Mallaby sees a grand bargain opportunity in this financial crisis

ARTICLE: “Bush to Host World Economic Summit by End of Year: Seeking a conference of ‘developed and developing nations,’” by Sheryl Gay Stolberg, New York Times, 19 October 2008.

THE FINANCIAL CRISIS: “A 21st-Century Bretton Woods: Success at global finance summit hinges on China’s willingness to play role once taken by U.S.,” by Sebastian Mallaby, Wall Street Journal, 25-26 October 2008.

The planned summit was proposed to be a Core-Gap love-in of inclusiveness, but as it shapes up, it’ll be the Old + New Core G-20 crowd, or about 2/3rd of humanity accounting for 90% of GDP.

Fair enough.

Mallaby has a great piece that describes how, in past crises, there is always a smart call for an updating of Bretton Woods, just like every crisis triggers calls for new Marshall Plans.

Some people say we’ve been living with BW-II for a while, which I like to describe as a sort of implicit Marshall Plan by which the U.S. consumer, through high consumption and borrowing, fueled the global economy across the 1980s and 1990s, facilitating the rise of all those emerging market pillars.

So whether you’d date this one as BW-II or BW-III (isn’t this a nicer and more sensible discussion than all that hyperbolic bullshit about World War III or IV?), Mallaby’s basic point is this: this time around it’s the US playing Britain and China playing the U.S. (sound familiar?).

Last time …

Britain, the proud but indebted imperial power, needed American savings to underpin monetary stability in the postwar era; the quid pro quo was that the U.S. had the final say on the IMF’s design and structure. Today the U.S. must play Britain’s role, and China must play the American one.

True enough in established-versus-rising dynamics, but, as Mallaby then points out, the cost to London was far higher than the one we face: the loss of its imperial trade preferences.

I guess you could say we’re going to lose ours too, just not in trade. Rather, we will end up losing our unilateralist war preferences.

The basic point here: China must unpeg its currency, loosen up on its $2 trillion in reserves, and in exchange for all that, we need to bring China into the senior heights of great power control of the global economy.

So duh! There won’t be any “league of democracies” and there won’t be any disinviting the Chinese from the G-20. Instead, there is, in Parag Khanna’s phrasing, the emergence of a G-3 that’s the US, the EU and the PRC.

Good stuff that I have been preaching for years now in the security realm. Now you know the reason why I’ve been so confident and dogmatic on the subject. I’m merely arguing superstructure; the base was already there, waiting to be realized by those clueless up to now.