It’s not for nothing that the US has remained the world’s superpower for a long period. It invariably manages to export its troubles overseas. The US needed low interest rates to sustain its financial economy in the wake of the collapse of the technology bubble and the 9/11 attacks. The result was overvalued currencies, low interest rates and bubbles everywhere else in the world. The overvaluation of the euro resulting from nearly six years of appreciation is now threatening the very fabric of the economic and monetary union in Europe. Peripheral European nations—Greece, Spain, Portugal, Ireland and even Italy—now face the prospect of painful real economic adjustment spread over a long period. There is no exchange rate safety valve for them.
Move on to Asia. Many analysts including yours truly thought that the US blinked when it postponed the twice-a-year report on global exchange rate regimes from its usual release date around mid-April. We felt it had succumbed to Chinese pressure. In the weeks leading up to the postponement, auctions of US treasury (basically, US government borrowing by issuing bonds) did not go off well. China had reportedly not bought enough of US bonds in those auctions. Consequently, we felt the US had moved to assuage Chinese concerns by postponing the release of its report on exchange rate regimes around the world. There was pressure on the US government from Congress to name China officially a currency manipulator.
But, evidently, the US had other plans. treasury secretary Timothy Geithner visited India. Brazil, Russia, India and China had a summit meeting. Soon after it got over, both India and Brazil joined the US in calling for a change in the value of the Chinese currency. Europe joined in too. Therefore, the US has successfully used the time to mobilize an international coalition against the undervaluation of the renminbi.
In the meantime, China is struggling to cope with a property price bubble and higher inflation rates. Under normal circumstances, both of them can be dealt with higher interest rates. But China’s interest rates are not free. Higher interest rates would bring upward pressure on its currency. Therefore, China has not moved its interest rate an inch. It is coming up with one administrative measure after another every day to contain excessive lending and an unsustainable boom in property prices. Kenneth Rogoff’s warning on China being the “this time it is different” story now needs to be recalled. By not increasing interest rates, China risks a failure in containing both forms of inflation—asset prices and goods prices.
Concerted external pressure on the currency hardens attitudes internally in China on the exchange rate regime. At the same time, its technocrats realize that China’s exchange rate policies are past their “use by” date. Its economic challenge is far greater than that of the US, in the sense that any macro-economic slowdown or stumble would appear to be a big defeat for China. The US has had its embarrassing moments in 2008. Now, it is the turn of China and other wannabe nations of the developing world.
Japan is mired in its economic malaise and India is relatively a small economy still. Moreover, it has its share of problems—economic and otherwise—to be of any immediate concern to the US.
In the US, as banks and mortgage lenders work out mortgage restructuring efforts, foreclosures are coming down. Its famed labour market flexibility had led to so much of job destruction that, compared with other countries affected by the crisis, the US’ labour market might be the first one to get back in shape.
On the thorny and sticky issue of regulatory capture by the financial industry, it is possible that, finally, the government is gaining the upper hand in pushing through reform proposals. Soon after the Securities and Exchange Commission launched a case against Goldman Sachs, former president Bill Clinton disowned both Robert Rubin and Larry Summers by claiming that he was wrongly advised on derivatives. In one stroke, he removed the intellectual underpinning for soft-touch regulation on the financial industry within the Democratic Party. Congress would soon approve the financial reform Bill. With that, the task of restoring balance between the “real” and “financial” in the US would begin.
Of course, this would not have been possible but for “cooperation” from other countries by way of policy errors and hubris. More importantly, however, it is their subscription to the US’ intellectual framework with respect to financial markets and macroeconomics (aversion to capital controls and tax on speculation, belief in financial market efficiency to name just a few) that enabled the US to export its troubles overseas and for the rest to receive them. So the lesson in this is that if the US’ hegemonic status is to end, its intellectual dominance on economics and capital markets has to end. That is not in sight as even the best non-US brains find that it offers a better intellectual climate than their home countries.
That means the US dollar retains its global reserve currency status without much resistance from pretenders.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at email@example.com