The G-20: Facing Another Commercial War?
Published in Clarin
(Argentina) on 23 October 2010
by Marcelo Cantelmi (link to original)
Forty years ago, Richard Nixon’s secretary of the Treasury, John Connally, best described what is happening today in the global economy. In a speech to European executives — worried about the abrupt changes in the parity of the U.S. dollar after the safety net had been lifted — he told them, “the dollar is our currency, but your problem.”
So now the U.S., pressured by its own domestic challenges, in which deflation and unemployment are not the least of its problems, is starting a financial competition with unforeseen consequences — if history serves as an example — among powerful nations. This action, which in Europe and China is being called irresponsible, not only exposes the reality that the world crisis is still in effect, but also the level of risk the U.S. is willing to take on a stage where the figures are good for fewer players.
It’s not only a question of numbers. In order to understand what is going on in the small world of politics, the world of economics has to be explored. The difficult adjustments spreading throughout Europe, the social unrest that corners leaders on both sides and the political decisions it has caused originate in an atmosphere where there is no room left for negotiations.
This week, David Cameron, the premier conservative in Britain, put into effect a severe program of austerity without precedent in the history of that country, which will pass on to its citizens the cost of the fiscal deficit dragging that country down after it rescued its banks. The objective is to stimulate a weak economy, and not to change the state’s role as a benefactor.
However, this objective is not only lacking, it is also proving difficult to accomplish. This is one feature of the crisis. The other, more serious feature is the war that Washington leads, as an alternative, to lower the parity of the dollar against the currency of its commercial rivals, reducing the price of exports and inflating those of its competitors.
The Financial Times characterized it as a save yourself if you can, beggar-thy-neighbor strategy. This is a serious situation because the size of the U.S., which even today accounts for 25 percent of worldwide GDP, will ensure that nobody escapes untouched by these policies.
The G-20 — an organization composed of the major industrialized and developed nations, headed by Washington and Beijing, and highly regarded by Barack Obama — will try to prevent this dangerous situation in Seoul next month. However, expectations are low since its trade ministers (the technicians of the group), assembled in South Korea this weekend, failed to get past rhetorical games.
It is understandable. This conflict, when seen from a historical perspective, illustrates the difficulty of stopping a storm after everything has been done to form it. Lester Thurow, former dean of economics at Harvard and adviser to Bill Clinton, had anticipated parts of this scenario 15 years ago in his best-selling book "Head to Head: The Coming Economic Battle among Japan, Europe, and America" in which he forecast that in a smaller world with fewer global participants, the superpowers would clash, leaving behind heavy commercial victims and no casualties.
The wars during the imperial period of George Bush, in the Middle East and the Gulf, came close to fulfilling this prophesy, which is beginning to rear its ugly head once more because a lot of what shaped it stems from that time of armed conflict.
It is no coincidence that Connally comes to mind. It was during his time as Nixon’s secretary of the Treasury that the U.S. declared the death of the gold standard (an ounce was U.S. $35) and with it, the predictability in the parities that had governed in the world since the end of the war and the Bretton Woods Agreements. Declaring the inconvertibility and devaluation of the dollar was the first step in deregulating international flows of capital and enabling what soon was transformed into the financial creativity at the bottom of the current collapse.
If we continue digging into the past, we’ll see what dangers are being courted. These protectionist policies are the same ones that fractured the planet super-structurally since before and after the Great Depression of 1930, and that ended during World War II — or as the ineffable Paul Krugman likes to put it, tongue in cheek, the largest transaction of public expense in history.
The main target of this strategy, with its current offensive, is Beijing, with the objective of getting it to revalue its currency so as to open their giant market to the West. Add to this strategy the possibility that the USA might accuse China of being a “manipulator of its currency,” which would be a convenient pretext to call for sanctions.
As a secondary — but equally important — objective, Washington is trying to create a domestic inflationary impact. Ben Bernanke, the chairman of the Fed, the central bank, said that inflation should be two percent in order to maintain price stability and contain unemployment. The problem is that these objectives are planted in a sandbox on the rubble of the rest of the world.
“The message is that the USA will print all the dollars that it needs in order to generate inflation. The rest of the world will have to fend for itself, it’s their problem,” stated the Wall Street Journal in a critical tone. The Financial Times, another conservative newspaper, wrote: “Instead of cooperation … the U.S. is seeking to impose its will, via the printing press.”
This alarm is due to the inconsistency of this policy. If China revalues its currency abruptly, it will complicate its domestic front, generating higher levels of inflation and social problems, including unemployment and currency inflation. This scenario would also complicate the operations of the U.S. and other Western companies relocated in Asia, collateral damage for which the impact remains to be evaluated.
The other problem is that the torrent of dollars printed by the Fed may be used for other purposes.
For example, the reference rate in Brazil is 10.75 percent, one of the highest in the world. That country, like Chile — a South American model within the arc of the “predictable,” a status that Argentina and Venezuela lack — is erecting a variety of barriers to protect itself from the effects of speculative capital. It will be difficult. The Institute of International Finance, an organization of global private banks, calculates that this year it will have 42 percent more funds at the margin: U.S. $825 billion.
In this chaos, the next step may well be a war of tariffs, in the North and South, to put a stop to the boom of cheap imports, which could atrophy the growth of global trade. Although this may be dramatic, it may not be unrealistic.
So now the U.S., pressured by its own domestic challenges, in which deflation and unemployment are not the least of its problems, is starting a financial competition with unforeseen consequences — if history serves as an example — among powerful nations. This action, which in Europe and China is being called irresponsible, not only exposes the reality that the world crisis is still in effect, but also the level of risk the U.S. is willing to take on a stage where the figures are good for fewer players.
It’s not only a question of numbers. In order to understand what is going on in the small world of politics, the world of economics has to be explored. The difficult adjustments spreading throughout Europe, the social unrest that corners leaders on both sides and the political decisions it has caused originate in an atmosphere where there is no room left for negotiations.
This week, David Cameron, the premier conservative in Britain, put into effect a severe program of austerity without precedent in the history of that country, which will pass on to its citizens the cost of the fiscal deficit dragging that country down after it rescued its banks. The objective is to stimulate a weak economy, and not to change the state’s role as a benefactor.
However, this objective is not only lacking, it is also proving difficult to accomplish. This is one feature of the crisis. The other, more serious feature is the war that Washington leads, as an alternative, to lower the parity of the dollar against the currency of its commercial rivals, reducing the price of exports and inflating those of its competitors.
The Financial Times characterized it as a save yourself if you can, beggar-thy-neighbor strategy. This is a serious situation because the size of the U.S., which even today accounts for 25 percent of worldwide GDP, will ensure that nobody escapes untouched by these policies.
The G-20 — an organization composed of the major industrialized and developed nations, headed by Washington and Beijing, and highly regarded by Barack Obama — will try to prevent this dangerous situation in Seoul next month. However, expectations are low since its trade ministers (the technicians of the group), assembled in South Korea this weekend, failed to get past rhetorical games.
It is understandable. This conflict, when seen from a historical perspective, illustrates the difficulty of stopping a storm after everything has been done to form it. Lester Thurow, former dean of economics at Harvard and adviser to Bill Clinton, had anticipated parts of this scenario 15 years ago in his best-selling book "Head to Head: The Coming Economic Battle among Japan, Europe, and America" in which he forecast that in a smaller world with fewer global participants, the superpowers would clash, leaving behind heavy commercial victims and no casualties.
The wars during the imperial period of George Bush, in the Middle East and the Gulf, came close to fulfilling this prophesy, which is beginning to rear its ugly head once more because a lot of what shaped it stems from that time of armed conflict.
It is no coincidence that Connally comes to mind. It was during his time as Nixon’s secretary of the Treasury that the U.S. declared the death of the gold standard (an ounce was U.S. $35) and with it, the predictability in the parities that had governed in the world since the end of the war and the Bretton Woods Agreements. Declaring the inconvertibility and devaluation of the dollar was the first step in deregulating international flows of capital and enabling what soon was transformed into the financial creativity at the bottom of the current collapse.
If we continue digging into the past, we’ll see what dangers are being courted. These protectionist policies are the same ones that fractured the planet super-structurally since before and after the Great Depression of 1930, and that ended during World War II — or as the ineffable Paul Krugman likes to put it, tongue in cheek, the largest transaction of public expense in history.
The main target of this strategy, with its current offensive, is Beijing, with the objective of getting it to revalue its currency so as to open their giant market to the West. Add to this strategy the possibility that the USA might accuse China of being a “manipulator of its currency,” which would be a convenient pretext to call for sanctions.
As a secondary — but equally important — objective, Washington is trying to create a domestic inflationary impact. Ben Bernanke, the chairman of the Fed, the central bank, said that inflation should be two percent in order to maintain price stability and contain unemployment. The problem is that these objectives are planted in a sandbox on the rubble of the rest of the world.
“The message is that the USA will print all the dollars that it needs in order to generate inflation. The rest of the world will have to fend for itself, it’s their problem,” stated the Wall Street Journal in a critical tone. The Financial Times, another conservative newspaper, wrote: “Instead of cooperation … the U.S. is seeking to impose its will, via the printing press.”
This alarm is due to the inconsistency of this policy. If China revalues its currency abruptly, it will complicate its domestic front, generating higher levels of inflation and social problems, including unemployment and currency inflation. This scenario would also complicate the operations of the U.S. and other Western companies relocated in Asia, collateral damage for which the impact remains to be evaluated.
The other problem is that the torrent of dollars printed by the Fed may be used for other purposes.
For example, the reference rate in Brazil is 10.75 percent, one of the highest in the world. That country, like Chile — a South American model within the arc of the “predictable,” a status that Argentina and Venezuela lack — is erecting a variety of barriers to protect itself from the effects of speculative capital. It will be difficult. The Institute of International Finance, an organization of global private banks, calculates that this year it will have 42 percent more funds at the margin: U.S. $825 billion.
In this chaos, the next step may well be a war of tariffs, in the North and South, to put a stop to the boom of cheap imports, which could atrophy the growth of global trade. Although this may be dramatic, it may not be unrealistic.
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