The World Is Curved by David M. Smick

Author:David M. Smick
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2016-12-15T13:38:07+00:00

6

Nothing Stays the Same: The 1992 Sterling Crisis

Google the word change and the list of quotations throughout history is impressive. Benjamin Disraeli stated: “Change is inevitable. Change is constant.” Heraclitus pronounced: “There is nothing permanent except change.” Winston Churchill suggested: “To improve is to change; to be perfect is to change often.” And Alvin Toffler, the pop culture writer, added: “Change is not merely necessary to life—it is life.”

This universal obsession with change raises the question—if change is so essential to the human experience, how come we as a society never see it coming?

If, for example, in early 2007 someone had written a book suggesting that American banks had hidden mortgage risk in a set of dubious, off-balance-sheet vehicles, reviewers would in unison have suggested that a series of typos had occurred. The author obviously meant the Japanese banking sector was hiding risk.

If the same book suggested that only an initial $200 billion of subprime mortgages in a world economy of hundreds of trillions of dollars would nearly topple global financial markets, the assumption would have been that this book belongs in the fiction department.

Had the book presented the image of Citigroup executives, as a result of this financial turmoil, being forced, tin cup in hand, to roam the world begging for sovereign wealth fund assistance, the manuscript would have been labeled as too derivative of a Tom Clancy novel.

For most of us, the status quo, not change, dominates our thinking. The status quo, we think, is not part of life; it is life. We assume what is will always be.

In the thinking of most people, for instance, the global trading system for goods and services, while perennially in trouble, will always survive. America will forever continue as the dominant economic power in the world. China will serve only as a positive influence for global economic prosperity. Central banks, in this new era of improved global productivity, will forever tame inflation and deflation. Global investors and traders will forever remain optimistic. Our institutions and freedoms will last forever, our financial assets forever secure. We will always remain prosperous mostly because the economic institutions and institutional arrangements in which we have placed our trust will, we believe, never change. The purring sound of the global wealth machine will forever remain a constant.

In this chapter, I’ll demonstrate what can happen when policymakers and politicians make that erroneous assumption. As Isaac Asimov (again back to Google) put it, “It is change, continuing change, inevitable change, that is the dominant factor in society.” I actually prefer an unknown named John A. Simone’s offering in the context of today’s economic environment. Simone said: “If you’re in a good situation, don’t worry, it’ll change.”

The story I will tell you in this chapter is about a European monetary crisis that occurred in 1992. It is a tale of ego, intransigence, and blindness. The story serves as a reminder that as much as we grab on firmly to the certainty of the status quo, change—often nasty change—is inevitable.

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