The “New World Order,” a term I use to describe international cooperation through organizations like the United Nations, the World Trade Organization, the International Monetary Fund (IMF) and the World Bank, as opposed to the term used by conspiracy theorists, is beginning to unravel over the issue of currency exchange rates. It’s about time.
All of these organizations (or their precursors) were established in the wake of World War II in the hope of breaking the cycle of misunderstanding, mistrust and nationalism that fostered global conflict twice in a span of less than thirty years. It’s not that I have a problem with international cooperation. But such cooperation and organizations, based on false premises and flawed economics, have been doomed from the beginning. Cooperation toward a goal of perpetual exponential growth (including population growth), coupled with a seismic shift in trade policy to unproven and flawed 18th century trade theories, produced ever-worsening global trade imbalances, culminating in the fall of 2008 with the only logical outcome possible – the bankrupting of the United States and the collapse of the global economy.
In the wake of that crisis, world leaders pledged cooperation in enacting stimulus to arrest the slide, and cooperation toward eliminating the trade imbalances. Predictably, the Obama administration tried to fly under the radar with approaches that wouldn’t ruffle any feathers – verbal arm-twisting of China on their currency and cajoling Europe and Japan to boost their domestic economies. None of it worked and now Obama and the Democrats are paying the price for their timidity, facing huge losses in the mid-term election. Finally, U.S. Treasury Secretary Tim Geithner, having had enough of China’s delay tactics, dropped his opposition to labeling China a currency manipulator. In short order, the House last week, by a wide margin, passed a bill that (if also passed by the Senate and signed into law by Obama) does just that, opening the door to punitive tariffs on Chinese products.
Predictably, howls of protest from China and hand-wringing by other export-dependent nations over the prospects for rising U.S. protectionism soon followed. Japan, alarmed over the unrelenting rise of the yen has just resumed blatant manipulation. And the U.S. Federal Reserve has all but said that it will soon be dumping huge volumes of dollars on the world market to further erode the dollar’s value. Emerging nations (led by China, of course) have taken their concern to the IMF, demanding that it intervene and stop this escalating currency war.
All of this is good news and I expect that it will continue. It’s good because it’s finally getting at the root of our economic woes. But, in the short run, it won’t make a bit of difference for the U.S. economy, since currency exchange rates have very little to do with global trade imbalances, which are actually rooted in population density and per capita consumption disparities that can only be mitigated by across-the-board tariffs. But at least the trade imbalances are coming under fire and eventually, one way or another, we’ll arrive at a point where a return to sensible trade policy will put this economy back on its feet. It’s going to be a long road, but finally the first steps are being taken.