On Economic Tribulations
I have not had time to come up for air in the previous week, much less post intelligently on a subject rife with complexity like the turmoil on Wall Street. This is unfortunate because it’s a very important story and it seems to be taken by the MSM with about the same gravity as SNL skits. Here are two recommended posts on the subject:
Nissam Nicholas Taleb – THE FOURTH QUADRANT: A MAP OF THE LIMITS OF STATISTICS
The author of The Black Swan extends his theory into strategy while critiquing the causes of the current mess. A must-read piece ( hat tip Lexington Green)
Fabius Maximus – Another voice warning about the nationalization of AIG
FM should get some credit where credit is due. The 4GW school ( and to an extent Fabius) were subjected to complaints that 4GW thinkers were long on criticism and short on solutions and blind or disdainful of economic variables. Fabius has made a special effort since he’s started blogging to concentrate on these areas and integrate economics into the 4GW critique. His post is rich in links and normative argument.
My own opinion? There are no levers scaled to the size of an even quasi-integrated global economy and the best that can really be managed in terms of intervention would be to get all of the major central banks on the same page on one or two relatively simple interventions, along with Treasury and the major holders of dollar reserves. They might be harnessed for a limited, stabilizing, effect but I think we have to accept that the global economy has shed it’s old skin from the nation-state Keynesian era once and for all.
September 18th, 2008 at 5:51 am
"the best that can really be managed in terms of intervention would be to get all of the major central banks on the same page on one or two relatively simple interventions, along with Treasury and the major holders of dollar reserves."
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I strongly agree. Unfortunately even this minimal cooperation might not happen. Instead nations or regions might take uncoordinated actions, each seeking to stabilize their own parts of the pond. Or we might see cooperation of our major creditors, but working against our interests.
September 21st, 2008 at 3:13 am
Hi FM,
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Definitely, there is the opportunity for countervailing power to be exercised and we can assume that it will be used, quietly, on the margin.
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However, holders of enormous dollar reserves – China, KSA, some gulf states -have made their strategic cushion hostage to our overall fortunes. A precipitous decline in the dollar ( a la the peso, Russian deval in the 1990’s) would be a calamity for many states and the global economy, not just America.
September 21st, 2008 at 5:49 am
Economic impacts are largely a function of the rate of change. A central banker (e.g., Peoples Bank of China) is no more likely "push the button" dumping US dollar holdings — destroying the global financial regime — than Bush or Putin to fire off their nukes.
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That is a straw man. There are many ways for them to change the global financial regime with less "precipitous" measures. Measures beneficial to some, highly unpleasant for America.
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However this was not the point I attempted to make. By uncoordinated I meant nations taking routine fiscal, monetary, and currency actions which are individually reasonable, but in aggregate clash — perhaps even destabilize the global financial system. "Beggar thy neighbor" currency devaluations are the classic example of this.
September 22nd, 2008 at 3:06 am
<b>"A central banker (e.g., Peoples Bank of China) is no more likely "push the button" dumping US dollar holdings – destroying the global financial regime — than Bush or Putin to fire off their nukes."</b>
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Yes, but they have been running on autopilot for twenty years. A political default position – they do not function like a Central Bank in the normal sense due to the hybrid nature of China’s political economy and the extreme sensitivity, at at least the CCP central committee level, of policy changes related to China’s economic development strategy. They will make decisions in way that normal state bankers will find unorthodox – more potential for unintended consequences here.