The Next Global Stage

Article excerpt

A borderless world means an end to old economics.

The global economy is a reality. Yet so many of those who should know better appear to be asleep, as if cocooned in a dream.

The old economic model tried to clarify the relationships between demand and supply, and supply and employment. It attempted to explain how supply/production and inventory increase as interest rates or money supply change. Because economists are convinced that these relationships are well-established, they can recommend that politicians and bureaucrats use one or more to influence the other, to generate employment, to increase gross national production or to stimulate housing starts.

They have invented still another tool to borrow money from the future when none of these levers seems to be responding sharply: minting promissory notes or bonds. Most governments have used the money in public works to artificially inflate their economics. This, of course, is certainly not what such towering figures as John Maynard Keyes or Friedrich Hayek originally meant. But governments act as though they are still within the bounds of economists' theories.

The world has changed dramatically since these original thinkers were active in the early 1900s. An economy is no longer enclosed within a country's borders, with the world an assembly of autonomous and independent nationstates. Instead, the world consists of interdependent units of nations and regions. Yet economists today are developing variations on the old masters' themes by modifying antiquated equations and building mathematical models that explain only a part of the global economy.

No one is thinking about the global economy and its cause and effect on a national economy. For example, a higher interest rate is good means to attract money from the rest of the world, as Alan Greenspan (under Bill Clinton's presidency) demonstrated. The U.S. economy from 1992 to 2000 was euphoric because the rest of the world pumped money into the country to take advantage of high interest rates.

In fact, we can argue that high interest rates are good, period. A higher interest rate means consumers can increase their financial asset base faster and their borrowing capacity increases. This is why consumption-and, hence, the economy-often moves against the preachings of the old masters who lived in societies made up of workers, not wealthy consumers with 401(k) plans. If money comes from the rest of the world, businesses can raise money in the capital markets and do not have to borrow money from banks. So again, the interest rate is no longer a decisive factor in a busindss's decision to make a capital investment.

In the borderless world, an excessive money supply held by the central bank can slip ont of the country if there are no attractive opportunities within the nation. In this way, a government is constantly arbitraged, or disciplined, by its own citizens and also by investors in the rest of the world.

There is no model to describe the global economy as such because we are dealing with so many parameters, variables and "units of economy." Furthermore, advances in information technology have made inventories significantly less necessary. Companies such as Toyota and Dell have demonstrated that they can make their products "just-in-time" and in response to orders. So, the grand theory that a government can lower interest rates to persuade businesses to stockpile inventories is no longer as effective.

Another complication is that the cybereconomy is growing fast and the cross-border exchange of goods, services and even financial instruments is taking place in areas unbeknownst to the economists, let alone to the government.

Finally, there is an increase-or even explosion-of funny money. Bonds and Treasury bills are funny money from the perspective of traditional economists because they act as money with liabilities for taxpayers to pay later. The trouble is that the buyers of these public liabilities are no longer the residents of an issuing country-in fact, two-thirds of the reserves of the central banks of developed countries are in dollars. …