American Shrinkage

We have known since the dawn of time that the world is an unfair place. The question is if it is becoming more or less unfair. There are differing points of view.

It seems like the world has become a better place to live in. Just ask the Chinese, the Indians and the new Brazilian “middle class.” They owe thanks to market capitalism, which increased wealth and freed human creativity.

But the post-World War II progress that created so much wealth and prosperity is finally showing signs of decline in the current crisis. It has turned against the United States where it spread too fast, like a metastatic cancer affecting the entire body.

There are things that don’t seem reasonable: for example, the salaries of bank executives in the country and the relationship between many prices and wages, such as in a company like General Motors, which employs 40 thousand people and today is worth $700 million in the market. To compare, only two apartments for sale in Manhattan this week are worth near 10 percent of the value of GM in the Stock Exchange.

The young U.S. president, Barack Obama, 47, seems determined to correct some of these discrepancies. For the U.S., the matter is not trivial, because it might put a considerable block on the so-called “creative force” of its capitalism at a time when its control of North America is at risk.

If the 19th century belonged to Great Britain and the 20th belonged to America, clearly now there is a displacement of economic power in Asia’s direction. While the U.S. has set the stage to have the largest deficit in recent history in 2010, China will accumulate more than $2 trillion in reserves (after 30 years, they haven’t reached $170 million — 0.0000000085 percent of the current total).

What’s more: While advanced economies will sink this year and probably a little more next year, too, China should grow afterward. In 2007, emerging economies (with China at the forefront) accounted for half of the economic growth worldwide. This year, China’s piece will be the largest, growing even bigger in 2010.

So, what does this change? A lot.

It doesn’t seem strange, after the crisis is over, that the world’s reserve currency would stop being the dollar and would become the Chinese yuan (or renminbi). In their trades, various countries already agreed with China to accept a direct exchange between their currency and the yuan without going through the dollar.

If China continues growing as it has been for years, and the U.S. continues to struggle with its problems, this could be a matter of years, not decades.

Another crucial point: The most recent initiative of the White House, asking Congress for a new and complete regulation of the derivatives market (tools that denote a crisis), seems absolutely necessary. However, it would also be a hard blow for North America’s economic power.

Derivatives are complex, financial tools that allow banks to pack hundreds of debts in other securities to be sold there or to create mechanisms like the “credit default swaps” (a type of security against losses). The problem is that today no authority supervises this, and it grew to $680 trillion (53 U.S. GDPs!) in 2008.

Now, Obama wants not only the supervision of these operations and the registration of every one of them in a sort of stock exchange, but he also wants the banks that update them to keep cash reserves (which is not done today) to cover possible losses.

Clearly, the result of this would be an abrupt decline in these operations and in the quantity of money involved in them.

The problem for the U.S. is that a large part of the economic growth of recent years has supported this “bubble” of derivatives. It created, in the last instance, wealth and plentiful credit for consumption, which accounts for 70% of the U.S. GDP.

There is no way the U.S. can come out of this crisis better than it began.