The World Is Curved

David M. Smick

Tom Friedman’s best seller, The World Is Flat, explained digital technology’s effects on the world – which shorten the distances among countries and people and revolutionize the global supply chain, thus creating a new world of opportunity and challenges beyond national borders. David Snick, an economic advisor to bankers and money managers and the author of the acclaimed quarterly, International Economy, wrote The World Is Curved (TWIC), in late 2008, as a reply of sorts to Friedman. Snick agrees with Friedman but adds that, from the perspective of the financial markets, nothing happens in a straight line and that events are curved; that is, they are beyond our visual and mental horizons, full of unknowns, forcing all hands to rely largely on their gut instincts. Thus, financial instability is “here to stay”.

The author notes that the terrifying turbulence of the subprime-driven Great Credit Crisis of 2007-2008 has elevated the cry for anti-globalization (trade barriers); indeed, two-thirds of Americans now (2008) favor protectionism, as do many Republicans and Democrats in Congress. If globalization is not allowed to continue, the life-blood of the world’s income growth (trade) will be choked off. Much of the world’s wealth now rests with non-democratic regimes (China, Russia and the Middle East), and the world’s financial system remains fragile, and the wealth creation of the last half-century could be reversed by deflation, inflation, stagflation and/or protectionism. Trade wars and capital controls may be the unwise choice of policy makers.

The Great Credit Crisis of 2007-8 began in August 2007, when the world’s banks and financial institutions stopped making loans; deals were aborted; home buyers couldn’t close; defaults began in earnest; the global markets began de-leveraging (deflating). To exacerbate this, fraudsters were exposed, and, when no one trusts anyone, no one will lend. America’s lenders (as encouraged and even pushed by government) were the instigators this world-wide crisis, because they originated sub-prime loans, then bundled them in small packages, and sold them around the world (“securitization”). At this point, while the banks and other financial institutions have been successful raising equity capital and are now trying to repay government bailout loans (to regain control of their salaries, bonuses, etc. and to reduce government intervention), the toxic loans remain on their balance sheets and remain an unsolved problem, and the global economy is increasingly beyond the control of government regulators. Even China’s micromanaging-government can no longer control its economy. Governments are struggling for relevance. With emerging markets now paying off debt and the world loaded with cash, governments are scrambling to maintain a vital international role, but he quotes several Chairmen of the Fed, who concede that there is little more that The Fed can do.

The era of free markets is under siege, and the potential for disruption by governments is growing exponentially. Japan, he notes, has not been able to solve its deflation problem, which is now in its second decade, and he doesn’t see how America can deal with the problem any better. He adds that American’s subprime crisis has cooled the enthusiasm for Western-capitalism worldwide. Risk aversion is growing, as it did in Japan. Snick’s main message is that the wildcard in the world’s “curved” future is politics, and, unfortunately, there seems to be a negative seismic shift away from free trade and free currency movements, both of which have been the cornerstones of prosperity over the past quarter century. To save the economy, we must change these trends, but he offers no other specific solutions (if, indeed, any exist). He joins the consensus in predicting “years before recovery”, implying many years.

Is the book worth reading? He writes with admirable clarity and reasonable brevity, if lacking color and beauty. To this reader, the data stated in these laconic notes provide an adequate summary of the book and negate the need to read it. Indeed, books which deal with aspects of our current economic malaise abound, being published by the score every month.