Tuesday, March 24, 2009

Replace the Dollar? 

A friend writes, "What the end of hegemony looks like..."
In another indication that China is growing increasingly concerned about holding huge dollar reserves, the head of its central bank has called for the eventual creation of a new international currency reserve to replace the dollar.

In a paper released Monday, Zhou Xiaochuan, governor of the People’s Bank of China, said a new currency reserve system controlled by the International Monetary Fund could prove more stable and economically viable.

A new system is necessary, he said, because the global economic crisis has revealed the “inherent vulnerabilities and systemic risks in the existing international monetary system.”
On the one hand, true. China's over $1 trillion in dollar-denominated reserves aren't as safe as they once were, and a devaluation of that asset through inflation would not be good for China. But, where else are they going to go?
While few analysts believe that the dollar will be replaced as the world’s dominant foreign exchange reserve anytime soon, the proposal suggests that China is preparing to assume a more influential role in the world. Russia recently made a similar proposal.
Lets look at this more closely. The Dollar has its privileged position in the world economy because a) many economists believe that the world economy needs some sort of stable reserve currency, b) the US is willing and can afford to maintain such a strong currency, and c) the rest of the world has left this arrangement unchallenged and benefits from it. Much of this is classic Kindleberger--the world economy needs a stabilizer, one stabilizer, to stabilize the global economy as market, currency, and lender of last resort. The US is that stabilizer.

The third of those reasons--acceptance by other world powers--is now under some degree of threat as China starts to fret about its dollar position. However, absent another actor willing and able to play the role of stabilizer, everyone--China included--risks putting themselves in a significantly worse position should the dollar lose its pride of place in the international economic system.

China suggests that the IMF's SDR form a new reserve currency. This indicates they really aren't all that serious about actually doing anything to dislodge the dollar. For one, to have a currency able to act as a reserve currency requires backing of a stable, authoritative, empowered entity that can manipulate fiscal and monetary policy as needed to protect the value of its currency. We call this a sovereign state. To give the IMF such rights would make the IMF a de-facto global economic sovereign. China has no demonstrated desire to create supra-national authority, not at the UN, nor the IMF. Moreover, there is a significant and real cost to maintaining a strong reserve currency. The strength of the dollar makes the US a great destination for products--we can afford to buy others' cheap stuff. A significantly de-valued dollar (coupled with an increased value of other currencies like the Yuan or Yen or Won) would be a disaster to economies that rely on exports. China would need to show that it is willing and able to take on a stabilizing role in the global economy, which just doesn't seem in the cards as of yet.

Perhaps, though, this might be read as an attempt to gain leverage:
The timing of the Chinese announcement, analysts said, could also be aimed at giving Beijing more leverage to negotiate with the United States and other nations in London on trade and on proposals about how to stabilize the global economy.
All that said, it would be foolish for US policy planners to simply ignore China's (and others) growing dissatisfaction with the Bretton Woods legacy system that now constitutes the global economy. The fundamental bargains that made such a hegemonic system possible (cf Ikenberry) have become frayed, and while neither China nor the EU (nor India, for that matter) are poised to overthrow US hegemony in the short term, they can clearly erode US hegemony by driving up the cost of acting as a stabilizer. In the medium term, this imposes a cost on everyone, as the global economy (and security order) falters without a clear stabilizer, but from a realist perspective, the relative gains (or in this case declines) could benefit the challengers to US hegemony--at least that's what they are betting on.

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Tuesday, March 17, 2009

Becoming Relics 

Yesterday as I drove to work, two stories on NPR caught my attention with how completely out of touch the interviewees sounded about their particular fields. These are people who are highly trained, performing what used to be important--if not vital--services, and well rewarded professionally for their accomplishments. And yet, listening to them talk about the importance of preserving the culture, practices, and institutional arrangements that enabled their profession, their claims rang so hollow, so 20th century, that I was struck that they would even say such things on radio.

The culprits? Bankers and Fighter Pilots. The Bankers were all upset about the "strings attached" to the TARP bail-out money they had received. Of particular concern was the limits on executive pay, and how this was going to cause a talent drain in the financial sector. All I could think was how tone-deaf the bankers sounded--while some of these guys may have had talent, it was a talent for destruction, not necessarily talent that you want to keep around. And, have they tried looking for jobs lately? There are quite literally thousands of finance professionals out of work, ready to step in to the jobs these supposed talents are vacating.

The Fighter Pilots were not quite as egregious, but still sounded like relics of a day gone bye. Morning edition has a nice 2 part story (yesterday and today) about fighter pilots and the changing fighter pilot culture. I'm not quite going to give the full Farley here, but listening to these guys, who sound as if they stepped off the set of Top Gun and into the story, you wonder if they are living in a bygone era (yes, I know one is AF and the other USN, but half of the first NPR segment is all about Top Gun, check it out, they even have the great music).
So why is there such an emphasis on training fighter pilots?

"None of us, I think, can really say with certainty who it is that we may end up having to fight next or what their capabilities are or what weapons systems they'll have," [Lt. Col. Dan "Digger" Hawkins, the deputy commander at Red Flag] says. "And so that's why we keep our skills honed with exercises like Red Flag — so that we can be ready to defend the country at a moment's notice against whoever it is who may try to attack us."

No one who is currently training at Red Flag has ever been in a dogfight, but the training they receive is what Hawkins calls "very realistic dogfights."

"As far as actual live combat, I'll believe that some of the last air-to-air kills that the U.S. Air Force had was in Bosnia back in the 1990s."

That was before these students were even pilots.
It sounds like such a valiant culture, much like the Pony Express was a valiant way to deliver cross-country mail in its day. For the past SIX years, the US has been engaged in two wars, actual ongoing combat operations, in one case against a real enemy that had actually attacked the United States, and fighter pilots have had no place to operationalize all that wonderful training at Red Flag. Instead, they have been pushed aside by robots. These days, Drones are the US weapon of choice in fighting Al Qaeda:
Pentagon officials say the remotely piloted planes, which can beam back live video for up to 22 hours, have done more than any other weapons system to track down insurgents and save American lives in Iraq and Afghanistan.

The planes have become one of the military’s favorite weapons despite many shortcomings resulting from the rush to get them into the field.
There is a near insatiable demand for more Predators and Reapers, but no the "pilots" don't want to actually fly them. Its just not the same--pulling 9Gs vs sitting in a small room playing video games--they say.

Bankers and Fighter Pilots. Heroes of the 80's and 90's. Sounding like relics of bygone era. It would be cute, if it wasn't so darn expensive to maintain the institutions that facilitate their cultures.


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