I'm reluctant to call the market, but I think that Gold is a clear cut buy.
The market is not paying enough attention to the IMF's volte face. For 30 years since Reagan and Thatcher the IMF have slavishly followed the Washinton Consensus; namely that the pursuit of growth is best achieved through deficit cutting and trade liberalization. The IMF now advocate the delay of deficit cutting. Give politicians a chance to resist a hard choice and they will take it gladly. Every year , slow growth will be used as the excuse to avoid the painful medicine.
Similarly , inflation targeting, the mainstay of central bank policy since the 1990s.It is being questioned. We are in a period where deficits won't be addressed and inflation will be encouraged.
Gold, Gold Stocks, commodity stocks are all a clear cut buy
Tuesday, 16 March 2010
Sunday, 14 March 2010
Did Globalization lead to the end of government control of the economy?
At the end of the 20th Century there were approximately 400 million[1] workers in the leading 25 Industrial countries. If the proportion working in farming and services had been the same as 100 years earlier, rather than the current 20 million in agriculture and 270 million in services, there would instead be 190 million in agriculture and only 100 million in services. (The Manufacturing proportion has remained the same at 27 pct of the workforce). This dramatic shift exemplifies globalization. The rapid spread of technology, foreign direct investment and trade combined with the opening up of capital markets has changed the nature of labour to a more urban and skilled work force. Assets, particularly financial assets, are owned by different corporations all over the world. Globalization has perhaps moved faster than changes in government policy and the institutions that monitor, influence and regulate these markets. As the current world economy suffers under a weight of debt and unfunded liabilities, it is possible that the consequences of globalization may have been too rapid for governments to adequately negotiate the current economic difficulties.
The last period of Globalization between 1870 and 1914 saw a brisk increase in trade and migration. Britain was both the industrial and financial leader. Most of the trading nations operated under the Gold Standard and the core countries of Britain, France and Germany cooperated to ensure that the system worked efficiently. World exports[2], as a percentage of GDP, almost doubled from 1870 to 1913 and foreign assets more than doubled. Transportation costs fell dramatically and migration to the new world was an economic consequence of the shortage of labour and high wages outside Europe. The inter war period reversed many of these gains. The economic devastation of the Great Depression and 2 World Wars was accompanied by 2 breakdowns in the Gold Standard both in the post war period and then again between 1931 and 1936. Most significantly ,World Trade[3] collapsed and the ratio of exports, as a percentage of GDP, was only marginally higher in 1950 than it had been in 1870. In this light, the Globalising period from 1950 until now seems even more remarkable. It started with scarce capital and a new monetary system based on semi - fixed exchange rates. Over 60 years World Exports[4] have more than tripled and real GDP per person has grown by over 3.25 pct among globalising countries. HDI[5], perhaps a better measure of living standards, has jumped by 20 pct to 0.95. And yet, despite these gains, globalisation is questioned and governments in the western world seem unsure how to deal with the current problems. Government deficits , unfunded pension liabilities , popular disquiet with immigration and a world-wide weakness in real estate and mortgages appear to have left governments little room for manoeuvre. After so much success, why such pessimism?
The new monetary system of Bretton Woods had to cope with both the economic collapse of the period and the social implications of a world war that had left even the victors demanding change. Britain had lost her industrial and financial pre-eminence and Europe as a whole was short of capital. The Marshall Plan, with surprisingly little aid, kick - started the European economy. This was facilitated by the EPU in dealing with credit in a world short of foreign exchange.
The new monetary order required and allowed compromise. Ruggie[6] described it as “Embedded Liberalism”. It would contrast the nationalistic tendencies of the 30s with a multilateral character but it would not embrace the laissez-faire liberalism of the 1st Gold Standard. There would be compromise. The USA allowed Europe her choice of greater social welfare and strong protection of agriculture. Domestic policy that granted safety nets for the disenfranchised, greatly increased spending on health and benefits and capitalist cooperation with the unions was the new pragmatic backdrop of the period. The Golden age that followed until 1973 witnessed average European growth[7] of over 4 pct. The social contract that workers would forego excessive wage increases in order that capital could be reinvested was the mainstay of a virtuous economic circle. The workers believed the promise of delayed economic benefits. Both capitalists and workers trusted each other. Government spending[8] rose as her part of the contract, by an average of over 5 pct of GDP from 1937-1960 in the 5 countries France, Germany, Sweden, UK and USA . Despite the economic problems that followed the Golden Age (inflation, high unemployment, strikes and wage disputes), the Globalising countries still kept a steady pace up until 2007.
Standards of Living were rising for the majority but it is only since the downturn in 2008, and the subsequent deterioration in government finances, that there has been universal recognition that policy might be ineffectual or out dated. Ruggie had suggested that concerns of trade wars and protectionism, particularly in the 1980s, were misplaced. He feared that it would be government’s inability to maintain her share of the social contract that would be the greatest threat to prosperity and open trade. Krugman[9] validated this view . He observed that continuous reference to “poor competiveness” , whether in terms of exchange rate policy or trade openness , was either a means of deflecting from the real problem of poor productivity growth or perhaps an ignorance of it. His conclusion is that “national living standards are overwhelmingly determined by domestic productivity”.
Poor productivity is at the heart of policy inaction. As “migrating” agriculture and manufacturing labourers move to the service sector, living standards are in jeopardy of falling because services have the worst sector- productivity rate. It is here that Government policy faces a dilemma. In order to increase the productivity rate of the service sector , the workforce needs to be re-skilled to a higher level. The comparative advantage of the Globalising countries lies in design and highly skilled work. However , in order to pay for this advanced education , it will require cuts in health care and perhaps pensions. That is unlikely be endorsed by the electorate. It’s a timing dilemma. Short term losses to living standards are required for longer-term economic gains, but voters will choose shorter term benefits.
The difficulty in accommodating sectoral change in the workforce is only one area of policy inaction. Coincidentally, governments need to fund themselves as well as their citizens’ retirements. Are they capable of it? At the end of previous long waves of economic growth, there have been market crashes that have required major policy adjustments to rectify the market failure. As Eichengreen , Bordo and Irwin[10] show, the Canal and Railroad investment manias of 1825 and 1873 required new accounting rules and greater contractual transparency .The agriculture depression of the 1870s resulted in tariff increases and generalised protectionism. After the 1929 Crash, Glass –Steagall was introduced to prevent commercial banks dealing in securities and both GATT and the IMF were institutions devised to implement the new monetary system. The collapse of the Gold Standard and the Great Depression needed a complete change, not just an overhaul. Martin Woolf[11] suggests that although Globalization in the long term may be inexorable, over the short term, corrections and pauses are inevitable. The contemporary market crash in US real estate and its mortgage market is a crash with a global complexion. Unlike the 1870s era, capital markets are open, countries use fiat currency and credit is plentiful within a lightly regulated system. US mortgages are split up, and repackaged , and owned all over the world. Low interest rates following the 2001-2002 recession led to Real Estate speculation. The monetary policy of the 2000s is suggestive of government losing control. In the USA, the administration applied pressure to the FED to accommodate the busting of the technology bubble with an inappropriately low interest rate. It would appear that fear of popular disapproval prevented the much needed deleveraging that should have occurred after the bubble. In Europe, monetary policy is applied singularly by the European Central Bank. Interest rates that might have been appropriate for Germany and France , were not for Ireland and Spain who were experiencing real estate and construction booms. In the current reversal, interest rates are now too high for these countries. Their governments have both lost the ability to lower rates and ease policy through the exchange rate.
Government borrowing is also unusually high. The Western governments have found that the drop in tax revenues since 2008, combined with the monetary injections into the banking system, have left them competing with each other for domestic and international funding .Greece[12], for example, despite rigorous deficit criteria codified in the Maastricht Treaty, has overextended herself and now needs to borrow at 2.8 pct higher than Germany. It is interesting to note that the IMF[13] has warned countries of cutting spending too early. The Washington Consensus of trade liberalization and fiscal reform has been expounded since the early 1980s as necessary requisites for growth and higher living standards. Is procrastination on deficit- cutting a clue that the IMF recognises Government inertia and inability to implement the necessary policies to ease the debt burden. Only in 2009, the IMF forced Hungary to retrench and cuts its deficit and such an abrupt change in policy reflects the bewildering complexities that the IMF and governments face in choosing what to cut and where to invest in order to attract capital and win votes.
Aging population is a demographic phenomenon which can partially be explained by the benefits of globalization, but it also threatens to undermine government policy. Rising living standards , the breakdown of the nuclear family and a long spell of economic prosperity has been reflected in fertility rates in Europe dropping well below the replacement level of 2. The ratio of persons[14] aged 15-64 to those aged over 65 is projected to drop from over 4.3 in 2000 to under 3.0 by 2025 and threaten the ability of government to provide pensions and health provision. During the Golden Age there were two coincident misunderstandings. a. Fertility rates would stay above the replacement level of 2 and consequently population ageing would not be an issue and b. The failure to recognise that improvement in health would greatly increase life expectancy. In Britain the Labour Party reneged on its commitment to increase the retirement age of certain workers in the public sector. Continental Europe is in a more serious position as private pensions are quite rare unlike Britain. It is clear , that at some point, retirement ages will need to rise dramatically and/ or pension benefits be cut in real terms. However, the inability to take any decisive action thus far reflects how governments have been unable to undo the policy mistakes and misunderstandings of several decades ago.
The Losers of Globalization
Low productivity in the service sector, high government debt , unfunded liabilities ( particularly in pensions) , an ageing population requiring health care and ,not least, the bursting of a real estate bubble have left government with complex problems. However, central to these 5 issues lies perhaps the core dilemma. How can these problems be solved equitably? Or, put another way, how are the losers compensated so that they do not bear an overwhelming burden? The losers , inter alia, are low- skilled workers, the elderly who do not have private pension provision and property owners who entered the market late, particularly in the USA. Perhaps in the future, the greatest losers will tragically be the younger generation if these problems are merely ignored.
Two of the greatest periods of Globalization, 1870 -1914 and 1950 - 1973 had one noticeable similarity; they were periods of cooperation. In the first period Britain ,in particular, acted benignly as the hegemon and facilitated the monetary system and trading environment to work efficiently. Equally the “Golden Age” was cemented by the trust between capitalists and workers in ensuring the best allocation of capital. Unfortunately, in today’s climate, we see the reverse. World Trade liberalization has stalled in the Doha round and discriminatory[15] free-trade areas (FTAs) have replaced the brief period of “Open Regionalization”[16]. The Copenhagen conference was not just marred in terms of lack of progress on climate change , but was damaged by the conclusion that USA and China had little to discuss in terms of economic cooperation. As in Davos and G20 meetings, their antipathy is clear and disquietening. Japan’s own Golden Age has been halted by a 20 year period of infighting between rival factions, notably the Central Bank and the Finance Ministry. An unfortunate example of the(multi) prisoner’s dilemma; the government lacking ability to enhance cooperation.
In a period of cooperation, losers have a better chance of being compensated . Between 1870 and 1914 , countries who would not have been able to access capital or would have had high transaction costs , were included in the “orchestra”. In the Golden Age, manual and semi skilled workers were promised a completely new level of welfare , education and health-provision. The working classes were so confident that they were not society’s losers that they were prepared to defer wage increases and abstain from disruptive bargaining.
Today’s losers are not so confident. The banking sector , which was the biggest player in the real estate boom through leveraging its balance sheet with direct property loans, mortgage-backed securities and real-estate derivatives , has required a bail-out of unprecedented proportion. Despite punishment taxes on banks, all workers will have higher fiscal demands to fund the bail-outs.The poorest paid will proportionally have the most to pay. The unskilled and the young are actually facing cuts in education at the time they most need an increase and a chance to re-train. The countries most in need of liberalization are watching the larger countries choose NTAs.
The 2nd half of the 20th century has seen an unparalleled increase in prosperity among western industrializing countries, East Asia and others but also a new and larger group of dispossessed; an underclass. Alongside the winners , there has been a growing group; the undereducated, sub Saharan countries and the Afro American community in the USA (who are the predominant losers in the sub-prime crisis.) In order to pay for higher education, lower worker retiree ratios and an ageing population governments will need to retrench and reallocate. Unfortunately those they wish to tax can change domicile (multi nationals) , or simply form a quorum large enough to vote against that change .Governments have run out of money. With over 50 pct of GDP allocated by European governments, there is not much scope for increase (Sweden went as high as 63 pct and since needed to retrench).
The necessary market mechanism to reallocate capital is several steps behind the pace of globalization. This in itself is a symptom of loss of control. In particular, Governments are unable to apply macro economic policy as many nations have unified monetary policy or fixed exchange rates. Equally, fiscal policy is constrained by the convergence of tax rates (which itself is a consequence of monetary harmonisation) and voter appeasement. It is also hampered by multi- nationals with their choice of domicile and voters reluctant to bail out the financial sector. (The regulators of the open capital-market system were unable to recognise the real estate bubble and were reluctant to restrict balance-sheet leverage).Immigration to overcome the age-imbalance of a population is unpopular and market liberalization has been reversed in favour of discriminatory blocs. If governments are unable to embrace the losers and overcome this current period of non-cooperation then it is possible that loss of control will lead to a reversal of the World Economy that may partially reflect the chaos of the 1930s.
Simon GILLIS 10 iii 2010
C.H.Feinstein. Structural change in developed countries during the twentieth century.
N.Crafts. Globalization and Growth in the Twentieth Century.
J.Ruggie. Trade, Protectionism and the Future of Welfare Capitalism.
P.Krugman . Competitiveness, a dangerous obsession .
M.Bordo B.Eichengreen and D.Irwin Is Globalization really different than Globalization a Hundred Years ago.
M.Wolf Is Globalization in danger?
R.Garnault and D.Vines. Regional free-trade areas: sorting out the tangled spaghetti
D.Baines N Cummins M Schulze Population and Living Standards
D.Baines European Demographic Change since 1945 in Schulze Western Europe.
M.Bordo H Rockoff The Gold standard as a “Good Housekeeping Seal of Approval”
J de Long B Eichengreen The Marshall Plan: History’s Most Successful Structural Adjustment Programme
N Crafts. The Great Boom 1950-1973 Schulze Western Europe
P Temin. The Golden Age of European Growth Reconsidered.
[1] C.H.Feinstein. Structural change in developed countries during the twentieth century
[2] D. Baines . Class Lecture Notes
[3] Ibid
[4] N.Crafts. Globalization and Growth in the Twentieth Century
[5] Ibid
[6] J. Ruggie. Trade, Protectionism and the Future of Welfare Capitalism.
[7] N.Crafts. Globalization and Growth in the Twentieth Century
[8] Ibid
[9] P.Krugman . Competitiveness, a dangerous obsession.
[10] M.Bordo B.Eichengreen and D.Irwin Is Globalization really different than Globalization a Hundred Years ago
[11] M.Wolf Is Globalization in danger?
[12] March 4, 2010 . Most recent Greek Government Bond issue
[13] IMF policy paper February 2010.Strategies for Fiscal Consolidation in the Post-Crisis World
[14] OECD, Employment Outlook 2007: Weighted average of France, Germany, Italy, Spain, Sweden and UK
[15] R.Garnault and D.Vines. Regional free-trade areas: sorting out the tangled spaghetti
[16] Ibid
At the end of the 20th Century there were approximately 400 million[1] workers in the leading 25 Industrial countries. If the proportion working in farming and services had been the same as 100 years earlier, rather than the current 20 million in agriculture and 270 million in services, there would instead be 190 million in agriculture and only 100 million in services. (The Manufacturing proportion has remained the same at 27 pct of the workforce). This dramatic shift exemplifies globalization. The rapid spread of technology, foreign direct investment and trade combined with the opening up of capital markets has changed the nature of labour to a more urban and skilled work force. Assets, particularly financial assets, are owned by different corporations all over the world. Globalization has perhaps moved faster than changes in government policy and the institutions that monitor, influence and regulate these markets. As the current world economy suffers under a weight of debt and unfunded liabilities, it is possible that the consequences of globalization may have been too rapid for governments to adequately negotiate the current economic difficulties.
The last period of Globalization between 1870 and 1914 saw a brisk increase in trade and migration. Britain was both the industrial and financial leader. Most of the trading nations operated under the Gold Standard and the core countries of Britain, France and Germany cooperated to ensure that the system worked efficiently. World exports[2], as a percentage of GDP, almost doubled from 1870 to 1913 and foreign assets more than doubled. Transportation costs fell dramatically and migration to the new world was an economic consequence of the shortage of labour and high wages outside Europe. The inter war period reversed many of these gains. The economic devastation of the Great Depression and 2 World Wars was accompanied by 2 breakdowns in the Gold Standard both in the post war period and then again between 1931 and 1936. Most significantly ,World Trade[3] collapsed and the ratio of exports, as a percentage of GDP, was only marginally higher in 1950 than it had been in 1870. In this light, the Globalising period from 1950 until now seems even more remarkable. It started with scarce capital and a new monetary system based on semi - fixed exchange rates. Over 60 years World Exports[4] have more than tripled and real GDP per person has grown by over 3.25 pct among globalising countries. HDI[5], perhaps a better measure of living standards, has jumped by 20 pct to 0.95. And yet, despite these gains, globalisation is questioned and governments in the western world seem unsure how to deal with the current problems. Government deficits , unfunded pension liabilities , popular disquiet with immigration and a world-wide weakness in real estate and mortgages appear to have left governments little room for manoeuvre. After so much success, why such pessimism?
The new monetary system of Bretton Woods had to cope with both the economic collapse of the period and the social implications of a world war that had left even the victors demanding change. Britain had lost her industrial and financial pre-eminence and Europe as a whole was short of capital. The Marshall Plan, with surprisingly little aid, kick - started the European economy. This was facilitated by the EPU in dealing with credit in a world short of foreign exchange.
The new monetary order required and allowed compromise. Ruggie[6] described it as “Embedded Liberalism”. It would contrast the nationalistic tendencies of the 30s with a multilateral character but it would not embrace the laissez-faire liberalism of the 1st Gold Standard. There would be compromise. The USA allowed Europe her choice of greater social welfare and strong protection of agriculture. Domestic policy that granted safety nets for the disenfranchised, greatly increased spending on health and benefits and capitalist cooperation with the unions was the new pragmatic backdrop of the period. The Golden age that followed until 1973 witnessed average European growth[7] of over 4 pct. The social contract that workers would forego excessive wage increases in order that capital could be reinvested was the mainstay of a virtuous economic circle. The workers believed the promise of delayed economic benefits. Both capitalists and workers trusted each other. Government spending[8] rose as her part of the contract, by an average of over 5 pct of GDP from 1937-1960 in the 5 countries France, Germany, Sweden, UK and USA . Despite the economic problems that followed the Golden Age (inflation, high unemployment, strikes and wage disputes), the Globalising countries still kept a steady pace up until 2007.
Standards of Living were rising for the majority but it is only since the downturn in 2008, and the subsequent deterioration in government finances, that there has been universal recognition that policy might be ineffectual or out dated. Ruggie had suggested that concerns of trade wars and protectionism, particularly in the 1980s, were misplaced. He feared that it would be government’s inability to maintain her share of the social contract that would be the greatest threat to prosperity and open trade. Krugman[9] validated this view . He observed that continuous reference to “poor competiveness” , whether in terms of exchange rate policy or trade openness , was either a means of deflecting from the real problem of poor productivity growth or perhaps an ignorance of it. His conclusion is that “national living standards are overwhelmingly determined by domestic productivity”.
Poor productivity is at the heart of policy inaction. As “migrating” agriculture and manufacturing labourers move to the service sector, living standards are in jeopardy of falling because services have the worst sector- productivity rate. It is here that Government policy faces a dilemma. In order to increase the productivity rate of the service sector , the workforce needs to be re-skilled to a higher level. The comparative advantage of the Globalising countries lies in design and highly skilled work. However , in order to pay for this advanced education , it will require cuts in health care and perhaps pensions. That is unlikely be endorsed by the electorate. It’s a timing dilemma. Short term losses to living standards are required for longer-term economic gains, but voters will choose shorter term benefits.
The difficulty in accommodating sectoral change in the workforce is only one area of policy inaction. Coincidentally, governments need to fund themselves as well as their citizens’ retirements. Are they capable of it? At the end of previous long waves of economic growth, there have been market crashes that have required major policy adjustments to rectify the market failure. As Eichengreen , Bordo and Irwin[10] show, the Canal and Railroad investment manias of 1825 and 1873 required new accounting rules and greater contractual transparency .The agriculture depression of the 1870s resulted in tariff increases and generalised protectionism. After the 1929 Crash, Glass –Steagall was introduced to prevent commercial banks dealing in securities and both GATT and the IMF were institutions devised to implement the new monetary system. The collapse of the Gold Standard and the Great Depression needed a complete change, not just an overhaul. Martin Woolf[11] suggests that although Globalization in the long term may be inexorable, over the short term, corrections and pauses are inevitable. The contemporary market crash in US real estate and its mortgage market is a crash with a global complexion. Unlike the 1870s era, capital markets are open, countries use fiat currency and credit is plentiful within a lightly regulated system. US mortgages are split up, and repackaged , and owned all over the world. Low interest rates following the 2001-2002 recession led to Real Estate speculation. The monetary policy of the 2000s is suggestive of government losing control. In the USA, the administration applied pressure to the FED to accommodate the busting of the technology bubble with an inappropriately low interest rate. It would appear that fear of popular disapproval prevented the much needed deleveraging that should have occurred after the bubble. In Europe, monetary policy is applied singularly by the European Central Bank. Interest rates that might have been appropriate for Germany and France , were not for Ireland and Spain who were experiencing real estate and construction booms. In the current reversal, interest rates are now too high for these countries. Their governments have both lost the ability to lower rates and ease policy through the exchange rate.
Government borrowing is also unusually high. The Western governments have found that the drop in tax revenues since 2008, combined with the monetary injections into the banking system, have left them competing with each other for domestic and international funding .Greece[12], for example, despite rigorous deficit criteria codified in the Maastricht Treaty, has overextended herself and now needs to borrow at 2.8 pct higher than Germany. It is interesting to note that the IMF[13] has warned countries of cutting spending too early. The Washington Consensus of trade liberalization and fiscal reform has been expounded since the early 1980s as necessary requisites for growth and higher living standards. Is procrastination on deficit- cutting a clue that the IMF recognises Government inertia and inability to implement the necessary policies to ease the debt burden. Only in 2009, the IMF forced Hungary to retrench and cuts its deficit and such an abrupt change in policy reflects the bewildering complexities that the IMF and governments face in choosing what to cut and where to invest in order to attract capital and win votes.
Aging population is a demographic phenomenon which can partially be explained by the benefits of globalization, but it also threatens to undermine government policy. Rising living standards , the breakdown of the nuclear family and a long spell of economic prosperity has been reflected in fertility rates in Europe dropping well below the replacement level of 2. The ratio of persons[14] aged 15-64 to those aged over 65 is projected to drop from over 4.3 in 2000 to under 3.0 by 2025 and threaten the ability of government to provide pensions and health provision. During the Golden Age there were two coincident misunderstandings. a. Fertility rates would stay above the replacement level of 2 and consequently population ageing would not be an issue and b. The failure to recognise that improvement in health would greatly increase life expectancy. In Britain the Labour Party reneged on its commitment to increase the retirement age of certain workers in the public sector. Continental Europe is in a more serious position as private pensions are quite rare unlike Britain. It is clear , that at some point, retirement ages will need to rise dramatically and/ or pension benefits be cut in real terms. However, the inability to take any decisive action thus far reflects how governments have been unable to undo the policy mistakes and misunderstandings of several decades ago.
The Losers of Globalization
Low productivity in the service sector, high government debt , unfunded liabilities ( particularly in pensions) , an ageing population requiring health care and ,not least, the bursting of a real estate bubble have left government with complex problems. However, central to these 5 issues lies perhaps the core dilemma. How can these problems be solved equitably? Or, put another way, how are the losers compensated so that they do not bear an overwhelming burden? The losers , inter alia, are low- skilled workers, the elderly who do not have private pension provision and property owners who entered the market late, particularly in the USA. Perhaps in the future, the greatest losers will tragically be the younger generation if these problems are merely ignored.
Two of the greatest periods of Globalization, 1870 -1914 and 1950 - 1973 had one noticeable similarity; they were periods of cooperation. In the first period Britain ,in particular, acted benignly as the hegemon and facilitated the monetary system and trading environment to work efficiently. Equally the “Golden Age” was cemented by the trust between capitalists and workers in ensuring the best allocation of capital. Unfortunately, in today’s climate, we see the reverse. World Trade liberalization has stalled in the Doha round and discriminatory[15] free-trade areas (FTAs) have replaced the brief period of “Open Regionalization”[16]. The Copenhagen conference was not just marred in terms of lack of progress on climate change , but was damaged by the conclusion that USA and China had little to discuss in terms of economic cooperation. As in Davos and G20 meetings, their antipathy is clear and disquietening. Japan’s own Golden Age has been halted by a 20 year period of infighting between rival factions, notably the Central Bank and the Finance Ministry. An unfortunate example of the(multi) prisoner’s dilemma; the government lacking ability to enhance cooperation.
In a period of cooperation, losers have a better chance of being compensated . Between 1870 and 1914 , countries who would not have been able to access capital or would have had high transaction costs , were included in the “orchestra”. In the Golden Age, manual and semi skilled workers were promised a completely new level of welfare , education and health-provision. The working classes were so confident that they were not society’s losers that they were prepared to defer wage increases and abstain from disruptive bargaining.
Today’s losers are not so confident. The banking sector , which was the biggest player in the real estate boom through leveraging its balance sheet with direct property loans, mortgage-backed securities and real-estate derivatives , has required a bail-out of unprecedented proportion. Despite punishment taxes on banks, all workers will have higher fiscal demands to fund the bail-outs.The poorest paid will proportionally have the most to pay. The unskilled and the young are actually facing cuts in education at the time they most need an increase and a chance to re-train. The countries most in need of liberalization are watching the larger countries choose NTAs.
The 2nd half of the 20th century has seen an unparalleled increase in prosperity among western industrializing countries, East Asia and others but also a new and larger group of dispossessed; an underclass. Alongside the winners , there has been a growing group; the undereducated, sub Saharan countries and the Afro American community in the USA (who are the predominant losers in the sub-prime crisis.) In order to pay for higher education, lower worker retiree ratios and an ageing population governments will need to retrench and reallocate. Unfortunately those they wish to tax can change domicile (multi nationals) , or simply form a quorum large enough to vote against that change .Governments have run out of money. With over 50 pct of GDP allocated by European governments, there is not much scope for increase (Sweden went as high as 63 pct and since needed to retrench).
The necessary market mechanism to reallocate capital is several steps behind the pace of globalization. This in itself is a symptom of loss of control. In particular, Governments are unable to apply macro economic policy as many nations have unified monetary policy or fixed exchange rates. Equally, fiscal policy is constrained by the convergence of tax rates (which itself is a consequence of monetary harmonisation) and voter appeasement. It is also hampered by multi- nationals with their choice of domicile and voters reluctant to bail out the financial sector. (The regulators of the open capital-market system were unable to recognise the real estate bubble and were reluctant to restrict balance-sheet leverage).Immigration to overcome the age-imbalance of a population is unpopular and market liberalization has been reversed in favour of discriminatory blocs. If governments are unable to embrace the losers and overcome this current period of non-cooperation then it is possible that loss of control will lead to a reversal of the World Economy that may partially reflect the chaos of the 1930s.
Simon GILLIS 10 iii 2010
C.H.Feinstein. Structural change in developed countries during the twentieth century.
N.Crafts. Globalization and Growth in the Twentieth Century.
J.Ruggie. Trade, Protectionism and the Future of Welfare Capitalism.
P.Krugman . Competitiveness, a dangerous obsession .
M.Bordo B.Eichengreen and D.Irwin Is Globalization really different than Globalization a Hundred Years ago.
M.Wolf Is Globalization in danger?
R.Garnault and D.Vines. Regional free-trade areas: sorting out the tangled spaghetti
D.Baines N Cummins M Schulze Population and Living Standards
D.Baines European Demographic Change since 1945 in Schulze Western Europe.
M.Bordo H Rockoff The Gold standard as a “Good Housekeeping Seal of Approval”
J de Long B Eichengreen The Marshall Plan: History’s Most Successful Structural Adjustment Programme
N Crafts. The Great Boom 1950-1973 Schulze Western Europe
P Temin. The Golden Age of European Growth Reconsidered.
[1] C.H.Feinstein. Structural change in developed countries during the twentieth century
[2] D. Baines . Class Lecture Notes
[3] Ibid
[4] N.Crafts. Globalization and Growth in the Twentieth Century
[5] Ibid
[6] J. Ruggie. Trade, Protectionism and the Future of Welfare Capitalism.
[7] N.Crafts. Globalization and Growth in the Twentieth Century
[8] Ibid
[9] P.Krugman . Competitiveness, a dangerous obsession.
[10] M.Bordo B.Eichengreen and D.Irwin Is Globalization really different than Globalization a Hundred Years ago
[11] M.Wolf Is Globalization in danger?
[12] March 4, 2010 . Most recent Greek Government Bond issue
[13] IMF policy paper February 2010.Strategies for Fiscal Consolidation in the Post-Crisis World
[14] OECD, Employment Outlook 2007: Weighted average of France, Germany, Italy, Spain, Sweden and UK
[15] R.Garnault and D.Vines. Regional free-trade areas: sorting out the tangled spaghetti
[16] Ibid
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