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Finance for thought

Reviews of four books that challenge and elucidate the most pertinent economic topics of our times

by Paul Cochrane

In the years since the credit crisis erupted in 2007 there has been a steady flurry of economic and financial books published claiming to tackle the root causes of what some have dubbed ‘The New Great Depression’, offer alternatives to the current financial system or provide warnings of the inherent dangers still facing the world economy. With the beginning of a new year that has dark storm clouds still crackling with lightning and thunder over the global economy, Executive has selected four of the most thought-provoking economic books printed in the past year to prime the reader for the challenges ahead.

Debunking Economics

Revised and Expanded Edition: The Naked Emperor Dethroned?

A book by Steve Keen

‘Debunking Economics’ has been a critical and commercial success since it was published in 2001, largely due to Australian economist Steve Keen’s withering critique of the neo-classical economic theories that have dominated policy since the 1970s. His claims are also given more weight by the fact that he predicted the 2008 financial crisis well in advance.

In a newly revised edition, Keen hammers the point home that mainstream economists, as well as central bankers, deserve no credit for the boom years prior to the crash but should shoulder the blame for the crisis and its aftermath. Through a pioneering explanatory statistical model, Keen argues that classical economic thought has little to contribute to what is known as Reality Economics, which is more cause-and-effect than assumption based. He argues that the near hegemonic adoption of a narrow-minded approach to economics in academia, which is then carried into professional life, is at the core of the problem, with those supposed to be implementing a cure still theoretically blinkered, evident in counterproductive solutions such as bailing out the banks and quantitative easing.

Keen’s historical and economic analysis of what went wrong are worth delving into, yet it is his alternatives that will interest the reader mulling options to get us out of the current maelstrom. He proposes radical changes, such as reducing or wiping out private debt through a widespread amnesty and, heretical though it may sound, the temporary nationalization of the American financial system.

It is doubtful whether Keen’s voice will be heard amid the hullabaloo, particularly as the United States enters an election year; as John Maynard Keynes pertinently remarked in 1935: “The difficulty lies, not in the new ideas, but in escaping from the old ones.”

The Quest

Energy, Security and the Remaking of the Modern World

A book by Daniel Yergin

Daniel Yergin is renowned for his Pulitzer Prize-winning ‘The Prize’,  which charted the rise of the world’s insatiable thirst for black gold as far as the first Gulf War in 1990. ‘The Quest’ picks up where he left off and ventures into the “Great Game” for energy following the break-up of the Soviet Union, the emergence of national oil companies from emerging markets like India and China and the dirty world of oil politics in the twenty-first century. He tackles the effects of the United States’ invasions of Afghanistan and Iraq on energy security and assesses the twisted reasons for the oil price spike between 2004 and 2008. As in ‘The Prize’, ‘The Quest’ shows why understanding the geopolitics of energy is essential to comprehending the world today, and where we may be going next. He discusses how new technologies and high oil prices are making previously untappable oil reserves accessible, although at significant environmental cost. Such ramped up output in the US, Canada and Brazil — each to some 3 million barrels per day by 2020 — could well change the ‘oil world order,’ particularly the West’s problematic reliance on the Middle East, he argues. And while Yergin is no believer in the ‘peak oil’ theory — arguably a flaw in his analysis — this does not stop him discussing at length the need for alternative energy sources, and how potentially disruptive technologies could be game changers in global politics and security.

Poor Economics

A Radical Rethinking of the Way to Fight Global Poverty

A book by Abhijit Banerjee and Esther Duflo

‘Poor Economics’ focuses not on Wall Street and the problems of the financial markets — the “1 percent” as the Occupy Wall Street protesters have labeled them — but rather the poorest of the world’s poor; not the three billion people that live on less than $2.50 a day but the billion surviving on less than a buck.

The focus is on how the poor respond to aid strategies, based on empirical research in 49 countries carried out over 15 years. What is radical about their work is that Abhijit Banerjee and Esther Duflo draw their findings from actually listening to and understanding the needs and behavior of the poor. Why, for instance, do people buy a TV and go hungry, or prioritize the education of one child over the rest of their offspring?

Moreover, their research is into what has worked in development economics and what has not: micro-finance is not the cure-all it is championed to be and higher rates of literacy and schooling do not necessarily equate to economic development and prosperity. As the inequality gap widens, addressing global poverty is a pressing issue for governments, development agencies and businesses. Banerjee and Duflo tell us where our attention needs to be, and it is no wonder their book won the Financial Times and Goldman Sachs Business Book of the Year Award for “the most compelling insight… into modern business issues.”

Currency Wars

The Making of the Next Global Crisis

A book by James Rickards

We are in the early stages of Currency War III, according to veteran financier James Rickards. The first currency war (CW) was between 1921-1936, and CW II took place from 1967, beginning in the lead up to the end of the gold standard in 1970 and culminating in the 1987 stock market crash.

Rickards argues that the United States has instigated CW III through the Federal Reserve’s quantitative easing policy — printing dollars to boost base money supply to get the economy out of recession. But by doing so, “the Fed has effectively declared currency war on the world” and the result is stagflation — stagnant growth and high inflation — and the world going deeper into financial crisis.

According to estimates, the US dollar comprises 61 percent of identified official foreign currency reserves, while the euro represents 26 percent. What happens to the dollar is of prime importance and the trends are worrying. The dollar’s position has declined from 71 percent in 2000, and stands to fall further as American power is challenged, confidence in the greenback weakens and more countries change their reserve currencies, as Russia and others have threatened to do.

Rickards uses possible scenarios — as played out at a Pentagon-organized financial war game — to highlight what a currency war entails and it is eyebrow-raising reading. The end result could be the dollar joining a crowd of multiple reserve currencies (MRCs), although all major currencies have recently devalued in parallel against gold, and in fact MRCs could exacerbate rather than alleviate the currency war. The other alternative is the International Monetary Fund pushes for greater adoption of its “world money”, Special Drawing Rights. The final possibility is the dollar will be “rejuvenated by gold or descend into chaos with both redemptive and terminal possibilities.”

Rickards suggests a return to the gold standard to retain stability, of money backed by something tangible, not paper or digits on a screen. Yet, however this currency war plays out Rickards warns that it “is the most meaningful struggle in the world today — the one struggle that determines the outcome of all others.”

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Paul Cochrane

Paul Cochrane is the Middle East Correspondent for International News Services. He has lived in Beirut since 2002, and has written for some 70 publications worldwide, covering business, media, politics and culture in the Middle East, East Africa and the Indian subcontinent.

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