This year, baby boomers born after World War II like myself remember the 50th anniversary of 1968, when many of us came of age.
I was studying at the University of Bristol that year, and it was illuminating that my generation of students were protesting against the Vietnam War in Paris, London and Washington, witnessing the unfolding of the Cultural Revolution in China and “flower power.” Bristol was then hardly the home of liberals, being a very middle-class redbrick university, but the protests there ended up with the students occupying the Senate House just before Christmas.
Two events defined my understanding of how the British establishment worked.
First, the police negotiated with the students to come out to enable them to inspect a possible bomb scare and then reallowed the students to go back to reoccupy the building.
Second, they switched off the electricity, so after braving the cold, most students returned home for Christmas.
When I asked my lecturer what his impression was of the “occupation,” his humored comment was his regret that the switching off of the electricity spoiled all the Christmas turkeys that the lecturers used to enjoy during the festive season. Humor and tolerance resulted in little damage or harm to anyone.
Looking back 50 years later, we see a repeat of a generational divide, as millennials born in the 1990s go to university and witness an increasingly unequal and polarized world. The White House is still trying to get out of the war on terror, bogged down in Afghanistan and Iraq and picking fights with Iran, Russia, North Korea, China and almost each of its trading partners, allies or not. Everything will hinge upon a major fight between the left-ish Democrats and right-ish Republicans on who controls the US Congress and Senate in November. America is deeply divided, just as Britain and Europe are deeply divided and pondering what to do about immigration, technological disruption of jobs and the longest and hottest summer in history.
The year 1968 was an age before the internet revolution. Mainframe computers were limited almost to one per university, and they had a memory capacity smaller than my iPhone today. Today, social media has spread knowledge and disinformation as quickly as anything is invented. Who would have dreamed that you could download an app from the web and with a 3D printer, print out your own gun (illegal in most countries)?
In those days, we were taught at university about the deep divide between monetarist and Keynesian economics. The former advocated a free market view and the latter lots of government intervention to stimulate aggregate demand. Fifty years later, we realize that both views have their limitations, being simplistic models of how the real world really worked. The monetarists’ basic model was based on perfect information and rational man, completely ignoring human imperfections, climate change and that bureaucracies or institutions have interests of their own. Keynes himself understood the importance of uncertainty and the animal spirits in human behavior, but during his age, rapid technology, massive human inequality and climate change were hardly on his radar screen.
The weakness of both schools of thought is what I call paradigm blindness, because neither theories could explain nor predict what happens in the real world. This is why every academic, policymaker or central banker during the 2008 crisis blamed not themselves, but “radical uncertainty.” The lame excuse was the risk models narrowly defined risk mathematically as measured volatility, which did not cover uncertainty, and what cannot be measured can be ignored.
The perfect world of neo-classical economics, basically the framework adopted by the monetarists, assumed that the world was fundamentally stable and if slightly shocked, would revert back to normal. Keynesian economists understood uncertainty better, arguing that when the world gets into a rut, the government should step in. The invisible hand of the market can be guided by the visible hand of the state. But very often, market failure is the result of state failure, due to bad policies or even good policies badly implemented. The quality of bureaucracies truly matter to good markets.
The 2008 global financial crisis was a crisis wasted, because governments in advanced countries made fundamental political mistake of believing that fiscal deficits prevented them from undertaking fundamental structural reforms, so they left it to central bankers to print their way out of trouble. The result was that the top five central banks in the world increased their balance sheets from $6 trillion in 2009 to $20 trillion, or one-quarter of world gross domestic product. Flooding the world with liquidity created massive asset bubbles that benefited mostly the rich and knowledgeable (smart money), so inequality exploded.
Now that the central bankers want to exit quantitative easing, interest rates are about to rise.
The US is enjoying the longest bull market in history, even as global uncertainty has risen with trade wars, climate change disasters, terrorism and massive social discontent. So the gray rhino (a high probability, high impact event) is a rise in US interest rates in response to higher inflation. We have already seen Argentina and Turkey get into currency crises with interest rate rising to 40-50 percent per annum. Many will remember that the last time interest rates so high during the Asian financial crisis of 1997-98, the contagion spread to Russia, Brazil and others.
What is truly necessary is no longer more monetary or fiscal policies, but something that is politically difficult: structural reforms. European Commission President Juncker, summed up the dilemma best when he famously said in 2007, “We all know what to do, but we don’t know how to get re-elected once we have done it.”
Very few politicians have the stomach for taking the really tough decisions against vested interests that are necessary to engage in structural reforms, such as labor markets, bloated bureaucracies and closing down inefficient industries.
If no reforms are undertaken, crises often resolve everything through devastation. The invisible hand becomes visible panic. The BIS last week asked the question whether a perfect storm is coming in global financial markets. The smart money always know what to do, but what about the rest of us?
Crises, like natural disasters, often wipe out the past so that life can start anew, perhaps at a poorer but more equal level. The year 1968 taught my generation that finance can become simultaneously a creator of monetary wealth or a weapon of mass destruction. We thought we could have our cake and eat it.
It turned out that we have been eating the cake of future generations. Andrew Sheng
Andrew Sheng writes on global issues from an Asian perspective. -- Ed.(Asia News Network)