It’s noon on a sweltering hot day in summer with no air conditioning in your small uptown apartment. Sweat runs down your face and body as you decide to get a cold refreshing beer from your refrigerator. Opening the door, looking for a bottle amongst the array of other foods preserved within, a refrigerated breeze caressing your face, a refreshing idea flashes through your mind: prop open the refrigerator door, close the doorway to your tiny kitchen and let the refrigerator cool it! As you slowly, luxuriantly drink your beer and bathe in the cool air that fills the room, as the refrigerator’s compressor turns on to replenish refrigerated air, you congratulate yourself for your cleverness. A doctor’s appointment and some shopping take you out of the apartment for a couple of hours. You are careful to leave the refrigerator open and to close up the kitchen, anticipating a cool room when you return, but dumbfounded by the wave of heat that hits your face as you open the kitchen door. Not only is the kitchen now warmer than the rest of the apartment, the ice has melted, frozen foods are thawing and fresh foods are spoiling!
A refrigerator doesn’t chill the room like an air conditioner does even though both have cooling compressors whose net result—that pesky 2nd Law of Thermodynamics— is to add heat. The difference is that the heat generated by an air conditioner is exhausted outside an apartment and the heat from the refrigerator is exhausted outside the refrigerator, but into the kitchen. A refrigerator always heats the kitchen as it cools its interior, but its insulation and normally closed door required relatively little work (and thus net heat) from the compressor. Leave the door open, the compressor goes on and stays on and the refrigerator heats the room after the transient cooling effects of warming contents and thawing ice have been spent.
Now, I suspect that you know better than to try this; but should you care to do so in your own home, be my guest. However, this story is meant to be a metaphor for many things including the initial benefits of Globalization, the initial benefits of artificially low interest rates and those initial green shoots that some suggest might indicate that we are coming out of our Recession. It illustrates that what happens in the short term is frequently—though not necessarily— the opposite of what happens in the long term; in technical speak— a transient phenomenon may at first be the opposite of the steady-state one.
I’m convinced that this metaphor applies to Globalization which is driven by the short term benefits accruing from opening barriers to trade, politics and culture that have, over the centuries created pockets of economic differences throughout the world. In this case the short term benefits may last 20 or 30 years as a country “catches up” and reaches the same economic temperature as the rest of the world. But trade requires work to transport and to communicate, it generates waste, and it spoils once isolated cultures —at least from their perspective as in the oil rich Middle East that resists democratization—in some cases creating hostility and conflicts that more than negate the early benefits.
It applies to the benefits of artificially low interest rates—such as those maintained during the Greenspan years and returned to recently to “combat” the effects of Recession—that quickly produce an economic stimulus but only in exchange for digging an even bigger hole in the future with toxic assets; some of which finally triggered the crisis of 2008. We’re now undertaking to kick that can down the road with more low interest home loans.
Sadly, the green shoots of recovery that some are touting may well be transient responses that are counter to the longer term results. I can’t prove it, but my strategic instincts suggest it. I will elaborate on this in future blogs.
We and our economies are in one bounded room: Earth—where benefits and consequences ultimately mingle together in a slightly higher level of average uncertainty. Everything is a tradeoff, there are no free lunches
