The National 2008-04-15 15:12:26
In the immediate aftermath of World War II, Dean Acheson, then-US secretary of state, declared famously – and with characteristic immodesty – that he was “present at the creation” of a new geopolitical order.
It may not seem like it, given the cancer on Wall Street that threatens to morph worldwide, but we are on the crest of our own creationist moment, a tectonic inversion of the global marketplace.
True, the near-term outlook is ominous. Some economists argue that the fallout from the subprime mortgage meltdown could cost the US economy trillions of dollars in vastly diminished home prices, household income and investments.
Sustained dollar weakness will undermine the world’s largest market for manufactured goods and erode the value of foreign-exchange reserves. Shell-shocked foreign investors will be less inclined to buy US assets, including the sovereign debt that keeps Washington from insolvency.
But the coming shakeout is long overdue. Only a secular re-pricing of the dollar can reconcile the contradiction of America – highly indebted with a personal savings rate of zero per cent – as the source of three-fifths of the world’s foreign exchange reserves.
The positive legacy of the US credit crisis will be the end of the US as the world’s primary growth engine and the phasing out of the dollar as the world’s fiat currency in favor of a blend of major currencies.
Already, central banks are adjusting or discarding altogether their dollar links or managed-float regimes. Kuwait presciently abandoned its peg to the dollar in May and pressure is mounting on other Gulf states – most dramatically in the UAE, where the weak dollar is fuelling labour unrest by eating into worker remittances – to untether their dirhams and dinars.
In Asia too, creeping inflation has forced monetary authorities to shed the ballast of a weak dollar. Nowhere is that more clear than in China, where the yuan has appreciated by 15 per cent against the dollar since mid-2005 and is expected to rise further this year in response to that country’s highest inflation rate in 12 years. And as the yuan goes, so goes the Hong Kong dollar and its own rigid fix to its US counterpart.
The weaker dollar is siphoning investment in emerging markets which have been showing clear signs of overheating.
Over time, the strengthening of currencies in high-growth economies will emancipate their long-repressed consumers, the first step towards righting the global trade imbalances that stifle investment and stoke protectionist impulses among debtor states.
The process has already begun in China, where currency deregulation has unleashed a torrent of retail investment in overseas stock markets. Poor timing, true, but the supremely risk-tolerant Chinese will pile back in once share prices stabilise.
Personal consumption accounts for less than 40 per cent of China’s economy, compared with 70 per cent in the US, while its savings rate has actually grown since the 1990s, to a vertiginous 50 per cent of GDP.
The unwinding of that massive reserve for the purchase of imported goods and foreign investment will have a sustained and seismic impact on global capital flows. And it will come about on China’s terms, not in response to pressure from a hectoring US Congress.
Exchange rate flexibility will expedite the process, already underway, of weaning the developing world from the US as its primary consumer.
Half of China’s exports are now destined for other emerging economies, for example, while South Korean exports to the US actually declined by 20 per cent in the year to February while its total exports rose by 20 per cent.
Such “decoupling” as it is known, is neither a threat to globalisation nor insulation against a likely recession. It is, rather, the birth pangs of what could emerge as a more stable, multipolar global economy.
The US, saddled with debt and the heavy toll of overindulgence, should welcome it.
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The National 2008-04-15 15:12:26