A Leaderless Global Economy and the Tragedy of Bad Advice

(Originally written in June 2012)

From Beijing to Brussels to Baltimore, the economic data is pointing to a global economy hanging by a thread and that should not surprise anyone- unless you believe that ECB still has policy tools to solve the European Debt crisis or the current rate of unemployment on both sides of Atlantic is actually an indication of market correction which was long time in making. 

The ongoing crisis, as mentioned many times here, is actually a job crisis. Without growth and employment, the crisis will linger with us as it has since 2007-08. Meanwhile, it is painful to watch the global leadership and the handling of the crisis by the same leadership. Leadership on the both sides of the Atlantic have pursued what I call : the Band Aid Solution Policy” in order to pass the blame to the other side. (Last year the debt deal saga in the US is a prime example). That is the level of political and economic discourse not only in the US but in Europe, India and many other nations. Moreover, the policy advice given to the political leaders is lame at best- at least what the policy makers are releasing to the public. I will be very surprised if the advice shared in public is different from advice given in private to the decision makers. If that would have the been the case, the world  would have at least have an idea where this crisis is going and how to contain it. Obviously, that is not the case.

It seems that the failure to solve this crisis is actually a failure of economic institutions including the institution of leadership. I am not sure if it is because these institutions are not equipped to deal with the new challenges or if they are just incompetent.  There are no magic bullets to solve this crisis and if any one tells you otherwise is either lying or does not know the basic economics. The EU has to make the hard choices and so does the US. China alone cannot be the engine of the global growth. (The recent data out of Beijing is not that great either). 

The citizenry is loosing jobs, pensions, and most importantly hope and trust in the political and economic institutions. It is imperative that decision makers, even for the sake of selfish reasons such as getting re-elected, start doing some serious thinking regarding managing this crisis. If not, the punishment will be thrown at them as we saw in France. Who knows what turn societies will take if this persistence crisis continue to take their incomes, savings and jobs away. 

All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership.

                                               John Kenneth Galbraith


So, is it a default or not? Ask the unemployed of the EU….

(Originally written in March 2012)

A thing is not necessarily true because badly uttered, nor false because spoken magnificently.
Saint-Augustine of Hippo
November 13, 354 – August 28, 430

… (December 11, 2009) – There is no possibility of Greek default. Former Greek prime minister, George Papandreou.

(January 29, 2010) – There is no bailout and no “plan B” for the Greek economy because there is no risk it will default on its debt.  The European monetary affairs commissioner Joaquin Almunia.

(September 16, 2010) – “Restructuring is not going to happen. There are much broader implications for the eurozone should Greece have to restructure its debt. People fail to see the costs to both Greece and the eurozone of a restructuring: the cost to its citizens, the cost to its access to markets. If Greece restructures, why on earth would people invest in other peripheral economies? It would be a fundamental break to the unity of the eurozone.” – former Greek Finance Minister George Papaconstantinou

(Last week) – Greece issue has been solved. President Sarkozy.

…..(Last week) – It would be wrong to assume that the euro zone has resolved Greece’s sovereign debt crisis after the successful completion of the country’s debt swap with its private creditors. German Finance Minister Wolfgang Schäuble

You can only conclude one thing from the above statements and that is : People in charge of policy making in Europe do not have a unified definition of what ails Europe. Is it the Greece? Is it the burden of the Debt? Is it too much regulation? Is Greece the only bad apple in Europe? All things being equal, the minimum requirement to manage this crisis is that there has to be a basic resolution on the unified definition of the crisis among the policy makers in EU.

Here is the key point: All the above headlines are about Greece. However, it was never about Greece. But the real story is who is next; who is drowning in the debt and who will fall next. That is the key question behind every statement and every question asked by the European policy makers.

Last week’s debt restructuring is not the end of this saga. One must not leave the sight of the real issues facing the Greek economy and Europe in general. High unemployment, structure deficits and lack of concrete growth strategy remain the real risks. Without addressing them, no policy tool will help Europe to get out of this economic mess. You don’t need to be a Harvard Economist to know that these are the essential elements which put country on the road to economic recovery or- a default. Greece itself is in free fall. The “benefits” of austerity have not become apparent, as the Greek economy saw growth rates of -0.2% in 2008, -3.3% in 2009, -3.4% in 2010, -6.9% in 2011, and…? The 4th quarter of last year saw a GDP fall of 7.5%. Do you see a trend here? The Greek economy is down by almost one-fifth in less than five years. Unemployment has risen to 20%, and 50% among young people, many of whom are leaving the country. That economic situation is worse than 1974, when Greece’s military dictatorship collapsed following a confrontation with Turkey over Cyprus and as a leap in oil prices hit economies around the world. That year the Greek economy shrank 6.4 percent. The current agreement with the EU will not improve the economy, but require even more wage cuts, government spending cuts, and higher taxes. These efforts will not create economic growth. Greece has to leave the EU to do more. It has no other option.

Look inside the US. The citizens of California have chosen to let a series of cities enter bankruptcy, severely cutting police and fire, health, and other services. Europe has had about all the pleasure of bailing out Greece that it can handle, and is clearly ready to say, “Enough!” It is all very sad, but that is the consequence of too much debt and leverage. And every nation is subject to that consequence if it does not keep its own fiscal and economic house in order. Every nation. As mentioned on these pages before, at one point, the German taxpayers will loose their patience regarding Greece or the bail out/s as a whole.

Behind Greece, Spain and Portugal are lurking in the shadows. This by no means is the end of the EU crisis and the the global crisis in general. Debt restructuring alone will not change the dynamics of the economic malaise which has gripped the EU and stalled the global recovery. The potential slowdown in China, Japan and Australia are other lurking risks. The ultra high oil prices are another matter. The Geo-Political risks in the Mid-East is another risk. So, we must bear in mind as policy makers, money managers and investment leaders that the ongoing economic crisis is not like any other the world has seen since 1930s. Policy tools used by the government has only increased the debt. The European Central Bank’s balance sheet surged to a record 3.02 trillion euros ($3.96 trillion) last week, 31 percent bigger than the German economy, after a second tranche of three-year loans. This trend more likely will continue. I would love to know the thoughts of Milton Friedman or Friedrick Hayek on what Ben Bernanke or Mario Draghi are doing to manage this crisis.

And then there is the whole issue of unemployment. With extreme austerity measures and budget cuts and with little or no economic growth, the unemployment has no where to go but up. Millions are disappointed at the so called “European Dream”.  Unemployment, as I have mentioned many times, is the ugliest side of this recession. There is a tremendous amount of anger in Greece, Portugal and Spain. People have been robbed of their savings and lively hood and they do not see the end to this crisis. No other issue in the economic, political or social thought challenges the authority and legitimacy of the state than the issue of unemployment. High unemployment is in fact the biggest shame for any society. Wealth inequality is an other.

The sovereign debt crisis is not over. Not in Europe, not in Japan, and not in the US. It is in a lull period. I do not buy this argument that “The market is telling us that the crisis is over.” The market knows a lot less than many pundits believe. What did the market know in mid-2007? Not very much, although the warning signs were clear, at least to some of us.

All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership.

John Kenneth Galbraith October 15, 1908 – April 29, 2006

The Egyptian Revolution 2.0 :The Psychology of Mob Rule and the Social Transformation

                                      (Originally written in December 2012)

The great upheavals which precede changes of civilisations such as the fall of the Roman Empire and the foundation of the Arabian Empire, seem at first sight determined more especially by political transformations, foreign invasion, or the overthrow of dynasties. But a more attentive study of these events shows that behind their apparent causes the real cause is generally seen to be a profound modification in the ideas of the peoples. The true historical upheavals are not those which astonish us by their grandeur and violence. The only important changes whence the renewal of civilisations results, affect ideas, conceptions, and beliefs.

The memorable events of history are the visible effects of the invisible changes of human thought. The reason these great events are so rare is that there is nothing so stable in a race as the inherited groundwork of its thoughts.

The present epoch is one of these critical moments in which the thought of mankind is undergoing a process of transformation. Two fundamental factors are at the base of this transformation. The first is the destruction of those religious, political, and social beliefs in which all the elements of our civilisation are rooted. The second is the creation of entirely new conditions of existence and thought as the result of modern scientific and industrial discoveries.

The Crowd

A Study of the Popular Mind

Gustav Le Bon


There was a cautious optimism among many who follow the Arab world as crowds gather on the Arab streets to demand openness, jobs, rule of law and hope in the previous year. It seemed that the citizens were eager to pursue a path to have a say in their future and make their leaders accountable for their actions, after decades of stifling rule which punished the dissent and crushed the opposition in the Arab world. People in the Arab world and specially the young, began the journey of making their social order more balanced and more equitable with real economic opportunities. After decades of authoritarian rule, citizens, frustrated with discredited institutions and paralyzed political parties, could not take it any more. Rising unemployment with massive income inequality and little hope for the future, the citizens became mob participants and brought down their rulers with lots of fanfare and enthusiasm for the future.

But, once the elections were over with new faces in the power – things stayed the same as they were before. Perhaps, the expectations among the Arab populace regarding the change were unreal. Perhaps with patience and by trial and error, the social order in the Arab world will finally get it right. Perhaps….

As a result, countries affected by the so-called Arab Spring now face political spheres that are shaped by crowd dynamics, rather than by genuine political or ideological movements. Indeed, much of what is happening in the Arab world today can be best understood through the study of crowds.

Crowds are the opposite of organizations; rather than being dominated by rigid hierarchies, they are often led by individuals with no formal rank. And, unlike political movements, crowds tend to form quickly and organically, like dark clouds gathering to form a storm, and their objectives are immediate: surround this police station, burn the palace, seize that ministry, etc.

The ongoing storming of the political institutions in the Arab world is a symptom of underlying anger and frustration in the Arab societies. What is common between  Egypt’s Tahrir Square, Tunisia’s Sidi Bouzid, or Bahrain’s Al Daih, is the idea that the tipping point of anger among the Arab citizens is not far and once that point is reached, chaos will become the norm and the social order will be beyond control- no matter how brutal the crackdown might be-even with the firings of tanks and guns and as we might see in Syria, with chemical weapons. Then it becomes what Le Bon called the “sovereignty of the crowds” and the “sovereignty of political elites”.

Under these conditions, the real challenge facing the Arab Spring countries, at least in the short term, is not ideological, but institutional. Institutions have not delivered or have not delivered quickly what they promised. President Morsi must start the process of reforming the core Egyptian institutions to boost the economy and stabilize the social order. We are seeing in many nations in the world where the institutional promises were not delivered, people are taking on the streets. The recent violent demonstrations in India, Bolivia, Nigeria, Chile, Athens, Madrid and many other places are reaction by the people to promises gone unfulfilled.

For the Arab world’s new political elites, the lesson is clear: crowd dynamics cannot be ignored. There is no way, rulers can continue to consolidate the power as they did in the past and show no ability to solve the chronic problems of unemployment, inequality and lack of opportunity in their respective societies. For Egypt, the window to start delivering on the promises is closing and the top leadership of the Military is watching closely. If the system continues the way it has been, there is no doubt that the crowds will turn on Morsi and that will provide an army an opening to move in.

Social rage stems from collective injustice in society. One can identify many elements  as to why and when crowds are formed and mob justice becomes the order of the day but one cannot deny that once crowds are formed to have their say, no firepower is enough to silence the dissent. President Morsi, are you paying attention, Sir?

Failure of the Monetary Policy and the Current Global Economic Crisis

(Originally written in September 2012)

Both the Federal Reserve’s Bernanke and ECB’s Draghi have been busy since the beginning of the summer. They are on full-time mandate to print as much money as they can to pour life blood in their respective economies and so far, the result is not what they had wished. But they are central bankers and the Monetary Policy is the only option they have to provide whatever life they could to ailing and sluggish economies. But, it has not worked and it will not work. As said on these pages before, it might have started as a credit crisis but for a long time, it has been a job crisis. Monetary policy does not have the ability to address the structural issues an economy is facing. Falling incomes and the disappearance of good paying jobs require more than tweaking of the Interest rate. It requires a comprehensive approach to response to new challenges of the global economic system.

A nation must pursue multidimensional policies which includes tax reforms; investment in sectors such as education, R&D, skill upgrade, labor reforms, financial regulations and much more to name a few. As economies continue to shed jobs, printing more money is not the cure. Every major data collection organization has grim numbers for 2012 in the US, EU, Latin America, India and China regarding the unemployment situation. Even the real picture behind flag burning and killing in the Middle-East is of a major unemployment crisis.

It is a global problem with severe implications on the global economy. The longer it takes for the the political and policy leadership to address this issue, the worse the consequences will be. Anemic growth with crippling employment situation in major economies of the world will not find its solution in the interest rate announcement. The economic and political leadership in many parts of the world is still struggling to fully comprehend the ongoing structural changes in the global economy while the sluggish global economy combined with terrible social and political conditions in many parts of the world continue the social and economic carnage. Accountability has lost its fervor and true leadership is a relic in modern times.

As an avid reader of economic history, I am familiar with the consequences of high unemployment in any given society and economy and how it can quickly erode the social contract which has far reaching consequences than debt and deficit. If we are still struggling with the strategy as to how to contain this crisis after four years, perhaps bond buying alone is not the right way to solve this mess.

The Politics of Austerity,Debt and Growth: The Confusing Priorities and Misguided Policies

The world of economics went through a storm few week ago when the famous and now the infamous study by Rogoff and Reinhart (Harvard) was challenged and questioned when it was revealed that their data was “managed” to show the critical link between national debt threshold and its impact on the national economic growth. This started the tasty exchange between those who had always had some doubts about the study and those who continue to believe the main message of the study which is that the high debt will bring economic and financial armageddon to the nation-one day – When that one day will come in nation’s future – no one knows. In other words, we are all somewhat clueless regarding when exactly that Bang! moment comes in the national economic affairs where the debt is so out of control in a way that there is practically no economic growth for a long time.

It was suggested, by many in the economic press, that the champions of the austerity approach both in the US and in Europe used the R&R study to drum up the support for continuous austerity measures even though the results of that approach were visible to everyone involved in the economic analysis especially when it came to unemployment and the economic growth.

I am not here to either defend or reject the Rogoff and Reinhart (R&R) study or thesis or whatever anyone else calls their “analyses”. Yet, what I would say that no government policy action is based on one study- no matter who and how influential the author/s are. Moreover, by putting the blame on a study or analyses for a certain government policy is like saying that Nazi’s drew their insipration from Nietzsche’s Übermensch (Superman) concept. For those of us who have been amazed at the policy response to this crisis on both sides of the Atlantic, we do not need R&R study to inform us that the policy response has been nothing short of a dismal at best and whatever efforts have been made by the policy makers, have not solved the real issues facing the economies of the Europe and the US. Off course, there are those who still believe in the old line that: well, it could have been worse without these policy responses. Well, you all know what I think of that response.

With sluggish growth and the dismal unemployment figures in across the Western world, there are plenty who are still advocating the austerity approach and one must ask: if the policy response has not produced the desired results, then why insisting on the approach?  The answer lies understanding the crucial relationship between the concept of power and idea/s. In the world of economics, it is falsely assumed that  ideas are not powerful, and the economic models usually assume that people are motivated by straightforward self-interest rather than complicated notions. The concept of power and who has that power does not even fit into the subject of econometrics. Yet, it matters the most in understanding the underlying elements of the political economy.

Ideas are powerful. If they become part of a political power discourse, they can change the course of the history. That is true for both good and bad ideas. Like good ideas, bad ideas have profound consequences. We do not live in the tidy, ordered universe depicted by economists’ models. Instead, our world is crazy and chaotic. We try to control this world through imposing our economic ideas on it, and sometimes can indeed create self-fulfilling prophecies that work for a while. For a couple of decades, it looked as though markets really were efficient, in the way that economists claimed they were. As long as everyone believed in the underlying idea of underlying markets, and believed that everyone else believed in this idea too, they could sustain the fiction, and ignore inconvenient anomalies. However, sooner or later (and more likely sooner than later), these anomalies explode, generating chaos until a new set of ideas emerges, creating another short-lived island of stability. The cycle continues and that in a nutshell is the History of Economics.

This means that ideas are fundamentally important. Galbraith knew that and so did Keynes. The world does not come with an instruction sheet, but ideas can make it seem as if it does. They tell you which things to care about, and which to ignore; which policies to implement, and which to ridicule. Everyone from the center left to the center right believed that weakly regulated markets worked as advertised, right up to the moment when they didn’t. It is a recurring theme in the history of economics.

John Maynard Keynes famously argued that politicians are the unwitting slaves of the ideas of defunct economists. We must understand the application of Keynes’s dictum, asking what those ideas are, why they are so important, and where they came from in the first place. The economy is much too important to leave to economists alone – no matter how smart, eloquent and convincing they might be. We need to understand how ideas shape the economic order and how power advances those ideas and how this relationship plays itself out in any given society.

As of today, while policy makers and political masters in many industrialized nations continue their “economic policy making” to contain this ongoing crisis, millions and millions of citizens have lost their living standards; they have no prospects for gaining meaningful employment and the chronic economic malaise of long-term unemployment continues. These are scary themes to ponder. The citizen’s economic well being is crucial to sustain peaceful social and political discourse in any society. When the economies collapse, societies breakdown and chaos manifest itself in the national psyche – that is true even for those societies who were once “ The Super Powers” of their era.