If there is one gap between Americans and the rest of the world that I immediately notice whenever I travel and talk politics, it is that the rest of the world is often irritated by and envious of American self-confidence.
Others see Americans as walking boldly through the world without regard for constraints, whereas citizens and nations through the rest of the world are all too aware of the constraints on themselves, their hopes and actions.
To some degree, America has a domestic version of this tense battle brewing now — between neoconservatives who believe that America should be about making sure that the right values are generated and pursued inside other countries that matter to us and that there are few costs too high to pay to achieve that goal vs. those who think that before venturing off on values-driven crusades abroad, core American interests need to be better off at the end of the effort than they were before.
There are some Americans, including myself, who see the Iraq War as already too costly in terms of casualties and financial costs but also in the damaging negative impact on the ‘mystique of American power.’ The Iraq escapade has shown the limits of American power, and that’s not a good thing when most of the rest of the world is irritated with American behavior.
In my view, we are about to be taught a lesson by a world that wants America to be tethered down. And the world is going to hit America where it has a serious blindspot at the moment — on the economic front. We are on our way to becoming a much poorer, on relative terms, superpower with the Chinese, Japanese and Europeans using currency management and debt dependency to constrain our options.
The International Herald Tribune today ran a piece by Eric Pfanner today about the Russians possibly juggling their reserve currency portfolio and offsetting the dollar-denominated parts of their reserves by adding more euros.
American economists and central bankers seem to scoff at the notion of the U.S. dollar losing its reserve currency status. But in revolutionary times, when everything seems to be changing, these sorts of anachronistic attitudes about permanence seem to be very wrong-headed. What is clear is that the Euro has become increasingly important in global transactions, and its vector is pointed up. The dollar’s vector is pointed down. We need to take stock of what that means — and what it may mean is that the bad behaviors America has been able to get away with for so long in terms of piling up debt and maintaining an irresponsibly high current account deficit may soon be impossible to maintain.
Yesterday, there was a piece in the Financial Times that I cannot link that argued that China was holding its own vs. the United States in the debate about currency revaluation. What is clear here is that China recognizes it has some latitude over U.S. actions now — and seems willing to say this publicly. During the many years that America went through the charade of debate China’s most favored nation status and trying to weigh human rights violation concerns with economic priorities, America never really came close to using any of the leverage it had over China through this annual MFN debate. But already, China has learned that it has leverage over U.S. actions.
Alan Greenspan is now saying that the current account rising as fast as it is is a bad thing and that the dropping dollar should concern us. Some of us are ticked off that Alan Greenspan is three years too late, and that this is Greenspan covering his ass — not good public policy commentary.
This economic charade from the White House has been going on for some time and lots of commentators — even manic neoliberals like Martin Wolf of the FT — have been worried about the compounding effect a rapidly growing American current account deficit combined with some kind of currency shock.
America cannot afford what it is buying from the rest of the world — it’s as simple as that. That is why the dollar is falling — but with the Chinese yuan falling at a rate equal to the falling dollar, we can’t but help keep buying from them, and the Chinese help financing our ability to buy their products. This can’t continue — and when it ends, the reality will be that Americans broadly will see their living standards fall.
So, America is walking blindly into an economic morass of constraints that it has largely inflicted on itself, and other key nations will not be able to help themselves from helping to fasten a tether here and there to further tie down the America that it wants to walk less boldly through their world.
— Steve Clemons