The news that China’s high performing economy, the engine that has prevented an expansive global economic recession in the last 3 years, is slowing down may be the surest sign of more troubles ahead. Despite its huge market, China is unwilling or not yet ready to assume the role played by the US (being the repository of most of the world’s goods) unless Beijing is given a role proportionate to that status in managing the global financial system. It also implies that reforming the global economic system, which has generated an abundance of wealth and propelled hundreds of millions of workers to middle-class status, needs to be tackled in earnest. However, convincing the affluent inhabitants of the first world that the system of entitlements, which has become standard in the developed world, is having a negative impact on global prosperity may be the greatest challenge facing world leaders. As the riots in Greece over that country’s government’s austerity plan and the stand-off in Washington over raising the U.S debt ceiling to avert a possible default demonstrate, it may be next to impossible for affluent countries to enact the reforms necessary to save the global economic system.
The U.S, the chief beneficiary of the 1944 Bretton Woods Accords from which derives the present economic order, must take the lead to starve off a precipitous crash of the system. That, however, requires painful political decisions which neither the Obama White House nor the Republican-controlled House of Representatives seems willing to undertake. Naturally, all Americans (the poor, the rich and the middle-class) must tighten their belt and bid good-bye to the entitlement programs, because the day when they will start paying for imported goods in currencies other than the dollar may not be too far off. More to the point, the prospect of the US defaulting on its debts, though highly unlikely, will nonetheless influence the drive to replace the dollar as the leading global currency. Since August 5th 1971 when then-US president Richard Nixon (1969-74) terminated the convertibility of the Dollar into gold, the foundation of the Bretton Woods Accords, the stability of the global financial system rested upon the credibility and creditworthiness of the US government. This arrangement however could change in the event of a US default on its debts, which may send the system crashing down like a house of cards.
In a worse case scenario, the US may end up being a passive participant in the decisions that affect its own future, because China, the EU and others will be in the driver seat (Caucasian solidarity oblige, the EU might be a reluctant reformer). Hence, the question facing US policy makers is not what programs to eliminate or which tax cuts should remain on the book, but how much should be slashed from every item in the federal budget. These cuts must certainly include Medicaid, Medicare, capital gains, mortgage interest deductions and tax exemptions for churches (many crooked pastors have provided a solid argument against that one, and the Lord would agree) to name a few. Social Security however must be exempted, because it is not an entitlement program but a retirement fund paid for by the retirees. The gravity of the situation is such that without a thorough restructuring of the US federal budget, the next generation of Americans may end up having to pay to get a High School education. Most importantly, the US and the rest of world may revert to the destructive old habit of protectionism which would naturally bring about global economic disturbances and possibly military conflicts among the major players. As the 19th century French political economist Claude Frédéric Bastiat (1801-50) expressively and correctly puts it: “When goods cannot cross borders, armies will.”
To enact the needed reforms and save the system, US leaders need to remember that it was the Great Depression of the late 1920’s which provided the impetus for WWII (1939-45), the most murderous human conflict to date. Incidentally, WWII could have been averted, if only the then-shapers of the world had listened to John Maynard Keynes (1883-1946) who, as an economic adviser to the British government at the Versailles Conference (1919), warned that the level of reparations payments imposed on Germany would eventually ruin Europe. As predicted by Keynes, the victorious allies’ misguided policy led to a global economic downturn and set the stage for the political ascension of Adolf Hitler in Germany in 1933. The analogy being that, unlike the present-day economists advising US policy makers, Keynes was not a partisan ideologue, but a visionary who could see the larger social and political ramifications.
Indeed, economic disturbances invariably created social upheavals that spilled over national borders and provoked regional conflicts. In today’s environment, however, a Great Depression-type economic disturbance will inevitably bring worldwide disorder, because of the interdependency of the global economic system. Hence, what is happening in Washington should not be of concerns to Americans only but also the entire world. To make matters worse, the International Monetary Fund (IMF), the overseer of the system, cannot force Washington to accept the necessary austerity measures, although the Fund is suggesting a package of tax increases and programs cuts.
Unless corrective actions are undertaken in Washington, the US, the country that has accumulated the greatest concentration of power and influence in the history of the world, may end up having the shortest span of dominance. That will be history’s greatest irony.
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