Sequel to Globalisation: The slide to disorder, Inventing demons & My country, ’tis of thee
July 15, 2005 8:15 PM   Subscribe

Since the US is the systemic centre of the global capitalist system, the shift to militarism is having global effects, some obvious, some insidious... While the US is the leading state in the international system, it is ensnared in webs of dependence of its own making: US patterns of consumption and living standards, while helping to maintain Asian economic activity, require the absorption of ever larger volumes of world savings, currently 80%. Over time this will prove unsustainable... Since there is no transnational political authority to halt or reverse the disintegrative trend, we are sliding towards disorder.
United States: the slide to disorder  Also by Philip S. Golub:
United States: inventing demons & My country, ’tis of thee
posted by y2karl (28 comments total)
WTF does 'world savings' mean? the US remotely raiding the world's piggy banks, and hording the cash under the white house lawn??

looked at the links, very flowery french BS.

the 'slide to disorder' eh?
posted by jimjam at 8:31 PM on July 15, 2005

WTF does 'world savings' mean?

Guess who's paying for America's spending binge - for the ballooning credit card bills, the scramble for homes, the country's gaping budgetary hole? Poor countries have become the financiers of the United States, fueling one of the most extravagant consumption drives in world history.

From 1996 to 2004, the American current account deficit - which includes the trade deficit as well as net interest and dividend payments - grew to $666 billion from $120 billion, swelling the nation's demand for foreign financing by $546 billion. The cash has come mostly from what the International Monetary Fund defines as emerging markets or developing countries - nations that have piled up mountains of cash even though most of their citizens are poor. High on the list is China, whose per-capita gross domestic product of $1,300 last year was a thirtieth that of the United States. Others are Russia, where G.D.P. per head was $4,100, and India, where it barely topped $600.

Another Drink? Sure. China Is Paying.
posted by y2karl at 8:54 PM on July 15, 2005

Put simply, jimjam, the United States of America is considered a better credit risk than local investors.

The Economist's somewhat less ideological take is still unsettling:

If America keeps on spending and borrowing at its present pace, the dollar will eventually lose its mighty status in international finance. And that would hurt: the privilege of being able to print the world's reserve currency, a privilege now at risk, allows America to borrow cheaply, and thus to spend much more than it earns, on far better terms than are available to others. Imagine you could write cheques that were accepted as payment but never cashed. That is what it amounts to. If you had been granted that ability, you might take care to hang on to it. America is taking no such care, and may come to regret it....

A second disturbing feature of the global financial system is that it has become a giant money press as America's easy-money policy has spilled beyond its borders. Total global liquidity is growing faster in real terms than ever before. Emerging economies that try to fix their currencies against the dollar, notably in Asia, have been forced to amplify the Fed's super-loose monetary policy: when central banks buy dollars to hold down their currencies, they print local money to do so. This gush of global liquidity has not pushed up inflation. Instead it has flowed into share prices and houses around the world, inflating a series of asset-price bubbles.

In the Economist's view, it isn't only American consumers who have benefited; but the risk is shared. If it's shared broadly enough, and the global economy keeps growing quickly enough (or population growth in developing countries slows enough, which would have much the same effect), everybody still wins. The Monbiot view that there's a static pool of "world savings" is a typical leftist approach, compared with the growth-capitalist belief that human capital can expand limitlessly. The truth is probably more muddled. For one thing, where there's cash to be had, there's more cash to be had in creating liquidity. Remember that most banks in the US have outstanding loans far exceeding their deposits (IIRC it's 10% or something under Fed rules). The same goes for, say, Argentina collectively. Bankers in Argentina want to make the most money they can, too, and in the safest way possible. So it's attractive to effectively loan money to the US, who's paying for it. Whether it's a good idea in the long run for Argentines (and I'm not choosing this example randomly) to invest in the US housing market instead of the Argentine industrial market is another thing entirely. Certainly, there's less available money for such things.

It certainly isn't clear, though, that if the US weren't borrowing China's money, that Chinese standards of living would rise. It might even be just the opposite.
posted by dhartung at 11:09 PM on July 15, 2005

from bizweek last week :D
Economists, though, worry that the good times are built on shaky foundations and wonder when they will end. "We're in a highly unstable equilibrium," says Martin Barnes, managing editor of The Bank Credit Analyst. "There are so many things that are three standards of deviation from normal."

What worries economists is that most of the savings is going to one country. According to Harvard University's Rogoff, the U.S. alone is soaking up as much as three-quarters of the excess global supply of savings. The result: a current-account deficit totaling $668 billion last year, or 5.7% of the country's GDP. And a further rise this year looks likely. Economists fret that at some point foreign investors and governments may tire of putting big sums into the U.S., triggering a steep decline of the dollar and a jump in U.S. interest rates.

So far, of course, that hasn't happened. Indeed, the dollar has risen 7% against a basket of major currencies this year, in part aided by Europe's woes...

It's not only the sheer size of the U.S. borrowing that could be a problem. It's also what the money is being used for. Unlike in the late 1990s, when the U.S. was tapping foreigners to help finance productivity-enhancing investment, much of today's borrowing goes to pay for the federal budget deficit and to fund a surge in house prices that many experts believe can't last...

Policymakers find themselves coping with a peculiar situation. The usual signals -- inflation and unemployment -- are in good shape, especially in the U.S. Nevertheless, imbalances spawned by low rates -- from the global housing boom to the swelling trade deficit in the U.S. -- may have left the markets and the economy more exposed to a monetary mistake by the Fed. "A concern is that...a policy misstep could cause a quick" shift in investor attitudes, potentially disrupting financial markets and the economy, Fed Vice-Chairman Roger W. Ferguson Jr. said in a speech in Berlin on May 27.

The savings surge also means that governments are not being penalized for running budget deficits. In the not-so-distant 1990s, traders -- the so-called "bond vigilantes" -- would drive up interest rates when they saw deficits getting out of control. Today, that's not happening. Such easy money could be helpful, if government spending is going for productive long-term investments such as infrastructure, education, and research and development. The danger, though, is that cheap capital will give politicians the opportunity to waste the money on items that don't boost long-term growth.

If low rates eventually pave the way for productive investment by governments and businesses, that would benefit investors. But until this happens, they must choose between accepting lower returns or taking on added risk. "In a balanced portfolio, you should expect an average rate of return of about 5%," says Barnes of The Bank Credit Analyst.

In search of better returns, investors have piled into a host of risky assets, from high-yield bonds to credit derivatives to emerging-market debt. If global growth slows, such indiscriminate buying could backfire. For example, the credit quality of newly issued junk bonds has declined sharply, according to Merrill Lynch & Co. A record 34% of new issue volume last year were by companies whose debt received the lowest ratings handed out by the ratings agencies, well above the previous record of 29.4% set in 2000. "The deterioration in credit quality in 2003 and 2004 could well show up in increased defaults in 2006 and 2007," says Martin Fridson, head of FridsonVision, a bond research service.

If global savings is channeled in the right ways, it can be a great boon for the world economy, enabling the sort of investment and risk-taking that fuel growth. But there's far too much evidence right now that low rates are encouraging behavior that could cause trouble. Hold on to your hats.
posted by kliuless at 11:31 PM on July 15, 2005

altho i'd add if merkel and sarkozy can get it together and koizumi passes postal reform, i think that'd go a long way toward rectifying perceived imbalances :D and if the ARM market doesn't blow up!

oh and iirc, almost half the US trade deficit is related-party trade -- inter-company trade between parent companies and their foreign subsidiaries -- which i think makes the trade deficit more structural than it might otherwise be, i.e. it's US corps choosing to locate production abroad [altho there is certainly foreign direct investment in the US as well; think toyota plants in alabama(cf!) n.america ... oh wait, but those cars aren't sent back to japan... nevermind :]

anyway, i suspect we'll be having our first test of how resilient currency and bond markets are soon enough :D

posted by kliuless at 12:21 AM on July 16, 2005

hehe, sorta a better example :D

Airbus Plant Headed For Alabama!
posted by kliuless at 12:34 AM on July 16, 2005

well of course I enjoyed reading United States: inventing demons thanks for the link, too tired to read the others
posted by nervousfritz at 12:35 AM on July 16, 2005

The Great Depression shows that our economic systems can topple themselves to utter ruin, and I can't help but think there were a lot of failsafes then that we haven't got now. (Of course, we also have a lot of new failsafes, but... they kind of look like tying an elephant with straw - it may works while the elephant is calm, but one real panic and there might as well be nothing there)
posted by -harlequin- at 1:42 AM on July 16, 2005

> the shift to militarism is having global effects, some obvious, some insidious...

The Asia Times noted one such effect recently, in an article predicting that a dollar crash is not likely. Money (heh) quote:

Even if one were to believe that Asian economies could withstand the significant financial ramifications of an overt move away from the US dollar, it is doubtful they would move to do so. The alliances that bind the US to playing a vital security role in that part of the world are becoming increasingly important - at a time when we are seeing increasing signs that the delicate balance that has kept the region relatively tranquil for several decades is starting to come undone.

This is not to suggest the existence of a strong quid pro quo in which the US and Asian leaders are closely coordinating and linking economic with security considerations. Rather, as CLSA analyst Christopher Wood highlighted in a recent report, a recognition is developing that "there is clearly a 'rearmament dynamic' at work in the East Asian region in the sense that the post-1945 status quo is over".

As China moves to augment, upgrade and flaunt its military capabilities and to achieve more economic and political stature, Japan, South Korea and Taiwan, which depend on the US as guarantors of their security, are unlikely to take any steps that might endanger Washington's ability to sustain its treaty and alliance commitments.

I suppose you all noticed (especially the hyper-aware y2) that China threatened just the other day to use nukes over Taiwan. When the Chinese rockets are flying, all those formerly strong currencies of the nations that can't shoot back are Kleenex.
posted by jfuller at 5:01 AM on July 16, 2005

Given that, last I checked, China had all of 20 ICBMs that can reach the US, that threat isn't very credible.

"Oh yeah? Well... if you try to stop me from taking Taiwan, I'll inflict serious damage on some parts of your strategic weaponry, even though I will be utterly unable to touch the vast majority of it, and I will thereby provoke you into completely destroying my military and many of my cities! So there!"


"Oh yeah? If you do that, I'll blow up 10--20 of your downtown cores, leaving the suburbs largely unharmed but for cancer and the like and leaving your nuclear forces completely undamaged, and I will thereby provoke you into downright annihilatory levels of force against me!"
posted by ROU_Xenophobe at 6:20 AM on July 16, 2005

ROU_Xenophobe: I believe the Chinese plan was to nuke the two Pacific deep-water ports in such a way that they have deniability. And then invade Taiwan. Not straight-up nuclear assault.

(IE, some actual state-sponsored terrorism, rather than the Bush wet-dream version).
posted by teece at 7:59 AM on July 16, 2005

ROU, that doesn't sound good. Your best case scenarios still leave 50-100 million americans dead.
posted by zpousman at 8:31 AM on July 16, 2005

teece: the general's threat in the linked article boils down to "If you shoot at our boats, we will launch our missiles at you." The general goes on to say that China will be so ferocious that they will launch several times more ICBMs than they actually have.

Your best case scenarios still leave 50-100 million americans dead

Maybe. I don't know how many people a counterforce strike of 20 warheads (the best case) would kill; it would mostly fall in unpopulated areas.

The point is that it also means, at a bare minimum, the utter destruction of the Chinese military and state, or, at worst... I dunno. Call it 600--1100 million Chinese dead. Which isn't a choice they'd be at all likely to pick when the alternative is "Okay, so we don't get Taiwan after all."

The PRC has a minimal nuclear deterrent good for keeping people from invading out of the blue, not a credible counter-nuclear force. The general was "just" being a crazy blowhard, presumably for the benefit of some Chinese audience.
posted by ROU_Xenophobe at 8:51 AM on July 16, 2005

yeah, fareed zakaria's come to the same conclusion (RIP rafiq)...
For the American government, the free ride may be coming to an end. It has run irresponsible fiscal policies, knowing that foreign governments and people would provide it with unlimited credit. But that credit comes at a price. When China holds huge reserves of dollars, it also holds the power to damage the American economy. To do so would certainly hurt China as much or more than it would America, but surely it would be better if U.S. policy were less vulnerable to such possibilities. Fiscal responsibility at home means greater freedom of action abroad.

In foreign policy, Washington will face two possibilities. The first is that China will push its weight around, anger its neighbors and frighten the world. In this case, there will be a natural balancing process by which Russia, Japan, India and the United States will come together to limit China's emerging power. But what if China is able to adhere to its asymmetrical strategy? What if it gradually expands its economic ties, acts calmly and moderately, and slowly enlarges its sphere of influence, hoping to wear out America's patience and endurance?

The United States will then have to respond in kind, also working quietly and carefully, also adopting a calibrated and nuanced policy for the long run. This is hardly beyond its capacity. America has been far more patient than most recognize. It pursued the containment of the Soviet Union for almost 50 years. American troops are still on the banks of the Rhine, along the DMZ in Korea and in Okinawa.

A world war is highly unlikely. Nuclear deterrence, economic interdependence, globalization all mitigate against it. But beneath this calm, there is probably going to be a soft war, a quiet competition for power and influence across the globe. America and China will be friends one day, rivals another, cooperate in one area, compete in another. Welcome to the 21st century.
what might that look like? well...
At present the U.S. net foreign asset position stands at 26 percent of GDP, the result of cumulating successive current account deficits. That means non-U.S. residents own U.S. assets like bonds, equity, bricks and mortar to the tune of a quarter of annual GDP. Usually the more a country owes abroad the more likely it requires a low rate of foreign exchange or high rate of return on capital. Let’s make two assumptions and then ask what happens to the U.S. net foreign asset position. First, let’s assume the Bretton Woods II system stays in place for another three-to-five years or so, not an unrealistic assumption given many Asian countries’ priorities of urbanization and export-led growth. At PIMCO we’re not only treating that as an assumption, that’s one of our secular forecasts. Second, let’s assume the world economy continues to grow as it did on average between 2000 and 2004. If those assumptions hold, then as John Llewellyn at Lehman Brothers shows in a forthcoming paper, the U.S. net foreign asset position would decline to approximately 70 percent of GDP by the end of this decade...

For the U.S., the consequence of a declining net foreign asset position with a relatively tame FED implies the dollar will remain under pressure over the secular horizon. The dollar’s strength today will likely prove temporary. If the dollar does not depreciate in the face of a declining U.S. net foreign asset position, the empirical history of current account adjustments suggests that would be a statistical aberration.
a secular decline in the dollar tho (not a dollar crash) implies steady losses as the value of dollar-denominated (financial) assets held abroad erode. to counteract this, i think you'll see a growing movement to diversify, and if not out of the dollar per se, then into 'hard' assets, or at least higher yielding or strategic ones...
US treasury secretary John Snow reckons a revaluation of the Chinese renminbi will come next month. He has been wrong before. Is he right this time?

On some counts, a move would be timely.

China's money supply last month grew 15.7 per cent, its fastest in a year and above the 15 per cent target set last July. Loan growth also accelerated, notwithstanding administrative efforts to temper overheating by clamping down on lending. There is pressure from mounting foreign exchange reserves too. These now stand at $711bn and are set to reach $1,000bn next year. All this argues in favour of the greater monetary control a flexible currency regime would provide.

Ultimately, however, Beijing can afford to remain intransigent. Inflation is muted, and manufacturing overcapacity acts as a useful depressant. For now, sterilising the money supply is affordable: the central bank's weekly bill issues are around half the levels of April and May. That also reflects slowing inflows of speculative money. (Counterintuitively, this is one of China's own prerequisites for a revaluation.)

All in all, banking on an imminent currency move is still brave. In any case, a revaluation of 5-10 per cent would barely dent the US trade deficit; nor would it revitalise American sunset industries. Beijing's appetite for US Treasuries could diminish. And it would become more tempting to spend foreign reserves, worth less in renminbi terms, on US acquisitions not a prospect America's politicians are likely to relish.
like i wonder what might happen if a chinese co. were to emerge as a bidder for BNFL's westinghouse unit? :D

posted by kliuless at 8:55 AM on July 16, 2005

Foreign Affairs is feeling sanguine:

In a series of recent papers, economists Michael Dooley, David Folkerts-Landau, and Peter Garber maintain that Asian governments--pursuing a "mercantilist" development strategy of undervalued exchange rates to support export-led growth--must continue to finance U.S. imports of their manufactured goods, since the United States is their largest market and a major source of inward direct investment. Only a fundamental transformation in Asia's growth strategy could undermine this mutually advantageous interdependence--an unlikely prospect at least until China absorbs the 300 million peasants expected to move into its industrial and service sectors over the next generation. Even the widely anticipated loosening of China's exchange-rate peg would not alter the imperatives of this overriding structural transformation. Ronald McKinnon of Stanford argues that Asian governments will continue to prevent their currencies from depreciating too much in order to maintain competitiveness, avoid imposing capital losses on domestic holders of dollar assets, and reduce the risk of an economic slowdown that could lead to a deflationary spiral. According to both theories, there should be no breakdown of the current dollar-based regime.

P.S. I feel like we're whispering in the library. Hold it down you guys, the librarian is frowning at us.
posted by jfuller at 9:29 AM on July 16, 2005

Negri and Hardt have one analysis of the rise of networked society. Their critique is essentially external to the American government. Internally, Ronfeldt and Arquilla have enunciated a doctrine of noopolitik, which is -- like Negri and Hardt -- built around a framework that describes how networks are transforming social structures. Noopolitik, unlike the military / capitalist / nationalist imperium envisioned by BushCo, is a strategy of cooperative hegemony based on transparency and international cooperation.

In the noopolitik framework, conflicts between transnational networks and nation states happen as netwars, the first of which was the Zapatista netwar. On the bright side, nonviolent netwars like the campaign for the Tokyo accords, the international agreements to ban landmines, the various human rights struggles and other forms of social activism have raised these transnational networks (often heavily influenced by NGOs that serve as nodes) to political parity with nation states.

In the middle ground, limited conflicts like the WTO protests, domestic resistance to the war in Iraq, and other forms of more militant social tranformation are also occuring.

On the dark side, transnational criminal organizations (TCOs), terrorist networks, and cryptarchies (for lack of a better word) like BCCI, the Iran-Contra "Enterprise," the Moon Organization, and (arguably) BushCo,. use networks based on secrecy to challenge, attack and subvert national and subnational states.

Statements of BushCo doctrine, like the National Security Strategy, openly endorse a return to outmoded "balance of power" politics -- underpinned by the ability to project military-industrial force rapidly as a "stiletto" of neocortical warfare (as evidenced by the popularity of "shock and awe" tactics.) The Global War on Terror is playing out as battle between two dark side entities, the BushCo nation-state versus the terrorist networks and Iraqi and Afghan nationalist networks. In Iraq, it has devolved into a classic of embattled military occupation trying desperately to erect a proxy state to transform a conflict between nations into a civil war over the carcass of a failed state. This is very similar to the conflicts between Aries worshippers Neil Stephenson describes in the latter part of Cryptonomicon.

But Ares fighting Ares is just exactly the problem. The solution lies In Athena's Camp.
posted by warbaby at 11:43 AM on July 16, 2005

dooley was at the PIMCO secular forum, but i think wilmot's got the juice... cf. mcculley :D
McCulley: But we don’t worry about the base case, we worry about the risk case scenario, which is that Bretton Woods II ends sooner rather than later. At this year’s forum, we concluded that many of the risks are tilted toward an early end to Bretton Woods II, and that if Bretton Woods II does come to an early end, it would tend to exert a deflationary bias to the world rather than an inflationary bias...

The number one risk to Bretton Woods II is protectionism, notably in the United States... Risk number two is that Bretton Woods II endemically has bubbles associated with it... Risk number three is commodity prices... A fourth concern is geopolitical risk, because you have a system where the poor are lending to the rich... And the fifth risk is that Euroland is the odd man out in this global monetary arrangement...

Powers: Another risk in addition to the ones that Paul has already outlined is how much it costs China, Japan and other countries to inherit U.S. monetary policy through the Bretton Woods II arrangement. Right now, the cost for Japan and China is nothing. In fact, it’s profitable. As Japan and China soak up the dollars that are flowing into their region by issuing domestic debt, the interest rates Japan and China are paying on domestic debt are far below the interest they are receiving on U.S. fixed income. But South Korea is right at the cusp of this arrangement starting to impose a cost on them and that is one of the reasons that South Korea appears to be front and center in considering diverisification away from U.S. fixed income.
posted by kliuless at 12:12 PM on July 16, 2005

jimjam: when punctuation and analysis just won't cut it.

Metafilter: very flowery french BS
posted by joe lisboa at 12:48 PM on July 16, 2005

kliuless, don't put "cheers!" after every comment you make.

It's like you're toasting to the impending "interesting times" for the United States. Unless you are, in fact, toasting (and drinking) with each comment. Cause if you are, then keep on keeping on!
posted by zpousman at 1:00 PM on July 16, 2005

as for hardt & negri, i like their idea of 'the multitude' (pp. 397-399, 407-408) that exists beyond the nation-state on par with global capital flows. but also as mcculley sez :D
There is no free market in passports. Indeed, the very definition of the sovereignty of nations includes the right – at the point of a gun – to define who is and isn’t a citizen: entitled to vote; subject to laws of the land, including the obligation to pay taxes and submit to conscription; and eligible for the social safety net funded by fellow citizens...

In turn, sovereign governments – especially democratically-elected governments, but also governments with democratic tendencies – must be responsive to their citizens’ needs and wants, not global citizens’ needs and wants. Thus, sovereign countries should and do have the ability to print their currencies in sufficient volume to keep them undervalued on purchasing power parity terms. It’s called mercantilism. And all developing countries practice it, to some degree, so as to bootstrap themselves to prosperity by exporting goods to developed countries, while importing their superior know how, institutions and political stability.

This is neither good nor bad, just the way it is: developing countries acting in their own perceived best interest, undervaluing their currencies through the power of sovereign-owned printing presses for money. Developed countries do the same thing, just in a different way, overvaluing their passports by restricting their production via sovereign-owned printing presses...

But until the day in which there is free trade in developed countries’ passports (like with New York City taxi medallions!), globalization will be a comparative advantage game tilted to the advantage of the haves relative to the have-nots.
now, i find this fascinating because, even tho there may be "no free and open global market in citizenship," that does not mean people do not vote with their feet, so to speak, migrate anyway and, perhaps most important, find accommodation wherever they may end up :D these movements not only blur nationalisms, regionalisms and identity itself (see discussion on sikhism in toronto, melbourne and india):
Most accounts of America's arguments about itself concentrate on divisions within the country: red v blue states, religious v secular voters, the 50-50 nation. This survey takes a different route. It looks at things that Americans have always had in common: mobility (the willingness to up sticks and move); immigration; equality of opportunity; and a love of clubs and voluntary associations (“nothing, in my view, deserves more attention,” wrote Alexis de Tocqueville).

Ideally, all these things work together to create an open, forward-looking society. The restless and ambitious move to the frontier, setting up new industries and opening up new avenues to wealth. More opportunities attract more people, and greater equality of opportunity adds to the supply of wealth-seekers, so social and geographic mobility reinforce one another. A dynamic country attracts immigrants who refresh its stock of ambition. Voluntary associations flourish in the midst of all this activity, making for a stable as well as a dynamic country.

Yet this survey will argue that the cycle no longer works as it did. Some component parts—notably geographical mobility and immigration—continue to whirr merrily. Voluntary associations are reviving, though only after a long period of decline. But disturbingly, there are signs that social mobility is dwindling. The political system, for its part, is adding to social rigidities instead of counteracting them.

The problem is not that America has become less dynamic. Its society continues to grow and change as fast as ever. But traditionally the country has been seen as a melting pot, which after much stirring produces greater integration. Now some of that activity may be causing separation. Has America become a centrifuge?
writ large, the global centrifuge may yet spit out stephenson's 'burbclaves & phyles' :D

posted by kliuless at 1:05 PM on July 16, 2005

China had all of 20 ICBMs that can reach the US

As long as they tell us the launch times and trajectories in advance, and it's not raining, our missile defense shield will protect us. Uh, from some of the missiles. Maybe.

"There are some who, uh, feel like that, you know, the conditions are such that they can attack us there. My answer is: Bring 'em on. We got the force necessary to deal with the security situation."
War Peace President George W. Bush
posted by kirkaracha at 2:50 PM on July 16, 2005

writ large, the global centrifuge may yet spit out stephenson's 'burbclaves & phyles' :D

Well, I don't know about that. But in other news, people are already hard at work building the first primitive version of what will become the floating city of would-be immigrants off America's coast.
posted by sfenders at 3:49 PM on July 16, 2005

Do you remember when GW Bush explained the unstated policy of the defense of Taiwan to the press? He said, to the effect, 'we will defend taiwan with all means available".

That's code speak for: "We have nukes on our Aegis destroyers that will take out any conventional force you have."

The Chinese general is quite right in his assertion that, an inferior army must use every weapon at it's disposal when confronted with overwhelming odds. It's really elementary when you think about it.

He is also reminding us, the people of the USA, that China has nukes. It's a sick PR stunt in that regard, fucking pathetic really.

Unfortunately for us, we are not really in a position to conduct another war, hah! (Another conventional one at least, *ahem)

Chinese Comunists are losers and can collectively kiss my ass. Governments must chill out here before this shit gets major. I won't tolerate a nuclear war, it's just unacceptable. Shit, i'd go fight first, and you know who I mean.
posted by kuatto at 10:25 PM on July 16, 2005

But China could easily survive a conventional or nuclear war--us not so much.

Have any of the countries holding dollars/our debt been converting to Euros? We stopped Iraq, but what about all the others?
posted by amberglow at 10:31 PM on July 16, 2005

> But China could easily survive a conventional or nuclear war--us not so much.

There are two Chinas. 750 million Chinese are still farmers. And not mechanized farmers, either, not even mechanized at the level of the Soviet collective farms. I mean animal-power farmers. The lucky ones have an ox or a water buffalo. The rich, modern China is all concentrated in cities in the eastern end of the country. Lose those (as they certainly would in a nuclear exchange with the U.S.) and the China that "survives" is all 1000 A.D. peasants (with radiation sickness.) Not that it would be peaches for the U.S. either...

> Have any of the countries holding dollars/our debt been converting to Euros?
> We stopped Iraq, but what about all the others?

The main such country, Russia, has done so to the extent that two years ago their dollar holdings were 90% of their foreign reserves. Now that's down to 80%, and that's the largest shift that's public knowledge. Otherwise, Indonesia made some noise, Bahrain made some noise, and (much more significantly, considering their dollar holdings) South Korea made some noise--from which they quickly backpeddled. It's difficult to know who's diversifying out of dollars quietly, because unless there's a landslide conversion (which we know isn't happening because it couldn't be concealed) central banks tend not to talk about what they're actually doing.

Since we started this thread with long sotto voce quotations from Le Monde Diplomatique, here's some more from the same source concerning the Euro's prospects as a reserve currency:

The obligation on the reserve currency country is twofold. First, it must stand ready to provide worldwide liquidity so there is enough of its currency circulating in the world to underwrite global trade and finance. This requires a predictable economic growth path. Second, it must stand ready to be what is called the "lender- of-last-resort," to sort out debt problems when countries become over-extended. And it must do all this while maintaining a reasonably stable set of internal and external currency values, along with robust economic growth....

...the euro faces two structural impediments to it becoming an alternative reserve currency. The first involves the "lender-of-last-resort" standard. The [European Central Bank] has no authority to be a lender-of-last-resort. National central banks in the euro zone retain this authority and responsibility but only within their own countries. The euro zone has not faced this problem across its jurisdiction and neither the ECB nor national central banks have this authority outside either their own countries or the euro zone. Absent this capacity, the euro at best can only be a limited alternative reserve currency in global markets.

The second structural impediment pertains to slowness of cross-country bank reforms and a major technological chasm between U.S. and euro bank systems. Bank charges remain high on inter-bank transactions across countries. And inter-country transactions are cumbersome compared to U.S. banks because of antiquated practices that have not been reformed and the considerable technological gap between U.S. and euro-zone banks. If there is a widely accepted gap between European and American military capacities, there is likewise a similar technological breach between euro-zone and American banks.

Paradoxically, this could be closed if the United Kingdom joined the euro, because its banking practices and technological abilities are the only ones in the world that rival the United State's. But this is not likely in the near term as the UK, for very good reasons, has opted to remain outside of the euro.

The above was written before the recent spate of No votes on the proposed European constitution, and before the bombings in Madrid and London and the the murder of Theo van Gogh. All of those events (the No votes more than the violence, I suspect) have militated against confidence in the Eurozone, hence in the Euro, by central bankers--a notoriously skittish breed. Britain is not about to drop the Pound for the Euro (and they aren't even going to bother to have a vote on the constitution.)

But the main problem the Euro has in replacing the dollar is that "provide world liquidity" business. You've got to get enough Euros out there, which would require that Europe spend enough Euros buying stuff from the rest of the world to replace America as the world's default consumer. Which in turn requires a lot of that "robust economic growth" the man mentioned, and it just isn't there. Europe is economically stagnant and Europeans aren't having kids, and barring some miracle that's the way it's going to stay.

As for the ECB becoming lender of last resort to the world: central bankers imagine, say, Argentina or India (or the U.S., heh) suddenly needing loans in the trillions to stave off financial collapse and revolution; and they imagine that Europe's response would likely be at about the same level as their military response in Kosovo and Cote D'Ivoire. ("The ECB has no authority to be a lender-of-last-resort.")

jfuller's cloudy crystal ball says: slow diversification by central banks into Euros, as Euros acquire prestige and a track record comparable to other strong currencies, but no mass stampede unless prompted by outside ("extrinsic," in banker-speak) events. And I can't imagine what such events might be, if actual events (Iraq etc.) haven't done the job. 2008 headlines: suitcase nuke takes out Chicago, California falls into the Pacific, and the election is between Newt Gingrich and RuPaul.
posted by jfuller at 6:02 AM on July 17, 2005

President RuPaul! I like the sound of that! : >

Hasn't the expansion of the Eurozone helped the process along tho? There are now many more countries using it as currency than before.
posted by amberglow at 8:31 AM on July 17, 2005

> There are now many more countries using it as currency than before.

There will be, but there aren't yet. From the more and more indispensible wikipedia (Egad, more batteries-not-included print):

The ten new member states [Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia] should be adopting the euro as soon as appropriate guidelines are met. For these new member states, the single currency was "part of the package" of European Union membership – unlike the UK and Denmark, there is no "opt out" permitted. Sweden also has no opt-out, but its government has made no moves towards fufilling criteria for joining.

The dates these ten states are expected to enter the third stage of the EMU and adopt the euro vary: 2006 for Estonia, 2007 for Cyprus, Lithuania, and Slovenia, 2008 for Latvia, Malta, and Slovakia, 2009 for the Czech Republic and Poland and finally 2010 for Hungary.

None of these little guys is exactly an economic powerhouse, though "Polish plumbers" notoriously scared the French.

Note: Dominique de Villepin (the new improved post-"Non" French P.M.) is now against expansion of the E.U. Since de V. is one of President Chirac's sockpuppet accounts, one assumes this means Chirac is now ag'in expansion also.

Oh yeah, one other sovereign state dumped the dollar for the euro some few years back: North Korea
posted by jfuller at 9:53 AM on July 17, 2005

"events, dear boy, events," or exogenous variables!

here's a neat experiment that uses scenario modeling to see under what conditions the euro might overtake the dollar as a reserve currency :D the result? Briefly put, if the UK joins the EMU..., the euro becomes the dominant currency. altho as amberglow implies, i wonder what might happen if OPEC switches its pricing scheme?

oh wait :D
Of major importance to the ultimate success of the euro, in terms of the oil pricing, will be if Europe's two major oil producers — the United Kingdom and Norway join the single currency. Naturally, the future integration of these two countries into the Euro-zone and Europe will be important considering they are the region’s two major oil producers in the North Sea, which is home to the international crude oil benchmark, Brent. This might create a momentum to shift the oil pricing system to euros. However, from today’s perspective, even after the UK joins the single currency, there would seem to be little incentive for London’s International Petroleum Exchange (IPE), where Brent is traded, to switch its Brent crude oil and gas oil contracts to euros, since both are traded internationally and the dollar is at the centre of a complex global oil trading and hedging system.
reserve diversification is, i think, a different matter! but i agree that the expansion of the eurozone, and the widening and deepening of its bond markets (securitised debt :) has been a major hallmark of its success (despite setbacks!) that can and in many respects already has granted the euro "prestige and a track record comparable to other strong currencies" :D

also fwiw, re: "a Chinese general's remarks that war over Taiwan could lead to the destruction of hundreds of US cities," i thought this was an interesting take :D
China (unlike the US) has an official "no first use" policy for nuclear weapons - previously, it has stated it will only use them in retaliation against nuclear attack. However, Zhu Chenghu's hawkish remarks may constitute some signalling to the US military that the Chinese position is changing. Zhu said he had previously made similar remarks to Adm. Blair, the former commander in chief of the United States Pacific Command. We'll have to see how far Beijing distances itself from Zhu's remarks.

Estimates of the size of China's ICBM arsenal have not changed in 20 years. Reports usually state that they have only 10-20 liquid-fueled missiles capable of reaching the US (albeit now MIRVed with miniaturized warheads similar to the W88 - how similar is a controversial question). However, China's capacity for production of ICBMs and warheads (one can extrapolate from their satellite launch and nuclear programs) suggests that the old estimates are drastically low. Even Israel is estimated to have hundreds of warheads in its arsenal.

The General's comments may have been carefully calculated by the Chinese military in order to force US planners to consider the possibility of a nuclear strike on a US carrier group in the area (or even a strike on US bases in Okinawa or Guam) in the event of a conflict over Taiwan. Zhu sounds bloodthirsty, until we recall that MacArthur wanted to use nuclear weapons against China during the Korean war (this nuclear "blackmail" was an important impetus to Mao to push for a Chinese atomic bomb, although he never admitted it publicly) and that the French wanted the US to save their garrison at Dien Bien Phu (Vietnam) with nuclear bombs.
posted by kliuless at 9:55 AM on July 17, 2005

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