Monday, January 19, 2009

Zakaria and Ferguson - Trust

If you didn’t watch Fareed Zakaria’s program yesterday -- GPS -- you missed a heck of show. The last portion of his show was an interview with Niall (pronounced “Neal”) Ferguson. Mr. Ferguson is a historian from Harvard and just plain brilliant. He has a new book out (of course) --The Ascent of Money -- and I’ve already purchased it. Having read a previous book by Mr. Ferguson (Empire: The Rise and Demise of the British World Order and the Lessons for Global Power. It is NOT for the faint of heart) I’m looking forward to reading it. (And while I’m plugging books...I happen to be reading Mr. Zakaria’s right now -- The Post-American World.)

Anyway, the interview was about looking at our current financial crisis from a historical perspective. It was great (but scary) stuff. The transcript is already up and I feel sure the video will be on the GPS main page sooner or later. I wanted to tie this conversation into my previous post about trust in the financial markets but I didn’t have the time.

”NIALL FERGUSON, HARVARD UNIVERSITY AND AUTHOR, "THE ASCENT OF MONEY": We are now in a financial crisis that bears comparison with the Great Depression. Nobody should have any doubt about that.

The difference is that we're adopting very different monetary and fiscal policies to try to repress that crisis. That's why I would call it a Great Repression.

But it is potentially as bad. We're not out of the woods yet. And it seems to me that we're looking not only at the biggest post-war recession, but potentially also at an extremely slow, long, lost decade. It's something that nobody ...

ZAKARIA: Sort of like Japan in the '90s.

FERGUSON: That could be a good scenario. If you think of the Great Depression as the worst case scenario, we would be getting off lightly if we can get by with a decade of one percent per annum growth.

So at the moment, I'm really quite apprehensive that the process of deleveraging has far from run its course. There's no floor in sight in the real estate market. And these things have a self-perpetuating quality. One of the lessons of history is that depressions tend to feed on themselves. There is, after all, a psychological dimension to this. Once people get really spooked, it's very hard for the market to find its bottom. “

Because of my limited understanding of economics, this “psychological dimension “ is the factor I focus upon. I feel as if it will be what the average American focuses on also -- consciously or not. In a nutshell, who can we trust ? Who should we trust ?

This interview covers other fascinating ground, such as our relationship with China.

”ZAKARIA: What is the back story of what is going on now?

When people look back 50 years, 100 years from now, and they watch the United States in this extraordinarily vulnerable position because of all this debt -- somewhat true of Western Europe as well, perhaps in some ways more true -- and they watch China, with $2 trillion of surplus savings, with a budget surplus, growing still, for the most part, robustly, what will they say about the trajectory of these countries?

FERGUSON: I think they'll look back and say, you know what? There was actually one country at the heart of the global economy in the early 21st century, and it was called Chimerica -- China plus America. And these two economies were symbiotically linked. They were intertwined with one another.

China did the saving, America did the spending. China made its funds available through currency intervention, the United States took the money and piled on the debt.“

The transcript is well worth the time it takes to read. (Scroll down towards the end of it for the interview.)

But back to the central question, “Who do we trust ?”. My perception is that there are two groups fighting for your trust. The first, I believe, includes the conventional wisdom. We come up with a stimulus plan -- as big as we dare -- and hope for the best. It will be the biggest gamble in economic history. And make no mistake, it is a gamble. Nobody knows for certain what will happen. It’s just the best plan that the best minds can come up with.

The other group -- and I hope they’re in the minority -- wants more of the same. I think of them as “The Ones That Got Us Into This Mess”. Tax cuts and an unregulated economy. Never mind that it didn’t work. Never mind the the non-sensical logic of it all -- we can pay off a mountain of debt and pay for two wars by cutting taxes.

I hope you have figured out that you will have to decide on which course to take with whatever limited knowledge you have of the situation. Oh, you can decide not to decide all right. But that is -- in effect -- making a decision. When the conservative talk show hosts tell their listeners to call their Congressmen (and you know they’ll scream for lower taxes and less government spending) you can sit this one out. The banks and the businesses won’t have to scream. They’re close enough to Congress to whisper. Besides, money talks. You don’t have to get involved in running your country now. You can sit this one out too. Of course, that is how we got into the mess in the first place isn’t it ?

Don Brown
January 19, 2008

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