Managing Decline

The United States is clearly unable to uphold the responsibility of maintaining a global currency. This is not in itself a devastating conclusion. After all, the particular responsibility involved was never voted on by the American people, whatever John Bricker and others wanted. It emerged in the middle of the nineteen forties as the extension of the displacement of the British Empire and the export of a security guarantee and interventionist policy to the the rest of the world. The World Bank, the International Monetary Fund, and the GATT/WTO settlement implied the CIA, the NSC, the Pentagon, and the other accoutrements that the USA acquired under Roosevelt and Truman, not altogether to the good of the republic.

Anyway, we have now had nearly half a century of deficits, in trade and in the federal budget, and one deliberate and determined reversal of an attempt to remedy the situation in order to deliver tax cuts to the rich after 2001. World prices in dollars have consistently risen, and inflation has eaten away at the American standard of living. Inequality, which has malificent and demonstrable effects on social mobility, culture, and the economy, has taken a grip.

At the same time, an insane sort of economic debate, pitting classical monetarist ultras against mutant Keynesians who would not have been out of place in a Kafka novel, is taking place. A small group at the top are attempting to use Quantitative Easing and world currency reform, along with a 'tolerable' level of demand destruction, as a battering ram into an uncertain future. In the meantime, ordinary Americans are drowning in mortgage and student debt.

It's like a scene from Hitchcock's Lifeboat. The Banker who caused the destruction, more or less openly living off of pep pills, is sitting at the oars as Tallulah Bankhead and a cast of suspicious others slowly break down all around. Meanwhile, everyone waits for the next wave, and wonders about the next submarine.

In the midst of all this, an interesting game is developing in Asia. One of the features of the present crisis is how wealth and income are clearly returning to the Indian Ocean states, after a couple of hundred years away. Through the same processes of history which delivered America world leadership, most of those states don't use their own currency. Instead, they lend the profits from selling things to Americans and Europeans back to Americans and Europeans, then take a portion of the repayments--probably the larger part--and use them in trade. For the past few years, they have been transferring these 'earned' dollars into oil, food, and commodity investments. The African and Arabian states enriched by these purchases have been then paying off what remaining debt they have, by returning the dollars and euros to the pyre that the west is currently building up.

What to do? Tim Geithner, the American who has been handed this big pot of horrible, has clearly been dwelling on a return to the original proposals of Lord Keynes in 1944 for a world currency, which could replace the dollar. The Chinese like this proposal too, though their government prefers the instrument stitched up in the nineteen seventies and currently to be seen on most airline tickets (on the insurance section), the SDR, to Keynes' 'Bancor' or Gold.

For various good reasons, the Chinese, Indians and ASEAN states do not wish to use their own currencies and will not use the Yen, and they cannot use the Euro because the Germans are being for some reason defensive about the fruits of their hard work and savings. So it seems that talks about a world currency are the only avenue, doesn't it?

Talking about the SDR also buys time, and might convince China to slow its long-term plan to float the renminbi if all else fails. I think that they would more likely go for regional dominance than global power, so they will have a strong imperative not to drop the dollar, and can't use the Canadian or Australian equivalents as proxies, but at the same time, they know that the US dollar is a wasting asset.

If I were the US, I would therefore talk up talks--and launch a little counter proposal.

Why is it not in US and European interests to talk up South Korea and the Won, under cover of louder music about currency war and bullshit like that?

The Koreans have a very strong economy; they don't raise hackles in Asia the way the Japanese do; they have extensive interests in shipping, and manufacturing, and banking, and the won is fully traded. Why wouldn't a declining US rely on the one country where it still has a military foothold on the Asian mainland, and why shouldn't that country be encouraged to become the regional currency of second choice, after the dollar?

One reason is that the Koreans aren't stupid. Their culture is one of hard work and almost Latin passion, as I know personally, but also of a very clear application of reason. Why should they, an exporting country, let the won appreciate because Big Brother America's house is not in order and the US prefers to concentrate on stupid arguments produced by the media rather than to face up to its problems?

Convincing them of the benefits of a strong won strategy may be as important to the G-20 summit, held in Seoul next month, and the wider Asian future as anything else. The alternative, I guess, is a long-term plan for an ASEAN currency unit, but, well, the euro (though still much stronger than many expected) and the CFA franc are not the most seductive of enticements. If Koreans took up some of America's slack, America might buy time to reform, ensure that the Chinese took an even more restrictive interest in the doings of their puppet in Pyongyang--and arrest China's inevitable rise without a futile currency war. Who knows, it may even raise the prospect of Korean reunification on Southern terms.

It's pie in the sky, though, so long as the USA refuses to face up to the consequences of a binge cocktail of deficits, welfare, tax cuts and narcissistic stupidity on both sides of the political divide that has gripped that country since at least the middle nineteen sixties. Whether America does so or not is of vital importance to the west.

Man the lifeboats.


Toni said…
Hmmmm, the currency issue is big news in the markets these days, but its been so since at least when I started work in 86. Back then it was the Japanese that were drawing the complaints, now its the Chinese. The Plaza Accord did absolutely nothing to "save" the American auto industry and other key sectors and the Japanese proved far more able to deal with excessive currency volatility. Having said that, The Japanese moved up the technology ladder far more quickly than the Chinese have been able to. Korea followed the Japanese model quite rigidly. I always remember it as 100 Won to the Yen give or take, but in the Asian crisis there was quite a divergence. I was at a Bank Of England meeting when the finance minister gathered a number of creditor banks and the guys from the IMF and said Korea is bankrupt, if your banks don't keep the credit lines open we will default on all our debt, then Korea staged a remarkable come back. My father went to Korea after the end of the Korean war when it was the poorest country in the world. They have a history of succeeding. The Japanese are different, they are a largely irrelevant country now. The accumulation of wealth was so huge and unlike most other countries spread with some semblance of social responsibility that the nation has become sort of aimless. There are a huge number of Japanese youth who work crap part-time jobs just in order to earn enough money to go to Bali for 6 months, London is crawling with 30 something Japanese women who are students, (ie avoiding getting married. If the Asian crisis had spread to Japan what would have happened? Japan has enough money to buy the IMF outright.

Japan and China do have a similar problem though, they both have a symbiotic relationship with America, they both generate foreign earnings by selling to America and Europe and because they have such enormous currency reserves their investment opportunities are limited. The only market that can partially absorb their money is the ever expanding US Treasury market. This leads them both to have a huge currency liability, every point the dollar drops is a huge real loss to them. Apart from assuming what it believes is its rightful place in the world, China is most concerned about maintaining social order, which means jobs. China at least sees itself as a counterweight to the US, I remember in a bar on the thousand Islands of Jakarta and this Chinese civil servant/banker asked why this wasn't Chinese. I asked him what he meant and he said Vietnam, Malaysia, Indonesia, Borneo, Philippines it was all on the China Sea so it should all be Chinese. I suspect a lot of Chinese share that viewpoint. As you point out, The Chinese have no desire to become the global currency, who needs the Arabs pushing for $100 per barrel oil due to depreciation, but I am sure they can envisage a regional trading block. The Japanese will never give up the Yen and as for the Euro, well I thought it was a bad idea when it was still the ECU and the plight of Greece, Ireland and Spain has only further convinced me. If it wasn't for the costs involved, the Krauts would love to return to the Mark. I suppose at the end of the day, seeing as no currency is on the gold standard any more they are all really just as vulnerable as each other.
Martin Meenagh said…
Thank you for that comment, Toni, your insights are always welcome.

I find myself wondering about the euro, from a sceptical position; it's been subject to huge torsions and pressures in the past three years and is defying all reports of its death. I take your point about Ireland being screwed though--I found Guido Fawkes' latest filleting of AIB quite interesting over at today, for instance.
I'd bet on Koreans and then Indians in Asia.

What westerners forget I think--about China or Iran, for that matter--is that both are in a sense a bit like Britain or Austria-Hungary or Spain were, agglomerations of different ethnic groups. It's no surprise to me that the driving force of states like that is to look united to outsiders and to hold the show on the road by any means necessary inside. The Mandarins are the same as the English who always seem puzzled that the world is not, for some bizarre reason, British, to my eye.

I think that people are going to flail around, given that a gold standard would be impossible, trying to establish some connexion or nexus of currencies over the next twenty years. As you rightly point out, the precedents are not good at all.

I hope all is well. Did you see Edge of Darkness in the end?
Martin Meenagh said…
Oh, just a postscript--I left out ASEAN from that bet I speculated on. I have had quite a few Vietnamese students over the years (who, because of their achievements, are going to be important in the future). Amazing people, and well worth backing if you are looking at the long term--one hour with them and you can see how they beat the Americans.