Only structural change can heal global system

There is something fundamentally amiss with the global economy and it will take structural change to set things right.

The structure of U.S. and global society is a mosaic of structures inherently in conflict, said Paul McCulley, a fellow at the Global Interdependence Center and a former senior partner at PIMCO.

Speaking at the CFA Institute Conference in Boston, he said that before considering how to change the structure, it is important to understand the structure itself.

The tapestry of the U.S. and global society is a mosaic of competing structures formed by seamless interweaving of democracy, capitalism and sovereignty of nations, he explained.

Capitalism, he said, is about making the pie as big as possible, while democracy is about slicing it evenly with a sense of social justice, equity, freedom and opportunity for everybody.

“Right now there is not a sense of decency in the distribution of the pie and the pie ain’t growing,” he said of the growing discontent among the U.S. population.

McCulley applied the same notion—democracy, socialism and sovereignty of nations as three competing structures—to analyze the European crisis.

“Monetary union without political union and, therefore, fiscal union is not a path to salvation, but a crucifix. This will ultimately bear the damned nations of democracy as its fruits.”

The current state of affairs in Europe begs questions like “do we believe in nation states?” and “do we believe in democracy in those nation states?”

As part of the Eurozone agreement, members of the monetary union gave up part of their sovereignty (the right to issue currency), but retained other parts, as political states able to determine their own fiscal destinies. This schism inherently created a conflict of interest.

“It doesn’t work and when the push comes to the proverbial shove, it’s a conflict between capitalism and democracy,” said McCulley. “These subject the peoples of countries that can’t pay their debts to the surrender of democracy. We take away their freedom, as a sovereign country, we take away their democracy and make them worship to the Golden Calf of bondholders. It’s really that simple.”

Structural changes are needed and the conflict between structural pillars of our society must be accepted as the nature of the beast. “Quit whining and moaning about conflict, because the conflict is supposed to happen; it is structurally part of the mosaic of our competing systems.”

In China, the interplay between capital and democracy is far more lopsided than in the U.S. “Democracy is not very robust in China, which makes capitalism more forceful,” he said.

Alluding to America’s dissatisfaction with China’s monetary policy, he said the U.S. has “to be careful in having debates” with China and make it clear that “we’re not doing so out of spite, [but] from an academic perspective.”

Prior to the onset of Europe’s sovereign debt crisis, there were frequent rumblings from Beijing to Tripoli that the euro should, perhaps, supplant the U.S. dollar as the world’s reserve currency. That debate has effectively ended now, and the option of a “basket of currencies” also appears to be off the table.

That’s no surprise to McCulley.

“The [U.S.] dollar is a dirty shirt, but it’s the cleanest dirty shirt, so quit editorializing about it being a dirty shirt,” he said. “It is going to be the cleanest dirty shirt for a long time.”