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Tuesday, March 15, 2011

How the West Was Lost

Dambisa Moyo is a brilliant young woman. A P.H.D. in Economics from Oxford and having a master’s degree from the JFK School of Government at Harvard are only the beginning of her impressive credentials. A few years ago, the young Zambian lady shocked the world with a book entitled DEAD AID, which boldly suggested that foreign aid is not working and that there is a better way to help Africa.

Now her next blockbuster is racing up the business best-seller lists. It is entitled HOW THE WEST WAS LOST (Farrar, Strauss and Giroux, 2011) and urges the U.S. and Europe to take corrective action quickly or face financial disaster.

In a very tightly written 195 pages, she makes some very well reasoned arguments. She boils our Gordian knot of difficulties down to three key areas:
1) The capital crisis—too much money diverted into homes rather than building up our infrastructure
2) The huge amount of debt that has created a financial house of cards
3) The labor crisis both in terms of quality and quantity

Her language has a brutal directness that you do not hear anywhere else. Consider this passage on pensions: “Forget Bernie Madoff, forget Alan Stanford, the biggest Ponzi scheme has got to be the looming car crash that is Western pension funds. And like any well-run Ponzi game, its results will be devastating. It will all end in tears.” She goes on say that her generation will face “double taxation” of having to foot the bill for current retirees and somehow save for their own.

Her coverage of the housing crisis and how the West got there is similar to others that I have seen but she raises issues that others do not. In Canada or the United Kingdom if you walk away from your home, you are still liable for the remaining mortgage. In many U.S. states, she points out, a walk-away is the bank’s problems and ultimately that of society.

The book concludes with a withering finale of tough love. She has a section entitled “all is not lost.” Her four possible scenarios are all scary but certainly possible and likely if we continue on our current path. In brief, they are:

1) The Status Quo—we continue to spend, neglect education, and remain the pre-eminent military power. If this continues the US (along with much of the West) will be second tier economies as the debt overwhelms over.
2) China Falters—somehow the Chinese cannot keep growth going and they do not overtake us. She says it is possible but not likely.
3) America Fights Back—we go on a fiscal diet, get real in all areas, and return to the bright days. She asks if we have the will to do this plus will we or can we give up our role as the world’s policeman? Also, other countries will have to virtually always play fair on trade and other issues if we are to solve our problems. Is that realistic?
4) America’s Nuclear Options?—These are tough choices. She suggests that we become less open and more protectionist as we get our house in order. Also, she tells us that the US has benefited the least from being open to global development. Then comes the bombshell. To get out of the mess, America may have to default on its debt. This would hurt the Chinese but she thinks that the world might forgive us faster than we think. Or, we can do a de-facto default by inflating our way out of the mess (this seems to be happening now to a certain degree). If we do not do one of these things she suggests that “many fear America will remain in a stranglehold of debt and dependence from which it will be very difficult to credibly escape.”


Someone wrote to me and suggested that a young Zambian is not the person to dissect our problems. My answer was one a wise man once told me—“Understanding requires distance. We cannot read a book by rubbing it against our eyes.”

Ms. Moyo has given us a shrill wake-up call. Will we respond to it?

Should you be unwilling or unable to read the book, check out Ms. Moyo on YouTube. There are several great interviews with her there.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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