Too many nations have substantial economic power now and their interests diverge from the United States. And the transformation carries significant risks.
Dean Acheson, the legendary secretary of state, wrote a memoir called “Present at the Creation” as the United States crafted an international order after World War II to prevent another calamity that had its roots, partly, in economics.
Among those institutions created to enhance stability: the International Monetary Fund, the World Bank, the precursor of the World Trade Organization and the dollar as the world’s bulwark currency. When the G-20 organization of major world economies meets in Seoul later this week, it sits on the shoulders of these achievements.
But it’s hard not to wonder if we’re present at the destruction.
And if you think this is an esoteric history lesson, take out a dollar and set it in your lap.
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The Group of 20 was an accommodation to keep the American-built system going — expanding the G-7 in 1999 to include such rising economic powers as China, India and Brazil. But it’s shown a growing irrelevancy in resolving the currency dispute centered on China’s refusal to allow the renminbi to meaningfully appreciate.
Actually, it’s one sign of the fundamental differences that separate the members, something rarely seen with the G-7. The developing nations that are net creditors want to keep it that way. The developed world, especially the U.S., wants the up and comers to spend more on imports but also is ravenous for them to buy government debt.
It’s this basic imbalance, more than the currency dispute, that is tearing apart the international economic order created in the late 1940s and built upon until the capstone of the World Trade Organization in 1999 — where the initial disputes and inequalities of globalization played out in the Battle in Seattle.
Now a new order is aborning. It won’t happen suddenly and it might come about with minimal bumps. But it won’t be an American-dominated system: Too many nations have substantial economic power now, their interests diverge from ours. And the transformation carries significant risks.
A big one attaches to that dollar in your lap. For more than six decades, it has been the world’s reserve currency, used for business and commodity transactions, treasured by central banks as a hedge against risk. This gave the U.S., in effect, a limitless credit card. Trade and budget deficits didn’t matter to the extent that the powerful dollar was coveted or eventually came home in the form of investment.
Now, as the U.S. faces a large fiscal deficit and the Federal Reserve is pumping more money into the system to avoid a stalled recovery, the dollar faces unprecedented risks. For example, China and other countries have discussed moving away from it to a basket of other currencies.
This wouldn’t be in China’s immediate interest considering Beijing holds $2.5 trillion in foreign reserves, much of it dollars. But you see the trajectory. And if the dollar loses major value, so does the purchasing power of the sawbuck you hold, as well as every asset valuated in dollars, e.g., your house and 401(k). And goodbye ultimate planetary gold card.
While China is an easy target because of its currency manipulation and de-facto protectionism, America can’t escape its own accountability.
As investor George Soros wrote in the “New York Review of Books”: “The imbalances that were at the root of the crash of 2008 remain to be corrected and the private sector is unable to do it on its own. The U.S. still consumes more than it produces, running a chronic trade deficit. Consumption is too high at nearly 70 percent of GDP, compared to an unsustainably low 35.6 percent for China.”
To that, I would add the liabilities of political paralysis, bad trade deals and a dangerously unstable banking system that, nevertheless, has gained much control over the government. MIT economist Simon Johnson calls this latter “the doom cycle.” (Western Europe faces some of the same challenges.)
Trade is the other instability growing from the slow collapse of the American order.
High unemployment and the destruction of numerous domestic industries has put Americans in the most anti-trade mood in recent history. Unlike Washington, most states aren’t net trade winners. We would be one of the first casualties in a trade war, but such conflicts may be inevitable.
Whatever the wishes of the globalized American economic elites, many angry voters favor outright protectionism. And given the seeming success of Chinas state capitalism, with its protectionist aspects, who can blame them?
It hasn’t yet dawned on many Americans that cheap stuff from overseas comes at a price. It keeps rising.