Arno Mong Daastøl arnomd at
Mon Jul 27 14:17:34 PDT 1998

Although Kuttner's article is quite journalistic and imprecise, the fact that BW prints this kind of article is somewhat encouraging - though they really are latecomers.

Kuttner does make some strange assertions, for instance on the downfall of Bretton Woods, where the common American understanding of geopolitical affairs shines through - with an inability to appreciate how the US has been subsidised for more than half a century through seignorage espcially by the weekest nations without reliable currencies of their own - and an inability to appreciate how for instance Europeans have complained about this, especially the French: The US print "worthless" paper (dollars) and in return import goods. Thereby they have been able to finance their global informal "empire" and prolong the Anglo-American 347 year hegemony(from 1651), which now is being forcefully enlarged into SE Asia.

BW recently estimated this US "debt" to some 5 trillion dollars:

The last section of the leader in Business Week, March 9th '98 reads:

"The U.S. owes some $5 trillion to dollar holders abroad, thanks to three decades of trade deficits. This ''dollar overhang'' hasn't been a problem to date. But by 2001, the first competing store of value to the dollar since the days of a strong pound sterling will be here. No one knows what will happen. But though the impending surge in the trade deficit poses no immediate threat, America should ponder getting its trade house in order. The euro could change everything"

Kuttner seems to think that fixed exchange rates are possible in a world with efficient international transport technology - and therefore trade across borders. Still the main intention is good - less instability and more production. And I cannot really see much alternative to the Tobin tax. Fixed rates in my opinion would be unmanagable and too rigid causing in the end ABRUPT changes in this rate. Flexible rates (when provided with a "brake" like the Tobin tax) seem to have the possibility of providing a more stable system.

I would suggest looking into Henry Carey (1864): "Financial Crisis" and to a smaller extent into Friedrich List (1841): "The National System of Political Economy" for the following reason:

Kuttner makes an understandable journalistic shortcut and counterposes freedom in trade with goods and with financial assets (capital flows). List and especially Carey points to the inter-relationship, and while arguing for better transport technology and international division of labour, they also argue for measures to ensure larger domestic production. The economic reasons are less transport costs and less instability. The reason for the latter is very shortly that fewer intermediaries; merchants, will lead to less exchange and less speculation. Besides, control over consumption and thereby production will be more in the hands of local authorities - or people if you like. Thereby the possibility of efficient counteraction to sloping demand is larger.

Hope you all have a better summer than here in Norway! We are litterally drowning in chilly rain. Arno

Business Week 980727:



We are learning once again the fundamental difference between free commerce in ordinary goods and free commerce in money. The former is broadly efficient--it subjects business to bracing competition and allows products to find markets anywhere in the world. The latter is destabilizing and deflationary--it holds the real economy hostage to the whims of financial speculation, which is vulnerable to herd instincts, manias, and panics. In ordinary commerce, prices adjust and markets equilibrate. In global money markets, erratic and damaging overshooting is the norm.

Exhibit A is, of course, the Asian crisis. The Asian collapse is widely blamed on structural problems--too much state interference in economies, ''crony capitalism,'' and thinly capitalized banks. But that system, while in need of overhaul, did produce exceptional growth for two decades. The more important cause of the Asian crisis is the sudden exposure of these nations to the speculative whims of unregulated financial capital. It is impossible to run an efficient economy when your currency swings by 100% in just a few months.

EASY TARGETS. The fundamentals of most Asian economies remain enviable--high savings rates, well-educated and disciplined workforces, high rates of productivity growth. However, when these economies became targets for global financial speculation, they were abruptly exposed to forces beyond their control. Hot money poured in, seeking supernormal returns. When the hot money resulted in overbuilding followed by falling expectations, the money poured out just as quickly. To reassure the same global speculative capital, these nations, encouraged by the International Monetary Fund, resorted to tight money and deep economic contraction. The kowtowing to skittish financial markets has led to generalized deflation.

In popular memory, John Maynard Keynes is (wrongly) associated with simple deficit spending. But at the heart of the Keynesian insight about the failure of markets to self-regulate is the disjuncture between the real economy of long time horizons with fixed obligations and the short-term, often irrational character of financial markets.

The Bretton Woods system was an attempt to square this circle. Bretton Woods married free commerce in goods to regulated commerce in money. It created fixed exchange rates and controls on private capital movements--precisely so that free trade in goods could coexist with high growth and full employment. Financial speculators had no role in the Bretton Woods system, so there was no systemic bias in favor of slow growth.

Bretton Woods collapsed, however, because it was never anchored by the global credit system envisioned by Keynes. Rather it was temporarily anchored by the U.S. dollar. But when the need to finance expanding global commerce collided with the need to maintain domestic price stability, dollar hegemony became too great a stretch. The U.S. sacrificed fixed exchange rates, finally ending the Bretton Woods system in 1973. It is more than a coincidence that 1973 also began the era of slower growth.

SAFETY NET. With the collapse of Bretton Woods, a new generation of free-market fundamentalists insisted that money was just another commodity with prices set by markets like the price of ordinary goods. Exchange rates should float; all capital markets should be totally permeable. Recent events, however, have proven this view tragically wrong.

If we are not careful, the world will enter a deflationary spiral not unlike the Great Depression, triggered by events in Asia. The American architects of Asian rescue can't decide whether they trust speculative markets to govern flows of currency and capital. On the one hand, the Clinton Treasury backs the IMF view--liberalize capital markets, get government out of the way, reassure investors. On the other hand, Treasury Secretary Robert Rubin talks of the need for Asian social safety nets; he encourages Tokyo to bail out its banks and urges the Chinese to keep pegged exchange rates--none of which policies exactly reflect deference to market forces. The policy muddle reflects an intellectual muddle.

Ad hoc damage control coupled with self-defeating austerity is the wrong approach. Better to act systemically, with a ''Tobin Tax'' on short-term currency transactions, as well as a more managed system of capital flows and exchange rates. It remains to be seen whether today's statesmen can rise to the occasion or whether they are still prisoners, as Keynes once put it, of the ideas of defunct economists.


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