The Standard & Poor’s downgrade is nothing. How the leadership of such a great country can have come to convey to global economic and political markets the appearance of being a bunch of street brawlers at this fragile moment in history, and inflicted such wounds on American and global recovery, is both terrifying and tragic.
In Foreign Policy this week David Rothkopf reports one of ‘the keenest observers of Washington I know, a major international figure who is regularly in touch with heads of state, finance ministries, and financial institutions worldwide’ as saying ‘I don’t think most people in Washington have any idea of the damage that has been done in the past few weeks to America’s brand around the world’. From a distance, it seems that Fox and the Tea Party movemment has had something to do with delivering this political outcome. Whatever the explanation of the political malaise that cuts down good public policymaking in America (a disease also virulent in other industrial democracies), its consequences are not purely domestic.
The reasons the market subsequently tanked (for which Europe also deserves credit) are because there is no stimulus, the Obama administration has been locked out of any chance of maintaining one, and everyone now thinks that America and the world are headed back into recession. The idea that confidence would be restored by cutting the budget lasted a few nanoseconds.
Barry Eichengreen, in our lead this week, puzzles at why it took the market as long as it did to dive. The critical information was all out there.
‘Start with the stock market’, argues Eichengreen. ‘Although the pundits had all kinds of explanations, there was in reality little new information to justify a 500-point fall in the Dow Jones index on Thursday. That the summit in late July designed to solve the crisis in the euro zone had solved nothing was already apparent in, well, late July. The new data for US GDP that reinforced the picture of weak growth were similarly well beyond their sell-by date — they had been released on 29 July. The terms of the deal raising the debt ceiling were already known on 1 August. None of this was news’.
All this, and Europe, coalesced to drive investors into deep anxiety about a double dip. The market is extremely skittish. It’s not only investor sentiment that is erratic; households are anxious about the future. We’re seeing palpable demonstration of that now, even in Australia where there is less immediate (though real medium term) cause for it.
‘Then there was the debt-ceiling deal which took all possibility of further short-term fiscal support for the economy off the table. No one disputes the need for fiscal consolidation in the US in the medium term. But medium term is, in practice, when recovery is secure and the economy is firing on all cylinders. The fiscal impulse had already turned contractionary because the 2009–10 stimulus was being progressively withdrawn. The debt deal guaranteed that there would be a further, albeit small, contractionary impulse starting this October. More importantly, it boxed in the Obama administration, preventing it from doing anything substantive to get the economy going again’.
And, Eichengreen argues, there is much less freedom for Asia (read China) this time round to buck the wave, as it did so adeptly in 2007–8. Today Chinese policy makers have less room for manoeuvre. With inflation already running at 5 per cent, the Chinese authorities are trying to rein in bank lending. ‘Credit policies that inflated further an already expanding property bubble would not be helpful. Then there are worries about the balance sheets of financial institutions, like the credit cooperatives that financed local government’s infrastructure projects’, Eichengreen argues.
If Chinese authorities are constrained in this way from responding to a second hit as they did to the first in the initial crisis, and exports slump, Chinese growth would fall and ‘the implications of other economies that sell parts, components and, above all, raw materials to China would not be pretty’.
There are other views about how robust the Chinese economy might be to another big shock and we shall review those in coming weeks.
But this event is bigger than most people think, because it involves the deep and uncertain play of the troubles of politics into the market. And it involves a substantial downgrade not only of America’s economic but also her political stature. So at this time, it is right to fear for America more than for ourselves, if only because, as Eichengreen reminds us, that is where the ultimate reason to fear for ourselves currently lies.
Peter Drysdale
Peter Drysdale identifies and explicates the wider, global, economic repercussions of the histrionics surrounding the recent US debt-limit deal which, nonetheless, lacked the substance necessary for addressing core issues. Given America’s position as far and away the world’s largest economy, and the single most influential driver of global financial, commercial and economic processes, the consequences of policy failures there are very likely to impact on the rest of the world. As Drysdale points out, bourses in the USA, Europe and Asia have already offered evidence of this. He is right to suggest these are early days and there’s more to come.
What many analysts have said less about is the strategic consequences of America’s economic failings. The current liberal-democratic global order has been secured and maintained by the USA with its hitherto unquestioned economic leadership and military primacy, the latter founded on the former. As recent debates demonstrate, the former’s recovery may impose significant costs on the latter. While in neither arena the world shows signs of throwing up effective replacements, the unique singularity represented by US superiority in the economic and, flowing from it, other arenas, has clearly been eroded, both substantially and in the perception of investors. This erosion will likely reinforce strategic processes of power diffusion already underway before the onset of the current crisis in 2008-09.
Eventually, the US economy is likely to recover, but the contextual landscape in which it does so would probably have been transformed by then. Recovering America’s moral leadership might prove more challenging than restoring the US economy to health. Other actors, especially the BRICS grouping, are likely to develop their individual and collective interests independent of US ones, and growing wherewithal with which to pursue these. In short, before the status quo ante is restored, if it ever is, the 500-year old continuum of successive Portuguese, Dutch, Spanish, French, English and American domination of the global commons, which effectively translated into the Euro-Atlantic domination of the global political-economy, could well come to an end. Should this prognostication come to pass, we will probably be presented with a new strategic world.
Transitional fluidity born of systemic change is already generating strategic uncertainty. The failings of the US economic policy-making elite could only exacerbate that process. This is why these are turning out to be potentially dangerous times, and not just for economic reasons.