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The only advantage the West has is a better standard of living for its citizens. Yet the United States is working hard to throw away this advantage by overspending at home and fighting needless wars abroad. And it now has a US$2 trillion financial crisis at hand.
Europe is following in the U.S. footsteps, but its economic crisis is a bit less severe.
The all-powerful United States has been struck down by a financial crisis never seen before. Oil is one of the culprits in draining U.S. wealth. Every year the country transfers US$700 billion to the Middle East to import oil. And it transfers US$300 billion a year to China in the form of a trade deficit for consumer goods.
Unless a solution is found to these problems, the U.S. troubles will not go away. Also, withdrawal from Iraq is an urgent necessity, not an option. That will save about US$150 billion a year.
A U.S. recovery will require a change in the direction of capital flows. The United States has borrowed nearly US$1 trillion a year, mostly from the developing world, and used it to fund its insatiable demand for cars, consumer goods and housing. In addition, the country has a US$10 trillion debt to repay.
Once these excesses are corrected, the United States may begin to prosper again. But it will have to share its progress with the emerging economies.
Unfortunately, the G20 leaders achieved nothing at their Nov. 14-16 meeting in Washington, and are unlikely to achieve anything at their next meeting in April. The United States is no longer the economic power broker it was in 1944, when the Bretton Woods conference was convened. At that time the United States and Britain agreed on a grand strategy of Anglo-Saxon freestyle capitalism that was supposed to rule the world forever.
In 1971, 30 years after Bretton Woods, the principle a fixed currency exchange rate was dumped. Although the U.S. dollar remained the dominant currency, it was no longer based on gold. This act, and later trade agreements struck by the United States, spelled its doom.
The core of its trade agreements was that the United States would keep the surplus cash within its reach. This was the start of the U.S. troubles, as surplus cash had to be spent. Americans developed an insatiable demand for goods and services, which exporting countries were pleased to meet, while keeping the value of their currencies low.
The G20 leaders who gathered to coordinate a U.S. rescue were at the same time rescuing themselves, as they are all already involved in the financial crisis. They must coordinate plans to prop up failing banks, then the credit market, then the consumer market and then the troubled manufacturing sectors.
Yet truthfully, nothing happened at the meeting. The G20 leaders came, they sat together, they talked and they dispersed. They each stated their own goals and objectives, without identifying common objectives. Hence no agreement was expected.
The U.S. dumping of the fixed currency regime sowed the seeds of today’s troubles. Floating currencies with regular interference from respective governments proved a bigger threat to the international financial order than the Vietnam War, Cold War or Iraq Wars.
A key example is China, which generated a huge trade surplus by keeping its currency low. China’s currency should have been revalued ten years ago, but it was not because the United States was hooked on surplus Chinese cash from China’s purchases of U.S. Treasury Bonds.
As for oil money, the United States could not curb the expansion of the auto industry and its fuel-inefficient vehicles because the flow of cash generated from imported oil was so handy, especially as oil exporters kept their cash in U.S. banks.
Now the G20 nations want to create a new world order. This could take years, but it is sure that in the new order the United States will be one partner, not the dominant partner.
The U.S. dollar became mighty when it became the only currency linked to gold in 1944. This was the end of the so-called “gold standard” that existed from 1870 to 1944, in which each currency was linked to gold. After Bretton Woods, all currencies were linked to U.S. dollar, which was linked to gold.
From 1953 till 1971 the Japanese were net beneficiaries of the fixed exchange rate. Their low currency made their products inexpensive in world markets. The same thing happened to war-devastated Europe, while the United States became the center of consumption. Prosperity grew in the United States, followed by Europe and Japan.
When the currencies were floated in 1971, the Japanese and European currencies gained in value and their products became more expensive. In the 1980s the Chinese stepped in. Their currency for the last 20 years has been inherently underpriced, making their products cheaper. They are following the Japanese model of low currency, low labor costs and freedom to export anywhere with no import duties.
Prosperity in the Arab world is linked to oil, not currency. From 1973 until today the Middle East oil exporters have sold oil at high prices. They too became notorious spendthrifts, and whatever they could not spend they left in dollars in U.S. banks, stimulating U.S. spending.
India has also reduced the value of its currency slowly. It was 7.50 rupees to the U.S. dollar from 1953 to 1971; it is 44 rupees to the dollar today. This has helped its exports and remittances from abroad. But the foreign investment that has helped Japan and China succeed is missing in India, which is stuck in a failed socialist model.
What can the G20 do in these circumstances? With 20 countries involved – a few of which wish to challenge U.S., European and Japanese economic might and domination – it will be difficult to reach a currency agreement to hasten economic recovery. The United States can spend its way out of an economic depression, but this would only postpone its economic collapse. No long-term solution will be forthcoming without currency and trade reforms.
China, Saudi Arabia, India, Japan, South Korea and Taiwan, all foreign holders of U.S. dollar accounts, are unlikely to take any measures that would cause their holdings to decline. They will resist the temptation to undermine their currencies. On the other hand, there may be no other way out.
Hence the G20 will talk a lot. They will feel great being part of a select group. But no agreement that protects everyone’s interests is possible. The monetary system cannot be healed without a lot of pain. Fewer Chinese imports and alternative energy sources will eventually heal the U.S. economy, but the U.S. dollar will not be the dominant player in the future.
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(Hari Sud is a retired vice president of C-I-L Inc., a former investment strategies analyst and international relations manager. A graduate of Punjab University and the University of Missouri, he has lived in Canada for the past 34 years. ©Copyright Hari Sud.)
