Joseph Stiglitz: Can We Cure the Economy or do We Cure Ourselves?

I was watching a documentary on the Asian Crisis last night.  It spoke of the IMF and US Treasury advocating for Asian governments to take up IMF loans to stabilise their economies. Moreover, moving those economies towards a free market model as pre-requisites of the loans. The loans were to stabilise economies but in reality the economies collapsed. It appears the money inflow into the Asian banks from Western investors and uptake of loans by Asian Governments enabled Asian banks to pay off western investors and apparently they pulled money out to look after their own interests, then economies collapsed. That is my understanding of the documentary.

The key thought that arose for me was the word such as ‘stability’ and how this word is used to justify certain activities. As one looks at the free market system it is clear it is not a stable system. Even a quick look at speculative investment, money takes flight at the hint of instability or the possibility of losing yields, that is what Keynes saw as the instability of speculation or indeed greed. I believe it was he who said of markets with imperfect information were places where speculative investors behaved in ways similar to gambling in a Casino. I envisaged the so-called stability as a desire for security and order and whilst life is business-as-usual we gain the idea that we are safe and secure as there is a rhythm in sameness or familiarity. When we meet with uncertainty, panic ensures.

There was a quote mentioned in this documentary by Ayn Rand ‘I will not die it is the world that will end’. That connects with my own philosophy of the spiritual life that moves us and within that there is hope. We are indeed here to experience life in all its colours.

When I look at my own life of living in a tent and travelling around without a real sense of where I will sleep tonight, I see my inner security developing and indeed my resilience. The proof in my security is that always I find a place to sleep and sometimes it is truly amazing where I end up when I just allow uncertainty to show me where I am going rather than controlling life. My sense of self expands to life and I watch fascinated how it unfolds. I see the illusion of stability where systems play the economic game in familiar ways, yet the ecological system is under strain and is unable to fullfill the demands of consumers infinitem. The marketing drive to have everyone demand the latest ipod, computers, flatbed screens, automobiles, luxury houses across the world means that many are stimulated to have a lifestyle similar to the United States, we would require 4 earths to fullfill that material demand. I perceive greed as the weakness in the global system and we will return to the notion of need and balance. Balance with nature is the real world equilibrium. This balance with nature reflects in developing inner peace and a sense of flow in life rather than control. As we move towards our true vocations rather than occupations we will find the new world arise.

I have published this article by Joseph Stiglitz as I find myself drawn to Joseph Stiglitz and he appears an honest voice to me and I see him contrasting and harmonising with my current world view. He is an Economist and couches his language in economics speak, however whilst I understand the thrust of economic discussion I keep wondering what happens when it collapses, I don’t know if pump priming by government is going to keep the economies afloat as we are so interconnected these days. Moreover, the ecological collapse is another factor where the real world comes into view. The economic one only exists whilst resources are available to keep it going, as resources dry up prices rise and inflationary pressures arise, unemployment increases and social polarisation. We start to see stagnation occuring and insecurity as people link their identity to what they do rather than who they are. I believe the way through this crisis is to develop inner peace and reconnection with communities which are self sufficient and harmonious. Sounds pie in the sky hey! yet from my perspective as I become more secure within myself and able to deal with consant change, uncertainty, few resources, no paid work, no family I start to see the magic of our world flowing to me through sharing, caring and I feel myself increasingly part of a global system which is not globalised but harmonised. As I let go I start to feel the harmony with my true nature. I see myself in the other these days and what I do to another I do to myself. There is no place for selfishness or greed, as I take from another is the same as taking from myself. The same applies to nature. As we destroy nature we destroy ourselves. I found my sovereignty in my freedom. I see that the world cannot grow within a shrinking pie and growing population. The cure rests within knowing ourselves and managing the ecological footprint and designing organic system that flows from our potential, our desires, our interests into activities that harmonise with nature, as we can’t oppose the natural order, it is in control in truth. Sounds like a new type of organisation, organic comes to mind. I am sure Edward de Bono would like that word. As we self regulate, as we self develop, become more natural in our emotions and behaviours we see a new world emerging. That is my experience and my vision.

Something to contrast with Joseph as we play with mindsets and the future of the world.

Enjoy Joseph’s perspective.

2011-10-03

NEW YORK – As the economic slump that began in 2007 persists, the question on everyone’s minds is obvious: Why? Unless we have a better understanding of the causes of the crisis, we can’t implement an effective recovery strategy. And, so far, we have neither.

We were told that this was a financial crisis, so governments on both sides of the Atlantic focused on the banks. Stimulus programs were sold as being a temporary palliative, needed to bridge the gap until the financial sector recovered and private lending resumed. But, while bank profitability and bonuses have returned, lending has not recovered, despite record-low long- and short-term interest rates.

The banks claim that lending remains constrained by a shortage of creditworthy borrowers, owing to the sick economy. And key data indicate that they are at least partly right. After all, large enterprises are sitting on a few trillion dollars in cash, so money is not what is holding them back from investing and hiring. Some, perhaps many, small businesses are, however, in a very different position; strapped for funds, they can’t grow, and many are being forced to contract.

Still, overall, business investment – excluding construction – has returned to 10% of GDP (from 10.6% before the crisis). With so much excess capacity in real estate, confidence will not recover to its pre-crisis level anytime soon, regardless of what is done to the banking sector.

The financial sector’s inexcusable recklessness, given free rein by mindless deregulation, was the obvious precipitating factor of the crisis. The legacy of excess real-estate capacity and over-leveraged households makes recovery all the more difficult.

But the economy was very sick before the crisis; the housing bubble merely papered over its weaknesses. Without bubble-supported consumption, there would have been a massive shortfall in aggregate demand. Instead, the personal saving rate plunged to 1%, and the bottom 80% of Americans were spending, every year, roughly 110% of their income. Even if the financial sector were fully repaired, and even if these profligate Americans hadn’t learned a lesson about the importance of saving, their consumption would be limited to 100% of their income. So anyone who talks about the consumer “coming back” – even after deleveraging – is living in a fantasy world.

Fixing the financial sector was necessary for economic recovery, but far from sufficient. To understand what needs to be done, we have to understand the economy’s problems before the crisis hit.

First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services.

The problem is analogous to that which arose at the beginning of the twentieth century, when rapid productivity growth in agriculture forced labor to move from rural areas to urban manufacturing centers. With a decline in farm income in excess of 50% from 1929 to 1932, one might have anticipated massive migration. But workers were “trapped” in the rural sector: they didn’t have the resources to move, and their declining incomes so weakened aggregate demand that urban/manufacturing unemployment soared.

For America and Europe, the need for labor to move out of manufacturing is compounded by shifting comparative advantage: not only is the total number of manufacturing jobs limited globally, but a smaller share of those jobs will be local.

Globalization has been one, but only one, of the factors contributing to the second key problem – growing inequality. Shifting income from those who would spend it to those who won’t lowers aggregate demand. By the same token, soaring energy prices shifted purchasing power from the United States and Europe to oil exporters, who, recognizing the volatility of energy prices, rightly saved much of this income.

The final problem contributing to weakness in global aggregate demand was emerging markets’ massive buildup of foreign-exchange reserves – partly motivated by the mismanagement of the 1997-98 East Asia crisis by the International Monetary Fund and the US Treasury. Countries recognized that without reserves, they risked losing their economic sovereignty. Many said, “Never again.” But, while the buildup of reserves – currently around $7.6 trillion in emerging and developing economies – protected them, money going into reserves was money not spent.

Where are we today in addressing these underlying problems? To take the last one first, those countries that built up large reserves were able to weather the economic crisis better, so the incentive to accumulate reserves is even stronger.

Similarly, while bankers have regained their bonuses, workers are seeing their wages eroded and their hours diminished, further widening the income gap. Moreover, the US has not shaken off its dependence on oil. With oil prices back above $100 a barrel this summer – and still high – money is once again being transferred to the oil-exporting countries. And the structural transformation of the advanced economies, implied by the need to move labor out of traditional manufacturing branches, is occurring very slowly.

Government plays a central role in financing the services that people want, like education and health care. And government-financed education and training, in particular, will be critical in restoring competitiveness in Europe and the US. But both have chosen fiscal austerity, all but ensuring that their economies’ transitions will be slow.

The prescription for what ails the global economy follows directly from the diagnosis: strong government expenditures, aimed at facilitating restructuring, promoting energy conservation, and reducing inequality, and a reform of the global financial system that creates an alternative to the buildup of reserves.

Eventually, the world’s leaders – and the voters who elect them – will come to recognize this. As growth prospects continue to weaken, they will have no choice. But how much pain will we have to bear in the meantime?