George Soros and Fareed Zakaria bring their respective perspectives to the challenges that the United States will soon to face. Both were born abroad and are very concerned with what is happening.
George Soros was born in Hungary and is now a well-known fund manager. In The New Paradigm for the Financial Markets (2008), Soros relates how the implosion of the Soviet Union in 1989 resulted in the victory of market fundamentalism, the idea that the markets are always self-correcting to an equilibrium.
Soros distinguishes between “everyday events, which are repetitive and lend themselves pretty well to (Gaussian) statistical generalization, and unique, historical events whose outcome is genuinely uncertain.” * The first source of market uncertainty, that we tend to focus on, is exogenous and results when political or economic events affect the market. The second source is endogenous, resulting from a reflexive interaction between subject and object, altering both. These two sources explain the non-Gaussian nature of the market’s behavior. Soros' Theory of Reflexivity describes how to trace causality (and indeed history) in complex systems, how an explanation of events after the fact results from the tracing of the interplay between participants' views and the actual state of affairs. Soros believes that markets should be given the greatest possible scope compatible with economic stability.
The source of the financial markets' stability (the ability to error correct in extremis) is the regulatory authorities. Market stability "has to be actively maintained by the authorities....The fact that regulators are fallible does not prove that markets are perfect. It merely justifies rexamining and improving the regulatory environment." The present financial crisis is primarily the result of a regulatory failure in 2003 (and of course several human foibles). But this crisis, the worst since the 1930s, has several unique features that make the Fed’s contra-cyclical monetary policy ineffective: financial innovation has run amok, the willingness of the rest of the world to hold dollars is impaired, the capital base of the banks is under stress, and (we might add) there is a one year inventory of unsold homes.
This book is definitely worth reading. The sum total of its message, in the short-term, is caveat investor. It calls for greater regulatory control over the credit creation process. But Soros forsees, " ...the end of a long period of relative stability based on the United States as the dominant power and the dollar as the main international reserve currency. I forsee a period of political and financial instability, hopefully to be followed by the emergence of a new world order.
* Economist Frank Knight (1921) made the same distinction between risk and uncertainty. The existence of the latter does not invalidate the former (and economic theory) – if you believe in error correction, economic or political. Error correction enables markets, societies, living beings to respond to changes in the environment appropriately.
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What might that new world order be?
Fareed Zakaria was born in Mumbai (Bombay), India; graduated from Yale and Harvard; and is now editor of Newsweek International. His latest book, The Post- American World (2008), discusses how the U.S can relate to a world marked, not by the decline of the U.S., but by the rise of the rest.
Samuel Huntington at Harvard has argued that modernization and Westernization are wholly distinct. What is uniquely Western are: the classical legacy, Christianity, the separation of church and state, and the rule of law. We note that those features Huntington identifies as uniquely Western can be restated in universal form: secularism, Pauline Christianity, and (very slowly and unique to each country's political culture) pluralism and the rule of law. Zakaria writes, "What is vanishing in developing countries is an old high culture and traditional order. It is being eroded by the rise of a mass public, empowered by capitalism and democracy...The story is about catering to a much larger public than the small elite who used to define a country's mores...Today, almost one-fourth of the planet's population, 1.5 billion people, can speak some English." Culturally, both the local and the modern are developing abroad. As high rates of economic growth continue abroad, growing GDP/capita x a large number of capita = Increasing GDPs. It is inevitable that the age of American hegemony is passing.
But does that mean the decline of the United States? America's economic strengths remain formidable: Allowing for cyclical ups and downs, it produces around 26% of the world's GDP; its military dominates at every level; its technological base remains strong; its economy is rated as one of the world's most competitive; and higher education is America's best industry. With 5 percent of the world's population, the United States has either 42 or 68 percent of the world's top fifty universities. "American culture celebrates and reinforces problem solving, questioning authority, and thinking heretically." Then there is America's secret weapon. Most important, it is open to new immigration and remains demographically vibrant. "...(it) is creating the first universal nation, made up of all colors, races, and creeds, living and working together in considerable harmony."
Zakaria identifies the source of our present problems as political, due to Washington’s inability to generate broad coalitions that solve complex issues. The American economy faces the strongest challenge in its history. Family incomes are flat or rising very slowly, inequality grows, and "Americans are borrowing 80 percent of the world's surplus savings and using it for consumption." Because the U.S. has been on top for so long, it has not taken the trouble to understand the rest of the world. "We have not had to reciprocate by learning foreign languages, cultures, and markets...Americans...can swim in only one sea. they have never developed the ability to move into other peoples' worlds." When going abroad, American businesses used to bring with them capital and know-how. Now, when they go abroad Americans discover that these two commodities already exist. So what is America's competitive advantage? Economically, its either energy (oil, natural gas, coal) or new ideas.
To avoid repeating the grievous mistakes that brought on both world wars, the U.S. set about creating multilateral organizations such as the UN and NATO. There is still a strong international demand for American power in its positive manifestations. We note that complex systems like the financial markets or the international system of states require a stabilizer. The world, a former president of Brazil writes, wants America to affirm its own ideals. "That role, as the country that will define universal ideals, remains one that only America can play."
To operate in this new world, Zakaria lists six guidelines: 1) The U.S. must choose its priorities, making large strategic choices where it focuses its energies and attention. For instance, it should not be embroiled in an 8th century A.D. struggle between the Sunnis and the Shias of Iraq. History is being made in China, India, and Brazil. 2) It should build broad rules and not narrow interests abroad. 3) It should emulate Bismark's Germany, engaging all the great powers and having better relations with all of them than any of them with each other. 4) The emerging international order of an open world economy and multilateral negotiations is networked. The U.S. should also take advantage of such an ad hoc order. 5) It has many more resources from its civil society than the government. 6) The U.S. has every kind of power except one, legitimacy. "Legitimacy allows one to set the agenda, define a crisis, and mobilize support for policies among all organizations…Washington needs to understand that generating international public support for its view of the world is a core element of power, not merely an exercise in public relations. Other countries, peoples, and groups now have access to their own narratives and networks.…In an increasingly empowered and democratized world, in the long run, the battle of ideas is close to everything. ”
The U.S. has played the game very badly by its unilateralism. Both Soros and Zakaria end their books with almost exactly the same idea. Zakaria writes, “...American was a strikingly open and expansive country…Everywhere I went, the atmosphere was warm and welcoming. It was a feeling I had never had before, a country wide open to the world, to the future…”