A new world financial order in the making?
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.