The governor of the Bank of England, Mervyn King,
gave a speech Monday in New Delhi, India which has attracted an unusual degree of coverage and commentary back home. To anyone familiar with the way things work in the United Kingdom, it is clear that Mr King is keen that his message be heard loud and clear and news commenters are obliging.
Mr King called for a new charter for the International Monetary Fund as a sort of international rating agency that would pore over the balance sheets of nations and ruthlessly provide truthful commentary on the risks that those balance sheets reflect for the nation itself and for other nations implicated by trade and finance through the international markets.
Read carefully the speech is a stark warning that the "debt denial" of the United States poses a great risk to the world's financial stability. Like a credit card abusing consumer who can't control an addiction to shopping, the US is past the point where it can pay off its debts without pain to itself and its creditors internationally.
Under the post-war Bretton Woods system of fixed exchange rates, imbalances were detected and caught early. The IMF served as "lender of last resort" and stepped in to provide official reserve finance and a program of reforms to stabilise a wayward country (as it did on four occasions in Britain). Modern specie currencies and globalised capital markets have changed all this and rendered the IMF largely redundant in its former role. Instead, the nations of Asia now freely provide finance through the capital markets and there is no formal constraint on a debt-addicted rogue nation. As a result, any adjustment is likely to be harsh not only for the problem nation but for all those connected to it through their stakes in financing its excesses.
Bonddad, Stirling Newberry, and Jerome à Paris have written extensively about the dangers of the trade deficit, budget deficits, debt overhangs, and the fragility and inequality of the US economy. What gets less attention is what the collapse of the USA economy and the US dollar may do to the other 6.2 billion people on the planet and their aspirations for better lives. The decline of a superpower economically often coincides with grevious wars as well as economic dislocation.
While a collapse of the housing market and consumer-driven economy would be disastrous for many Americans, it would be no less disastrous for many Japanese, Chinese and Indians too. Many Japanese depend on their holdings of US Treasuries to finance their retirement security. China has invested billions in an industrialisation which is aimed solely at fuelling American consumption of electronics goods, clothes and other consumables. India's economy has oriented itself toward exporting services and technology closely tied to the burgeoning service economy and financial bubble. A collapse in the USA would be felt in every part of the world, but would echo most loudly in the creditor-states in Asia.
The USA has used its sole superpower status to weaken the international institutions developed after World War II as constraints on unilateral aggression and abuse. The United Nations has been undermined by the staged campaigns of stooges like Norm Nelson and John Bolton attacking its credibility and independence. The World Bank has been put under the dominion of arch-neocon Paul Wolfowitz, architect of the Iraq invasion and occupation. Clearly Mr King hopes the IMF can stand out and regain some credible independence and a role of curbing the USA's excesses.
Why is reforming the IMF suddenly so important? As Mr King reminds us, the Bretton Woods system was part of the international solution to prevent future wars following World War II. If it is to prevent the sorts of financial catastrophe that leads to conflict in future, it must be updated to reflect the realities of globalised capital markets:
Although domestic economic policies seem to have become increasingly boring over the past decade or two, their interaction has not. Consider two, related examples. First, the rise in the US current account deficit to more than 6% of national income has raised fears of how the inevitable correction will eventually be achieved. Second, for much of the past twenty years, as evidenced by the Asian crisis of the late 1990s, we have worried about emerging market countries accumulating excessive dollar liabilities. Now we seem to be worried about their accumulating excessive dollar assets. Capital has flowed "uphill" from poor to rich countries. The invisible hand of international capital markets has not successfully coordinated monetary and exchange rate policies. [Emphasis in the original.]
Mr King is saying - as bluntly as any central bank governor ever will - that the markets have FAILED. Monetary and exchange rates are now so far out of whack that a correction could be a global disaster. He invokes Lord John Maynard Keynes' words in saying that the IMF needs to have as its goal "ruthless truth-telling".
The Financial Times had coverage of the speech on the front page yesterday, as well as an editorial reinforcing the message. This is a measure of how scary the USA's debt addiction is to the rest of us out here.
As Anthony Hilton comments in yesterday's Evening Standard (sorry, no link to the story):
Individuals can spend more than they earn as long as they have a credit card. Thanks to private capital flows, so can a whole country.
Again like credit cards, the good thing about capital flows is that they buy time and should make violent economic readjustments less likely, but the bad news is that they also make it possible for a country to ignore the need to adjust at all.
In this way, a bad situation can become very much worse, and eventually positively dangerous. The risk, then, is that the readjustment, when it is forced upon the debtor in denial, does as much damage to innocents abroad as it does to the people and politicians in the country responsible.
It is obvious to everyone who read the speech that Mr King is speaking about the USA, although naming no one. Apparently "ruthless truth-telling" is too much to ask of a mere central bank governor, no matter how grave the risks.
Instead the "ruthless truth-telling" is coming from the commentaries. The Financial Times editorial yesterday reveals the context of a dispute between the US and the rest of the world:
Mr King recognises the need for the IMF to clarify its role in monitoring exchange rates: a prime demand of the US. However, he suggests this role must necessarily be a limited one, and the IMF should not focus on exchange rates to the exclusion of balance-sheet issues equally important in assessing the sustainability of global imbalances.
As if to reinforce yesterday's coverage, today the Financial Times follow up with a long commentary by Martin Wolf, The world needs a tough and independent monetary fund [behind firewall]:
Being specifically concerned with international monetary stability, Mr King focuses on provision of the information, analysis and advice needed for international co-operation. Specifically, he recommends the execution of three tasks: first, the IMF "should provide and share information about the balance sheets of all major countries, their composition and size, and the links between them"; second, it should "encourage countries to abide by their commitments to each other by promoting greater transparency about national policies"; and, third, it should provide "a forum for national authorities to discuss risks to the world economy".
Mr King's view is not an isolated one. Rodrigo de Rato, the Fund's managing director, has himself stated that "we need a sharper focus to our surveillance, particularly of the larger, systemically important economies". Mr King notes, however, that the Fund's only asset is its power of analysis, persuasion and "ruthless truth-telling", in the words of John Maynard Keynes. That phrase, he says, does not "conjure up many memories of any of the many international meetings I have attended". If this is to change, the IMF needs an "independent, respected and clear voice".
However true, it is hard to have confidence that Mr King's proposals, however enlightened, stand much chance of success.
William Keegan, writing for the Guardian, concludes:
The world economy may have proved robust in recent years, but many analysts fear this is a robustness on the edge of the precipice. Mr King is to be encouraged in his advocacy of a more efficacious IMF. But the chances of securing any support from the Bush-Cheney administration must be close to zero.
The Bushistas and Americans in general seem incapable of rational self-restraint where debt is concerned. Mervyn King has courageously called for the global community to re-impose some restraint, using their leverage as creditors and stakeholders in the American balance sheet.
Let us hope that it will not take yet another World War to remind nations that a shared framework of cooperation to ensure financial stability is in the interests of us all.