BOOK REVIEW: Dance of the Trillions
Dance of the Trillions leaves many mysteries about global capital flows unexplained
Any book that begins with the words "In the summer of 1920, Havana must have felt like the throbbing heart of civilization" is likely to draw you in. Even if the book’s subtitle is Developing Countries and Global Finance.
And that is the value, and allure, of Dance of the Trillions, David Lubin’s deft 128-page book about the crazy world of international capital.
At a time when SA’s fiscal crisis has left it highly exposed to a full downgrade to "junk" investment-grade status and the global economy is tottering on the edge of another crash, we can all benefit from a work that provides a relatively accessible, but thoroughly credible and authoritative, account of the vagaries of capital markets.
Lubin, as head of emerging-market economies at Citi, is well placed to respond to the question of how humanity ended up with the "system" of global finance we have — especially one that renders developing-country economies so vulnerable to the volatility of international capital flows.
Lubin makes great use of storytelling to illuminate his answer. He begins in Cuba, where, as the price of the Caribbean island’s sugar rose sharply in 1919, "the boom begat a boom in finance".
It provides a neat illustration of the bigger tale Lubin weaves. It’s the story of how the surge in commodity prices was influenced by a shift in the geopolitical environment, while a loosening of monetary conditions in the US encouraged capital towards more risky investments in foreign countries for higher returns. At the same time the innovation in financial markets increased the mobility of international capital.
Despite the passing of time, and numerous opportunities for lessons to be learnt, these remain the essential ingredients of the world in which a country like SA must survive and strive to prosper.
It’s what the economist John Kenneth Galbraith called "a kind of sophisticated stupidity".
The consensus after the Great Depression of the 1920s was that much of the blame for the collapse had to be laid at the door of international capital mobility – essentially, that the money that came in inevitably went out too.
Perhaps most interestingly of all, the book’s arc takes the reader from the US-shaped international finance regime to a China-shaped one, as the argument for better management of the impact of capital flows strengthens.
As laconic in his writing as he is in real life, Lubin notes that "what comes around, goes around". So, international capital mobility has again been subjected to searching critiques in the modern era — "just as the failures of globalization in the early twentieth century led to a rediscovery of the role of the public sector in restricting market activity, it is possible to argue that we are beginning to see something similar today, with China at the center of the shift".
The chapter titled "Exit finance", and the era of financial crises of the 1980s and 1990s, provides a useful exposition of the important matter of what defines vulnerability for emerging markets.
The answer is weak external balance sheets.
What is so striking, though not surprising, is the prescription that such a diagnostic analysis led to in the early 2000s, which was not that international financial markets needed to be reformed and made "safer" for developing countries, but rather that developing countries had to do more to ensure their own safety.
Lubin then diverges into a discussion about "good" versus "bad" kinds of capital flow. Here the essential idea seems to be that foreign direct investment (FDI) is likely to be way less harmful than loans that arise from short-term external debt.
This is a particularly relevant discussion in SA today. Since the country is apparently heading towards the "debt trap", as indicated by finance minister Tito Mboweni’s most recent medium-term budget speech, there is plenty of discussion about the need to consider taking loans from — whisper it — the International Monetary Fund (IMF). But Lubin’s analysis shows that FDI is more likely to be the productive alternative, in the sense of creating goods, services and jobs, and less prone to leave at the drop of a hat.
All of which suggests that President Cyril Ramaphosa’s strategy for economic growth, in which FDI plays such a pivotal role, is a reasonable one. This is despite FDI flows remaining highly sensitive to other external geopolitical and market factors, including the nebulous notion of "sentiment" that I know from direct experience is a major consideration for fund managers, and even ratings agencies. Given that, I’d hoped Lubin would say more about the role of sentiment — but alas, no.
Nonetheless, it was an enthralling read. Not many investment bankers are able, or willing, to step back from their daily merry-go-round to provide such an elegant and erudite illumination of their complex, bewildering world.
Inevitably, Dance of the Trillions leaves many mysteries about global capital flows unexplained. Yet it does yeoman’s work in shedding light on the conundrums posed by different attempts at managing capital mobility more effectively in the interests of emerging-market economies.
For this alone, we should be immensely grateful for Lubin’s timely and critical reflection of the world he and his employer inhabit.