United States Losing Financial Clout?

There are growing signs that the United States is losing its financial clout. One of these signs is the growing talk about adding other currencies to the list of currencies used as international reserves. The Premier of China has been raising this issue for quite a few months now. French President Nicolas Sarkozy gained attention last week by not only supporting discussions on the issue but also suggesting that France and China work together in developing such a change. The proposed venue: the upcoming G-20 talks in Seoul, South Korea.

There has also been talk within the International Monetary Fund about the need for change, both in terms of representation (the governing body of the IMF is heavily weighted toward the Europeans) and the makeup of international reserves.

The fact is that these initiatives are becoming more and more credible. A change is not imminent, but it is expected that discussions will grow about more co-ordination between countries or the inclusion of other currencies as international reserves.

The United States continues to attack the foreign-exchange policies of the Chinese, but Chinese leaders have worked hard behind the scenes to build relationships and to act in a way that is supportive rather than divisive. A recent example is the announcement that China will buy Greek government bonds to show support of the effort being made in Greece to restore confidence in the economic policies of that government.

“The U. S. plans to use IMF meetings and sessions of the Group of 20 in October and November as venues to coordinate international pressure on Beijing, rather than press its views unilaterally.” (See “IMF Talks on Currency Restraints,” http://online.wsj.com/public/page/news-business-us.html.)

Yet those that seemingly support a broader base for international reserves are getting most of the press and any real publicity condemning the actions of the Chinese appear to be mostly coming from the United States. The support the United States does get seems half-hearted, at best.

The United States seems to be losing its relative position in the financial world. Yes, it is still “Number One” but the fifty years of credit inflation that has weakened its economic base (http://seekingalpha.com/article/227990-monetary-warfare-can-nations-have-independent-economic-policies) coupled with growing strength in the emerging nations has resulted in changes in the relative position of countries in the world. The United States continues to act as if it were still the “sole act” on the stage, while many of the emerging nations, especially the BRIC nations, are finding their relative strength and their voice. (France’s Sarkozy, with no place else to go, seems to be leaning to the BRICs to show he still has some clout in the world.)

The growing conflict comes from the fact that the financial world has become increasingly interconnected. Capital mobility is greater now than many believed possible forty years ago. But, the existence of this mobility limits the choices available to countries: they can either have fixed exchange rates or they can have independent governmental economic policies.

Many, like the United States, have opted for independent governmental economic policies. This has resulted in the internal economic problems in the United States mentioned in the Seeking Alpha post cited above. The consequence of this has been a decline in the value of the United States dollar. Other countries have had to follow various paths in order to protect themselves from what they consider to be a “competitive devaluation” on the part of the United States.

These other countries are not particularly happy.

The call has gone out for nations to join in greater co-ordination: “the Institute of International Finance, the global top bankers’ club, is calling for renewed global co-ordination to address the trend towards unilateralism on macroeconomic, trade, and currency issues. Likewise, Chinese Premier Wen Jiabao has also been calling for global policy co-ordination.” (See the opinion piece by John Plender, http://www.ft.com/cms/s/0/295e207a-d09a-11df-8667-00144feabdc0.html.)

The likelihood of achieving some form of greater co-operation and co-ordination in the economic policies of member nations seems to be slim and none. This is especially true given the leanings of a majority portion of the voting body of the Federal Reserve System and the Chairman of the Bank of England concerning the use of “quantitative easy” to spur on their economies. In fact, the calls for greater “quantitative easy” at central banks has grown over the past several weeks which, of course, has had a negative impact on currencies.

In my view, we are in this conflict for the long haul. To me, the stage is set for the emerging nations to continue to press their point. There seems to be a growing sense their time is coming and that the United States is only going to become relatively weaker…although still Number One.

The model broke in the European sovereign debt crisis earlier this year and the European Union pulled together for a long enough period of time to keep things from totally falling apart. Some people had suggested that this European model of “coming together” be used in the G-20 and in the IMF.

I don’t think this is going to happen.

Greater global co-operation and co-ordination is going to have to come about someday. It is just not going to happen any time soon.