Saturday, August 1, 2009

The World is Curved: Hidden Dangers to the Global Economy

The World is Curved: Hidden Dangers to the Global Economy by David M. Smick.

According to Steve Weinberg's September 22, 2008 review of the book in USA Today:
When Thomas Friedman published The World Is Flat: A Brief History of the Twenty-First Century, the title entered the English language as an explanation of globalization's impact on economics all the way to households — not only in the United States, but also in other nations.

In Friedman's book, the discussion is vast, the linkages complex, the outcomes unpredictable, making it a challenge for the casual reader.

David Smick has written a response to Friedman, The World Is Curved: Hidden Dangers to the Global Economy. Smick lauds Friedman's book but thinks it has become dated through no fault of the author. Smick directs Johnson Smick International, described as a "strategic market advisory firm that works with hedge funds and major financial institutions."

Many readers might not understand Smick's job description, much less what he actually does day to day to affect the health of currency markets.

Hoping to remove some confusion, Smick decided to write a book with an obvious allusion to Friedman's. Sure, the world is indeed flat in some ways. For the financial markets, however, "The world is curved. We can't see over the horizon. … We are always being surprised, and that is why the world has become such a dangerous place."

Offering valuable historical perspective, Smick explains that international financial markets have always been plagued by uncertainty. In recent years, the unknown factors have multiplied.

"There are new players with new perspectives," Smick says. "All of a sudden, a huge pool of funds is competing around the world for investment opportunities. Bankers, business people and governments in industrialized economies are now competing with entrepreneurs, start-ups and old state-controlled companies in emerging economies to attract those funds.

"With new kinds of securitized debt, mezzanine investing and outrageously complicated financing instruments, it is almost impossible to figure out what is going on at any given time. Investors need new kinds of information to make good decisions. But exactly what information is that? And where do they get it?"

At that point, still in the book's prologue, a lay reader might ask: Securitized debt? Mezzanine investing? Huh? Help!

Smick does his best to define terms, using non-specialized language. Chapters with titles such as "Tony Soprano Rides the Chinese Dragon" and "Japanese Housewives Take the Commanding Heights" certainly help.

Many readers will be familiar with the home loan debacle in the United States because so much has been written about the subprime market — a relatively small and previously obscure market of financial instruments tied to mortgages made to borrowers with unstable or no credit histories.

But what does the subprime crisis have to do with the financial world being curved? An anecdote from Smick illustrates the answer: A small village in the north of Norway saw its "entire financial future destroyed because its financial managers invested heavily in a Citigroup product called a collateralized debt obligation.

When the housing markets an ocean away in Florida and California collapsed, the debt obligations soured, and the Norwegian village had to shut down kindergarten and health care services for the elderly."

That example begins on Page 4. Little in the rest of the book provides cause for optimism. Perhaps, just perhaps, a combination of government policymakers, private-sector lenders and entrepreneurs across the curved globe will come together to offer a modicum of stability.

That, however, would mean understanding the causes and effects of global financial crises. If Smick is correct, such understanding might transcend the limits of knowledge.

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