The headlines this morning…The Federal Reserve, the European Central Bank, the Bank of Japan and other counterparts entered into a coordinated effort to provide liquidity to world markets so as to revive confidence in international financial markets and, hopefully avoid a melt-down. Now, almost $250 billion of dollars can be auctioned off around the world via swap lines within the world central banking network. Almost one quarter of a trillion dollars of liquidity is now available!
To my mind, the tipping point has been reached. The era of go-it-alone, unilateral, cowboy nation behavior has collapsed. It should be very, very difficult for a nation to act independently in its own interest in the future.
This has been coming for many years now, but, as usual, it takes a crisis to pull it off. Four major books in recent years have given us a picture of this world and the lessons of these books should be taken to heart. These books should be “must” reading:
Mohamed El-Erian—“When Markets Collide”;
Thomas Friedman—The World is Flat”;
David Smick—“The World is Curved”;
Fareed Zakaria—“The Post-American World”.
None of these books contends that America will lose its premier position in the world. What all of these authors imply, however, is that the United States must become a partner with other countries rather than the arbiter of world behavior. Not only has the world become more connected and interdependent, the world has also become more uncertain. The only way nations can function within such a world is to cooperate with one another and seek solutions together because the problems and difficulties they face are huge and affect everyone.
Historically, I would place George W. Bush alongside François Mitterrand in terms of country leaders that got caught up in an ideological dead end. In the 1980s, Mitterrand, who was the president of France and a Socialist ideologue, attempted to “go-it-alone” and introduce a very socialist program which included substantial budget deficits underwritten by the French central bank, capital controls and a possible government take-over of industries. Capital fight followed and private business investment dried up. Finally, in March 1983, Mitterrand, after many fierce battles, gave in to world financial markets, gave up his ideological stance and moved to tighten up the budget, make the French central bank independent, and fight inflation. This whole experience “was a brutal warning to all political leaders that the regime of global capital made it much harder for any government, whatever its democratic political mandate, to go its own way.” (This quote comes from Steven Solomon, “The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy,” pgs. 286-287.)
George W. Bush, upon election to the U. S. presidency, established a “go-it-alone” effort, only in his case, the ideology was tilted to the Reaganomics of the 1980s…cutting taxes was the true test of his conservatism, everything else be damned. (It was a remarkable experience to listen in the primaries to ALL of the Republican candidates running to become their Party’s presidential nominee. They ALL bent over backwards attempting to convince people that they were the true heir of Ronald Reagan because they were going to provide the most tax cuts to Americans when they were elected President.)
Bush 43 got his tax cuts…and the Federal Reserve supported the tax cuts by keeping real interest rates negative just like a good member of the administration should…and now, like Mitterrand, Bush 43 is getting his market response. The only difference is that Bush 43 is not repenting and not changing his administration’s policies. He doesn’t have to…he’s a lame duck.
Another world leader facing his “Mitterrand moment” is Vladimir Putin, Prime Minister of Russia. Putin is finding out that even a Russian oligarch cannot “go-it-alone” and escape unscathed in terms of the opinion of world financial markets. Since the invasion of Georgia, the Russian stock market has fallen 55% and capital seems to be fleeing the country. The Russian stock market was closed on Wednesday and Thursday to stop the decline and the Russian government pledged the equivalent of almost $20 billion to shore up market confidence.
Bottom line—world leaders must decide on one of two choices going forward with respect to globalization. Either they can pull in the carpet through a national catering to populism, protectionism, and withdrawal from free-trade agreements or they can work with other nations to build a coordinated, cooperative world economic order that is composed of equal partners and not prima donnas.
To me, this is no choice at all. True leadership is going to come from those that realize the need of world partnerships and don’t pander to a national populist frenzy. True leadership is going to come from those that subscribe to the basic fundamentals of economics and finance (as discussed in my posts of September 15 and September 17). And true leadership is going to come from those that do not believe that their nation can just “go-it-alone”.