Battling for Influence in Asia
I have always maintained that FATCA is but the tip of a huge iceberg. Recently, I wrote about the 2007 to 2010 period, where rich countries saw the ratio of their gross sovereign debt to GDP spike from 74% to 101% on average. British public debt jumped from just 44% of GDP to 79%, while US debt leaped from 66% of GDP to 98%. Furthermore, thanks to weak profits and higher unemployment, the biggest drag on public finances have come from lower tax receipts. FATCA unfairly targets individuals when everyone knows that the real targets are corporations – particularly stateless ones.
At the same time, I have also invited thinkers to go even deeper. Forget politicians who play for the cameras rather than for the good of the citizens they represent. Look at the currency war being waged. CNBC published a story on February 14th this year entitled ‘Is the Dollar Dying? Why US Currency Is in Danger’. Many of us believe that one of the key pillars of the US economy is that the US dollar remains the world’s reserve currency, which includes the petrodollar system. This allows the US to continue running deficits and printing currency to stimulate its economy. The CNBC article is pointing out that according to the International Monetary Fund, the dollar has drifted to a 15-year low and is shrinking as a percentage of the world's currency supply, raising concerns that the greenback is about to see its long run as the world's premier denomination come to an end.
“It is perhaps a good time for the befuddled world to start considering building a de-Americanized world,” said a statement on Monday by Xinhua, the state news agency of China — which holds some $1.3 trillion in Treasury bonds.
Much of US policy, not just tax policy but national security policy and the entire Pacific pivot, is understandably driven by the need to preserve the supremacy of the US dollar. As I write this blog on October 16th, that’s what makes the on-going governmental paralysis more disturbing. President Obama missed two important summits because of the Congressional standoff. Firstly, there was the October 7th/8th Asia-Pacific Economic Cooperation forum, which was held in Bali. Secondly, there was the October 10th East Asia Summit held in Borneo. The highlight of both summits was President Obama’s no-show, which gave President Xi Jinping a chance to demonstrate to regional players China’s relative political stability and commitment to the region.
While the battle for control of the world’s reserve currency becomes more intense, it is hard to ignore globalization's 2008 slowdown. The Economist’s recent special feature on The Gated Globe points out that world exports as a share of world GDP rose steadily from 1986 to 2008 and has been flat since. It also points out that global flows topped $11 trillion in 2007 but was barely one-third of that in 2012. So while some of this decline is cyclical, much of it is due to the deliberate policy, including systems of hidden protectionism, capital controls, and government subsidies. FATCA is a minor measure that is consistent with the broader thrust to encourage offshore funds back onshore.
Given the on-going weakness within the EU, the main theatre of the currency war is the Pacific, and the Trans-Pacific Partnership (TPP) is a key asset in the US's arsenal. Since 2010, negotiations have been taking place for the TPP, s a proposed free trade agreement under negotiation by Australia, Brunei, Chile, Canada, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States, and Vietnam. Note the absence of China from the list of TPP countries. To increase the likelihood of TPP measures being passed by the respective countries, much of the negotiations continue behind closed doors. Despite this effort, I see little chance of it getting past Congress given Republican animosity. Maybe there would be a chance if Democrats strengthen their presence or if enough Tea Party GOP Representatives get kicked out of the House in the next midterm.
An article in today’s NYT reminds us of what happened to the UK. The UK was the world’s foremost power during much of the 1900s. Its influence peaked by 1870, but it still took 10 years after World War II, and a 30% devaluation of the pound before the share of dollar reserves in the world exceeded that of sterling. The author suggests that the United States appears to be in the middle of a similar process. “During the cold war, there was a strong bipartisan consensus that United States leadership in the world was a good thing for us and a good thing for the rest of the world,” said Jeffrey Frankel, an economic adviser for President Clinton, now at Harvard’s Kennedy School. “In the last 10 years, we completely blew it.”
It would be interesting to see how this plays out.