Thursday, November 23, 2006

Disquiet on the Economic Front

We know less and less about what's driving the world economy. (And technology is in part responsible for that...)

A not-too-heartening corollary of the fact that the US no longer pulls the reins that drive the world economy is that nobody really seems to be in charge. Central bankers and such other venerable economic boffins are finding to their dismay that their ability to influence economic events is limited by their poor understanding of the forces at work in the global economy.

What's happening in the US is pretty much emblematic - the degree of control that the Fed exercises over the US economy is in decline. Business Week asks in a recent cover story, Can anyone steeer this economy?, and opines that the US govt's policy interventions are no longer able to influence the course of the economy as they did in the past - they are swamped by global forces that are pretty much out of anybody's control.

On a similar note, Fed Vice Chairman Donald L. Kohn said recently that "our understanding of the inflation process is limited".

By the way, technology has no mean role to play in this sequence of events: Fed Chairman Ben Bernanke recently told a conference of central bankers in Frankfurt that financial and technological innovations have altered the traditional relationships between money supply, economic activity and inflation, hobbling the ability of policymakers everywhere to influence economic events.

While this is overall a perplexing state of affairs, it is of far greater than academic significance: if, for example, the best economic experts among us no longer understand the forces at work in the world economy, what does that augur for their ability to manage crises? Will they have the policy wherewithal to respond to gyrations in capital markets or currency rates unleashed by these very forces? Will the drumbeat of varied economic malaises of the past - stagflation, eurosclerosis, irrational exuberance - replay in a macabre display of economic history repeating itself? And what about that most unholy of economic nightmares -the spectre of hyper-inflation?

Certainly, a matter for grave disquiet.