are going to default, and that's that. However, the Fed can and will prevent these from cascading into broader liquidity problems, by which I mean insolvencies created solely because of forced liquidation or unavailability of short-term credit. Even so, the Fed's capacity to move aggressively on this front is potentially limited by the need to avoid a precipitous collapse in the value of the dollar. Whether the outcome would look more like the U.S. in 2001 or Korea in 1997 remains to be seen.

Stephen Roach on Pitfalls of Partial Analysis, Dangers of Confluent Shocks

Stephen Roach's latest, The Pitfallls of Ceteris Paribus echoes Philip Tetlock's criticism of "expert advice' in Expert Political Judgement and Robert Jervis's cautions in Systems Effects: Complexity in Political and Social Life. A bit more on both books here.

Roach's take home message is "As bad luck would have it, a confluence of three potentially powerful shocks — oil, housing, and Fed tightening -- is now in play. All other things the same, the US or global economy may not have been dealt a lethal blow by any one of these shocks. But that may well be beside the point. This is not the time for ceteris paribus." Here's more:

Ceteris paribus may well be the two most dangerous words in the economist's toolkit. Loosely translated from Latin as "all other things being the same," this concept has become a foil for partial-equilibrium analysis — an increasingly fruitless and misleading approach in today's complex and interdependent world. With oil prices rising, the housing cycle turning, and central banks tightening, the pitfalls of ceteris paribus have never been greater.

The US economy is the most obvious and important case in point. There is no lack of rules of thumb to gauge the impacts of shocks. For example, Federal Reserve staff estimates put the impact of a $10 increase in the oil price at -0.2% of forgone GDP growth and +0.2% on the headline CPI — with both impacts spread out over roughly a three-year time period … At the same time, residential construction activity has risen to a post-1960 record of 6.2% of nominal GDP — well above its longer-term mean of 4.5% (over the 1960 to 1995 period). Under the sugar-coated presumption of asymptotic mean reversion, a post-bubble shakeout of homebuilding could knock at least 1.7 percentage points off overall economic growth. A "non-asymptotic" correction would obviously be a different matter altogether. Meanwhile, the Fed has taken the federal funds rate up from 1% to 5.25% over the past two years — a monetary tightening that the Fed's own rules of thumb suggest should already be knocking at least one percentage point off aggregate growth in real GDP.... [W]e have a reasonably clear understanding of how to gauge the impacts of any one of these developments. Unfortunately, it is the interplay that matters in the real world.

… Our penchant for partial analysis is an outgrowth of the event- and sound-bite-driven culture that shapes the day-to-day debate in the media, financial markets, and political circles. I am as guilty as the rest in that respect. War breaks out in the Middle East and the telephone instantly lights up with requests for impact analysis as seen through the lens of the oil price. New home sales disappoint — as they did once again in the just-released June report (a 3% monthly drop to a level that now stands 11% below the year-earlier pace) — and the calls come in for an assessment of the post-housing bubble carnage in the US economy. Same thing happens every time the Fed tightens — or, more aptly these days, changes its mind on monetary policy. We answer these well-intended questions because they fall within the job description of the economist, market strategist, analyst, or pundit. But in doing so, we compartmentalize our answers in a fashion that does great disservice to the ultimate truth.

Yet "context is key" in going from the partial to the broader answer. That's especially the case for the American consumer — quite conceivably the most important call in the global economy these days. Energy prices go up and we typically assess the impact of that development by looking at the energy-related portion of personal consumption expenditures. Currently that share stands at 6.2%, well above the 10-year average of 4.9%. Under alternative geopolitical and oil price scenarios, we then typically model different trajectories of the energy portion of total consumption and render the macro verdict accordingly (see Dick Berner’s 17 July essay, "Tipping Point? "). But here's where the context point is absolutely critical — there is much more going on here than just an increase in oil-related expenditures. The housing market is rolling over, ultimately denying income- and saving-short households the wealth effects they have been aggressively converting into purchasing power and consumption in recent years. Moreover, courtesy of Fed tightening, a resolution of the great bond market conundrum, and "resets" of cut-rate mortgage loans, debt service obligations of overly indebted consumers are also on the rise. In other words, there are a number of other things currently happening to US consumers that render the partial analysis of an oil shock almost meaningless.

And those, of course, are just the first-round implications. If the American consumer finally caves under the weight of this confluence of forces, I suspect business capital spending — the widely presumed next source of recovery — will be quick to follow. I come to that conclusion fully mindful of all the positives that seem to support a much more resilient outlook for this sector — namely, record corporate earnings and cash flows, long-deferred capacity expansion programs, ongoing productivity strategies driven by IT-enabled capital deepening, and the heavy replacement needs of a shorter-lived, increasingly IT-intensive capital stock. Notwithstanding these important considerations, they miss the essence of the capital spending decision: Fixed investment is a "derived demand" highly dependent on expectations of the prospective trajectory of end-market demand. As such, the demand forecast is, itself, an excellent predictor of future pressures on the existing stock of productive capacity — apprising business decision makers of the need to increase the scale of their operations. If demand expectations are marked down in any meaningful fashion —- as could well be the case if the US consumer fades — the investment cycle could quickly shift to the downside. And if capital spending weakens, so, too, will capex-related employment and income generation — putting further pressure on consumers. Yet you won't reach that conclusion by sticking with the rules of ceteris paribus in analyzing the impacts of higher oil prices. …

Mr. Risk

Business Week's June 12 cover story is Mr. Risk Goes to Washington. It opens, "What does a Treasury Secretary do?" After exploring that question, the article continues:

… Think of Paulson as Mr. Risk. He's one of the key architects of a more daring Wall Street, where securities firms are taking greater and greater chances in their pursuit of profits. By some key measures, the securities industry is more leveraged now than it was at the height of the 1990s boom. It has also extended its global supremacy since then. …what Paulson brings to the Treasury Dept., the Bush Administration, and, in fact, all of Washington, in addition to his understanding of risk, is an ability to communicate its upside and downside. ...

But the story that caught my eye is titled Inside Wall Street's Culture of Risk Here is a sampler:

...Wall Street has always been about taking risk. But never has the "R" word been such an obsession for the men and women who rule the nation's biggest investment banks. Never have they had to reconcile so many bets made on so many fronts. The conditions have been ripe. Historically low interest rates and relatively calm markets in the last few years have allowed a new type of firm to flourish, one that acts primarily as a trader and only secondarily as a traditional investment bank, underwriting securities and advising on mergers.

Goldman Sachs' CEO Henry M. Paulson Jr. has led the charge. Major Wall Street firms have watched with envy as Goldman has repeatedly racked up record earnings on the strength of its trading business. The biggest stunner came in March when Goldman announced that in three months it had tossed off $2.6 billion in profits -- nearly half as much as it earned in all of 2005 -- on $10 billion in revenues. Not coincidentally, Goldman also put a record amount of the firm's capital at risk of evaporating on any given trading day. Its so-called value at risk jumped to $92 million, up 135% from $39 million in 2001. "[Goldman is] a horse of a different color now," says Samuel L. Hayes III, professor emeritus of investment banking at Harvard Business School.

As Paulson prepares to move to Washington to serve as U.S. Treasury Secretary, Goldman shows no sign of easing up. Nor do its followers. This trading boom, fueled by cheap money, is fundamentally different from the ones of the past. When traders last ruled Wall Street, during the mid-'90s, few banks put much of their own balance sheets at risk; most acted mainly as brokers, arranging trades between clients. Now, virtually all banks are making huge bets with their own assets on many more fronts, and using vast sums of borrowed money to jack up the risk even more. They're shouldering risks for their clients to an unprecedented degree. They're dabbling in remote markets from Brasilia to Jakarta, and in arcane products like credit-default swaps and catastrophe bonds. Led by Goldman, many investment banks now do more trading than all but the biggest hedge funds, those lightly regulated investment pools that almost brought down the financial system in 1998 when one of them, Long-Term Capital Management, blew up. …

Empire of Debt: Small Chance of Imploding?

Today's CBS News Sunday Morning aired a segment titled In Debt . The take-home message is:

The United States is a nation of debt. Americans have accrued billions of dollars worth of personal consumer credit, and the number is rising via credit cards, innovative mortgage packages, home equity lines, student loans, etc. At the same time, the U.S. had a negative savings rate last year. Translation: We're spending more than we're earning. Cynthia Bowers says that's like any bubble: The credit bubble can only end one way -- badly.

Addison Wiggin said, if I heard right, that we have a "small chance" of falling into a banking crisis wherein savers as well as debtors need to worry. My question is, "How does Wiggin or anyone else know?"

I thought about flying blind in a snowstorm, worrying about running into a mountain and not knowing whether you were over Alaska or Nebraska. Or worse still not knowing whether your had, say, one chance in a hundred of being over Alaska v. Nebraska or vice versa. It seems to me that we are so far away from anything that has happened historically, that we don't really have a means to know whether or not the chance of crash-landing our economy is small or large.

Addison: How do you know? I want to know. I would sleep much more soundly if I knew that the chance really was "small." My immersion in Complexity Theory denies me the luxury of making statements like "the chances are small" when dealing with geopolitical dealings. My guess is that either I mistook Wiggin's intent else he spoke in haste. But maybe not.

I have taken to Karl Weick's notion that "believing is seeing" (see also) more often than "seeing is believing." And when dealing with matters economic and geopolitical, I find much more of the former than the latter.

Fourth of July Fireworks at the end of June

Nouriel Roubini tells us that “the dollar is heading South” sometime soon – again! In “U.S. Net Foreign Liabilities...larger and larger,” looks forward at the rest of 2005. Roubini concludes, in part:

What does this imply for the U.S. dollar over the rest of 2005? The U.S. dollar has been strengthening this year based on rising U.S. short term interest rates and relative growth rates of the U.S. compared to Europe and Japan. But this recent strength of the U.S. dollar - as well as low long term interest rates in the U.S. - will increase the U.S. current account deficit rather than shrink it as it would be needed to reduce global imbalances. So, the global current account imbalances will become worse and, on top of it, the balance sheet losses of U.S. residents on their foreign assets will be large and leading to a ballooning of the U.S. net foreign liabilities by the end of 2005. Once the scale of the potential current account and net foreign debt increase of the U.S. sink in the markets you can expect the dollar to start falling again. With such a large and growing current account deficit and increase in net foreign liabilities the dollar can head only in one direction: south!

The same pattern occurred in 2004 when the US dollar held up until the summer and started sinking again when the awareness of the staggering scale of the U.S. external balance started to sink in the mind of investors. And once China moves its currency some time in the fall, a snowball effect on the dollar can be expected: other Asian currencies that were effectively fixed via forex intervention (as long as the Chinese peg held) will also be allowed to appreciate once China moves. Then, the U.S. dollar weakening will be exacerbated as, on top of reduced central banks intervention in Asia, private Asian investors who invested in U.S. dollar assets - based on positive carry trades and low risk of capital losses from movements of their pegged currencies - will also have a huge incentive to dump dollar assets to avoid such capital losses.

At that point, the unustainability of the U.S. external deficit and of its by product - the mushrooming U.S. net foreign debt - will become clear to markets and investors. Such a structural bearish force on the U.S. dollar will dominate any U.S. growth development and further Fed interest rate action over the second half of 2005.

Stephen Roach tells us that “The Endgame” cometh, not yet, but with increased ferocity when it does. Based on a presumption that we are experiencing “bad growth” fueled by asset bubbles and a monstrous debt wave Roach states that the Fed, steeped in denial, is attempting to deflect attention away from its role in this sad state of affairs, and is running for cover—not wanting to be blamed for the shakeout.

Roach then looks forward: “I suspect the US interest rate climate is likely to remain surprisingly benign and, therefore, supportive of yet another wave of debt-intensive asset inflation. As a result, the housing and bond bubbles could well continue to expand, allowing asset-dependent American consumers to keep on spending” And adds that, “US property market are now starting to display all the classic symptoms of a mania…. Equally worrisome is evidence that ‘asset flipping’ is now reaching Ponzi-like proportions.”

Roach concludes, “Sadly, bad growth begets more bad growth -- until it’s too late. Following this week’s likely rate hike, the US central bank will have only 325 bp in its arsenal -- literally half the ammo it had five years ago when the first bubble popped. With the aftershocks of the property bubble likely to be far more worrisome than those of the equity bubble, this time the Fed may be ill equipped to face what is shaping up to be an increasingly treacherous endgame.”

One More Worry: Flu pandemic could shut down world trade

My recent List of Worries didn’t include the Pandemic Worry. Maybe it should have, at least in a some generic form. Or maybe the list is too long already. Who knows. But today’s headlines include yet-another-scare-reference to a possible future flu pandemic. Being a bit bored here at lunchtime, I thought I’d share it:

In the July/August issues of Foreign Affairs, Michael T. Osterholm give us, “Preparing for the Next Pandemic.”

The summary reads,

“If an influenza pandemic struck today, borders would close, the global economy would shut down, international vaccine supplies and health-care systems would be overwhelmed, and panic would reign. To limit the fallout, the industrialized world must create a detailed response strategy involving the public and private sectors”

Moving to the main text, we can snip this:

What would happen today in the office of every nation's leader if several cities in Vietnam suffered from major outbreaks of H5N1 infection, with a five percent mortality rate? First, there would be an immediate effort to try to sort out disparate disease-surveillance data from a variety of government and public health sources to determine which countries might have pandemic-related cases. Then, the decision would likely be made to close most international and even some state or provincial borders -- without any predetermined criteria for how or when those borders might be reopened. Border security would be made a priority, especially to protect potential supplies of pandemic-specific vaccines from nearby desperate countries. Military leaders would have to develop strategies to defend the country and also protect against domestic insurgency with armed forces that would likely be compromised by the disease. Even in unaffected countries, fear, panic, and chaos would spread as international media reported the daily advance of the disease around the world.

In short order, the global economy would shut down. The commodities and services countries would need to "survive" the next 12 to 36 months would have to be identified. Currently, most businesses' continuity plans account for only a localized disruption -- a single plant closure, for instance -- and have not planned for extensive, long-term outages. The private and public sectors would have to develop emergency plans to sustain critical domestic supply chains and manufacturing and agricultural production and distribution. The labor force would be severely affected when it was most needed. Over the course of the year, up to 50 percent of affected populations could become ill; as many as five percent could die. The disease would hit senior management as hard as the rest of the work force. There would be major shortages in all countries of a wide range of commodities, including food, soap, paper, light bulbs, gasoline, parts for repairing military equipment and municipal water pumps, and medicines, including vaccines unrelated to the pandemic. Many industries not critical to survival -- electronics, automobile, and clothing, for example -- would suffer or even close. Activities that require close human contact -- school, seeing movies in theaters, or eating at restaurants -- would be avoided, maybe even banned.

Vaccine would have no impact on the course of the virus in the first months and would likely play an extremely limited role worldwide during the following 12 to 18 months of the pandemic. …

So, there we have it. If we add add this to the list, we’ll have all the threats in the Universe now packed into my list of recession/depression worries. Well, not quite. Consider this, from the movie Men in Black:

JAY: Can we drop the cover-up bullshit?!
There's an Alien Battle Cruiser that's
gonna blow-up the world if we don't...

KAY: There's always an Alien Battle Cruiser...or
a Korlian Death Ray, or...an intergalactic
plague about to wipe out life on this
planet, and the only thing that lets people
get on with their hopeful little lives is
that they don't know about it.

Roubini: Supply-Side Vodoo Black Magic, Geopolitical Implications of Imperial Financial Overstretch

Nouriel Roubini is masterful in talking us through his recent CNBC debate with Arthur Laffer on supply side economics and the Bush tax cuts: Deja Vu Voodoo Economics...or Supply Side Voodoo Black Magic, June 20, 2005. I don’t want to spoil his magic. Go read it! But permit me a to repeat his conclusion:

So today Laffer argued that the latest fiscal figures of increased revenues had vindicated his Voodoo Magic while the reality is that, of course, return to trend GDP growth was bound to eventually lead to some temporary recovery of revenues relative to their totally dismal lows of recent years. So, he must have been smoking some suspicious substance having spent too much time in Voodoo Cabal ceremonies to argue that the data vindicate his supply side Laffer Curve that should be better renamed as the Laughable Curve. We have now a country that has a structural gap between government spending and government revenues that averaged 3% of GDP now and is expected to increase to over 4% of GDP in the next four years. This reckless fiscal policy driven by reckless and unsustainable tax cuts is a major threat to the medium-term prospects of the economy. While these massive fiscal deficits have not led to increases in long term interest rates as most of the financing of these deficits comes from abroad, especially foreign central banks, this is a Ponzi scheme cannot last forever. At some point, foreign will tire of cheaply financing the U.S. and they will pull the plug. And no government can afford to permanently collect revenues at a rate that is 4% of GDP lower than what it spends.

And, as recently lucidly pointed out by Gale and Orszag in a recent LA Times op-ed piece, our long term fiscal problems are much more severe today than they were in the 1980s and early 1990s for several reasons: private savings rates were much higher then than now and thus the crowding out effects of budget deficits on investment and/or net exports are much more serious today; we were then a net foreign creditor while we are now a net debtor country, the biggest debtor in the world; we were then a quarter of a century away from the retirement of the baby boom generation while today those baby boomers are starting to retire in mass; Reagan had the sanity of reversing part of his tax cuts once he realized the impact of voodoo economics while the ideology of this administration is "tax cuts, tax cuts" to death regardless of reality; in the 1990s we got lucky with the end of the Cold War that led to a fall in defense spending of 3% of GDP while today defense and homeland security is way up and expected to go up even more; the Republicans allowed the PAYGO constraints to deficit spending to expire in 2002 and they are now vehemently against reintroducing them as they would clash with their senseless goal of making all tax cuts permanent.

So, while this voodoo magic religion seems to have also infested the halls of the the U.S. Congress, the next time you hear Mr. Laffer and his voodoo magicians tell you that their strange religion and odd beliefs have been vindicated, remember that this black magic has been tried twice before and has miserably failed. It is time for the U.S. to get rid of such barbarian delusional beliefs and get back to a reality-based mainstream economics of budget constraints. Otherwise, as predicted in a recent S&P study, the U.S. would be on its way to experience over the next decades an unsustainable death path would eventually lead to a junk bond credit rating status. That would be the ultimate verdict on supply side Voodoo Economics!

The very next day Roubini follows with a wonderful tour or the world’s geopolitical landscape, subtitled The Risks of Imperial Financial Overstretch, June 21, 2005. Roubini concludes:

[T]he recent strength of the U.S. dollar will turn out to be a curse rather than a blessing as it will further worsen the U.S. current account deficit at a time when this deficit should start to shrink rathen than increase. Moreover, the low long term interest rates are also a mixed blessing as they postpone the necessary adjustment towards fiscal discipline and they provide fuel to an asset bubble in real estate that has already led to dangerously low levels of U.S. private savings. So, let the Panglossians cheer the strength of the dollar and the low long term interest rates. Both of these asset price developments are feeeding the domestic and international imbalances that risk to lead to an eventual hard landing for the U.S. and the global economy.

And beware dollar and bond bulls: last year the dollar rallied for a good part of 2004 until the evidence that the U.S. current account was worsening and we needed to borrow $2 b plus a day to finance it sank in during the summer and fall. You can expect the same this year: once the realization that the U.S. current account deficit is headed above $800 b (well above the 2004 level of $ 650 b) expect the dollar to start weakening and the bond market rally to reverse itself. And with the Fed headed to raise the Fed Funds rate to at least 4% by year end (see the latest Berry Fed commentary on this), we will see whether 10 year Treasuries can still defy gravity and levitate around 4%. As such a sharp flattening of the yield curve would make only sense if the U.S. economy were to be headed towards a severe economic slowdown and an inflation easing that does not seem to be over the horizon, expect instead long rates to move towards 5% by year end. Then, it will take little to prick the housing bubble where the froth is reaching levels that make even Greenspan and his governors nervous by now.

In conclusion, the rise and decline of the British Empire show the risks of imperial financial overstretch. The U.S. is on a similar slippery path where the growing vulnerabilites are disguised by unsustainable private and public borrowing and bubbly asset prices in bonds, stocks and real estate. Landing back to reality from this increasing froth may end up quite hard and painful. The Emperor has no clothes even if it is still parading around blissfully blind to its own near-nakedness.

Economic Nightmares: Potential Triggers

Most economists are worriers. In terms of triggers that might bring our system down, into a recession or perchance in worst case a depression, I worry about things like:

• Complex derivatives and hedge funds, with concentration of risk, possible "herding," and potential for contagion.
  
• McMansions and continued inflaton of housing bubbles: Great Gatsby redux.
  
• Reinflation of asset bubbles in various places, cases.
  
• Job losses and wage losses.
  
• Ever-more indebted "consumers of last resort" in the USA, with so-called savings gluts elsewhere.
  
• Political chatter that "Deficits don’t matter," and public and private behavior suggestiing that people think "Debt doesn’t matter."
  
• Citizens dumbed-down (by TV and other distractions).
  
• Terrorism and fanaticism on various sides of theology/ideology faultlines.
  
• Too-often ignored environment and social external effects of economic development schemes.
  
• Excessive, fanciful entitlement packages (retirement and medical care for starters).
  
• Marketing hype of credit and consumerism amid cultural disrespect for financial prudence and thrift.
• "Deregulation" that has once again unwound many of the checks and balances in the financial world.
  
• Inattention to structural deficits and a belief that all world financial problems can be solved by "helicopter money."
  
• General denial of longwave social cycles and the fact that when things like financial markets wind-up in big ways they will wind-down in big ways (e.g. Minsky's hedge, speculative, and ponzi finance phases, general complexity theory, sytems dynamics, etc.).
  
• Short-sighted energy policy, (US now more dependent on foreign oil than even 30 years ago).
  
• Poor international and domestic monetary policy (little agreement on proper course, some call it economic warfare).
  
• Poor domestic private and public savings policy (or alternatively stated, massive credit bubble).
  
• Pushes for protectionism in the face of offshoring, jobless recovery, etc.
  
• Maldistribution of income (growing gap between rich and poor, disappearing middle class).
  
• Ever-increasing tendencies toward monopoly.
  
• Massive fraud and corruption in business, accounting, banking and government.
  
• Productivity boom, claims of "new economy" (forgetting Joseph Schumpeter's "creative destruction," Karl Polyani's The Great Transformation).
  
• Deflationary fears.
  
• Inflationary fears (short term: imports, metals, etc; longer term fears of generally too-high inflation/stagflation or either coupled with "debt deflation").
  
• Flu Pandemic (that shuts down world trade). {added 6/24/2005}

American Economy on Life Support

Many popular press reports tell us about the resilience of our economy. But my deeper readings give me pause. Today on National Public Radio, I heard to yet another dire warning from Clyde Prestowitz (audio) explaining that the American economy is on life support, due to massive debt, job losses to the rest of the world, and more.

Prestowitz joins a growing list of economists from varying philosophical persuasions who believe that a great transformation/powershift is in the works. The USA is viewed as vulnerable by most, but their scenarios vary both in the short and long term. Most that I find are skeptical at best as to our prospects going forward, thinking that stagflation may be one of the least negative scenarios we face.

One of the biggest unknowns seems to be that we are the only great power to enter into this type historical shift with a mountain of public and private debt as our main geopolitical weapon. What we have are big nukes, ever-bigger public and private debt, and fat and happy consumers of last resort for the world’s goods. Welcome to America. Welcome to the world of uncertainty, risk, novelty and surprise.

Prestowitz was no doubt pitching his new book, which we can add to longer lists of books on powershifts and transformation in the world. Here’s my list (alphabetical by author) with indicators as to which books I’ve not yet read, but probably should:

See also Prestowitz's 5/31 Globalization Game, Boston Globe.

A Few Good Books on Globalization:

Jihad vs. McWorld: How Globalism and Tribalism are Reshaping the World. 1996. Benjamin R. Barber

For the Common Good: Redirecting the Economy Toward Community, The Environment, and a Sustainable Future. 1989. Herman E. Daly and John B. Cobb.

The New Realities: In Government and Politics, in Economics and Business, in Society and World View. 1989. Peter Drucker.

The World Is Flat: A Brief History of the Twenty-First Century. 2002. Thomas L. Friedman (Not read yet)

The Lexus and the Olive Tree: Understanding Globalization. 1999. Thomas L. Friedman.

One World, Ready or Not: The Manic Logic of Global Capitalism. 1997. William Greider.

System Effects: Complexity in Political and Social Life. 1997. Robert Jervis.

Out of Control: The New Biology of Machines, Social Systems, and the Economic World. 1994. Kevin Kelly.

Beyond the Limits: Confronting Global Collapse and Envisioning a Sustainable Future. 1991. Donella Meadows, Dennis Meadows, Jorgen Randers.

Wealth and Democracy: A Political History of the American Rich. 2002. Kevin Phillips.

The Great Transformation. 1944. Karl Polanyi. (dabbled at, but never thoroughly read)

Three Billion New Capitalists: Great Shifts in Wealth and Power to the East. 2004. Clyde Prestowitz. (not read yet)

The Art of the Long View: Planning for the future in an uncertain world. 1991. Peter Schwartz.

The Fourth Turning: An American Prophecy. 1996. William Strauss and Neil Howe.

Powershift: Knowledge, Wealth, and Violence at the Edge of the 21st Century. 1990. Alvin Toffler.

Where do we go from here? Scenarios

I'm a believer in scenario planning, wherein one refrains from locking into any one future. Instead of using planning to build "plans," as most bureaucracies do, scenario planners use planning to do two simple things: to rehash the past, and to rehearse the future.

The trick with scenario planning is to lay out several plausible scenarios and use them in the rehashing and rehearsing. Here are four scenarios, laid out tentatively so that we can play with them (and add to them or abandon some) in this blog.

Continuity: Soft-Landing Escape from the USA-China "Dance of Death"

"In the continuity view, the recent experience of longer expansions, more volatile financial markets, and possible increases in the growth rate of underlying productivity are seen, for the most part, as simply reflecting the specific configuration of exogenous shocks hitting economies against the background of a broadly unchanged set of structural relationships." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf

Hard-Crash Replay of the 1920s-1940s

The hard-crash view relies on theories of continued long-wave cycles of optimism followed by irrational exuberance, followed by irrational pessimism, followed by pessimism, followed by optimism, and so on. Human psychology, human politics, and human economics go hand in glove: cycles will continue. There will be differences in each wave to be sure, but don't bet on “new economy" thinking. Consider writings of the great economists, and don't leave out Joseph Schumpeter, John Kenneth Galbraith, and Hyman Minsky.

See: Doug Noland's Conundrums, 5/20/2005 – Scroll Down two-thirds of the way to subheader, Marshall Auerback's 'Bretton Woods II' is not a Monetary System, it's an Excuse, 5/24/2005, and Marshall Auerback's Debt Trap Dynamics: Time To Think The Unthinkable, 2/15/2005.

Snippet from "Debt Trap Dynamics":

So the problem is likely to get worse, which could ultimately lead to "solutions" that prove highly disruptive to the existing system of multilateral trade and cooperation which has developed over the past several generations. A resort to out and out military force cannot ultimately be ruled out.

New-Environment: Frothy Replay of the late 1800s

"The new-environment view emphasizes endogenous forces in the system rather than external shocks, and it stresses the conjunction of three factors taking shape over the last decade or so: liberalized financial markets, low and stable inflation – underpinned by higher credibility of central banks' anti-inflation commitment – and positive supply-side developments." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf

Stagflation Replay of the 1960s – 1970s

"1960s and early 1970s: excessively easy US monetary and fiscal policy leading ultimately to a global liquidity overhang, substantial spikes in commodity prices and inflation, followed by stagflation." http://www.csfb.com/home/research_and_commentary/html/docs/34705687.pdf

My dream is for some form of continuity, some magic to pull us through and beyond "Bretton Woods II." My nightmare is that we are not set up well politically to deal with the type imbalances that existed just before both World War One and World War Two. Things could get wild indeed.