Only the end of the beginning

Monday, 28 September 2009 

Swan may have been talking about us entering the ‘Asian Century’ in India a few weeks ago, but the US is still a quarter of the global economy (compared to 2% for India) and dwarfs its nearest rival Japan. Even if China’s growth continues in a straight line (which it never does) it will be well into this century before the US is overtaken. Like it or not, this will largely be the US century as well, just an unstable one. Before a sunrise, there has to be a sunset. However, at least we now have a clearer idea of what Rudd meant by middle power diplomacy. It’s not as an interlocutor between China and the US, as though either power needs it. It is to make the best of US decline.

Irrespective of Rudd’s efforts, the G20 was always going to happen. It has not come about because China and India needed to be included, we could have had a G10 or G11 for that. It has come about because the type of political leadership that made the G7 and G8 a meaningful body over the last few decades, i.e. the US’s, has eroded. What we have now is a forum that disguises and accommodates that weakened leadership that Obama has inherited, but has not yet found a way to reverse. Rudd’s achievement was less to form the G20 than to make sure through lobbying that Australia was well positioned in that formation and that he could present himself as having a role to play in it.

It is fashionable now to say that a recovery is underway, but it looks more like a stabilising of the global economy after last year’s shock rather than a recovery. All of the problems that were supposed to have caused the crisis are still there. There is still bad debt on banks’ balance sheets and even the type of pay practices that governments have claimed were the cause are still going on. Governments have promised more regulation, while conveniently forgetting the problems suffered by the highly regulated European banks, but the main thing they have done is try to replace the collapsed credit system of the private sector with one in the public sector. In effect in order to fix a banking crisis, we now have a fiscal one. While the governments are hardly likely to acknowledge their role in creating this, the way this fiscal crisis is starting to creep into the political realm is through the growing disagreements over ‘exit strategies’ and a recognition that for some strange reason the recovery could be more painful than the downturn.

Australia’s deficit is neither here nor there. The problem is the US’s. Even there, it is not so much the issue that the US’s debt is set to approach a staggering 100% of GDP, not seen since WW II, but the problem of who will finance it. This is where the political problem comes in; declining US influence makes it harder to apply the pressure to get other countries to take the strain.

It is interesting to compare now to a quarter of a century ago when the US was struggling with a lingering recession and a sizeable current account deficit. Reagan had come to power with the task of rebuilding influence lost by defeat in Vietnam and the subsequent drift under Carter. Immediately he set about reviving a second ‘Cold War’ and so by making the Evil Empire the issue, underpinned US relevance by posing a problem only it could deal with. The pay-off was the Plaza accord of 1985, where the US effectively got the other Western Powers to devalue the US currency even if it screwed countries like Japan in the process. It was this calling on major Western economies by the US that led to the G7 being formed a year later.

Roll on a quarter of a century and the US is struggling to find the issue to recover its leadership. Bush tried the War on Terror, nobody followed, so the neo cons made a virtue of it by espousing the joys of unilateralism. Obama at least represents the acknowledgement that the US had to rejoin the pack but he still lacks the issue that would recover pre-eminence.

Climate change does not do it. The problem for the US is that, unlike the Cold War and the War on Terror, which made virtues of US military might, the climate change agenda turns the US’s economic dominance against it. As the world’s largest polluter, the US can never enter the climate change arena except on the wrong foot.

So instead we had the hugely convenient discovery of an Iranian nuclear plant just on the day the Pittsburgh Summit opened, allowing Obama to stand on the stage with other western leaders like Brown and Sarkozy to shake a stick at Iran. In doing so they highlighted the contradiction at the centre of the G20 summit. While ostensibly set up to allow the emerging economies a greater voice, it is kicked off by three developed nuclear powers reminding the emerging world why they can’t join them.

Yet while the US press has continued the story, it has died a death in other countries. As seen progressively through the two Iraq wars, the US may beat the drum but it doesn’t always mean the others will do much more than give vocal support. Furthermore, unlike the CIA stooge that ruled in Baghdad, the Iranian government is less likely to respond to threats. Nevertheless Obama has to find something to avoid becoming another Jimmy Carter.

This is the central contradiction at the heart of Rudd’s foreign policy and given the role foreign affairs plays, at the heart of the government as well. Rudd’s switch away from Howard’s War on Terror allowed Australia to better adapt to the new global reality, but that reality is US decline and loss of influence. Yet as we saw with Rudd’s triumph last week, Australia remains as reliant on US patronage as ever.

Posted by The Piping Shrike on Monday, 28 September 2009.

Filed under International relations

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6 responses to “Only the end of the beginning”

  1. Lefty on 28th September 2009 8:25 am

    The debt/deficit hysteria is overblown.

    The only real constraints here are political and ideological.

    We endlessly confuse the functioning of a federal government budget with that of a household budget because we are like the three blind men and the elephant – we feel one particular part of the animal and conclude that what we are feeling is the entire beast.

    A logical assumption, but completely mistaken.

  2. Persse on 28th September 2009 9:21 am

    Thought provoking points, however equating Obama with Carter underestimates both men. Carter lost the image wars for a whole lot of reasons – not least the shallowness in ability of the team he brought with him into government, his relentless micromanagement, and unlucky international circumstances. The USA would be a better place if Carter had not been distracted and had been able to go on to a second term.
    Obama, however, has a long history of leaving those who underestimate him eating dust in his trail.
    He also is not being well served by his foreign policy team – Clinton is little better than her ineffectual and sidelined predecessor.
    The astonishing thing about the US policy viz-a-viz Iran is how much the interests of the US would be advanced by rapprochement with the Iranians. Logistics for the Afghan conflict, stability for Iraq, security for oil supply, all would be both advantageous to the USA and good for the Iranians.
    The painting of Iran as some sort of threat, a minor regional power, sits somewhere beyond hyperbole into the Kafkaesque.

  3. fred on 28th September 2009 11:58 am

    The US hierachy needs a public enemy to distract attention from its problems.
    Fact, logic, ethics, reality are irrelevant.

    “Look over there, it’s an Iran!”

  4. Charles on 28th September 2009 6:39 pm

    Step 1: Accept you can no longer fund pointless wars.
    Step 2: Sort out your domestic problems.
    Step 3: Let inflation rip, the dollar devalue.

    I suspect they will go straight to step 3.

  5. Ricc on 1st October 2009 2:29 pm

    So the logic is while Japan could be brought into underwriting the cost of US debt voluntarily in the 80s, because it was a political/military ally against the Soviet bloc, NK and China, the US can’t call on allies or underwriters like China to do so today, lacking the moral authority (its allies) or an alliance (China) to do so.

    Reagan’s strategy clearly wouldn’t have worked if the USSR was economically entwined with the US the way China is.

    On regulation, I think all efforts are doomed. I think in economic terms there is a fundamental weakness in capitalism involving joint stock companies and the agency problem.

    If the joint stock company was intended to manage the pooling of risk for risky foreign ventures, but is now used to manage cash-rich going-concerns headquartered in unrisky developed countries, then it looks like the wrong tool for the wrong job.

    It is no surprise company managers take risks – that is what a company is for. They limit liability – why?

    The agency problem is real – can shareholders realistically expect their funds to be managed for their benefit alone (as opposed to for benefit of the managers themselves, the government, the shrieking interest groups and so on).

    Regulation seems to be about addressing agency yet any manager of a joint stock company has the personal incentive to spend nearly as much time trying to get around the regulations for their own benefit, as they spend trying to make money for the company.

    I wonder if it is time to re-look at the joint stock company. It is not an automatic right inherent in capitalism; it is an artefact granted by governments to allow entrepreneurs to pool risks. The government’s to give and to take away. Capitalism can allow people to accumulate capital and finance on credit without allowing them to dodge their liabilities either personal or collective.

    No risks; no pooling in my book. Go back to family companies where if the boss of the company ie its owner, is not happy with the result, he hires and fires till he is.

  6. The Piping Shrike on 1st October 2009 4:18 pm

    I wouldn’t argue that the military-economic link is as direct as that, more I would see it that Reagan’s Second Cold War provided the political framework to manage economic matters that is lacking today.

    The issue of pooling is very interesting and goes to a particular bugbear of mine. I would see the problem the other way round, i.e. not too much pooling of risk but too little.

    What we have seen in recent years is increasing regulatory constraints on the activities of pooling institutions like pension funds, mutuals and insurers to manage financial risk. It was partly in response to this that derivatives to slice and spread risk were developed. My view is that regulators have made the situation worse, but when the consequences are felt, continually see it as a problem of not enough regulation.

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