The pretence of knowledge3 min read . Updated: 30 Jul 2012, 09:48 PM IST
The pretence of knowledge
The pretence of knowledge
We do not expect central bankers to sound like investment bankers or corporations on roadshows, trying to sell their stock or debt offering. Glenn Stevens, the governor of the Reserve Bank of Australia, came close to doing that last week. The subtle and not-so-subtle notes of triumph in his speech were troubling. If there is one thing that the crisis of 2008 proved, it is that those who think of themselves as masters of the universe eventually find out that they are not. The “Committee to save the world" stands discredited. Most do not take their utterances seriously these days. Then there is Jamie Dimon of JP Morgan. He dominated the global stage, hectoring regulators and working with other bankers to thwart regulatory intentions, etc. The “whale" swallowed his ego or so we hope.
Australia might have escaped the crisis of 2008 with hardly any scar to show for it. Stevens’ speech is peppered with charts that show how well the Australian economy, the banking sector, or the housing market have done, compared with other developed countries. That does not mean, however, that there won’t be black swans around for Australia. He made obligatory references to the risk that the Aussie luck might run out even as he sounded (too) confident that they would be able to take it in their stride. I hope he is right.
Besides, if we examine the history of the 20th century, we will realize how extraordinarily lucky we have been and how that should not be expected to endure. According to Gillian Tett of the Financial Times, (in her recent article on disaster economics), there were 58 disasters in the 20th century. Professor Robert Barro defined disasters as those events that triggered a decline in per capita gross domestic product of 10% or more. Only two of them occurred in the second half of the 20th century. No wonder risk premiums became too low as we approached the end of the 20th century.
Separately, The Economist had a blog post which showed, based on Professor Angus Maddison’s data, that around 55% of the output the world economy had produced (in 1990 prices) since the year of Jesus Christ was produced in the 20th century. Even more staggering is the fact that just the first decade of the 21st century generated global output that exceeded the combined output of the first 19 centuries (1 AD–1900 AD) since Jesus Christ.
That is indeed an achievement and that is also a warning. Our ancestors could not have dreamt or imagined that technology would advance to such an extent that we would be able to experience so much of history in just one century. This has two implications: One is behavioural and the other is with respect to availability of resources to replicate that achievement in the 21st century.
Half a century of absence of economic disasters and staggering output generation has made us assign low probability to risks and demand very little risk premiums. The output achievement has extracted a heavy toll on resources and the environment.
Most Western countries pursue debt-laden growth even at the cost of rising and gaping inequality lately, That has set off an unholy race for commodities among countries, led to debasement of currencies, inflated asset price bubbles in different corners of the world and has set off climate variability of alarming proportions. The exceptionally long and widespread drought in the US has broken many temperature records. It rained while the mercury soared to 109 degrees Fahrenheit in Mecca, Saudi Arabia and India has had a very severe shortfall of rains in many crop-producing regions of the country.
At one level, it is too much to expect central bankers to become preachers. But they are still seen as non-partisan intellectuals and respected. It is time they begin telling people that we have an “exaggerated view of our knowledge of how the world works". I guess they have to begin by convincing themselves of it first.
V. Anantha Nageswaran is an independent financial consultant based in Singapore. Comments are welcome at firstname.lastname@example.org
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