Category: Global balance

In this recent (introductory) post on this topic I wrote, “The US financial system’s current woes have accelerated the decline in American power in the world that has already been underway for several years now.” I think it’s important to specify that this decline has occurred both in the level of raw economic power the US can wield in the world and in its reputational or ‘soft’ power.
Regarding soft power, yesterday the folks at the Pew Global Attitudes Center sent out a report (Hat-tip Jim C) stating that,

even before this fall’s financial crisis, a 24-nation Pew Global Attitudes survey conducted in March-April 20081 found that many in other countries already felt the U.S. economy was having a negative impact on their own country’s economy.

The figures they use to illustrate this are persuasive. If you scroll down to the second figure they have in the text there, “U.S. Economic Influence”, you’ll see that in no fewer than 18 of the 23 non-US nations surveyed, a significantly greater proportion of the public judged the US’s economic influence on their country to be negative, than those who judged it positive.
In some cases, the disproportion was huge. Look at Turkey (70% ‘negative’ vs. 4% ‘positive’) or Argentina (50% ‘negative’ vs. 4% ‘positive’.)

Continue reading “Financial crisis and world power shifts, pt.2”

In all the publicity around the $700 billion bailout for wall Street that became law last Friday, the fact that Congress last Tuesday also appropriated $25 billion to prop up ailing US-based carmakers passed almost unnoticed in the US.
But it was not unnoticed overseas. (A hat-tip, indeed, goes to Frank al-Irlandi, who drew this to our attention earlier today.)
Of course, this bailout considerably distorts the global “free market” in cars– not that any such thing ever actually existed. Non-US carmakers, including those who operate production lines within the US, are reportedly furious. The FT reported on Saturday that German car-makers are already lobbying to be allowed access to these funds.
The FT reporters there note that European and Asian banks were successful in their efforts to gain access to the federal bailout loans being made available to the US-based (but often foreign owned or foreign funded) banks.
Regarding access to the car industry loans, they write:

While the aid package does not specifically exclude foreign carmakers, one European executive said it was “clearly a bail-out” of the Detroit-based industry.
The loans would help carmakers modernise their plants to build more environmentally friendly vehicles. They are available only to plants that are more than 20 years old, excluding all but a handful of foreign-owned facilities.
Stefan Jacoby, the US head of Volkswagen, said lobbying had already started, with Tennessee and Virginia – the two states where the German carmaker has a US presence – also taking part.
The Department of Energy has yet to flesh out the legislation with detailed regulations in a process that will take at least six and maybe as long as 18 months.

I wrote last night that as the current crisis continues we have to guard against “any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a ‘cleansing’ act of war.”
Obviously in these tough times there will be some significant degree of economic nationalism, as we have already seen. Indeed, the WTO in its current form may well be one of the major casualties of the crisis as it evolves. However, I still believe that the crisis can be dealt with and overcome by the world’s nations in ways other than war. To the three reasons for relative optimism that I listed yesterday I would certainly add the fact that today, 63 years after 1945, all the world’s major nations have long experience of working together in a rules-based system that addresses issues in the economic, political, and security arenas.
Also, after all the experience of warfare the world has had since 1939– from Hiroshima to Iraq– no responsible leader could realistically today think that going to war will “solve” any actual problems.
We are not in the 1930s. Reason, calm, and a sense of fairness can prevail.
But it depends on us all having informed and fair-minded publics, as well as wise leaders…

The US financial system’s current woes have accelerated the decline in American power in the world that has already been underway for several years now. This is so for a number of reasons:

1. The crisis has revealed the degree to which the US government and other American institutions have become indebted to non-US creditors, and therefore the antecedent (pre-crisis) reduction in the US’s ability to wield economic power in the world, as well as its current and ongoing reliance on the goodwill of non-Americans if the effects of the crisis are to be minimized.
2. It has revealed the weakness and dysfunctionality of a whole series of American institutions, ways of doing business, and habits of mind that previously were thought to be successful and worthy of emulation. (Among these are the extensive de-regulation of the financial markets that has occurred in recent years; the rise of the myth of the financial “Masters of the Universe”, barely accountable to shareholders or anyone else; a glaring dissonance between personal incomes and social utility; etc.)
3. Finally, the way the elected leaders in Washington have handled the crisis to date has shown a president who is now beyond even “lame-duck” status– “dead duck”, perhaps?– a congressional leadership that has had its mindset formed far more by political donors from among the mega-bucks high-flyers than by the constituents whom they are supposed to represent, and the lack of any discernible voices speaking credibly about what it means to be “a national community” in America today and stressing the mutual obligations that in any democratic country all citizens reciprocally owe to each other.

These failings matter. They matter, firstly, because the weakest and most vulnerable among our fellow-citizens– and among non-citizens– will be those who are hurt the hardest by the crisis in the bricks-and-mortar economy that still lies ahead.
They matter, too, in a different way, because our country has until now been the world’s sole “Uberpower” (to Josef Joffe’s vivid and evocative term.) So the contagion from our woes has already started to infect several other parts of the world– most particularly, Europe. Also, this financial crisis and the way it has been handled further assault the already-battered “brand” or reputation of the US around the world, making the descent of the US from Uberpowerdom much steeper and more rapid than it would otherwise have been.
I welcome this shift. Uberpowerdom was never either moral or sustainable and the US and its rich-world allies have inflicted grievous harm on the low-income world over the past 15-plus years. However, all such large-scale power shifts are unsettling and carry the potential for dislocation and violence. The fact that the present power shift is accompanied and accelerated by a financial crisis that will almost certainly morph into a much broader economic downturn within and outside the US makes such reactions more likely… We all need to be very vigilant in the coming period to watch for, and try to tamp down, any signs of surging economic nationalism, nationalist greed, jingoism, or a desire for the supposed solaces of a “cleansing” act of war.
There are, however, several reasons for hope at the present turning point– most of them coming with a distinctively Chinese accent:

1. The whole world is more densely and complexly intertwined at the economic level than ever before. This has meant, yes, that the contagion from Wall Street’s woes has spread elsewhere. But it also means there really is a high degree of inter-dependence among the world’s major power centers. Some people write about the high prospect of “wars” for resources. There are, and will continue to be, contests for resources among the major powers, yes. But I see these being waged overwhelmingly through non-military means. Washington’s experience of war in Iraq– a war in which access to oil was certainly one key factor– showed the limited utility of the weapon of outright war. And thus far, the major non-Iraqi beneficiary of post-2003 Iraq’s oil agreements has been China, not the US!
At a broader level, though, the economies of China, Russia, India, or other “rising” powers” are too tightly tied to those of the US and other trading partners for the rising powers to want to break those ties through outright war against the fading Uberpower and its allies.
2. China may anyway be able to escape the worst ravages of the economic crisis to come. Although the People’s Bank of China and the China Investment Corporation have lost some money through (as it turned out) unwise investments in US entities, still Beijing has been successful in (a) keeping most of its economy protected from too many internally generated financial woes– precisely because of the under-development (in US terms) of its domestic financial structures, and (b) winning at least some protection from Washington for the $400 billion investments in Fannie Mae and Freddie Mac which remain, I think, by far the largest of its non-T-bill investments in the west.
If China is indeed able to keep its economy significantly insulated from the downturn in the west, then its continued economic growth may–even at lower growth rates than the hard-to-sustain 10%-plus rates we’ve seen recently– end up being a considerable continuing engine for the world economy and may even help lift the battered “west” out of its doldrums over the years ahead.
I see that today, Premier Wen Jiabao described the country’s financial market as “safe and stable with generally adequate liquidity.” A statement from the central bank welcomed the US House of Representative’s passage of the Wall Street bailout Friday noting that “China and the US share common interests in … a stable financial market.” And Wen said that “Maintaining ‘steady and fast’ growth is the largest contribution China can make to help the world overcome the current financial crisis stemming from the United States.”
3. It is also worth noting here, once again, that China’s rise onto the world scene in the past 15 years has occurred in a quite unprecedented way. China has not emerged as a world power through force of arms outside its own borders or through arms-racing. (Its nuclear arsenal is, at an estimated 200 warheads, many times smaller than those of the US or Russia. It truly looks like a “minimum deterrent” force.) It has emerged onto the world scene instead by buying into the existing rules system as embodied in the United Nations and its institutions and the institutions of global economic governance– all of these institutions having been established by the US in the post-1945 period. The peaceful, rules-respecting manner of China’s rise is a cause for considerable reassurance for everyone who will be (is being) affected by it.

Here are a few of the other things I’ve found interesting to read recently, on topics related to the above:
Bloomberg told us that today the German government agreed to a $68 billion bailout for Hypo Real Estate Holding AG, a commercial property lender. Here is some more commentary from Calculated Risk, who says the underlying problem may not be as bad as it seems: “this sounds more like a liquidity issue rather than a solvency problem.”
Here is a piece by the FT’s Wolfgang Munchau looking at some o0f the tricky economic governance issues, at this time of crisis, for a Europe that is still only partly coordinated on the relevant matters. (The crisis might have a deep affect on Europe’s governance questions– and that could happen in either direction, I think.)
Here is a piece of geopolitical analysis from the very pro-US French commentator Dominique Moisi. It is titled “A global downturn in the power of the west” and says:

First, the shock reinforces the relative decline of the US and the passage from a unipolar to a multipolar world. Whoever is its next president, America will not only have to face more diverse and complex challenges but will have fewer means with which to confront them. The interaction between the infectious greed of its financial class and its politicians’ dereliction of duty has impoverished the country. The torch of history seems to be passing from west to east. It is true that China and India are also affected by the financial turmoil; less so Japan, a country whose financial conservatism is the product of bitter experience 20 years ago. But to paraphrase French President François Mitterrand: growth is in the east and debts are in the west. Furthermore, fear is in the west and hope is in the east, so we are equipped in very different ways to face this crisis.
The meltdown has also revealed the depth of an identity crisis, not just in America but also in Europe. Nationalisation may have been the initial American response to the crisis. But it is nationalism that is the main obstacle facing Europe. The temptation of the “to each his own” mindset was present in Europe in the good times, but has become irresistible in bad times. Nicolas Sarkozy, French president of the European Union, may be mounting a brave and gallant fight to produce a “European answer”, but his activism is not sufficient to hide deep divisions among member states.

And here is an assessment from China’s Xinhua titled “Impact of global financial turmoil on China seen as limited.” It includes this:

“We feel China’s financial system and its banks are, to the chaos developed in the U.S. and other parts of the world, relatively shielded from those problems,” said senior economist Louis Kuijs at the World Bank Beijing Office.
He told Xinhua one reason was that Chinese banks were less involved in the highly sophisticated financial transactions and products.
“They were lucky not to be so-called developed, because this (financial crisis) is very much a developed market crisis.”
A few Chinese lenders were subject to losses from investing in foreign assets involved in the Wall Street crisis, but the scope and scale were small and the banks had been prepared for possible risks, Liu Fushou, deputy director of the Banking Supervision Department I of the China Banking Regulatory Commission, told China Central Television (CCTV).
Chinese banks had only invested 3.7 percent of their total wealth in overseas assets that were prone to international tumult, CCTV reported…
Kuijs… expected an impact on China’s banks coming via the country’s real economy, as exports, investment and plans of companies would be affected by the troubled world economy and in turn increase pressure on bad loans.
Wang Xiaoguang, a Beijing-based macro-economist, said the growing risks on global markets would render a negative effect on China in the short term but provided an opportunity for the country to fuel its growth more on domestic demand than on external needs.
He urged while China, the world’s fastest expanding economy, should be more cautious of fully opening up its capital account, the government should continue its market reforms on the domestic financial industry without being intimidated.
Chinese banks had strengthened the management of their investments in overseas liquid assets and taken a more prudent strategy in foreign currency-denominated investment products since the U.S.-born financial crisis broke out, CCTV reported.

Well, I expect that things are not quite as rosy in China’s economy as this reporting makes it sound. Here’s a recent FT assessment– registration required.

Did you know that China has over $900 billion of exposure/investment in US Treasury bills and in debt issued by Fannie Mae and Freddie Mac– and that the Chinese government has therefore (quite understandably) been exerting its influence in Washington and elsewhere to prevent the US financial system tumbling completely off the cliff of insolvency?
You might never know that fact if you read only the mainstream media in the US, which have been dominated by highly Americo-centric stories about the anguished interplay among the big players in the US government and economy.
But an article buried deep within today’s WaPo tells us this:

As U.S. financiers scrambled this week over how to deal with possible collapse of major financial institutions, Chinese Vice Premier Wang Qishan arrived in Washington with a message: To survive the crisis, U.S. equity markets need countries such as China that have massive foreign exchange reserves to jump in a big way.
… China … is estimated to hold a fifth of its currency reserves — as much as $400 billion — in Fannie Mae and Freddie Mac debt. In addition, its banks have billions of dollars worth of exposure to the American International Group, Merrill Lynch, Lehman Brothers and other companies in crisis. The Industrial and Commercial Bank of China, for example, has $151 million in bonds issued or linked to Lehman; China Merchants Bank has $70 million of Lehman bonds; and the Bank of China has $75.62 million of Lehman bonds.

In addition, as I noted here recently, China has holdings of US T-bills that on July 31 totaled $518.7 billion.
Today’s WaPo piece is by Blaine Harden, reporting from Tokyo, and Ariana Eunjung Cha, reporting from Shanghai. The information it gives about tyhe actual content of Wang’s interventions in Washington, and the US reaction to them, is sketchy or non-existent. But at least Harden and Cha do give some important information about the role that both China and the also heavily exposed/invested Bank of Japan have been playing in the current crisis, matters that provide a crucial geostrategic background and framing for the current crisis.
The WaPo’s editors saw fit, however, to bury it deep within the “Business” section of the paper, as though it was of no particular interest to the general public.
Also buried deep within the business section is another article illustrating another significant international dimension of the US financial crisis. That is this article, that reminds us that enormous though the current– hopefully one-off– taxpayer bailout of the financial sector will be, still, it is roughly the same size as just one year of the Pentagon’s budget.
I’ll deal with some of the intriguing implications of this latter fact later on. But the Harden/Cha article contains some extremely important information that I think the WaPo’s editors should have given a lot more prominence to.
It starts with this assessment from an associate director of the Bank of Japan:

Japan is a captive of its investment in the United States economy and its central bank has no real alternative other than to hold on to the massive amounts of U.S. Treasury bonds it owns and work hard to help clean up the mess on Wall Street, Hidehiko Sogano, an associate finance director at the Bank of Japan, said Friday.
“The reason why we stress the importance of stability is that the amount which we have in U.S. assets is so enormous,” said Sogano, referring to the roughly $860 billion of the bank’s $1 trillion in reserves that are in U.S. investments, mostly Treasury bonds.

Of note there: Both the figure for the size of the BoJ’s total US investments, which I haven’t seen recently, and the way that this BoJ manager– reportedly representing bank policy– defined the bank’s interest during the current crisis.
As I noted here recently, the latest figure on the amount of T-bills Japan owes is $593 billion. That means it owns around $260 billion in other, quite possibly much more risky US investments. Later in the piece, Harden/Cha write that on Friday, “Finance Minister Bunmei Ibuki conceded at a parliamentary hearing that the government and central bank hold about $74.5 billion in debt issued by… Fannie Mae and Freddie Mac.” Well, not nearly as much as the Chinese hold in Fannie and Freddie. But still, not inconsequential.
Harden and Cha also wrote this:

Sogano, who said he was speaking for the bank, is part of a team at the bank that has worked around the clock this week to calm global markets. “If we shift out of the dollar without deep consideration, then that would surely affect the market,” he said. “So that is why we always have to be very careful. If that sounds conservative, it is conservative.”
In a week of epochal market turmoil, for the Bank of Japan being very careful has meant being aggressively interventionist. Besides injecting the equivalent of about $96 billion in four days into money markets for overnight loans, the bank has gone into the business of making dollar loans.
It joined with four other central banks in a $180 billion currency swap with the Federal Reserve and will use its $60 billion share to supply dollars to local and foreign institutions.
Sogano said that the Bank of Japan feels that U.S. market turmoil, even if it continues for months or years, will not alter the central place the United States occupies in global finance and will not undermine the willingness of the Bank of Japan to invest in the United States. “There will be no change because we quite understand the importance of the U.S. market and the stability of the dollar,” he said.
…Ibuki, the Finance Minister, said Friday that Japan would consider funding the International Monetary Fund or other international lending agencies to help with bad debt.
Sogano said there is no political support in Japan for mobilizing the several trillion dollars in Japanese pension funds and other savings funds to recapitalize troubled U.S. financial institutions. He agreed that such investments, if properly managed, could increase returns for savers in Japan.

Does that mean that the Japanese might be eager (or at least willing) to have the IMF help bail out some sectors of the US economy? That would raise some fascinating issues, if so.
Regarding China, Harden and Cha note that, unlike the Japanese, China might indeed be willing to intervene to buy up some troubled US financial entities– including the troubled financial giant Morgan Stanley.
Harden and Cha write:

In recent weeks, finance chiefs from around the world have come to consult with their counterparts at the Federal Reserve and U.S. Treasury about possible interventions.
China’s delegation, headed by a 60-year-old ex-banker who comes from the country’s depressed coal-mining region, has been among the most vocal, according to sources briefed on the discussions.
… As U.S. officials were deciding in August whether to take over Fannie Mae and Freddie Mac, the Treasury Department held informal talks with officials from the People’s Bank of China, the country’s central bank. At that time, investors in Fannie Mae and Freddie Mac in China were dramatically reducing their holdings. The U.S. side told China that a cash infusion was in the works; China said that it expected the U.S. government to “do whatever is necessary” to protect the investments.
Accompanied by a delegation that includes senior officials from China’s central bank and Ministry of Finance, as well as banking, insurance and securities regulators, [Vice Premier] Wang had originally traveled to the United States on Sept. 14 for trade talks in Los Angeles. But as new shocks hit earlier this week, Wang flew to Washington to meet with Treasury Secretary Henry M. Paulson Jr.
Wang sought assurances that if the Chinese government were to encourage its companies to seek investments in the United States, the deals would not face the same political opposition that has undone past Chinese investment proposals.
Andy Xie, an independent economist who was formerly Morgan Stanley’s chief Asia economist, said the United States needs to accept that a large amount of U.S. assets must be transferred to other countries’ ownership. “If the U.S. is not willing to accept that,” Xie said, “they will have to print money and the dollar will fall. And we will be headed toward a global financial meltdown.”
Companies in the United States and in Europe are already reaching out to Chinese investors.
Morgan Stanley chief executive John Mack has been in contact with the China Investment Corp., the sovereign wealth fund that manages $200 billion, and with China’s Citic Group. La Compagnie Financière Edmond de Rothschild on Thursday announced that it had sold a 20 percent, $340 million stake to Bank of China.
It’s unclear how Chinese investors will respond to the overtures, especially given that their biggest investment in Wall Street to date, CIC’s investment in asset manager Blackstone Group, has turned out to be a disaster — its investment has lost half its value.

That investment was of around $3 billion. Ouch.
… At the end of last month I wrote here about the extent to which the economy of the “rest-of-the-world” was becoming decoupled from that of the US. It is true that that decoupling has been happening– in the sense that countries other than the US now do a lot of trade and financial business with each other that does not involve the US or US-owned companies at all. But this decoupling has been a process, not a binary on-off switch; and it is still very far from being anywhere near complete. Indeed, given the very “open”, globalized nature of the world economic system, it will never be complete. The US will still certainly, for the entire foreseeable future, be one significant participant in the world economy. But it will not dominate the world economy to anything like the extent it did from 1945 until recently.
Meanwhile, what we have seen in the past few days, is the extent to which non-US governments, seeing the size of the stake their countries’ economies have in the good health of the US financial system, have stepped in to try to help Washington shore up the system. It is true that these other countries– primarily Japan, China, some European countries, and Saudi Arabia– are not helping to save the US financial system out of pure altruism. They strongly need the US system to remain fundamentally sound. There is a very deep interdependence between the US and these these other countries.
But it is also the case that, as they help Washington shore up the US system, they will be buying increasingly large stakes in the whole of the US economy– and in both the policies that steer the US economy, and the policies that might affect it.
Those latter policies include many strands of Washington’s foreign policy, with at the forefront its incredibly expensive maintenance of a bloated (and often actively dysfunctional) worldwide military machine.
What’s more, Washington has been using that military– and threatening to use it–in a number of different ways that directly affect the national interests of what we might now handily start to call “our friendly creditors” among the world’s other nations. Those friendly creditors will most likely be having an increasingly strong say in the content of some of those policies.;
Use the military– or threaten to use it– against China, or in a way that escalates tensions between China and Japan?
You gotta be kidding.
Use the military in Afghanistan in ways that destabilize China’s long-time friend Pakistan and continue to foment additional Islamist extremism in Central Asia (including Western China)?
The Chinese will most have something to say about that, too.
Use the military to launch an act of war against Iran or to help Israel to do that?
Many of the friendly creditor nations will have plenty to say about that.
The world is changing with unprecedented speed these days…