Tuesday, May 23, 2006

I Get More Letters

Peter Ireland of Karavans, a clearinghouse for information on sustainability issues and green entrepreneurs, writes me:

I run Karavans.com and was wondering if you can recommend any books/articles that deal with the how-to of economic survival in a depression?

I have been anti-globalization since the mid 1980s. A lot of economic news today points towards a collapse of the dollar and a possible depression. So I'm trying to build a resource of articles and books on the subject.

(Of course anyone who knows of any articles is welcome to send them here; and of course there are many books on my Beyond Economic Globalization reading list that probably don't answer the question posed here, but are nonetheless great to peruse).

I respond

I'm probably on record as saying this before but, just to clarify, I am not "anti-globalization." If you define "globalization" as the movement of goods, ideas, people, etc., around the world, then this process has been going on for millenia and is simply a part of human civilization. The notion that this could be stopped or reversed (leaving aside the question of whether it *should* be stopped) strikes me as fanciful. I just finished a book by two French economists, Dumenil and Levy, called "Capital Resurgent." They had this to say: "May material, intellectual, cultural, and emotional exchanges be extended from one end of the planet to the other. May people and resources circulate for the greatest well-being of all. But neoliberal globalization is no way to accomplish this." In other words, the problem with what is happening now is a political one--a political choice of institutions and rules governing this process--an increasingly globally-integrated economy and society--that determines who bears the costs and who reaps the benefits of global socioeconomic restructuring. This is also directly related to issues of sustainability on which your website focuses as the institutions result in an externalization of the costs leading to unsustainable depletion of the environment (and a maldistribution of the environmental costs).

In regards to your question, I presume you are referring to what individuals can do in terms of personal finance to insulate themselves from the potential (and probable) deep recession ensuing from an eventual correction of US economic imbalances. Whether a more gradual, orderly reversal is still economically possible is fundamentally unknowable, however it is plain to see that the alignment of interests and ideologies make such a dream politically near impossible.

I don't have any readings that really address this issue, and I'm afraid I don't think there is really much that individuals can do. The text book answer to your question is that individuals should diversify their portfolios, preferably with assets that are "perfectly negatively correlated" with asset prices in the US. That is, when US asset prices fall, these other ones go up so the porfolio maintains its value. This is conventionally held to mean foreign assets. But the nature of the global imbalances make the prospect of foreign assets' performance rather dubious. The form of globalization that has been pursued over the last 25 or so years is characterized by anemic growth in most parts of the world (owing to a number of structural contradictions built into the institutions of global neoliberal capitalism--PDF). The areas that are growing are growing by exporting to the US, which is only sustained by American consumers' willingness to accumulate debt and their willingness to lend. When the US goes into recession and interest spike to prop up the dollar, their export markets will disappear (because they will become much more expensive in $ terms and people will lose access to credit, etc.).

When this thing blows up, its going to take the whole world (or a lot of it) down with it. Imagine a bank on the precipice of failing that calls in all its loans to cover its liabilities. The firms who borrowed from the bank could be profitable, but need that bridge loan to pay operating expenses. All of the sudden, they can't pay, so the bank can't pay, so the whole thing collapses. China, Japan, and some other Asian countries that hold most of the world's official dollar reserves will be the big losers when the dollar plunges. (This has led some to argue that they won't let it plunge, and thus the imbalances are inherently sustainable, though I don't buy it).

What can an individual do at a micro level? Not much, I'm afraid, as the environment in which individuals operate are forged at the macro level. (This is excepting the VERY rich who have access to financial and physical mobility, and financial services and instruments that regular people like us can't even fathom). There was a big push in economics in the late 1970s to very recently to "micro-found" macroeconomic theory. This is based on the idea that the big picture is nothing more than the sum of all individuals' behaviors (making saving, investment, and consumption decisions, say). While a great number of important insights were gained from this, it obscured from a very important principle: humans are social beings, and their motivations, behaviors, and preferences are socially constituted. In other words, there is also a macro-foundation for micro-behaviors: social structures create an environment in which individuals develop and operate. In this micro-macro dialectical system, I believe that the dominant causality runs from macro to micro.

So, why can't individuals diversify their way out? The reason is that it is fundamentally unknowable how assets will perform in the future. This is the principle contribution of Keynes to economics (though a lot of economists miss it because they never bother to actually read "The General Theory"). Individuals don't know what the future holds--even less so in a period of crisis like the potential one you worry about. Thus it is impossible to know the true probability distribution of potential future states. Risk-reward scenarios, expectations of returns on investment, etc., are only meaningful conditional on stable conventionally formed (i.e. widely held beliefs, coordinated by macro-structure) expectations of the future. Investment behavior, etc., which will determine the individual's portfolio value in the future depends upon one's confidence that their expectations of the future are true, knowing that the true probability distribution is fundamentally unknowable, and hence impossible from which to derive scientific statistical inferences. This conventional expectation formation will most certainly break down when the US experiences twin balance of payments and financial crises. Anyone who claims to know a magic investment that will save you from this mess is selling a lump of fool's gold (don't be fooled by the gold bugs--precious metals, too, posess little inherent value and are subject to the same kind of conditional valuation as stocks or bonds).


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