Dear Dr. Galbraith: Please take these comments as those of an educated layman, who worked in the international derivitives markets for many years. I have no "ism" to sell, although my values lean towards ecological-economics. Cheers, Steven B. Kurtz (excerpts below from your text,which was posted to Futurework List intact) full text available at: http://epn.org/galb/jg980707.html ------------------------------------------------------------------------ "The Butterfly Effect" Copyright © 1998 by James K. Galbraith. Small actions can have large consequences. The mathematics of chaos teaches that a butterfly, flapping its wings in Brazil, can set off a chain of events leading to a hurricane at Cape Fear. SK: "can ..." is different than "will" or "must necessarily". On March 24, 1997, the butterfly was named Alan Greenspan. That day, he flapped his wings just once, raising the interest rate by one-quarter of one percent point. SK: Greenspan cannot act alone; he does exert above average influence. Global currency instability started just about then. The Thai crisis hit three months later. SK: Currency rates respond within second, hours, days. Three months is an eternity for a supposed response. After that, it wasn't just the Asian Rim currencies .. Yen... .. Taiwan and Australian dollars. And ...an index representing the Euro. Indeed there was a worldwide devaluation, leaving only the British pound and the U.S. dollar flying high. Seen this way, the so-called "Asian crisis" was not restricted to Asia. SK: It is not normal to refer to slightly weaker rates (ex. D.Mark & F.Franc) as a "crisis". In fact, 10-20% annual trading ranges are the norm for many currency relationships. Frequently countries *desire* a lowering of the relative (only kind of) value of their currency for competitive reasons. What caused the differences? Roughly, currencies collapsed in proportion to their dependence on American capital. Those hit hardest were those that have relied most on our investments, that had the least resident wealth, that were most caught up in construction booms financed by short-term inflows. SK: America is but one global player. Isn't it possible that the devaluations were in accordance with % of relative overvalue? Artificially high levels can be set by pegs, to enhance the conversion(to other currency based investments) value of funds looted by an elite from an economy. The collusion of foreign governments and TNCs is also possible. These pegs give a sense of risk avoidance to foreign investors, who seek high returns with limited risk. When there is an unsustainable, artificial value ascribed to anything, it eventually adjusts. What is unfair in my view, is for taxpayers to bail out investors. When U.S. interest rates started to rise, dollar-sensitive investors came home. The dollar went up, and its closest dependencies, like Suharto's rupiah, were the greatest victims. In short, this was a crisis of the American financial empire. SK: A 1/4% change in a 5+ % rate is historically 'static'. The slippage of liquidating some foreign investments and reinvesting in US or elsewhere (incl. commissions and bid/offer spreads) offsets that fractional *annual* rate increase. It had little effect on the US equity mkt., which traditionally loses when treasury bill rates rise. But since this crisis was made in Washington, SK: That is a conclusion that has not been substantiated. ... it cannot be ended in Seoul or Djakarta. Reforms of Asian domestic policies may be necessary. But they cannot cure a problem that was caused, most fundamentally, by our own policies that raised real and relative interest rates. SK: Even if one accepts your conclusion(I don't), your certainty re future cure is speculative at best. Local actions may be the best source of remedy; bioregional ecosystem health is the ultimate basis of human and economic health in the view of many economists like Daly & Cobb. Equally, the vast capital inflows into the United States in 1997 -- the portfolio investments that fueled the boom in the American stock market -- SK: The US equity mkt has been in a boom for 8 years, with a tripling of averages. were kicked off by Greenspan's rate hike (and the expectation that more would follow). SK: Expected sequential rate hikes drive investments out of equities into short term cash equivalents, and sometimes into long term bonds since recession and deflation could be feared as a result. The consequences for the American productive economy are now surfacing in a vast increase in the U.S. trade deficit, as exports tumble and cheapened imports flood our markets, and as falling exports lead to slower economic growth and rising unemployment. These consequences will multiply if we fail to act quickly -- and correctly. SK: Agreed. The U.S. has a speculative bubble not unlike Japan 10 years ago. And so the debate at the Federal Reserve's Open Market Committee is between those who say "raise rates" and those who say, "not yet." Greenspan and the "not yet" faction have held the line so far. But such a stalemate must always end, eventually, in a rate increase - never, until much too late, in a rate cut. Today, on the contrary, interest rates must come down. Indeed, interest rates should be cut sharply -- let's say two full percentage points -- to meet the global crisis. SK: The magic of credit! More tokens circulating combined with a net growth in human numbers of *250,000 DAILY* would only speed our consumption of future generations real wealth, the natural capital and regenerative capacities of earth. A simple metaphor is a dog chasing it's tail. If interest rates were zero, no increase on real wealth would ensue. Tokens & credits cannot be eaten, drunk, or used as fuel. Further steps, of which the mildest would be a Tobin Tax on capital flows and speculative transactions, might help. SK: It would redistribute some tokens. The proposed multilateral agreement on investments (MAI) should be abandoned, and the U.S. should instead recognize the fundamental right of every state to control the immigration and emigration of capital. SK: Agreed. But the regimes in power can still loot their own countries! That loan to Japan was a good step; more may be needed later. SK: Japan is the second wealthiest nation. Why should American taxpayers pass credits (tax revenues in disguise) to them via IMF or another conduit? Special measures for Russia are urgently needed, as that giant country, a security issue for the entire globe, continues its slide toward disaster. SK: Not as "giant" as before the USSR breakup! The whole planet is in a "slide towards disaster". Take a look at warnings from thousands of scientists including the majority of living Nobel winners: http://dieoff.org/page1.htm SCIENTIFIC CONSENSUS RS AND NAS STATEMENT is the official 1992 statement of the Royal Society and the National Academy of Sciences. WORLD SCIENTISTS' WARNING TO HUMANITY is from the Union of Concerned Scientists in 1992. WORLD SCIENTISTS' CALL FOR ACTION AT THE KYOTO CLIMATE SUMMIT Science Summit" on World Population: A Joint Statement by 58 of the World's Scientific Academies. By stemming capital inflows, such actions might send stock prices downward at first; a boom based on capital inflows will not continue when they stop. But stock prices will recover if U.S. economic growth is sustained by an early recovery of the world economy, of other currencies and of our export markets. The alternative: more global instability and more of our own debt-driven bubble, followed by a prolonged collapse, could be -- chaos. SK: Global Finance is a "magical mystery tour". No one can consistently predict the future prices of anything. Human e-value-ation is both subjective and relative; and that, along with supply, is the then current determinant of economic decisions. What is certain is the daily shrinkage of the 'pie', and the average size slice/human. What is highly probable, according to scientific consensus, is the unsustainability of economic & population growth. Credit expansion (which like all fiat money is created out of nothing) only speeds the rate of the dog chasing it's tail. Steven B. Kurtz Fitzwilliam N.H.
