A couple of days ago I posted my thoughts on the “Buy American” provisions of the fiscal stimulus bill. A fair amount has been written since but none better than Ambrose Evans-Pritchard’s dispatch today from Davos. If you have any interest at all in this subject then it’s a must read.
There are two central themes to his article. One, the dollar despite all predictions to the contrary reigns supreme and thus puts the rest of the World at the mercy of the Fed and two, history presents a powerful argument for the United States to turn its back on the rest of the world and retreat into some sort of trade bloc of its own creation.
Here are his words on the dollar:
Nor is the US about to suffer its condign punishment for years of hedonism. It is not facing the predicted dollar collapse or the mass dumping of US Treasury bonds – yet. The dollar has surged against sterling, Aussie, rouble, rupee, and real.
Yields on 10-year US Treasuries are 2.84pc – lower than Germany (3.3pc) or France (3.81pc). One-year notes are 0.46pc. The worse the crisis gets, the more the world wants to place its shrunken wealth in the care of Washington. The US Treasury is finding it all too easy to suck in enough global capital to fund trillion-dollar deficits.
This is the “exorbitant privilege” of reserve primacy that so vexed Charles de Gaulle. You could hear the gnashing teeth at Davos.
“They can print the dollars,” said a weary Ernesto Zedillo, Mexico’s former president. The injustice of it. The arch-sinner is dodging its own disaster, leaving scores of well-behaved countries starved of capital and exposed to the crunch from Hell.
Russia’s Vladimir Putin railed wildly, calling for a global putsch to topple the dollar. “The one reserve currency has become a danger to the world economy,” he railed.
Kremlin aides hovered in the foyers, accusing the US of running a “beggar-thy-neighbour” policy. “All the free liquidity in the world will run into American Treasury bills. That is pretty selfish,” said one.
Herman Gref, former economy minister and now Sberbank chief, said the world should seize control of the Fed itself to force it to serve global needs. “Economies are facing collapse just because dollar credit has been withdrawn. That cannot be,” he said.
As for the historical argument, he presents the case that has been made recently by many others:
The other penny starting to drop is that trade wars have asymmetric effects. The Great Depression taught us that they hit surplus states harder than deficit states. Britain avoided the worst of the 1930s, although – or should that be because? – it retreated into an Empire trade bloc. America has the strategic depth to do the same, should it wish to do so. It may conclude that this is the best way to rebuild the US industrial base (as Germany did from 1933 to 1938, with success).
Mr. Pritchard notes that while ranting about the intentions of the U.S. other countries are at the same time quietly erecting their own trade barriers.
We should know very quickly what direction America intends to take. The fiscal stimulus bill will no doubt land on President Obama’s desk sometime around the middle of February. So far, his administration has played the role of provocateur so it might be unreasonable to assume that he will take up the fight for free trade. If the bill does include strong doses of protectionism then look for the dominoes to begin falling and true economic catastrophe to visit parts of the World.
If that happens, stand back and pray. The last time the unintended consequences launched unimagined terrors.