A new world fi­nan­cial or­der in the mak­ing?

Dünya Executive - - ANALYSIS - Gunduz FINDIKCIOG­LU Chief Econ­o­mist

Should we call it a new im­pe­ri­al­ism? Or the end of fi­nan­cial im­pe­ri­al­ism, if this term means some­thing truly? Well, the late Gio­vanni Ar­righi al­ready clearly sig­naled in the open­ing sen­tences to his short – but an­a­lyt­i­cally very well ar­gued - study on the ge­om­e­try of im­pe­ri­al­ism that the term im­pe­ri­al­ism was sur­rounded by a “pro­found am­bi­gu­ity”. To wit, the sem­i­nar that was called for a schol­arly dis­cus­sion on im­pe­ri­al­ism in 1969 at Ox­ford proved to be at cross-pur­poses - ref­er­ences to im­pe­ri­al­ism lack­ing co­her­ence - and only gen­er­ated fur­ther mis­un­der­stand­ing and spread dis­en­chant­ment among schol­ars at that time. As Ar­righi re­ports, in the late 1960s and early 1970s, there were at least ten themes re­lated to the over-bur­dened term im­pe­ri­al­ism. Im­pe­ri­al­ism in in­ter­na­tional af­fairs can be seen as the first, and mostly vul­gar, ref­er­ence and it was surely not con­fined to left­ist cir­cles. What were the oth­ers? Well, Im­pe­ri­al­ism and un­der­de­vel­op­ment, im­pe­ri­al­ism and cap­i­tal ac­cu­mu­la­tion, im­pe­ri­al­ism as the mo­nop­oly stage of cap­i­tal­ism (also the last and high­est stage in the Lenin­ist lex­i­con), im­pe­ri­al­ism as fi­nance cap­i­tal, im­pe­ri­al­ism as the car­tel so­luti

on to an oli­gop­oly game (in the mean­ing of Kaut­sky, thus lead­ing to ul­tra- or su­per-im­pe­ri­al­ism), im­pe­ri­al­ism and un­even devel­op­ment and im­pe­ri­al­ism as ten­dency to war (first be­tween im­pe­ri­al­ist pow­ers, then among un­der­de­vel­oped states as pro­voked by im­pe­ri­al­ist pow­ers). We should also add a qual­i­fier here, to the ef­fect that im­pe­ri­al­ism man­i­fests it­self as mil­i­tarism be­fore tend­ing to­wards univer­sal war mon­ger­ing. Con­trary to Hobson, Ar­righi claims in pass­ing that im­pe­ri­al­ism could be char­ac­ter­ized as an un­sta­ble and tem­po­rary phe­nom­e­non, which we may as well add to our list of at­tri- butes. So, which is it to­day, or is there a tractable def­i­ni­tion of what ‘im­pe­ri­al­ism’ could be now be­yond ‘folk the­o­rems’? I doubt it. In a world where China is emerg­ing as De­fender of free trade, and where the for­eign cap­i­tal share in Chi­nese man­u­fac­tur­ing hov­ers around 35 per­cent, there is no other way. As such, such global link­ages and longterm for­eign in­vest­ments can also be seen as De­fen­sor Pacis, i.e. ‘the de­fender of peace’ world­wide even though Mar­silio da Padova didn’t in­tend the ti­tle of his 1324 book to be used in this vein.

US pub­lic fi­nances, USD as re­serve money and so on

So, what is this? Has the re­cent pro­posal by Mark Car­ney, Gov­er­nor of the BoE, to the ef­fect that the USD could well be re­placed by a CBDC (Cen­tral Bank Dig­i­tal Cur­rency), only a tech­ni­cal mat­ter? Has it noth­ing else to do with fi­nan­cial­iza­tion that took stu­pen­dously flam­boy­ant pro­por­tions af­ter 1979, or even af­ter the gold an­chor was dropped en­tirely dur­ing the Viet­nam War? Or did the two oil shocks of 1973 and 1979 not change an iota in the fi­nan­cial sys­tem? Is the al­most ex­clu­sive use of the USD as a means of pay­ment, as a com­mon de­nom­i­na­tor of global debt is­suance, as a store of value, etc., a by­gone fact, a re­al­ity of life some­how, or is it des­tined to be changed shortly?

For in­stance, even if the com­ing of Mr. Trump is no ac­ci­dent, he may still lose the sec­ond term bat­tle. What will be left of the var­i­ous po­lit­i­cal and eco­nomic vi­cis­si­tudes that char­ac­ter­izes his term ex­cept a de­te­ri­o­ra­tion in pub­lic fi­nances and a lot of harm done to global and U.S. trade? Em­pir­i­cal re­search on U.S. pub­lic deficit sus­tain­abil­ity has em­pha­sized the im­por­tance of tak­ing into ac­count the pos­si­bil­ity of regime shifts in U.S. fis­cal pol­icy.

Most of the stud­ies that tested for the pres­ence of th­ese shifts con­sider mod­els with struc­tural breaks, where the break­points are ei­ther cho­sen ar­bi­trar­ily or are en­doge­nously de­ter­mined. Ac­cord­ingly, it may ap­pear that the U.S. bud­get deficit is sustainabl­e in the long run, but it has un­der­gone regime shifts.

Th­ese re­sults are also con­sis­tent with those of many ex­ist­ing em­pir­i­cal stud­ies, as the afore­men­tioned ones are. In­ter­est­ingly, regime shifts can be ex­plained by the ex­tent of the change in the deficit. More specif­i­cally, only when the in­crease in deficit per capita reaches a cer­tain thresh­old will fis­cal au­thor­i­ties in­ter­vene to re­duce the deficit. Hence, a strand of re­search iden­ti­fies two regimes, with bud­get deficit fol­low­ing dif­fer­ent dy­nam­ics in each one of them. Th­ese re­sults pro­vide sup­port for the ex­is­tence of trig­ger points in the US fis­cal pol­icy ad­just­ment.

We should bear in mind, there­fore, that there might be a thresh­old be­yond which debt dy­nam­ics may ex­pe­ri­ence a qual­i­ta­tive change. That point may come right af­ter the elec­tions and bears the po­ten­tial of dras­ti­cally mod­i­fy­ing the out­look of the dol­lar/euro ex

change rate. The re­cent fluc­tu­a­tions in the par­ity could just be symp­toms of a deeper di­ver­gence of opin­ion and might sym­bol­ize the co-ex­is­tence of two con­trast­ing data gen­er­a­tion pro­cesses.

Hence, there has al­ways been a weak spot in the Amer­i­can as­cen­dancy af­ter 1979 and the spot it­self may have al­ready bi­fur­cated into two. To be sure, the Em­pire may strike back, and with a newly ac­quired fresh­ness of spirit and char­ac­ter at that.

How­ever, at the very least, the plethora of fin-de-siè­cle ef­fu­sions about the demo­cratic prom­ise of the Brave New World is not only acutely em­bar­rass­ing and acridly je­june, but looks dis­turbingly un­re­al­is­tic. More to the point: The “one Ring to rule them all and bind them” – in the dark­ness? - looks in­creas­ingly harder to find. Amer­ica isn’t solv­ing con­trol prob­lems any more, but play­ing var­i­ous games with pow­er­ful op­po­nents. On this score, please do take Ro­goff se­ri­ously, who wrote 16 years ago in the Wash­ing­ton Post: “But what­ever the rea­sons, and they are ad­mit­tedly com­plex, isn’t it still a bit nutty that the world’s richest coun­try has be­come by far the world’s big­gest bor­rower, with a net debt to the rest of the world (as­sets mi­nus li­a­bil­i­ties) of more than $2 tril­lion? The Ro­mans would be jeal­ous: They went to a lot of trou­ble to ex­tract taxes from their em­pire; the world just gives money to the United States.”

And that brings us to the heart of the bi­fur­cat­ing spot. Af­ter all, where we were head­ing should have been pretty ob­vi­ous right from the start be­cause, by virtue of an ac­count­ing iden­tity, the cur­rent ac­count equals the dif­fer­ence be­tween na­tional sav­ings and in­vest­ment (CA = S-I). The story of ne­olib­er­al­ism was al­most about that: Amer­ica buys and runs a trade deficit. This is no longer the case. And if this is no longer the case, if the U.S. doesn’t drive global trade to the ex­tent it did 20-30 years ago, why should the rest of the world ac­cept sim­i­lar terms that were ac­cepted back then un­der those con­di­tions? Why should ‘the Ro­mans be jeal­ous’ even now that global fi­nance has changed. This is ex­actly what Mark Car­ney seems to con­vey when he said “Any unipo­lar sys­tem is un­suited to a multi-po­lar world.”

Right-wing pop­ulisms and eco­nomic tail risks

The graphic de­picts some land­marks per­ceived as lead­ing in­di­ca­tors of sys­temic risks. If any­thing, af­ter the “soft power” rhetoric of late 1990s (which by the way was noth­ing but an arte­fact of PE in S&P500 be­tween 1996 and 2000, it­self caused by over­seas in­vest­ments to Amer­i­can stocks) po­lit­i­cal risks in­creased. And there were wars and civil wars, and proxy wars, and ter­ror ev­ery­where. Amidst lots of changes, po­lit­i­cally, mil­i­tar­ily – Rus­sia is a force to be reck­oned with again, and yes, China is ris­ing in leaps, es­pe­cially its navy, and eco­nom­i­cally, the old wis­dom of the 1990s is def­i­nitely lost.

There is a car­toon from 1914, a car­toon that shows Euro­pean na­tions ready to cut each other’s throat. Jean Jau­rès was the last de­fender of peace back then. The cur­rent sit­u­a­tion all too of­ten re­sem­bles the last years of peace be­fore 1914, and this is a sug­ges­tion fre­quently re­peated in the last few years. How­ever, by­gones are by­gones, and the past never re­peats it­self in the same vein. Still, on at least two ac­counts, the po­lit­i­cal scene does bear sim­i­lar­i­ties with the dis­tant past. First, Europe is laden with a re­newed as­cen­dency of rad­i­cal – right-wing this time - move­ments. Sec­ond, in lieu of ri­valry be­tween Euro­pean pow­ers, there is now a pro­longed war of at­tri­tion be­tween the U.S. and China. Add to this lots of ‘proxy wars’, Syria be­ing the first and fore­most case in point. ‘Proxy wars’ ex­tend to relations with Iran, a die-hard theme of ‘cold war’ with Rus­sia that can al­ways re-emerge, sanc­tions, oil prices and all that.

If war is not an op­tion it is only be­cause primo, the en­emy (of the West) as such is a bit dis­parate and there­fore al­most un­known; and sec­ondo, mil­i­tary tech­nol­ogy is fright­en­ingly ad­vanced and can easily get out of con­trol. Tech­nol­ogy also traces a sim­i­lar tra­jec­tory, not in its essence but due to the fact that it grows by leaps and bounds, but the eco­nomic and wide­spread ap­pli­ca­tions of it await ma­tu­rity and/or need time so old in­vested cap­i­tal amor­tizes it­self. We shall see a to­tally dif­fer­ent world in pos­si­bly just a decade or so.

In the mean­time, right-wing pop­ulisms will oc­cupy the po­lit­i­cal land­scape not only of the mid­dle-of-the road coun­tries, but also in de­vel­oped ones. Europe is a case in point, but so is per­haps the U.S. Given all th­ese un­cer­tain­ties, the USD can­not re­main the uni­modal an­chor of the in­ter­na­tional fi­nan­cial sys­tem.

Habit for­ma­tion is ready to ex­pe­ri­ence a set­back, a U-turn, and CBDC will per­haps be a ve­hi­cle for that in the in­terim, of which more anon.

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