In the past few decades, the GWP has grown at a much faster rate
The world barely escaped a meltdown when bank after bank either failed or were on the verge of failing in the United States, as the global financial crisis struck in 2008-09. The administration of President Barack Obama fashioned out a rescue by pumping in almost a trillion dollars to shore up the banks and save the giant American automobile industry, which is still that country’s major industrial driver.
This money was made available by putting the printing presses of the various US Federal Reserve Banks on overdrive. Little wonder then that the US dollar is now devaluing against most world currencies.
Now President Joe Biden has injected $3.5 trillion to lift the US economy to new heights and near full remunerative employment. The US dollar is still the world’s preferred currency, with almost 66 per cent of the world’s reserves being held in the American currency. Most of the rest is held in euros. This clearly indicates that the United States is the world’s preferred banker. On the other hand, if the US continues with its profligate ways and keeps adding to the supply of dollars, the value of the dollar reserves will keep dwindling.
Now let’s turn to how the system actually works. Countries like China and India produce goods and services at low cost for consumption in the US, which in turn pays them in dollars, which they in turn deposit in US banks. Give or take a little. Since money cannot sit still, this money in US banks is then lent to Americans, who today have the highest per capita indebtedness in the world, to splurge on houses, cars, LED TVs, computers and Playstations which they can often ill-afford. This was well understood, but like the people who kept investing with Bernard Madoff, countries like China, Russia, Japan, Kuwait, India and others keep investing in US securities at interest rates mostly between 1-1.5 per cent. Thus, in effect, the rest of the world was plying the US with cheap credit, encouraging it to splurge even more. Unfortunately, there was and is no global regulator to caution the US on its profligacy or force it to mend its ways.
The July 1944 Breton Woods Conference took place under the fast-receding shadow of the Second World War, when the US was literally the last man standing. All other pre-war powers, including the victors, were in shambles. The US was then much more than now the world’s dominant economy and military power. The conference agreed on creating the IMF and World Bank to regulate the global economy and to provide development assistance to create a more equal world. Lord Keynes had in mind a more elaborate scheme that called for the establishment of an international reserve currency (Bancor) but this had to be shelved in the face of American obduracy.
The United States, as a likely creditor nation, and eager to take on the role of the world’s economic powerhouse, baulked at Keynes’ plan and did not pay serious attention to it. The US contingent was too concerned about inflationary pressures in the post-war economy, and ironically US representative Harry Dexter White saw trade imbalance as a problem of only the deficit country. The Harvard-educated White was later found to be a Soviet agent, and one only wonders if the world economy would have been different from what it shaped up to be?
As a result, the IMF was born with an economic approach and political ideology that stressed controlling inflation and introducing austerity plans over fighting poverty. But the fact that the US has been the world’s biggest deficit country for several decades and seemingly least concerned about it seems to have eluded the IMF. This and the fact that the US dollar has become the world’s preferred reserve currency is now the root of the world’s economic problem.
This international system was unilaterally abrogated when in 1971 then US President Richard M. Nixon delinked the dollar from the gold standard. In the absence of a standard and a useful regulatory function for the IMF, coupled with the Reagan-Thatcher era that followed in the 1980s, the big private banks were virtually given a licence to run amok. We are now reaping the bitter harvest. With the US dollar as the world’s preferred reserve currency, the US and its profligate citizens have an apparently endless access to easy credit to satiate their sundry appetites. In this way the ever-growing annual US trade deficit becomes the de facto engine of growth for many economies, such as China and the Asean countries.
In the past few decades, the GWP has grown at a much faster rate. In 1985 it was growing at 2.76 per cent. In 2015 it grew by 3.49 per cent. Much of this is due to the changing of gear in countries like China and India that began their great leaps forward. China’s growth in particular has been truly astounding. The growth trajectory of these countries has made people review long-held notions about how this century is going to shape up. It seems that in 2050 it will indeed be a very different world economic order.
This may be or may not be. But the world is a rapidly changing place. The economic balance of power is shifting towards Asia. Like Communism, the ideology of the Washington Consensus rammed down the world’ throat has been proved to be a failure. It’s time we begin to think differently.
Many think that the world’s four fastest growing major economies --Brazil, Russia, India, China (and South Africa), the Brics nations -- must now become the basic building blocks of the new order. That’s why they are now meeting at the highest levels so often. But it does not seem that they have a plan or agenda.
Interests often conflict. If the United States reins in its deficit, China has much to lose. The 2009 slowdown cost it over 22 million jobs. India’s GDP dropped two points. Russia’s oil revenues dropped off dramatically.
Yet it devolves upon these five growth engines to bring more order into the world system. Casino capitalism can’t be the guiding ideology. It must be swiftly discarded and a more responsive and intelligent system best suited to all, and not just the United States, is the need of the day. It’s time we revisited Lord Keynes’ proposal for a global reserve currency and consider establishing a system to regulate and manage it.