REVIEW: The World Finance Crisis & the American Mission, By Robert Skidelsky, The New York Review of Books, Volume 56, Number 12 · July 16, 2009
reviewing:
Fixing Global Finance
Martin Wolf, Johns Hopkins University Press, 230 pp., $24.95
Based on my quick read, Skidelsky (noted biographer of Keynes) obviously doesn't care to choose between the savings/cheap money theses regarding the recent financial crisis. One assumes he sees some interconnectedness, although he doesn't exactly say.
I do as well. The savings glut came as a result of our poorly trumpeted grand strategy to encourage Asia's peaceful rise. And it got out of hand (cheap money glut) because it was so seductive to our economic well-being, and because the basic package worked well enough to fuel a 27-year global economic boom (not bad, but let's point fingers anyway).
Wolf, like Greenspan, likes to focus on the savings glut, and apparently--to Skidelsky's way of thinking--doesn't blame America and its famous economic stewards on this point. In effect, Wolf seems to find enough causality in the savings glut thesis alone to account for and explain the structural imbalance that currently plagues the global economy.
But from the Asian point of view (or the world's, for that matter), the issue of the dollar as the reserve currency of note and that situation's tendency to allow American consumption and now debt-spending go unchecked means that just citing the savings glut thesis isn't enough.
It takes two to tango, as I noted about a decade ago when I first started talking about a "global transaction strategy" by which the U.S. encouraged the non-defense-heavy rise of great powers by importation so long as those powers kept our money cheap and thus kept the Leviathan feasible as a burden. I will not pretend to have had any foreknowledge of the economic implications of this structural imbalance. My economic knowledge doesn't go that deep. I simply knew that it worked for a very long time (the bulk of my life) and that this transaction meant the U.S. was providing its Leviathan activities as an implicit service (my basic point). As I always said, If the world doesn't care for how we deliver this service, they will cease to pay for it (put their savings elsewhere) and that will be the end of our capacity to provide it. To the extent that my presentations elicited questions about the sustainability of taking on such debt, my answer was always the same: it seemed hard to expect America to shoulder this burden forever, so movement needed to occur in the direction of picking up new strategic allies from those rising powers of the age (not Europe, but Asia--specifically China and India) because it was clear that, while the world seemed content to leave us with the Leviathan capacity, it was generating follow-on work (SysAdmin) that was beyond our means--especially in labor.
But as I argue in Great Powers, while this grand strategy was eminently successful, it has run its historical course: creating both the ends (frontier-integration of globalization's great expanse) and the means (new allies incentivized to help us) for a new grand strategy mix.
That's why I don't really care about how the economists frame the sheer economics of the debate here: savings versus cheap money. It's clear the imbalance is there and it's huge. It's clear the U.S. needs help on not being the sole great source of consumer demand in the system. It's clear rising Asia and Brazil should logically make their emerging middle classes happy (smart politics) and seek further balancing against the dollar as the global reserve currency (I'd like a third pole based on the East, as I've said many times). It's clear that there will be plenty of frontier-integration to go around and that America is too stretched now to handle on its own--and realizes that. It's also clear that rising China and India are interested in moving in the direction of being more assertive globally with their growing militaries, which makes sense given their trajectories.
In sum, all the pieces are there for a correction that includes bigger consumption in the New Core to balance the global economy's dependence on the Old Core, moves of all sorts to force fiscal and financial discipline on the U.S., and new levels of military cooperation between the U.S. and rising powers, none of which are dumb enough--in terms of their political leadership--to think that they can do it on their own or that they can afford some idiotic rerun of late 19th century balance-of-power BS (even as their militaries are full of such thinkers, and we've got a bit too many ourselves--thankfully, none of the relevant militaries are in charge of anything other than their wasteful and misapplied acquisition strategies).
(Thanks: Joe Canepa)