Tuesday, March 23, 2010
A brief treatise on treaties...
This history of treaties is not exactly a list of iron-clad agreements that survive political, social and economic upheaval, rather (and to translate into financial terms), they are strange options without a central clearing house to process them. This lack of any central authority to exogenously preside over treaty disputes guarantees that most treaties are mere affirmations of the status quo; ornaments that are manufactured in good times are fragile things at best.
There were attempts to provide some central clearing to treaties...entities such as the UN and NATO come to mind immediately, but in this era of global ECONOMIC cooperation where wealth is derived not from increased territory but by ideas, technology, and productivity, treaties based on military cooperation alone seem rather prehistoric.
Enter the IMF, the World Bank, the WTO, and other multi-lateral institutions that have quickly filled this institutional gap. Unfortunately, the IMF/WB/WTO equivalent of NATO's Blue-Helmeted soldiers will not be able to mend the kind of economic stress the EU currently suffers.
They will get it wrong because, paradoxically, they still analyze sovereign economic problems through the lens of the old territorial/Nato/Cold War paradigm: current account deficits are a priori bad and capital account deficits are a priori good. Trade deficits are bad. Debt/GDP ratios within sovereign currency issuer countries should never go above 60%. Currencies should never be pegged. Massive foreign exchange surpluses are destabilizing to the entire system, etc., etc.
As I have said in a previous post, it is entirely natural for a country that provides security and business services to the rest of the world to enjoy a current account deficit and capital account surplus for many, perhaps hundreds, of years. This was the natural role of the United States in the post-war era, and nothing in this economic downturn will detract from this central, crucial role.
Yes, there are many shoes to drop in the U.S. markets, but by and large, they are known unknowns (in the sense the quantities are unknown) Now, compare and contrast this set of circumstances with that of our potential competitors. It is no comparison.