Foreign Policy: The Disinformation Age

Foreign Policy
Spring 1999

The Disinformation Age

By David J. Rothkopf _*

This abstract is adapted from an article appearing in the Spring 1999 issue of Foreign Policy.

Trust no one. In today’s volatile global markets, deception, misrepresentation, and outright dishonesty are among the few constants. So are incomplete information, inadequate reporting, and biased or otherwise egregiously faulty analyses. Seldom has this state of affairs been clearer than during the throes of the current international economic crisis. On August 14, 1998, bankers approached the Russian Ministry of Finance and asked whether or not Russia intended to continue honoring its debt obligations. The answer was an unequivocal “yes.” Three days later, the government announced that it would essentially default on $60 billion of domestic debt and allow a de facto devaluation of the ruble. Money fled Russia and the world financial system was shaken.

For nearly a decade, the gurus of the Information Age told us that we were in the midst of a harmonic convergence of free markets, democratization, and a revolution in communications technology. But information technology is only as good as the information it delivers, and the flow of information is compromised at many levels. At the most basic level, governments still regularly provide economic information that they know or might reasonably conclude is inaccurate. Often, financial institutions not only accept this information but also relay it to their clients as facts when it suits their interests. Moreover, financial institutions offer themselves as independent analysts and providers of market information when, in fact, they have a variety of conflicting interests that shape their presentations of the “facts.”

The media only serves to distort matters further by using inadequate or misleading indicators-such as stock market indices-as though they were meaningful and by showcasing the dramatic story at the expense of detailed analysis. Even independent experts are often compromised by their dependence on governments or financial institutions for their livelihoods and reputations. Few disclose their stakes in the markets on which they pass judgement.

To understand the significance of this problem, it is crucial to recognize at the outset that financial markets are not simply seas of capital that sweep across the globe, ebbing and flowing, lifting some nations and capsizing others. They are really seas of information-information and analyses concerning values and how they might change. Prices, interest rates, even the availability of capital itself are just manifestations of how market participants currently interpret the information available to them.

The failure to provide timely and accurate economic data does not prevent financial crises; it merely delays the inevitable and worsens the blow. Instead of gradual readjustments, there is widespread investor panic. In Brazil, the devaluation of the real was greeted with shock by markets even though evidence had been available for months showing that such a depreciation would be inevitable. But even as the balance of power in the global economy has shifted from the public sector to private financial markets, the market remains confounded by old habits of secrecy and a system that has been rigged by insiders to serve their needs at the public’s expense.

Information flows in and out of emerging markets suffer the greatest problems. In these developing economies, transparency, accountability, and basic rules of disclosure are still unrefined concepts. These are relatively illiquid information markets just as they are relatively illiquid capital markets. Consequently, small amounts of information can have big, often inappropriate, impacts on market health just as in these smaller, fragile economies relatively small movements of capital can be destabilizing. The failure to disclose complete financial data typically obscures serious underlying vulnerabilities-such as excessive short-term debt or a shaky banking system-even when other macroeconomic indicators appear sound. This failure to provide complete information laid the foundations for the Mexican peso crash in 1994 and the Thai baht crash in 1997.

A number of recent proposals to deal with the international economic crisis have acknowledged fundamental flaws in the information flows underlying or influencing global capital markets. Still, to date, there have been few proposals that seek to address some of the core information issues at the heart of this most recent series of crises and aftershocks. An essential element in helping address the illiquid information markets of emerging countries would be to compel governments to improve their production of the key statistics on which markets depend.

In the private sector, full disclosure, accountability, and transparency from corporations whose securities are traded and from large market players such as hedge funds is essential. At the same time, the media should disclose the vested interests of its “experts” and pass this information along to its consumers. In the end, these suggestions are resolutely promarket. They seek to “perfect” markets more quickly, eliminate information arbitrages where possible, counteract information illiquidity, and counteract bad ideas. They seek to address the reality that much of the sea of information on which modern markets float is polluted with misinformation. And they can be counted as beneficial results of the recent crises that significantly reduce the weaknesses in this evolving global financial system with which we all must live.