This is the first of two posts on changes I think need to be made for a new, more sustainable economic and social system. The full article exploring these interventions was published in August 2008 on Goldmau.com.
Last year, I wrote an article titled The End of Capitalism as We Know It. As we witnessed the collapse of many widely-held beliefs about our economic system, it seemed appropriate to take a moment to reflect on the underlying dynamics. In all fairness, the philosophical approach to such analysis had been floating in my head for years. Since the early part of the last decade, I had uncomfortably witnessed the unstoppable force of mass consumerism and economic leverage take over every aspect of our system in complete disregard for the social aspects. However, it was not until this recent “quantity over quality” takeover engulfed the cultural fabric of our society that I started to really question the future viability of Mass Capitalism.
In this analysis, I explore four concrete areas of intervention for restructuring the imbalances of today’s capitalism and morphing it into a more sustainable social system—what I call “Qualitative Capitalism.”
- Monetary Policy
- Globalization Management
- Disclosure and Transparency in the Regulatory Process
In a speech delivered at the 2004 Eastern Economics Association in Washington, D.C., then-Fed Governor Ben Bernanke praised the stabilizing work of the modern Federal Reserve. It seems rather ironic to read these words today, one year after the start of the most disruptive crisis to ever hit modern global financial markets. A crisis certainly induced by misguided monetary policy, among a few other elements.
I take issue with Bernanke’s self-serving statements—even beyond the recent parameters. The variability in measurement of output, inflation, and unemployment over the last 20 years makes it difficult to draw solid and scientific conclusions on the effectiveness of modern monetary policy. But even if we tried to measure policy performance using slightly different metrics, such as the variability and frequency of financial and economic crises, the final grade would be rather embarrassing.
The last 10 years have proven devastatingly unstable and the depth and frequency of financial crises have increased dramatically. The 1998 Russian and Asian debacle was quickly followed by the 2000-2002 U.S. equity disaster (with a recession in 2001) and these were followed by the mother of all crises: the credit and housing bubbles of 2007 and now the possible de-anchoring of inflation expectations. It is not coincidence, in my view, that increased depth and frequency of recent crises coincided with a significant intensification in activism in monetary policy and a skyrocketing increase in money supply.
From a monetary policy perspective, the key to a successful economic system is stability.
Money supply should respond to demand for money (which, over the long run, should grow at a fairly stable pace). The Federal Reserve should remain vigilant over the stability of the system by overseeing full implementation of rules and regulations and by acting as a lender of last resort during systemic emergencies. I equate this to a choice for quality (less action, more targeted action) over quantity (too much activism, too much money).
Proper management of the globalization process is the most difficult and dangerously ideological area of intervention, but it is essential. As this process becomes more and more difficult to manage—due to the increased number of involved players, crosscurrents, and potential systemic instabilities—the agents involved may instinctively shy away from a more pragmatic(and beneficial) approach and move toward more ideological and possibly narrowly focused agendas. For example, once again the winds of protectionism have begun to blow again after years of increased trade and capital openness. It would be disingenuous to back away from one of the few economic certainties (the superiority of open trade and open markets in raising living standards) just because a crisis has occurred.
To be continued…
Related Articles in the GBR
- An Alternative Way to Manage Equity Portfolios by Davide Accomazzo, MBA, and Rosario Rivadeneyra
- Is Managed Futures an Asset Class? by Davide Accomazzo, MBA, and Michael “Mack” Frankfurter
- Top 10 U.S. Economic Items to Monitor by Darrol J. Stanley, DBA
- The Link Between Price and Profit Margin in a Global Market by William R. Smith, Jr., PhD and John K. Paglia, PhD