Monday, August 26, 2013

Krugman & Verhagen on Economic Bubbles

The well-known Noble prize winning economist, Paul Krugman, seems to be gaining more and more attention as a New York Times columnist than he ever had as a regular economist. Maybe in these times of admiration for fame and celebrities, Krugman should consider joining a reality show, if he really wants to influence the world outside the U.S. and possibly in other galaxies. Anyway, his latest column, This Age of Bubbles, questions why we've experienced so many economic bubbles since the late 70s. After the housing bubble in the U.S. and Western-Europe from a few years ago, before that the dot-com bubble, then the Asian bubble of the 1990s, and the real estate bubble (in the U.S.) of the 1980s, it seems now the BRICs with Brazil, India, and other emerging markets are hitting the proverbial economic walls. Krugman says:

"What’s going on? It’s a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. A couple years back, Western investors — discouraged by low returns both in the United States and in the noncrisis nations of Europe — began pouring large sums into emerging markets. Now they’ve reversed course. As a result, India’s rupee and Brazil’s real are plunging, along with Indonesia’s rupiah, the South African rand, the Turkish lira, and more."

After referring to the Federal Reserves policy of lowering interest rates and financial deregulation in the U.S. and around the world, Krugman concludes:

"In short, the main lesson of this age of bubbles — a lesson that India, Brazil, and others are learning once again — is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis."

Before sharing my view on this observation of increasing economic bubbles, let me refer first to Frans Verhagen, sustainability sociologist and author of "The Tierra Solution, Resolving Climate Change Through Monetary Transformation" (FYI: published by Cosimo Books of which the current blogger is the publisher) who just posted a response to Krugman's blog post, "Krugman's Age of Bubbles" You should read it, but here a few highlights:

"Why did so many bubbles happen during the last couple of decades while they were absent during the 50s and 60s and early 70s? There are many reasons, but the most important one is often not mentioned, let alone studied.

It was during this period (of the 50s till the 70s) that the international monetary system was a stable system, based as it was on the dollar/gold standard. When the Nixon Administration in August 1971 removed that standard, instability started to creep into the monetary, financial, economic and commercial systems. The latter systems were affected because the international monetary system acts as a glue of those systems: change that basic monetary system and all other global systems change.
So the question becomes of how we can return to a stable international monetary system in the 21st century.

Given that all global systems, i.e. monetary, financial, economic and commercial systems have to deal with this century’s greatest challenge of a changing climate that affects all dimensions of social and ecological life on this planet, it is my argument that we can use the world’s most basic system of monetary relations to also deal with this climate crisis. Thus, I have proposed the Tierra Solution that would resolve the climate crisis through monetary transformation, i.e. basing the international monetary system on the carbon standard of a specific tonnage of CO2e per person. The conceptual, institutional and strategic dimensions of such transformational change far exceeding the paltry reform efforts of the IMF are presented in my book published in 2012.

In this Age of Bubbles where the future of social and ecological wellbeing is at stake it behooves serious people to consider and debate transformational changes such as the feasibility of a carbon monetary standard that would force nations to decarbonize in their pursuit of low carbon and climate-resilient development in the global North and South."

So, while Krugman puts the blame mostly with financial deregulation and to a large extent also with the loose-money policies of the  Federal Reserve, Verhagen mostly blames an unstable international monetary system, since we went off the gold standard in the early 1970s. I think both are right in some respects, but I'd like to put the problem of economic bubbles in a broader context of increased instability in our external systems, whether economic, financial or environmental. There is a reason we're experiencing these instabilities, and that is that our external systems have not been in balance for a long time.

I'd like to quote Lao Tzu, the Chinese and Taoist philosopher of the 6th century BC:

"So sometimes things are ahead and sometimes they are behind;
Sometimes breathing is hard, sometimes it comes easily;
Sometimes there is strength and sometimes weakness;
Sometimes one is up and sometimes down.
Therefore the sage avoids extremes, excesses, and complacency."

Clearly in economic terms, but also in practical industrial terms, Western economies have not avoided extremes or excesses, and are complacent about its consequences. Whether it's monetary policies or unbridled economic expansion, there has not been any moderation or insight in the long term consequences of our policies. The results are clear, financial imbalances creating bubbles, environmental degradation creating pollution and climate change, and  economic imbalances creating inequality and enduring poverty. It's great that economists like Krugman or scientists measure what is going on in our economy or climate, and come up with various theories. But the bottom line is very simple, if there is no balance we'll be hitting the wall till our headaches become more and more painful. Once the headaches and crises get out of control, as they seem to be in Egypt, Syria, possibly Greece and Spain, Brazil, Nigeria, and also in Japan with its Fukushima disaster, only then will real change happen - and not just by tinkering with financial regulation of never ending conferences on climate change -.

1 comment:

  1. In order to achieve that challenging balance we have to strive to ever better understand the complicated interactions between the monetary, financial, economic and commercial systems with the social, cultural and political worlds. Part of that effort is to start thinking biospherically as is done by well-known British environmental writer Tony Juniper in his 1213 book “What has NATURE ever done for us? How money really does grown on trees.”