Daniel W. Drezner

The Mother of All Natural Experiments in Global Political Economy

If I’m reading the tea leaves correctly, the United States Congress is pretty close to a debt/budget deal.  Still, the U.S. is right up against the deadline, and even if capital markets aren’t freaking out in obvious ways, they are freaking out in more subtle ways.  Furthermore, the contours of the deal suggest that Washington ...

If I’m reading the tea leaves correctly, the United States Congress is pretty close to a debt/budget deal.  Still, the U.S. is right up against the deadline, and even if capital markets aren’t freaking out in obvious ways, they are freaking out in more subtle ways.  Furthermore, the contours of the deal suggest that Washington could very well be right back at this point come January/February. 

The economic costs of this repeated brinksmanship since 2011 have been pretty significant for the American economy — but that’s not the point of this post. Rather, I’m interested in the global reaction to these political convulsions.  Remember, no matter what you read, the U.S. remains the financial hegemon — and in theory, a superpower is supposed to provide "hegemonic stability" to the world economic system.  It is tough to argue that these repeated fiscal and debt crises have contributed to stability.

So how is rest of the world reacting to DC’s shenanigans?  It’s pretty pissed off, according to the New York Times’ Damien Cave:

The word many Mexicans now use to describe Washington reflects a familiar mix of outrage and exasperation: berrinche. Technically defined as a tantrum, berrinches are also spoiled little rich kids, blind to their privilege and the effects of their misbehavior.

“It’s a display of American arrogance,” said Raúl Silva, 40, an entrepreneur grabbing coffee at an upscale cafe here. “It’s a problem, and it’s going to affect us.”

Faced with Washington’s march toward a default, the world has reacted mostly with disbelief that the reigning superpower could fall into such dysfunction, worry over global suffering to come and frustration that American lawmakers could let the problem reach this point….

Indeed, the unequal distribution of power and wealth — part of the exceptionalism that American politicians loudly defend — has become a focal point for many foreign economists and officials. If any other nation had gotten this close to failing to pay its debts, they say, its economy would have already collapsed as investors fled, creating the need for a bailout not unlike what occurred here in Mexico in 1994….

Already, many argue, the standoff in Washington has deepened the sense of America’s decline. On the streets of many countries, conversations about the United States now regularly include expressions of shock and dismay. One businessman in Mexico said that following the fracas was like watching a famous couple’s marriage collapse in public, with shoving, shouting and ugly insults.

Now, if you read closely, you see two contradictory impulses in Cave’s story.  The first is frustration at a financial superpower that gets to exercise its exorbitant privilege because it’s so powerful.  The second is the conviction that the U.S. is on the way down.  It’s possible to reconcile those two views in the present — but in the future, one of these two beliefs has to give.  Either the rest of the world will continue to resent persistent U.S. hegemony, or the rest of the world will observe America’s decline.  It can’t really be both. 

We can also see this in China’s reaction to this spasm of American political fecklessness.  Everyone and their mother has been linking to the Xinhua editorial suggesting that, "it is perhaps a good time for the befuddled world to start considering building a de-Americanized world."  And yet, as the New York Times’ Mark Landler notes, it’s easy for China to say this…. and much tougher for China to actually do it:

China does not have many options beyond wringing its hands. Despite its efforts to steer its economy away from exports and toward domestic demand, China generates billions of dollars of excess cash that it needs to park somewhere. And for all the chaos in Washington, Treasury bonds remain a safer investment than most of the alternatives….

On one level, China’s $3.66 trillion hoard is a symbol of its financial might. But on another, it has tied Beijing’s hands. China’s central bank, the People’s Bank of China, cannot dump its Treasury bonds without driving down their value and incurring a painful loss on paper.

Wait, that sounds awfully familiar…. (see Ryan Avent and Max Fisher on this point as well)

So here we are.  Despite repeated own-goals, study after study after study after study after study shows that even after 2008, the United States remains the undisputed financial hegemon.  But will this latest episode trigger a concerted effort to reduce the reliance upon the United States?  Let’s go back to Landler:

That does not mean a brush with default will not have long-term damaging consequences for the United States. Even if China continues to buy Treasury bonds, economists said, it may opt for those with shorter maturities, which would drive up long-term interest rates in the United States, hurting home buyers and owners of small businesses.

The sour taste from the budget impasse will also motivate the Chinese to intensify their efforts to deepen their own debt markets. Already, China has negotiated swaps for its currency, the renminbi, with the European Central Bank and other institutions, a step toward making the currency convertible and, someday, a rival to the dollar and euro.

“This gives them a kick in the pants to do it,” said Kenneth S. Rogoff, professor of public policy and economics at Harvard and a former chief economist of the International Monetary Fund.

Any decline in the status of the dollar will be gradual, said Mr. Rogoff, who pointed to the erosion of the British pound sterling over several decades as a precedent. But, he said, “Memories are long: you do this once, you do this twice, and people start to think.”

At the time, U.S. policy during the Asian financial crisis seemed to reinforce views that the United States was the world’s benevolent hegemon. As the next decade demonstrated, however, U.S.-enforced policies in the Pacific Rim caused countries in that region to adopt policies designed to reduce their reliance on the United States and international financial institutions. 

Thanks to the Mongolian clusterf**k that Ted Cruz, John Boehner, and some other economic know-nothings in the U.S. Congress have perpetuated, the next decade of global political economy will provide an excellent natural experiment to see whether there will be any form of economic balancing against the United States.  Realists have been advocating predicting balancing behavior again and again and again and again since the end of the Cold War.  It hasn’t come to pass — the benefits of U.S.-centered globalization have been too good for most countries.  Furthermore, there are pretty sound reasons to believe that the future is bright for the U.S. economy.  The question is whether it’s worth being dependent on a growing economy that’s so politically unreliable.  So now we’re gonna see whether incipient U.S. rivals will start making the necessary down payments to act on their increasingly justified complaints.   

What do you think? 

 Twitter: @dandrezner

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