In What’s Next? (published last month) top economic experts look closely at the major economies of the world and predict how each will fare over the next several years. The book was compiled by economic commentator Lyric Hale alongside her husband, the renowned global economist David Hale. Here Lyric explains the importance of contrasting – and often provocative – opinions in helping us to understand and shape our own solutions to the economic problems of the world.
Article by Lyric Hughes Hale
I have been learning that a book event is not a one-way communication from author to reader. Our book, What’s Next? is a compendium of unconventional economic views by 22 different writers. Some are quite provocative, and we always seem to run out of time for questions from our audiences. One of our contributors for example, Albert Bressand, claims that alternative energy is basically a waste of time and money and more efforts should be expended to expand carbon resources. Speaking about the book with my husband and co-editor David Hale before an elite group in San Francisco (an alternative energy hot spot) I thought that this chapter might ignite the most debate.
I was wrong. The best question, more of a challenge really, came from a venture capitalist, a successful practitioner in the global economy. He wanted to know why he should spend time reading our book, and how we could prove that our authors’ views were “correct” and more predictive than others. I gave a not-bad answer, but reflecting on it later, I thought of what I should have said and what he was really asking. His question goes to the heart of the idea of forecasting.
Many have reasonably asked why economists didn’t predict the global crisis. The hard truth is there are no soothsayers. Even if we can dissect the past, no one can predict the future, especially in our fantastically complex globalized world. There are simply too many variables to solve the equation. In addition to this underlying complexity, there is the daunting conclusion of the new field of neuroeconomics. As is discussed by contributor Thierry Malleret, the human mind is booby trapped when it comes to predicting the future. We are all irrational actors.
The answer I gave in San Francisco a few weeks ago was that my economist husband is a very good forecaster, in spite of the fact that he does not use quantitative economic models. He uses statistics, but is not tied to them, and instead he relies on a global network of independent thinkers, many of whom contributed to the book. Robert Madsen, who wrote a chapter on Japan and presented with us in San Francisco, said in reply that what he effectively does is sit down with policymakers, looks them in the eye, and determines whether or not they are lying to him and that’s how he knows what is going to happen. His answer was much better than mine.
No, we as human beings cannot know that which depends on the actions of others, because we cannot even predict what we ourselves will do. Politics trumps economics every time. But if we have a framework of knowledge and information that is reasonably accurate and complete, then we can make up our own minds about what to do about the future, based upon our particular circumstances. Then when we listen to the media, or to our political leaders, we can sort the relevant from the dross. Our book is an attempt to circle the globe, and give independent points of reference to allow our readers to triangulate their own understanding of key policy issues. We are each responsible for our own future.
Let me give an example of how to sort out a media report about some “inevitable” future event. Last week I read an article in the Financial Times, which declared that the dollar was losing its reserve currency status to gold, as well as other currencies, quoting both UBS and Robert Zoellick, the head of the World Bank. There was some opining that China’s currency will be taking over the role of the US dollar. These are authorities, they must be right, correct? Relate this to a chapter in our book on the very same subject by the eminent John Greenwood, father of the Hong Kong peg, who has an entirely different view.
I sent the FT article to Mr Greenwood for comment this weekend, just to see if he had changed his mind after reading the article. Here is his reply:
“My comment on these ideas would be as follows:
I entirely agree that the world will continue to use multiple reserve currencies including the dollar, the euro, the yen, and the pound (and not forgetting the Swiss franc), but there is no realistic prospect of the renminbi becoming an international reserve currency within the next five years at least. Despite the current experiments with an offshore renminbi market in Hong Kong, there are at least three major hurdles to the RMB achieving international reserve status. First, the RMB is not convertible i.e. China still maintains capital controls on inflows and outflows, and given the way China manages its economy it is highly unlikely that these controls will be lifted. Second, related to this, non-residents are not permitted to maintain RMB accounts or buy and sell bonds in China. Third, China’s domestic financial markets need to be fundamentally reformed so that interest rates become the guiding driver of capital flows across a whole range of financial markets, not administrative and quantitative controls as at present. Until these changes are implemented the renminbi will be unable to perform the role of an international reserve currency.”
Sober, informed and thorough—it makes sense to me. Yes, central banks will use multiple currencies, but no, the RMB is not going to become a reserve currency, let alone the reserve currency, anytime soon. Mr Greenwood continues:
“Regarding gold, it is important to understand that the yellow metal has played no meaningful role in determining the quantity of money and credit in modern economies since the First World War. Consequently, while it may play a significant role as a precious metal in portfolio diversification strategies for asset managers — and particularly as a hedge against inflation at the right time in the cycle — it no longer plays a role in central bank management of money and credit conditions. Gold is therefore an interesting asset for private financial markets, but it will never again be widely used by central banks for intervention purposes (as it was before the First World War), or for determining the quantity of money and credit in any national monetary system, let alone the international monetary system.”
Not good news for gold bugs, but again, a background against which one can understand the ups and downs and the actual future potential of gold. More relevant than a chart, or a reflexive reaction to recent price increases.
What’s Next? is about understanding that there is not one future, and not one authority, but many. It is about asking the right questions.
What’s Next? Unconventional Wisdom on the Future of the World Economy by David Hale and Lyric Hale is available now from Yale University Press.