As global rule sets change, economics leads politics
■"Will EU, Japan Intervene Now? As the Dollar Hits New Lows, Action Is Possible Anytime, But the Risk of Failure is High," by Michael R. Sesit and G. Thomas Sims, Wall Street Journal, 2 December 2004, p. C1.■"A Revalued Yuan Again Becomes Focus for Traders," by James T. Areddy and Anil Varma, Wall Street Journal, 2 December 2004, p. C18.
■"Behind Big Drop in Currency: Imbalance in Global Economy: U.S. Soaks Up Asia’s Output By Going Deep into Debt; Something Has to Give by David Wessel, Wall Street Journal, 2 December 2004, p. A1.
■"Cinergy Backs U.S. Emissions Cap," by Jeffrey Ball and Antonio Regalado, Wall Street Journal, 2 December 2004, p. A6.
Old maxim I have come to know: politics always follows behind economics, and security always follows behind technology. So long as neither falls too far behind, things are fairly stable, but when the gaps get large—especially in the associated rule sets—that brittleness ensues and some smashing event eventually comes along to perturb the system and trigger new rules.
You definitely get that feeling with the global currency situation right now. The U.S. has been soaking up everything that Asia can build, enabling their export-driven growth and thus allowing them time and money to put off needed domestic political rule-set changes—especially in China but elsewhere too. Many on Wall Street have long said that Asia did not nearly clean up its banking act following the Asian Flu of 1997-98 and it didn’t do so for lack of political will.
On the flip side you got the U.S. living way beyond its means, because trade-happy Asia is more than happy to buy up our debt with all the dollars they earn in the transactions. So America spends plenty of both defense and social programs as its population ages and it medical system spins out of control on costs. Political decisions a’ plenty await both sectors, but why do today what you can put off until tomorrow?
Where the politics begins to catch up is in the Bush Administration’s call to let the dollar slide. It’s fairly political because if forces both the EU and Japan to act eventually, and here’s where the political ramifications can get big:
A successful intervention by the ECB [European Central Bank] could help establish the euro as a currency that deserves a status in world markets that could rival the dollar, some say, and the ECB as a bank that can move those markets effectively. The dollar inherited the mantle as the world’s premier reserve currency from the British pound in the first half of the last century. No one expects the dollar to lose that position soon: past speculation that the yen or the German mark could act as a viable alternative proved false.But for the first time, there is another country of a similar size to the U.S.—the 12-nation bloc that uses the euro.
Or what some might call the rise of a near-peer competitor?
Meanwhile, China’s government will come under even more pressure to revalue the yuan, pushing them in the direction of political reforms they may or may not be ready for.
Yes, yes, the politics is starting to catch up alright.
And sometimes, you just can't wait for the politicians to finally get it right in their heads, like watching U.S. energy companies move so vigorously in the direction of a CO2 cap-and-trade regime while Congress and the White House seem so stuck in the mud about the "broken" Kyoto Treaty. Frankly, all that was "broken" about that treaty was that it didn't include India and China. But guess what? They're moving in this direction on their own, with or without Kyoto. And they'll do it because it makes political sense on the environment and because it's essential for long-term economic health.