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Biggest game in town

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Stephanie Flanders | 13:00 UK time, Thursday, 29 January 2009

It started in the US. And that is where it must end.

For all the talk of the rising power of the East, the passage of today's $819bn stimulus package reminds us that some things haven't changed.

The very absence of US policymakers from Davos tells the story. None of them are here because they're too busy saving the world.

In 10 or 20 years' time, the world economy will probably have other engines it can turn to when American demand starts to falter. But right now, we are still all chained to the buying capacity of the US.

Chinese and Russians officials don't like America's presumption. Their complaints about the US are today festooned on the front page of the FT.

Having caused the crisis, the Chinese premier effectively suggested the Americans should show a bit more humility in deciding the best way out.

Igor Yurgens, a senior advisor to the Russian president, took a sharper tack. He said President Obama's stimulus package was "selfish" and philosophically akin to protectionism.

Bill ClintonBill Clinton is the closest thing Davos has to a senior US official this year and he responded pretty directly at a packed session this morning.

"The Chinese PM is right. It all started in the US." But, he said, the only way out was through a US stimulus, and that depended on other countries buying US debt - primarily countries like China that are "export-dependent, cash-rich but hurting."

The world needs the Chinese to stimulate their domestic economy to help fill the gap left by collapsing US demand. But I doubt that any Russian or Chinese policymakers seriously want the Americans to sit on their hands.

At the heart of the spats with the US is a more basic frustration that the dollar's status as the world's reserve currency means that, yet again, America is getting a free pass.

Governments all over the world are plunging into deficit to get themselves out of this mess. And the more profligate they were in the past, the more they are paying the price in the form of a falling currency. Witness what's happened to the pound.

But not the US. Because it is the world's reserve currency it can flood the world with US debt, and the dollar barely falters. It has even risen a little today.

It's not fair. And it may change. But for the moment, America and its currency are the biggest game in town.


  • Comment number 1.

    What the best Clinton comeback to Wen Jiabao and Putin is the ol' Trickle Down Theory!

    Save the rich first and the poor is enslaved.

    Please God save us from this imbecile.

  • Comment number 2.

    It is understandable that mainstream commentators are seeing the current crisis as a particularly bad downturn, but that normal service will be resumed, even if political and economic power has shifted.

    Much discussion is to be found particularly on how the imbalances are to be overcome - how China can grow its domestic demand.

    I venture to say that this is another example of lack of vision and understanding.

    There is a theory that describes capitalism as a decadent system.
    It is a Marxist theory - so immediately dismissed by many.
    But those of you who are more objective might like to try and understand it.

    I would suggest you start by googling for Loren Goldner's articles.
    His analysis of the current crisis is set within the context of this theory.

  • Comment number 3.

    So which currency out there is actually strong enough to become the currency of last resort? Surely if there was one already then the capital would have already fled there.

    If we withdraw this central plank from the US will it actually get much worse for much longer?

    Should we simply re-impose the Gold Standard and dispense with currencies altogether?

    What about a worldwide currency?

    Or are you simply talking about rebranding all commodities and getting them to pay for everything in "x" instead of $'s. Remove that market and the crutch of the US will surely be removed.

  • Comment number 4.

    The free ride enjoyed by the Americans thanks to the dollar's reserve status will certainly come to an end - the only question is when. Already it is hard to see how the US can possibly service their debt. Sooner or later people will not only stop buying dollars, they'll dump those they already have. That really will be an historic day.

    ps - very happy to see you back Stephanie. Any chance you might make an appearance on Newsnight? They desperately need you.

  • Comment number 5.

    Let's get this straight.

    (i) Investors are invited to buy trillions of dollars worth of US Treasury bills, notes and bonds;
    (ii) The US government uses this money to stimulate its economy;
    (iii) The US private sector eventually starts growing, and returns to profit;
    (iv) Equities and corporate bonds rise in value;

    and then......

    (v) The value of US Treasuries fall, as investors stampede to sell them and get back into equities and corporate bonds as quickly as possible. So, the original investors into Treasuries lose money.

    Not a very good advert for buying Treasury notes or bonds is it? I don't think I'll buy any.

    The other risk to consider is what happens if the US stimulus package actually fails - the value of the US dollar will fall, causing imported inflation, causing the value of Treasuries to fall.

    If the US stimulus package is successful, or if it fails, the outcome is the bursting of the US Treasuries bubble.

    Maybe I'm not understanding this right.......

  • Comment number 6.

    The US Dollar is a Ponzi scheme.

    Before all of these TARP, bailouts & Stimulus packages this was the situation.

    "The average family of four in America is associated with $732,000 of debt"


  • Comment number 7.

    Stephanie wrote:

    ".. they are paying the price in the form of a falling currency. Witness what's happened to the pound."

    er no, the Government WANTS a lower pound. It wants to devalue the currency without actually having to say so. It wants the advantage of protectionist policies without having to say so - it can just blame the market! It wants to fulminate and rant against such policies in public whilst deliberately pursuing policies that are the exact opposite.

    (By the way they are WRONG - but that is another conversation!)

  • Comment number 8.

    Thanks for coming back online Stephanie.

    It is wonderful to see some real economic vision in the BBC's mainstream blogs (your Newsnight colleague(s) have also been doing a good job).

    Please withstand pressure and keep up the good work.

    Isn't it true that both China and the US desperately wish to deflate their currencies now to protect against depression.
    And China, as the stronger economic party, is happy to let the US Dollar remain as the reserve currency of the world for a few more years, whilst China escapes from depression, and then when China has regrown enough demand locally and in Asia, etc, China will insist on a dump of the US Dollar from its reserve role, bankrupting and destroying America.

    Two years, or ten years, anyone ?

  • Comment number 9.

    So the USD can't fall in value to reflect the state of the US economy. Sounds like the old house prices mantra to me. Unshakeable confidence can be a bubble too.

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 11.

    What Everybody has forgoten is:

    The law of unintended consequences:

    Which is that actions of government always have effects that are unanticipated or unintended.

  • Comment number 12.

    further to my post #11

    Merton identified five sources of unanticipated consequences. The first two—and the most pervasive—were “ignorance” and “error.”

    Merton labeled the third source the “imperious immediacy of interest.” By that he was referring to instances in which someone wants the intended consequence of an action so much that he purposefully chooses to ignore any unintended effects.

  • Comment number 13.

    I'm with the Chinese on this one. A little more humility on the part of the west is definitely in order. We are only too happy to lecture the Chinese on for example human rights issues when all the time our own economies were going pear-shaped. We'd do better to to mind our own business (literally).

    Chinese people are generally very hardworking and disciplined, saving rather than spending on fripperies. There is no welfare state as we in Britain now take for granted so if your job goes you need savings to fall back on. We would do well to take that lesson on board. Most Chinese people do not have anywhere near our standard of living either. Our government would also do well to remember these things before pontificating about what other countries should or shouldn't be doing. Many of our own ministers are some of the worst culprits for having their noses in the trough with their fancy life-styles, jetting around the world with big expense accounts. Their egos are mostly as big as their backsides and need pricking urgently.

    Of course the worst culprit got out before the going got really tough. A little clue: his initials are TB!

  • Comment number 14.

    Someone asked what the new world currency should be.

    The answer is very simple: gold.

    It has been used for centuries as money and has the advantages of being limited in supply, immutable, counterfeit-proof and easily transportable.

    Best of all, it cannot be manipulated by bankers as a way of getting rich at the expense of the average worker.

    Paper money has been heralded as a marvellous way to allow growth in the economy, but look where it has led us? In effect it has just been a way to borrow from the future to live it up in the present.

  • Comment number 15.

    I think it's a little bit silly and disingenuous of China and Russia to comment like this.

    They pretty much owe their current increase in prosperity mostly due to US and the hated West going into a spending spree, both at individual and country levels.

    Indeed, where would the capital have otherwise come to create all these factories, and where would the customers have come from to buy all the iPods, plasma screens and computers? And would we need nearly as much gas and oil if we didn't inflate the production? Doesn't seem good practice to blame your customer for spending less money in the shop when he's hard pressed...

  • Comment number 16.

    No. 14. wykhamist

    Reminds me of the opening lines of a particular film:

    "Once upon a time, there was more gold in the Bank of England than anywhere else in the world."

    "Safe, they used to say, safe as the Bank of England."

    "It looks good, it feels good, it is good".

  • Comment number 17.

    Clinton is simply roposing more of the imbalanced financial flows that got us into this position and the Chinese can't boost their own economy (which would be healthy and hopefully entail more imports from the West, to mutual benefit) and buy yet more US treasuries. The Russian position seems jard to understand but I suspect that the Treasuries required to fund Obama's expansion will be purchased largely by the Federal Resere - i.e. Quantitative Easing - leading to some devaluation of the US $ - perhaps this is what the Russians mean?

  • Comment number 18.

    The Yanks are, as usual, blinded by their myopic view of their own self-importance. Reserve currency or not they now find themselves strategically squeezed. This is not new, they are only repeating the same unknowingness that Britain displayed when we lost the economic leadership of the World.

    This time, the US faces 2 economies that are essentially central command economies (in Russia's case it can easily return to so being). They do not have to obey US economic dictates.

    China has enough internal slack to allow it to reflate is economic activity without the need for US support. It can also develop its own trading block in Asia. Thereby tying its neighbours to them rather than the US. (it will be interesting see if Japan re-aligns itself if China chooses this option). Russia too has the same type of options and could join with China to form a super-trading block.

    If the US does stimulate it's economy it then faces yet another problem. It will suck in even more Chinese imports and/or satisfy itself via 'local' production from foreign owned firms.

    This depression will change the whole World financial climate. The old assurances that the US can and will make economic decisions purely in its won interests have gone.

  • Comment number 19.

    "In 10 or 20 years' time, the world economy will probably have other engines it can turn to when American demand starts to falter. But right now, we are still all chained to the buying capacity of the US."

    It has a population which is about 1/4 of China's and it's demography paints a poor picture for its future. Other countries will surely soon start following China's non Liberal-Democratic lead, and what then of the USA?

    The question is now long 'now' is when thinking about investment, and for UK alas.

  • Comment number 20.

    The pre-eminence and safety of the USD cannot last.

    The Obama administration will destroy the dollar with its profligate spending, borrowing money from the rest of the world to buy votes for his party in places like Joliet, Illinois and Cub Run, Kentucky.

  • Comment number 21.


    The posturing is for headlines but disguises the underlying reality. I wonder how many sovereign wealth funds got good yield from the credit / asset value / consumption binge - pseudo democracies and oligarchs alike, not to mention Asian exporters.

    Now those swfs are filling some of the black holes in the US banks who conveyed the pain around the globe.

    Now they are having to stomach the prospect of funding the stimulus by buying US Treasury bonds. Meanwhile, the Chinese support their currency to prop their export model, which itself spawned a manufacturing capacity now confronting a vicious downturn.

    The Russians enjoy the petro/gas-dollars but face Obama's / EU's push for energy self sufficiency which might ruin their plans.

    Meanwhile the US have blown a trillion plus ( depending on which report you read) USD on foreign wars, with UK riding shot gun for 7-17 billion GBP ( cant get accurate figures) in the same wars.

    The truth is that interdependency reigns , decoupling is for later.

  • Comment number 22.

    #21 shireblogger

    Your thinking appears to be based upon a continuance of the status quo. However, that model is fractured if not completely broken.

    The only way that the US can attempt (and it is an attempt) to re-stimulate itself is to borrow even more whilst reducing the real value of those debts by printing even more money! This is the old 'everybody has to share our pain in the hope of a future benefit'.

    However, I wonder if Obama fully realises that China now has the skills and capital equipment to re-focus its economy internally to build its infrastructure. It also has the surpluses to be able to fund it. In the short term at least, it does not need the US. Further, it will not be happy to see the value of its US holdings devalued. Therefore it will resist any move by the US to devalue those debts.

    As for Russia's petro/gas reserves. It to does not have to rely on the US. neither the EU or the US have got further than expanding hot air in their push for self sufficiency. I am sure that Russia would be only too happy to deal in any other currency than the US$.

    Look at the rest of the world. In nearly every other country, governments are pressurising banks to commit their lending domestically. This is the first stage of global protectionism.

    Interdependency does not reign when the wind blows hard.

    I would love to hear Stephanie's view on our two opinions.

  • Comment number 23.

    # foredeckdave

    Interesting, and it would be great to hear Stephanie's views. Regarding hot air, check out the Nabucco pipeline sponsored by the EU and US plus other schemes via Turkmenistan and Azerbaijan etc.

  • Comment number 24.

    #22 - it seems to me that the real point of #21 is that China -and the other SWFs - depend on the west. The west is the source of their bloated currency reserves, gained in return for exports of oil, gas or just cheap tat, and they have found nothing better to do with this money than to lend it back to us, in the form of paper assets which are almost certain to lose value as the West inflates its way out of recession. I laugh every time i hear one of our politicians talking about the danger of deflation- no chance past next year!


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