The global financial agenda has been fairly steady this year: how to deal with the evil twins of deflation and the currency war. This is perhaps the first time since the end of WWII that world leaders are banding together again to rebuild the financial architecture after a major market crash and the longest lasting recession in a generation. One of the crucial questions: what do we do about the chronic and dangerous trade imbalances that are jeopardizing the global economy’s current recovery and future stability?
Apparently, when Treasury Secretary Timothy Geithner attended the G-20 meeting in South Korea in late October, he came armed with a little-known mandate of the International Monetary Fund (IMF) that requires it to investigate the reasons behind certain countries’ trade surpluses and conjure up solutions for how to reduce them. With that in mind, Geithner lobbied the G-20 to adopt a four-percent limit on a country’s trade surplus when compared to its gross domestic product.
This same argument made another economist famous in the 1940s—John Maynard Keynes. Keynes promised, in his own eloquent, yet convoluted way, to “offset the contractionist pressure, which might otherwise overwhelm in social disorder and disappointment the good hopes of our modern world.” Geithner promoted the same thing, only in plain English, stating that nations with trade surpluses should depart “from export dependence and [shift] towards stronger domestic-demand-led growth.”
Just the mere thought that the U.S. Treasure Secretary has to seek obscure paragraphs in 70-year-old documents to push for today’s policy illustrates how dramatically the role of America has changed. Seventy years ago, the U.S. was the world’s largest creditor. Today, it is the world’s largest debtor and is reduced to the role of the war-impoverished Britain when it irrevocably lost its global supremacy. Incidentally, this paragraph on trade surpluses that Geithner is now invoking made it into the IMF founding documents at the request of deficit-plagued Britain.
Not surprisingly, the four-percent limit on trade surpluses proposal did not fly far in South Korea, shot down by China and Germany, the world’s current export powerhouses. In Geithner’s defense, the IMF is supposed to police things like trade imbalances and G-20 ministers have agreed to give it the role of chief policeman. But the thing is that no one has yet had the guts to say anything to China, which continues to wage the currency war by not allowing its own currency to float freely, or rather to rise freely.
The Keynesian ghosts are restless again, arguing that free trade is destroying American jobs and businesses. The Obama Administration has so far wisely stayed away from taking any open reprisal measures, which Congress is trying to shove down its throat. But the fact remains that, in terms of options, there are not many good ones out there. The U.S. is laboring under the burden of chronic trade imbalances, further exacerbated by the plummeting U.S. dollar, although there are a few optimists out there who believe the forces of the market will dissolve trade imbalances on their own.
Perhaps the optimists are right, if there were time to test their theory. But there isn’t. As Keynes put it long time ago, “The long run is a misleading guide to current affairs. In the long run, we are all dead.” I would say, probably so, everything else being equal. But nothing is “equal” these days. Old rules no longer apply. The balance of power is shifting and the global economy has become multi-polar and multifaceted, all of which points to one solution that is also 70 years old, but you will not find it in any of the IMF founding documents or on the G-20 meeting agendas.
It is simply a matter of economic evolution. It’s what happened to Britain after WWII, when the country was so impoverished due to war efforts that its currency could no longer be the world currency. At that time, the U.S. dollar took over that coveted role. And now, years later, it is time to realize that the global financial systems have become too dependent on the greenback and that the pressure has to come off. If and when it does, it will perhaps give the U.S. some breathing space to fix its chronic trade imbalance problem, among other things.