Hodgepodge

I have a collection of somewhat related thoughts on the events of the last few weeks…

First to satisfy my vindictive side, I’m happy to see some of these developing countries put in their places. For the last few years they had access to cheap and easy money and they were able to talk a big game about independence from the IMF and the World Bank, and about their new vision for how the world should work, and how authority should be distributed. But now, when things actually start to go wrong, what do they do? They are crawling back to the very institutions from which they had declared their independence. They are crawling back to the Western financial system which they sought to overturn. Maybe before you criticize you should have a better plan, and even if you have what you think is a better plan, you better make sure it is in working order. China I think will be the real winner out of all of this, if that is their choice.

On a more positive note, I do hope that the current crisis will be an opportunity for reform of the global order. I doubt it will be a reform which will satisfy many other than China. China has the money, China has the influence, all we need to know is if China has the will to intervene and accept new powers and responsibilities. No one outside the G-7 other than China wields real power in the current crisis, so anyone else who hopes to benefit from reform will have to count on the good graces of China, or on some very powerful negotiation from the G-7 countries.

I’m also happy that this crisis is hammering countries that deserve it. Iran, Venezuela, and to a lesser extent Russia are all feeling the pain of collapsing oil prices. Hopefully this will shatter the illusion of their people that prosperity is resting on good government. Combined with a new president in the US, hopefully this will be a recipe for more peaceful relations between the west and these three other nations. I do think that the current oil price only reflects the fact that the global financial system is imploding. The real deciding factor for reordering relations with energy producing countries may be how long the fallout from the crisis keeps economic growth down.

This leads me to a further question. If in fact the spike in oil prices this summer was due to anticipated future problems of supply meeting a rapidly growing demand instead of speculation it seems like we are only setting ourselves up for even bigger problems in the future. If the downturn lasts for one or two years, and there is no new investment in new oil production facilities because the price is too low to justify it, production will keep declining. When the economy again picks up, we will be back to the past level of demand with less supply than before. Hopefully we will be in a position to absorb those price shocks.