Perilous Times and the Coming Crash of Cash
The age of the dollar is drawing to a close
Currency competition is the only way to fix the world economy, says
Jeremy Warner.
By Jeremy Warner
Published: 7:04AM GMT 05 Nov 2010
Dollar hegemony was itself a major cause of both the imbalances and the
crisis Photo: BLOOMBERG
Right from the start of the financial crisis, it was apparent that one
of its biggest long-term casualties would be the mighty dollar, and
with it, very possibly, American economic hegemony. The process would
take time – possibly a decade or more – but the starting gun had been
fired.
At next week's meeting in Seoul of the G20's leaders, there will be no
last rites – this hopelessly unwieldy exercise in global government
wouldn't recognise a corpse if stood before it in a coffin – but it
seems clear that this tragedy is already approaching its denouement.
To understand why, you have to go back to the origins of the credit
crunch, which lay in the giant trade and capital imbalances that have
long ruled the world economy. Over the past 20 years, the globe has
become divided in highly dangerous ways into surplus and deficit
nations: those that produced a surplus of goods and savings, and those
that borrowed the savings to buy the goods.
It's a strange, Alice in Wonderland world that sees one of the planet's
richest economies borrowing from one of the poorest to pay for goods
way beyond the reach of the people actually producing them. But that
process, in effect, came to define the relationship between America and
China. The resulting credit-fuelled glut in productive capacity was
almost bound to end in a corrective global recession, even without the
unsustainable real-estate bubble that the excess of savings also
produced. And sure enough, that's exactly what happened.
When politicians see a problem, especially one on this scale, they feel
obliged to regulate it. But so far, they've been unable to make
headway. This is mainly because the surplus nations are jealous
defenders of their essentially mercantilist economic models. Exporting
to the deficit nations has served them well, and they are reluctant to
change.
Ironically, one effect of the policies adopted to fight the downturn
has been to reinforce the imbalances. Fiscal and monetary stimulus in
the US is sucking in imports at near-record levels. The fresh dose of
quantitative easing announced this week by the Federal Reserve will
only turn up the heat further.
What can be done? China won't accept the currency appreciation that
might, in time, reduce the imbalances, for that would undermine the
competitiveness of its export industries. In any case, it probably
wouldn't do the trick: surplus nations have a habit of maintaining
competitiveness even in the face of an appreciating currency.
Unable to tackle the problem through currency reform, the US has turned
instead to the idea of measures to limit the imbalances directly,
through monitoring nations' current accounts. This has already gained
some traction with the G20, which has agreed to assess the proposal
ahead of the meeting in Seoul. As a way of defusing hot-headed calls in
the US for the imposition of import tariffs, the idea is very much to
be welcomed, as a trade war would be a disaster for all concerned.
China, for one, has embraced the concept with evident relief.
Unfortunately, the limits as proposed would be highly unlikely to solve
the underlying problem. Similar rules have failed hopelessly to
maintain fiscal discipline in the eurozone. What chance for a global
equivalent on trade? With or without sanctions, the limits would be
manipulated to death. And even if they weren't, the proposed 4 per cent
cap on surpluses and deficits would only marginally affect the worst
offenders: for a big economy, a trade gap of 4 per cent of GDP is still
a massive number, easily capable of creating unsafe flows of surplus
savings.
No, globally imposed regulation, even if it could rise above
lowest-common-denominator impotence, is unlikely to solve the problem,
although it might possibly stop it getting significantly worse. But
what would certainly fix things would be the dollar's demise as the
global reserve currency of choice.
As we now know, dollar hegemony was itself a major cause of both the
imbalances and the crisis, for it allowed more or less unbounded
borrowing by the US from the rest of the world, at very favourable
rates. As long as the US remained far and away the world's dominant
economy, a global system based on the dollar still made some sense. But
America has squandered this advantage on credit-fuelled spending; with
the developing world expected to represent more than half of the global
economy within five years, dollar hegemony no longer makes any sense.
The rest of the world is now openly questioning the merits of a global
currency whose value is governed by America's perceived domestic needs,
while the growth that once underpinned confidence in its ability to
repay its debts has never looked more fragile.
Already, there are calls for alternatives. Unwilling to wait for one,
the world's central banks are beginning to diversify their currency
reserves. This, in turn, will eventually exert its own form of market
discipline on the US, whose ability to soak the rest of the world by
issuing ever more greenbacks will be correspondingly harmed.
These are seismic changes, of a type not seen for a generation or more.
I hate to end with a cliché, but we do indeed live in interesting times.
Related Link:
Revealing The Coming Crash Of Cash!
http://www3.telus.net/thegoodnews/cashcrash.htm