Not So Flat After All
Release 4.20 October 2008
[Originally published in
Forbes.com on September 29, 2008]
by Bret Swanson*
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"A second Great Depression seems unlikely, but the thought is no longer a complete absurdity. The world is dangerously curved." So ends David Smick's new book, The World is Curved, a well-timed and lucid tour of the global economy.
With continuing chaos on Wall Street--and in Washington--Smick's insights appear supremely prescient. Dozens of recent books, of course, predicted doom, gloom and even "financial Armageddon." But dozens of books always predict these things. Smick's warnings warrant more attention because he mostly eschews the perennially wrongheaded tsk-tsk triad of the trade, budget and savings deficits. In its place he substitutes a more nuanced view of the promises and perils of globalization.
Published on Sept. 4, just as the credit crisis leapt to new levels of panic, Smick's book warned of further financial folly and even bank runs, which have now come to pass.
Playing off Thomas Friedman's The World is Flat (which probably now approaches the Bible's publication record), Smick outlines the global economy's biggest challenges--its curves. There is, of course, the China juggernaut and the corrupt and unpredictable "Tony Sopranos" who Smick says run its economy. And watch out for the Japanese housewives who, from their home computers, are secretly some of the world's most prolific and sophisticated currency traders.
More to our immediate crisis, Smick vividly describes the "dangerous oceans" of money, which concealed the complex and interfering derivative waves, opaque global hedge pools and off-balance-sheet debt submarines, that led to a "crisis of trust in the financial architecture."
But Smick is most convincing when he describes the largest potential undulation in Friedman's flat world: the rising threats of protectionism and anti-entrepreneurial populism. Unlike many Apocalypticians, Smick is less concerned with out-year budget blowups or resource depletion than he is with innovation. The chief source of economic growth, Smick insists, is entrepreneurship. "The secret is creativity, allowing new firms with new ideas to rise up, while existing firms work every day to reinvent themselves." The worst thing we could do is clamp down on entrepreneurs with high tax rates or close America's borders to outside capital, trade and talent.
Smick worries that in a much-needed attempt to update our regulatory framework to stamp out some of this era's worst excesses, we could easily end up with "Sarbanes-Oxley II." If so, the " U.S. financial services industry would go the way of the U.S. auto industry."
Smick saves sharp criticism for Warren Buffett, who he says fuels this "class-warfare" populism. "Buffett conveniently calls for massive tax hikes on capital after he has accumulated his own fortune," Smick writes. But if everyone else deserves higher tax rates to supposedly balance the budget, what's with his $30 billion tax-free gift to the Bill & Melinda Gates Foundation? "[W]hy wouldn't he have pledged his estate instead to the U.S. Department of Health and Human Services?" The answer, of course: "because [the Gates Foundation] is likely to be 10 to 20 times more productive than a government bureaucracy."
Every few chapters, Smick succumbs to traditional but disproved economic notions like the Phillips Curve or those dreaded but always vague "global imbalances." But what do you expect from someone who wines and dines with the Davos elite and achieves book-blurb nirvana from the likes of George Shultz, Jagdish Bhagwati, Alan Greenspan, Jean-Claude Trichet, Lawrence Summers and three dozen other intergalactic panjandrums? Smick has plenty of globe-trotting stories, from late night inebriation and crab-shack capers with staid Japanese ministers to outrageous Italian dinner toasts that serve as a metaphor for the fat, happy and bloated American economy.
Smick may too often tip his hat to the economics establishment and go out of his way to praise Democrats and Republicans alike. Bill Clinton's free trade achievements and capital gains tax cut get special (and deserved) praise. But Charles Schumer, of Schumer-Graham China tariff fame, as a great free-trading capitalist? I don't think so.
This is a rare popular book that pinpoints the crucial import of exchange rates, monetary policy and the need for a Bretton Woods-like global monetary system. But in the book's biggest disappointment, Smick lays little responsibility at the feet of the inflationary weak-dollar policy of the Federal Reserve.
He calls the Fed's 1% funds rate of 2003 to 2004 and subsequent easy money--which inflated the housing, oil, foreign reserve and credit bubbles--a "sideshow." Irresponsible bankers, mortgage brokers, home buyers and derivative packagers, of course, bear much responsibility for today's credit mess, and Smick better than most predicted the disastrous consequences. But these players couldn't have caused today's global panic of mis-priced assets without the Fed's massive mis-pricing of money itself. The Fed and its accomplices at the weak-dollar Treasury weren't a "sideshow" but the main event.
Smick ably identifies most of the crucial protectionist policy curves that threaten global prosperity, but unless we flatten the value of money itself, the world will continue to be dangerously curved.