Around the crisis carousel
I'VE been thinking a lot about this Michael Pettis post from the weekend, in which he offers some economic predictions for the remainder of the decade. What's most interesting about his thinking is the way he orients his model of economic activity around balance of payment dynamics. Here's an example:Since most global consumption comes from the US, Europe and Japan, the collapse in their demand will ultimately be very painful for the BRICs and the rest of the developing world. The latter have postponed the impact of contracting consumption by increasing domestic investment, in some cases very sharply, but the purpose of higher current investment is to serve higher future consumption. In many countries, most notably China, the higher investment will itself limit future consumption growth, and so with weak consumption growth in the developed world, and no relief from the developing world, today’s higher investment will actually exacerbate the impact of the current contraction in consumption.Mr Pettis argues that the pivot around which the BRIC economies (and China especially) swing is reliance on advanced-country demand. As that anchor (sorry, mixing metaphors) becomes dislodged, BRIC economies will face difficult internal structural changes.You might not buy all of his predictions, but it's a compelling way to view the big trends in the global economy, and especially the periodic eruption of crises. Big economies latch onto systems of international capital flows, to boost growth or stability or both. These systems are sometimes formalised, as in the Bretton Woods arrangement, but can also be informal, as in its Bretton Woods 2 successor, through which surplus countries obtained large dollar reserves. For decades at a time, the global economy may function reasonably smoothly while settled comfortably in one of these systems.But the rigidities such systems entail often lead to the accumulation of imbalances, which must inevitably unwind. The same structures that supported stability before act to slow or prevent adjustment. This will often mean that change is impossible until a crisis strikes. And when crisis occurs, countries will often find themselves muddling through a nasty period of adjustment, until a new global system develops which once again fosters stable growth.I have to say, I find this a very tempting way to interpret global economic history. And it's interesting how hungrily leaders eye replacement systems when previous structures become untenable. The G20 continues to discuss the potential development of reserve-currency alternatives. In Lindau last week, I heard Nobelist Robert Mundell argue that the world needed to return to a system of fixed exchange rates built around a dollar-euro peg. Not without some justification, writers often point to eras of reliable balance of payment rules as periods of dependable growth.I worry, though, that periods of sustained growth often reflect supressed volatility. The seemingly irrepressible desire for global economic stability may itself fuel the cycle of crisis.