The whole cloud, I believe, hanging over international finance at the current moment is the economic policy stance of the United States government.Oh, we can point our fingers at the Chinese, but it is the Americans that have set the tone for the world. And their current pronouncements about future fiscal and economic policy promise nothing more than a continuation of the past.
Martin Wolf, in the Financial Times stated it very clearly: the United States is trying to inflate China and in so doing inflate the rest of the world. (See http://www.ft.com/cms/s/0/9fa5bd4a-cb2e-11df-95c0-00144feab49a.html.)
Mohamed El-Erian, CEO of PIMCO, stated just last week that when the Federal Reserve creates liquidity it just spreads throughout the world going where ever it wants to. Worldwide capital mobility is a feature of the 21st century international financial system.
Stiglitz continues: “The downside is a risk of global volatility, a currency war, and a global financial market that is increasingly fragmented and distorted. If the U. S. wins the battle of competitive devaluation, it may prove to be a pyrrhic victory, as our gains come at the expense of others—including those to whom we hope to export.”
But, the United States has been conducting an economic policy for the past fifty years that has relied upon credit inflation to keep unemployment low, to provide individuals and families with homes, and to keep American manufacturers operating at high levels of output. (See my post “Maybe Things Have Changed” for October 22, 2010 at http://maseportfolio.blogspot.com/.)
Things began to get out-of-hand in the 1990s during the stock market boom connected with the tech bubble. Stiglitz again, “In 2001, (then) record-low interest rates didn’t reignite investment in plant and equipment. They did, however, replace the tech bubble with an even more dangerous housing bubble. We are now dealing with the legacy of that bubble, with excess capacity in real estate and excess leverage in households.”
And, these bubbles became world wide as the debt of the United States and the liquidity provided by the Federal Reserve System spread almost everywhere. The conditions we are living through at the present time were a long time in coming and have damaged other countries as well as the United States.
The world seems to be dividing into three (I previously thought it was just two) parties. The first is the emerging countries who seem to be doing OK and seem to be in the strongest position right now. These nations are the BRIC countries and others (like Canada) who have weathered the recent economic and financial meltdown in relatively good shape. The second group consists of the more developed countries, primarily in the West, that have followed economic policies not too different from the United States, like Great Britain, France, Spain, Italy, Greece, Portugal, and Ireland, who have experienced a sovereign debt crisis over the past year or so and are re-grouping by getting their financial affairs in order and adopting a different economic strategy for the future.
The third party contains just one nation, the United States. The United States is not showing any signs that it is getting its financial affairs in order. Furthermore, the economic policy philosophy prevalent in the United States government differs from what existed over the past fifty years only in terms of magnitude. The economic policy philosophy of the American government just seems to be even more of the same.
The leaders of the United States government have presented a common front to the world: our economic policy stance is a given. Now, let’s work out world financial reform.
I don’t see how anything new can be worked out in the G-20 or any other international body if the United States continues to take such a strong position. I believe this is the underlying message sent by the finance minister from Brazil who declined to attend the meeting that was just completed.
Nothing can be done to solve the imbalances in world finance if the United States continues to be un-moveable when it comes to its economic policy stance.
The world has changed. Things within the United States have changed. This is what my Friday post (http://maseportfolio.blogspot.com/) was all about.
But, the leaders in the United States continue to focus on their navels and claim that the problem is “out there”.
And, that is the problem.
World co-operation cannot come about when one country believes it has all the answers.
As such, I see the value of the dollar continuing to decline; the world situation will continue to remain unsettled with regard to countries co-operating with one another; and I see continued economic imbalance and dislocation, both in the United States, itself, and in the world.