Last Tuesday I attended the Economist’s Bellwether Europe conference in London. Several speakers raised ideas that made me want to follow up Philippe’s latest piece “Has China Peaked?”.
At the conference, many speakers and panelist (from regulators like the FSA’s Martin Wheatley, to economists like Roubini’s Arnab Das, to portfolio managers like Blackrock’s Richard Kushel) linked the future stability of the Eurozone and the prosperity of America to the continued growth of China. Niall Ferguson was even more explicit, saying at one point that “The governor of the PBOC has far more control over the future of the US and European economies than either Ben Bernanke or Jean-Claude Trichet”. I tend to agree that US and EU economic stability is tied to Chinese growth, but am worried by that fact, and skeptical about Chinese “control” of their economy either through their Central Bank or through “administrative measures”.
The People's Bank
The image evoked by statements such as Ferguson’s (even though I am sure he is too smart to have intended it) is of a carefully calculating Zhou Xiachuan sitting behind a desk in Beijing pressing buttons and pulling levers – a man in commanding a linear, essentially Newtonian system. The same tends to happen when people talk about the powers and actions of the Fed and the ECB. Even so-called “centrally planned” economies don’t work like that. Economies are not not machines, and they are not linear in the sense that once the behavior of its component pieces are understood individually, one simply needs to add them up to predict – and control via a Central Bank or other bureaucracy – the behavior of the whole.
A point which is not original but which bears repeating because it is so often forgotten is that Economics is not Physics, it’s a “Social Science” (a false metaphor if there ever was one). As one scholar says “God gave Physics the easy problems” and the behavior of economies is non-linear rather than additive.
Silberzahn & Jones 