The seemingly endless blockade of the U.S. government by the Republican Party has started to affect the world economy. The IMF-Worldbank Annual Meetings in Washington, D.C. during the previous weekend were dominated by this issue. Speaker after speaker, from World Bank President Kim to IMF Managing Director Lagarde, to finance ministers, bankers and tutti quanti implored the US representatives, Jack Lew and Ben Bernanke, to come to an early agreement.
Whether this international chorus will have any effect on the Tea Party ideologues who have driven the Republican Party, the US economy and the world to the brink of another deep recession and financial turmoil, may be doubted. Knowing the protagonists, this outcry and imploration might have the opposite effect on this highly provincial, self-serving sect. It might reinforce their resolve to hold the US and world economies hostage and demand capitulation from the US President and his party, because it gives them even more leverage than before.
To the rest of the world the US debt ceiling law will seem anachronistic. While all around the world, national parliaments are called upon to decide on the annual budget and possibly medium-term budget frameworks, the US has a “double whammy”, requiring parliamentary approval, the annual budget (the cause of the shutdown of government since Oct 1), and the increase in the debt ceiling. While the former has certain safeguards which normally enables government to carry on with limited financial means, the latter threatens default of the financial system, because it can prevent the US government from being able to redeem its outstanding treasury bills, the benchmark for millions of transactions. T bills are the investment vehicle for many foreign country asset purchases, they feed money market funds and can be seen of gauges of global financial health. They provide major liquidity to the global financial system, are the “safe haven” when other countries’ economic health is cast in doubt – and tie many of these foreign economies, especially China’s and other Asian countries’ to their perception of the US economy.
Let us remember that last summer, when the US Fed boss Bernanke, announced that the Fed might soon consider “tapering” (i.e. reducing) its present 85 bill/a month asset purchase program, which resulted in a several basispoint increase in U.S. forward interest rates, large sums of hot money started to flow out from emerging countries, throwing them into turmoil, which again resulted in the IMF lowering its emerging markets forecast for this and next year by half a percentage point. “When the US coughs, the world catches pneumonia”: such is the effect of the largest economy’s impact on the world. One may (rightly in my opinion) decry this hegemonial domination by a superpower, which has in normal times, the deleterious side effect that the US can increase its debt in its own currency, thus being able to ignore the massive effect of potential exchange rate changes on their ability to repay, but this imbalance is an effect of the post worldwar II global economic order, when the famous Bretton Woods conference in 1944 did not follow John Maynard Keynes argument for a world currency and symmetric adjustment mechanisms, but rather the US Henry White’s power argument to establish the US dollar as the world currency.
Too much liquidity is floating around the globe, being fed by national banks’ attempts to unlock the economic stagnation caused by the financial crisis. While this was a welcome development, it has turned into a significant problem for two reasons. One, the unwinding of national banks’ profligacy will be very difficult, since financial market actors have become addicted to cheap money. It is another, sad, story that most of this liquidity transfusion does not end up where it should, i.e. as credit to the “real” economy, but is rather used to invest in a carry-trade fashion in financial assets, risking yet other unsustainable asset bubbles. Second, crisis resolution endeavors by the national banks have (unfortunately) freed the second pillar of macroeconomic policy, the finance ministers, from helping the recovery. They have, prematurely, engaged in budget consolidation, austerity, thus choking the economy. Europeans all have installed “debt brakes” and follow “six-pack” requirements, i.e. budget consolidation, the US “sequester”, the non-budget for 2014 and the threat to no be able to increase the debt ceiling, de facto are hard-core budget consolidation programs, executed in the worst possible way.
The major irony is that after the double-dip of the 2008-present financial crisis, the Eurozone crisis 2010, the renewed volatility of short-term money seen this summer, and now the inability of the leading economy of the world to act in its own and the global economy’s interests, still do not lead to any significant attempt to rethink the global economic order. While in 2009 rays of hope were visible when the G-20 attempted to assume the role of “global governor”, these efforts have stalled. The endless bickering about IMF “quote reform”, an attempt to give more influence at this institution to the emerging economies, whose share in the world economy has increased significantly, which could only be a first start, is proof. The sliding of G-20 institutional strengthening into oblivion is deplorable. No other forum is in sight, domestic issues (like the Tea Party blockage) dominate responsibility for the global society and economy.