Wednesday, October 23, 2013

Fading American Expectation and Exceptionalism

Since the financial tsunami of 2008, I have been monitoring the bilateral currency swap agreements that China has entered into. According to the most recent report, China has 24 such agreements in place, the recent agreements with EU and UK are probably the most significant.

Most significant because EU represents a major portion of global economic activity, second only to the US and because UK is unabashedly and proactively going after opportunities associated with becoming a swap center for Renminbi (along with Hong Kong and Singapore) and bending over backwards to entice Chinese investments into UK.

There was a time when UK was the leading economic power of the world--you know, when the sun never set on the British empire. The pound sterling was at the time the world's reserve currency of choice. That was then.

Since then America has overtaken UK and became a superpower and after the collapse of USSR, the world's only superpower. The dollar has replaced the pound as the reserve currency.

Despite the fact that the financial collapse of 2008 was caused by American greed on Wall Street, the dollar was still considered the safest currency to have and hold. Foreign money piling into the US did its part in keeping the interest rate of US Treasury bills low.

Since that time, however, the US Congress has twice threatened to renege on the national debt which would in effect render the foreign holdings of US Treasury bills worthless. Each time, Congress kept the world watching with abated breath and backed off as the clock was about to strike midnight.

Congress has not offered a permanent fix to the circus revolving around the fiscal budget and debt ceiling but merely kicked the can down the street with yet another deadline looming on December 13. Some wags have suggested that Congress lacked sense of humor and did not select February 2, Ground Hog's Day, for the deadline.

Watching the US fiddle with the prospect of default is no joking matter but the world clearly appreciated that Washington has become one big joke.

As Wall Street Journal, among others, have pointed out, Asian countries in particular are now busy doing their own side deals in bilateral currency swaps to avoid additional dollar exposure. The most prominent next to China has been South Korea. They have been cutting one deal after another with their major trading partners. Their central banker said Korea is following China's lead.

The worldwide trend is obvious to anyone except members of Congress. American exceptionalism is fraying along with the declining desirability of the dollar. When enough countries decide holding on to the dollar is too risky, the American dollar will cease to be the reserve currency of choice.

When China is courageous enough to make the Renminbi freely convertible, the appeal of the dollar could take a quantum dump. When the world ceases to want dollars for their rainy days, the value of the dollar will go kaput. The American taxpayers will rue that day but it will be too late to throw the rascals out of Washington. The damage would be beyond repair.

Saturday, October 5, 2013

Does Shutdown Presage Global Meltdown?

An edited version appeared in New America Media.

The mightiest democracy in the world has grounded to a screeching halt by the tyranny of few.

Somehow the Tea Party members, roughly 10% of the House, were able to hold the Speaker of the House of Representative hostage and force him into an impasse with the White House.

The US Federal government can no longer operate because the political leaders of the two political parties cannot find common ground and agree.

Instead the parties are now feverishly engaged in explaining to the public why the other side is to blame. Nobody has a solution.

Befuddled observers around the world watch in morbid fascination even though they are hard put to explain how or why this can happen to the only superpower still standing.

The US is worse off than Italy: not even a person of Silvio Berlusconi’s ilk is around to bail out the American impasse and avert a government shutdown. (Berlusconi “saved” Italy by not bolting from the ruling coalition.)

The people of Lebanon are saying, “Hey, you Americans come and learn from us, we have gotten along without a functioning government for decades.”

To the Egyptians, this was an aha moment, namely how to get rid of a government without bloodshed.

Other western democracies such as France, Germany and U.K. are congratulating themselves for having the parliamentary form of democracy where the prime minister stays in power so long as a majority of the parliament supports him or her.

When the prime minister no longer has majority support and loses the confidence vote, the government falls. But, unlike the U.S. a minority cannot violate the basic tenet of democracy and shut the government down.

The bloggers in China seem to be having the most fun seizing the shutdown as an opportunity for a twofer.

On the one hand, the bloggers are praising the American civil society to the sky for its ability to go about business as usual, in contrast to China where a shutdown would assuredly lead to chaos and disorder.

On the other, some slyly suggested that a shutdown of the Chinese government wouldn’t be such a bad thing.

Tourists visiting the U.S. do not find the shutdown amusing. Many from China left for the US around October 1, China’s national holiday and the beginning of China’s Golden Week.

For many that scrimped for the trip of their lifetime, they will be going home without the customary photos of Yosemite and Statue of Liberty and other popular icons from the land of the free.

The bad taste of disappointed tourists is hardly the only damage to international relations for the U.S.

Because of the shutdown, Obama had to cancel his visit to Malaysia and Philippines and possibly the entire trip to Southeast Asia just to pivot back to Washington—further shaking the confidence of the region in the leadership of the U.S.

In contrast, China’s President Xi Jinping went to Indonesia and became the first foreign leader to address Indonesia’s parliament where he spoke for nearly an hour (and then he went on to Malaysia).  

The Taiwan based Apple Daily made a fuss over one of the phrases Xi used in his speech. He said jilidangjitianxiali, which the English China Daily has translated as, “The interests to be considered should be the interests of all.”

The cause of the excitement is because the same exact phrase used to be one half of the operating motto belonging to Chiang Ch’ing Guo when he succeeded his father, Chiang Kai Shek, and became the second president of Republic of China in Taiwan.

Indonesia would seem to be an unlikely venue to send a coded message to Taiwan. More likely Xi was using a phrase in common usage to emphasize the principle that one should consider the greater good over the narrow interest of a select few.

This, of course, is the very message that the political leaders of the U.S. are ignoring, namely, total focus on their individual agenda and not at all on national interest.

The gridlock continues and the U.S. is expected to hurtle over the fiscal cliff around October 17.  Without a Congress to work with the White House and raise the debt ceiling, the U.S. will have to default.

When the world sees the full faith of the U.S. Federal Government as worthless, there will be a worldwide financial Armageddon. Perhaps the crazies in Congress relish the idea of an Armageddon, but no one else will.

The self-inflicted wounds to American prestige will take time to recover. But if the United States actually defaults, the damage will be fatal and the world will never trust the U.S. ever again.