World Economy – Suffering from Acute Dis-Ease?

An analysis of articles published in Global Economic Intersection is fascinating microcosm of the larger macrocosm economic drama being played out on the global stage.

To discern patterns, we suggest that methodology from disciplines other than Economics, namely Electrical Engineering, Control Systems Engineering and Complexity Theory might give additional insights.

In this essay we coin the term dis-ease to simultaneously reflect two things:
1. The incipient instabilities (structural sicknesses) in the present world economy that are not being recognized; and
2. The misplaced comfort (ease) felt by all too many of the players.

Economic and Business Cycles – Are they really avoidable?

No one will argue that the Economic outcomes of nations or Business outcomes of enterprises are the result of many interdependent factors. Business performance of an organization for example is dependent on many factors or “variables” like aggregate demand, innovative capability etc. Economic performance, for example, is dependent on the ability of a nation to adapt to changes, currency supply, exchange rate, trade balance etc. Businesses are part of the larger economy and global trade.

Any system with multiple positive and negative non-linear feedback invariably is subjected to cyclical behavior with individual variables also experiencing cyclical behavior. For example the money supply itself varies over years and exhibits a remarkable cyclical behavior, with varying periodicity.

To make the issue more complex the “value” of a currency is not fixed. In 1972 the US moved away from gold based currency. For a very long time the US dollar enjoyed world reserve currency status. However, for multiple reasons, the US dollar is arguably losing its world currency status. Steven Hansen, in ”A Case for Divesting Dollars”, has written that the world has politely but  “fundamentally” rejected, “USA economic and monetary policy – specifically sovereign debt growth and quantitative easing. With open economic borders, USA monetary policy alone is ineffective unless all countries cooperate.”

We would like to conclude that cyclical behavior in world economic system is always going to be a reality notwithstanding the conspiracy theories, or attempt by any individual actors (read nations) to fix the problem or talk or coerce other nations into submission. Each actor wants to maximize its own economy; the emergent phenomena are the net of various factors interacting with each other in a mostly surprisingly, but in some sense “predictable”, behavior. We pick up this thread of predicting the unpredictable later in this article.

Periodicity of variables might be different from each other

In Electrical Engineering, Fourier analysis is classic methodology to find out the time period or frequency of different cyclical variables comprising a signal. A similar analysis can be done to separate out the constituents . Here is a simple contrived example.

The Fed effectively prints $’s dollars through QE [n], which soak up Treasury debt up from the secondary market. The Treasury debt can be used for rescue operations, such as bailing the auto industry. If the bailout is to pay for salaries only then there are no time lags; but if the money has been given to build new plants and machinery, design new models then the intended effects may take more than a year to fructify.

Similarly monetary and fiscal policies that require major changes have to go through the political process in democratic nations like the US and India but not so in autocratic nations like China. Even in democratic nations the time constants are different. An example is India where its often garrulous democratic process slows down changes. Recent political changes in the US may also have a slowdown effect.

Different variables have different time constants. It would be interesting to identify and research the periodicity and time constants of as many variables as possible.

Behavior of system at Tipping Point or Bifurcation Point:

When a system is unstable even small changes in one part of the system can create wild swings, the so called Butterfly Effect.

To paraphrase Nikola Tesla [1893] in modern economic speak, : “A single decision of undervaluing the currency from a “distant” China has altered the course of the world’s economic life, changed the destiny of nations, and has transformed the surface of the globe, so intricate, so inconceivably complex are the processes in Economics.”

This might seem an exaggeration but many things point to a current situation of instability. Among these things are failure of the recently concluded G 20, the Germany-Greece standoff, the crisis in Ireland, perhaps the ineffectual QE2 and impending failures of more banks in US.

Example: Predicting the Unpredictable- US & Chinida

This is not so difficult if we assume that no one country is now in command and the world is indeed multi-polar one with myriad trading patterns. Economic policies, howsoever economists and politicians try to fix by manipulating exchange rates and fiscal policies, are ultimately under the influence of larger macro factors ultimately.

Pattern 1: Outsourcing to China, first by the US and then ROW. This started after the dramatic opening of China by Nixon-Kissenger. Since then US businesses have systematically increased outsourcing to China. Since China mainly traded with US was it so bad to peg Yuan to Dollar?

Pattern 2: Before China’s ascendancy Japan, notably after the 60’s, rose mainly on the back of consumer electronics and superlative manufacturing skills, but then became stagnant.

Pattern 3: As anger in US grows over fundamentally structural economic issues, trade with China might slow down. China will have to work doubly hard to change its economy from export oriented one to that based on domestic growth. This where its authoritarian structure might be a liability.

Pattern 4: India is a domestic and bottoms up growth story so the immediate next three years might leave it untouched. See Chindia article.

Pattern 5: G-20 and currency conflicts are merely saber rattling of ineffectual political leaders who at the bottom of their hearts understand that there is very little in their individual control but play to their respective domestic compulsions and audiences.

Pattern 6: There are limits to growth and that brings us to the next section of this article.

Infinite Resources: Fact or Fiction?

There is growing consensus that something needs to be done on the wide spread economic unbalance, environmental degradation and to differentiate between sustainable and non-sustainable consumption.
In economic, business and political circles “Sustainable Economies” mostly raises the hackles.
Yet the case for sustainable development is strong and makes somber reading. Some of the problems associated with overpopulation are:

  • Depletion of natural resources
  • Increased levels of air pollution, water pollution, soil contamination and noise pollution.
  • Deforestation and loss of ecosystems
  • Elevated crime rate due to drug cartels and increased theft by people stealing resources to survive
  • Conflict over scarce resources and crowding, leading to increased levels of warfare
  • Less Personal Freedom / More Restrictive Laws.

Reference: Overpopulation

India and China will definitely hit road blocks if current western paradigm of growth are pursued. They will have to evolve different paradigms and different parameters to define growth and prosperity. However, not all changes will be properly foreseen; from the time of Malthus predictions of what growth limits might be have been off the mark.

The Overarching Pattern

A few conclusions “almost” seem certain:

  • The World Economy is suffering from dis-ease.
  • Like Bretton Woods 2, current economic order including US dollar reserve currency status is coming to an end.
  • Over a period of time newer systems might evolve mostly by a discovery process.
  • Multilateral trading arrangements rather than WTO (World Trade Organization) type mechanisms will come into play. This is already happening
  • China’s domination as world’s manufacturer will end as it shifts towards domestic consumption.
  • China’s place as cheap manufacturer will be taken up by other nations.
  • US will undergo an economic catharsis.
  • India might grow for few years before hitting resource road blocks.
  • Euroland will remain essentially static and so too will Brazil and Russia, the other members of BRIC.
  • Current parameters to quantify growth and wealth will have to be redefined to incorporate sustainable economics paradigm which does not assume limitless growth.

Will this play out and when will the dis-ease end? Only time has the answer.

Disclaimer: This analysis completely ignores armed conflict between nations.

Related Articles

Business Cycle Drivers by Derryl Hermanutz

Depression: The Forgotten Part of the Business Cycle by John Lounsbury

A Case for Divesting Dollars by Steven Hansen

Chindia – A Story of Contrasts. A Perspective View from India by Sanjeev Kulkarni

Currency Conflicts Come to Prominence Again by Ajay Shah

Losing the Battle, Winning the War by Menzie Chinn

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