The World is Curved
By David M. Smick
Portfolio, $26.95 (Marshall Cavendish, £18.99)
W hen he produced his history of the Great War, it was joked that Winston Churchill had written his autobiography and called it The World Crisis. David Smick, editor and founder of The International Economy magazine, has written his thoughts on global finance around extracts of his memoirs, and called it The World is Curved.
Smick focuses on international capital flows. Forget decoupling; the world is intimately connected. The title is a reference to Thomas Friedman’s 2005 bestseller The World is Flat. Friedman’s book focused on the “real” economy, where globalisation has reduced distances and countries have become less important; all is footloose and border-free. Smick sees his book as its counterpart, dealing with the globalisation of finance. He thinks this has been a good thing; world growth has never been stronger. But it also means that failures in one place can trigger avalanches on the other side of the globe. This is what the “curve” of the title refers to; whereas Friedman’s world is a level playing field, Smick’s has a horizon beyond which we cannot see.
Cash is now flowing in ever greater volume from countries with spare savings to countries with spare investment opportunities. With savings so low in the US and so high in the petro-states and east Asia, this process has transferred significant financial power to the east. Smick worries that, thanks to its vast foreign exchange reserves of nearly $2,000bn (€1,600bn, £1,300bn) – and its stockpiles of commodities – China, in particular, poses a risk to our financial stability.
Smick also fears that this new world means policymakers at central banks and in finance ministries have lost some of their tools and their sources of information. With poorly informed policymakers beholden to unpredictable and unreliable regimes, he worries that popular pressure will mount to end financial globalisation, or just tax and regulate it until it flees offshore. In the book’s view, the US must look to remain an attractive location for investment, but also correct these imbalances.
Although bolstered by academic research, The World is Curved has emerged from Smick’s decades in the company of financiers. Rather than proposing a broad conceptual framework, the book is really a collection of his reflections on globalised finance bound together with examples from his career, but which all point in the direction of his thesis, the thrust of which is surely correct. Happily, although written with the crisis in mind, the book is broadly focused enough to avoid being superseded.
However Smick is prone to hyperbole, especially on the weakness of policymakers. In his account, central bankers, lacking their old monetary weapons and statistical warning signals, are little more than actors, while politicians and bureaucrats haplessly stumble from problem to problem.
He also tends to see the worst in every situation. When liberalisation in Japan actually means bureaucrats have less power to get in the way, he frets that there is no one left at the tiller. His despair enlivens the book for the casual reader, but it also highlights the book’s key problem: it is not clear for whom it is written.
As a book for the general reader, it has some clear strengths. Smick is a resolute free-trader and an instinctive government sceptic, but appreciates the need to improve financial regulation. He also insists on focusing on structures and imbalances, rather than personalities.
Smick also avoids Friedman’s tendency towards pretentious rumination, writing in a clear, conversational style. Some chapters are not really important for his argument, especially his account of Black Wednesday, when in 1992 the pound dropped out of the European exchange rate mechanism. But they are useful summaries of key recent financial events for people new to the topic, and Smick’s own experiences add to the telling.
However, there are some notable omissions as a guide for casual readers. A longer precis of the arguments about whether central banks should target asset prices would have helped, and would also have provided him with more time for his defence of Alan Greenspan’s tenure as chairman of the US Federal Reserve. Given his starring role in popular arguments about the credit crisis, general readers may be disappointed that his part is not explored more fully.
For the more informed reader, the book is weak. Smick is a man worth hearing; some of his speculation, notably about China’s likely future investment strategy, has already been vindicated. But his analysis of the world to date does not quite add enough to what we already know, and his policy recommendations, while broadly right, are too vague.
The writer is an FT editorial writer