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Tuesday, April 08, 2003


I've finally got around to reading Niall Ferguson's article in the Chronicle of Higher Education on American "empire". His penultimate paragraph struck me:

[T]he empire that rules the world today is both more and less than its British begetter. It has a much bigger economy, many more people, a much larger arsenal. But it is an empire that lacks the drive to export its capital, its people, and its culture to those backward regions that need them most urgently and that, if they are neglected, will breed the greatest threats to its security. It is an empire, in short, that dare not speak its name. It is an empire in denial.

This stood out because of a seemingly unrelated item that I also read today, this time by Morgan Stanley's Stephen Roach:

Just because imbalances and excesses endure for longer than fundamentals suggest doesn’t mean we have the fundamentals wrong. Conversely, it may well mean that financial markets simply have asset valuation wrong -- that today’s dollar bubble is nothing more than the functional equivalent of the Nasdaq bubble some three years ago. To me, this is the most glaring example of a dysfunctional world. What concerns me most is that there’s nothing stable about the current imbalances in the global economy. Courtesy of a rapidly deteriorating US saving position, these imbalances can only get worse until something gives. I guess what I must be missing is the infinite tolerance of an ever-elastic US-centric world.

“It’s all the war” is the most common refrain I hear these days. In a postwar world, the argument goes, the combination of lower oil prices and a diminished “uncertainty factor” should provide a sharp boost to today’s weakened global economy. At that point, the combination of policy traction and the animal spirits of pent-up demand are expected to kick in -- precisely the opposite of what I expect and yet the perfect antidote to the angst that is currently gripping the world. I have no problem with the concept of postwar relief. But I have yet to figure out how it heals what is truly ailing a dysfunctional global economy. That’s the quick fix that I guess I must be missing.

Roach is a known pessimist, but his point is clear. Ferguson says the US lacks the drive to export its capital; what we all know is that the US can't export its capital, at least not in net terms, because of its low saving rate. The worsening current account situation is driving the dollar down, and, to some, the Bush Administration appears to be unconcerned. Nevertheless, as James Picerno reports, "Expectations are running high that a burst of economic growth, artificially constrained by the war, is waiting in the wings. Let's Hope."

I am not sure there is much the US Treasury could do, at least in the short run. What instruments are available? Take, for example, international monetary coordination. Kenneth Rogoff the IMF's chief economist, writes about its failure in the March issue of Finance and Development :

Having three "A" quality G-3 central bank boards (from a technical perspective) that focus mainly on national welfare turns out to accomplish much of what monetary policy can do. Based on current research, it is awfully hard to make the case that moving toward a more cooperative form of G-3 interest rate setting would bring large benefits, even in an ideal world, once domestic monetary policy institutions in all three regions were properly structured.

Rogoff is asserting that the central banks do best dealing with their own domestic problems. Really? The Federal Reserve may be doing as best it can; Edward Hugh points out that at least the Fed is making preparations to counter possible deflation. With reference to Europe, Brad DeLong worries that the European Central Bank is worrying about Eurozone inflation while ignoring the very real risk of deflation in the French-German industrial core. And Japan? It's been 14 years since their real-estate bubble burst, with no sign of stable recovery or even a coherent policy to achieve this. Given the different outlooks, could the G-3 even agree on a realistic program?

The spring meetings of the IMF and the World Bank take place this week, and they promise to be interesting, not least because of the expected anti-globalisation and antiwar protests. Half a world away, meanwhile, a war goes on. David Warsh asks if it was worth it:

A range of costs under various circumstances are easy enough to estimate. Potential benefits are much harder to gauge. It is not easy to put a credible price tag on what the US hopes to win with its war effort — or even to state clearly its aims.

But one thing at least is certain. Western-style democracy is no better than a distant second on the list. The Bush Administration’s hopes don’t depend on developing an Arab taste for political freedom. They rest instead on the belief that, after nearly a quarter century of bitter war, citizens of Iraq will prefer a lengthy peace.

Will this imperial export of a "long peace" calm global deflationary fears? Stay tuned.