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The Long View 2003-04-03: Consider the Alternatives

Here is an interesting one on the Euro and Germany. John felt that Germany couldn't pursue a sane fiscal policy because of the Euro. Twelve years later, this turned out to be very true, but not precisely for the reasons John thought. He did get the overall dynamic right however, the big economies, like Germany, are tied down by monetary union, and the smaller ones, the PIIGS, are overstimulated and prone to meltdown. Well, we proved that one right. John also was correct that no one dared question the idea of making Germany and Greece in some sense economic equals, at least until everything blew up.

A prediction that did not go so well is that China's financial system would also have blown up by now. There has been a market crash over there recently, but the kind of thing Gordan Chang has been going on about for fifteen years keeps not happening. John once pointed out that things like the unusual financial growth China has been experiencing of late tend not to go on forever. To date, the Chinese have been giving it their best shot.

I do think John was right to fear another nasty influenza epidemic. SARS looked pretty bad for a while, but it fizzled in comparison the the Spanish flu. Another pandemic of that magnitude would do very bad things to a word with daily international flights. We have just been lucky.

Consider the Alternatives

Here's an interesting point that Kermit L. Schoenholtz, the chief economist of Salomon Smith Barney, made about the decline in foreign investment in the US:

"If people believe that the events we've seen in Iraq are not one-off events, it will affect their investments."

The New York Timesappears

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The National Interest

We won't dwell on Japan's problems. Posen endorses the familiar assessment that it's an institutionally "blocked" society that can't summon the political will to pump the bad debt out of its submerged financial system. He says that Germany has not quite reached the same point, but it is in danger of a deflationary spiral. The reasons are different from Japan's. Germany's markets are freer, and the economy on the whole is more dynamic. The problem is that the euro system prevents Germany from adopting a sane fiscal policy. Today we are in the sort of period in which a country with control over its own currency would run large deficits and reduce taxes. Germany, however, is biting the bullet by keeping its deficits within the range prescribed by the European Central Bank in Frankfurt.

charter

The French deal with the fiscal prescriptions of Frankfurt by ignoring them. When the Germans start to do that, there won't be much of a system left.

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Then there's Asia. We have already noted the problems of the Japanese financial system. The Chinese a similar situation, but exacerbated by an order of magnitude by the remnants of a command economy. Still, the economy posts large nominal gains, so people who you think would know better continue to pour money into the country.

SARS

Gordon Chang

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Contrary to some expectations, the United Nations did not turn into a pumpkin when the Iraq War began; neither did NATO turn into six white mice. However, even though the UN is going to survive, it will be hard to take it altogether seriously hereafter. Ideas are surfacing for a supplementary organization that could be trusted with serious security issues, but which would be more than the telephone numbers on the American president's speed-dial.