It may be a stretch to compare the current crisis with that of the 1930s, although no less an institution than the International Monetary Fund has called it the largest financial shock since the Great Depression. The impact on the real economy has been nowhere as bad as during the 1930s, when unemployment in the US rose above 20%. Yet, despite those differences, the inaugural speech of the new US president can, with justification, hark back to the inaugural speech of Franklin D. Roosevelt on 4 March 1933, when he assumed America’s highest office in the depths of the Great Depression.
Consider what FDR had to say: “The rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers.” That sounds a lot like what is happening today—the very same “failure of credit”, the similar “lending of more money” and the identical “pleading for restored confidence”.
But apart from grave issues in the US economy, the new president will also face an international challenge. On 15 November, the heads of state of the Group of 20 nations will meet to decide how, in French President Nicholas Sarkozy’s words, “to re-found the capitalist system”. That carries the implicit threat that the US-centric neo-liberal Anglo-Saxon model of capitalism will be reworked to rid it of its more egregious blemishes and a more “international” system put in its place.
A front page commentary in the People’s Daily, doubtless blessed by the Chinese authorities, said Asian and European countries should banish the US dollar from their direct trade relations, relying only on their own currencies. “The world...urgently needs to change the international monetary system based on US global economic leadership and US dollar dominance,” wrote the author.
Dollar dominance, or as it is usually called, dollar hegemony, refers to the current system where the US dollar is the world’s reserve currency. Critics say that status has enabled the US to run up huge bills with other nations for their goods and all they have to do to pay for the goods is print dollars. It’s a system that has enabled the US to live far beyond its means, while the rest of the world is compelled to build up dollar reserves to maintain the stability of their currencies. But will the new US president truly find that his country’s role in the global economy is being challenged? If so, it could mean a catastrophe for the US economy, which is dependent on the kindness of the world’s central banks, which deposit the billions of dollars needed in the US to service its vast current account deficit.
Or is it just rhetoric?
Radicals such as Venezuela’s President Hugo Chavez will continue to believe that “it is not possible to re-found the capitalist system; it would be like trying to re-float the Titanic when it’s lying on the ocean floor”. And some amount of reregulation of the financial system will certainly occur. But it’s doubtful whether the mainstream members of the international community really want an end to the current Bretton Woods II system.
China, which holds trillions of dollars in US treasurys, and pegs its currency to the dollar, is unlikely to insist on major changes. The empire of debt in the US and its large deficit is nothing but the mirror image of China’s export machine and its over-accumulation. And if the world is so truly fed up with the US, why has the dollar been strengthening at a time when the crisis in the US is at its zenith? Clearly, there is a flight to safety, which is still perceived to be the dollar—even gold has not been immune to the sell-off. Central banks have been increasing their holdings of US treasurys all through the crisis.
Despite the rhetoric against neo-liberalism or Anglo-Saxon capitalism, cooperation among the major economies has been strong, with the US Fed providing billions of dollars in swap arrangements to European and some emerging market central banks. One of the reasons for the nationalization of the US mortgage refinance institutions was because foreign governments held large amounts of their bonds. In short, capitalism is global and the US is still its leader.
So, why the criticism? As economists Sam Gindin and Leo Panitch put it, “This is reminiscent of the criticisms that were raised during the 1970s, which were an important factor in producing the policy turn in Washington that led to the Volcker shock as the founding moment of neo-liberalism. US hegemony was not really challenged then; the US was being asked to act responsibly to defeat inflation and validate the dollar as the global currency and thus, live up to its role as global leader.” The new US president will have to fulfil these expectations.
If he fails, the consequences could be catastrophic. We only have to look at the 1930s, which saw the rise of Nazism and World War II.
Also Read Manas Chakravarty’s earlier columns
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at email@example.com