Monday, May 01, 2006

The first step is are all the others

Have you ever woken up one morning and decided you needed to go on a diet, stop drinking, stop smoking, spend less and save more, or spend more time with your children? I'm not referring to one of those momentary pangs of conscience that is quickly set aside but a real decision that eventually results in a change in lifestyle.

I have endured a few of these life changes and in my experience while the decision itself is important, it is only the beginning of an initially painful process as old mental associations are broken and new ones are formed. To paraphrase the catcher-sage Yogi Berra, the mission isn't accomplished until the mission is accomplished.

These thoughts were inspired by Stephen Roach's most recent optimistic research notes. While I agree with Mr. Roach that world leaders seem more vocal in noting not only that a problem exists but also that they need to do something about it, whether this proves to be another "South Beach" or fad policy that will only be followed until it is painful, i.e. when it begins to work, remains to be seen. In my experience, I've usually had to "make the resolution" quite a few times before it sticks.

Changing one's lifestyle, and the economic adjustments necessary to return to some degree of balance in international trade will require substantial lifestyle changes for many, tends to work best when the end goal is kept firmly in mind and the travails of getting there are admitted.

Resolving to stop drinking is easy while nursing a hangover on New Years Day. Not going to the bar after work the next Thursday when the hangover is gone is hard.

Resolving to spend less and save more is easy when you've just opened your Christmas season credit card bill. Not buying a new car when all your neighbors have recently bought new models is hard.

You get the picture.

Changing one's lifestyle means not only doing or not doing the chosen or prohibited activity that day, but every day forward, even when it is uncomfortable. To the extent the "fix" to what ails international finance includes a substantial increase in US savings, time periods of weeks, months or quarters, even in the event of a price discontinuity (a euphemism for a $ crash, for instance) are too short. It will require years. As they used to say in Econ 101 classes, change occurs on the margin.

During a recent phone conversation with a few friends in finance I likened the current period to the early 70s (or late 30s) when the realization that something needed to change in international finance was clear but just how to fix it, and how to apportion the pain was some years away. Nixon closed the Gold window in 1971, in recognition of the problem. The IMF didn't complete amending the relevant Articles of Agreement until 1978. Paul Volcker didn't adopt money supply targets as policy until 1979 and it wasn't until 1982 that Fed Funds rates came back down under 10%.

To avoid misunderstanding, I think it is better to admit there is a problem than to ignore it. I agree with Lao-tzu, a journey of a thousand miles begins with the first step. However, that first step is but one of many.

Given that most recent economic problems have been quickly "solved" by easing credit conditions, many seem to believe that this fix will be just as easy.

I don't think it will. It seems to me as if we are still in the fad economic policy phase. Barring a crisis, I expect it will be years before a true commitment to reform emerges.