Jun 09 2009

Greif’s Grief over the US Economy

by at 11:58 am under Uncategorized

Greif continually comes back to a simple phrase for economic development–”credible commitment.” These two words sum up what is necessary for any government to lead development. First, it must be a credible arrangement that all citizens and the world will recognize. Second, it must be a long-term and mutually beneficial relationship, much like a marriage. Today, in due part to the collapse of the financial sector of the US economy, we are continually threatened by the breakup of our “credible commitments.” US Treasury securities have been considered modern gold for decades, but will this last in perpetuity? History tells us that is unlikely.

Moody’s and Standard & Poor’s have as much global economic influence as the World Bank and the IMF combined. In our “consumer stock market” of late we tend to ignore bonds and focus the more exciting stocks because they allow us to bet on which companies will prosper and which will falter. However, Moody’s is continuously examining the bond ratings for cooperations, municipalities, state governments, and national governments. California is currently on a path to bankruptcy which will devastate their ability to borrow money at decent interest rates. Japan saw their government bonds downgraded and subsequently experienced the “lost decade” of economic stagnation. Is it possible the United States could be in for a similar debacle?

I believe this scenario is fascinating. It rather resembles the prisoner’s dilemma. Should the bond rating agencies destroy the very economy that they reside in? Are they breaking their own “credible commitments” by not fairly evaluating US treasury bonds? Could a worldwide consensus effectively overrule them if they keep denying anything is wrong?

To alleviate this threat, we must have a concrete and absolutely “credible” plan to attack deficits in the near future. I completely support the stimulus plan and, for the most part, the bailouts. However, unless we can agree to rock solid commitments for deficit reductions and debt repayment for the next decade the world market has little reason to believe in our credible commitment.

Greif’s arguments take economic stories from the past to explain why the work of development is so difficult in the present. We may argue about the role of “collectivist” versus “individualist” (the “American Way”) in society’s economic output, but both can cross the finish line to development in the correct economic environment. A society without credible commitments cannot even leave the gate. That is why I worry about our debt, even as I support President Obama’s ambitious stimulus package and bailouts. When I feel like our approach 10 trillion dollars cannot be compared, I take a look at this map. At least we’re not Italy, or Ethiopia…

Debt vs. GDP

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