globalization

Greetings from tomorrow. 

In light of the Fort Hood shootings, I thought I would share with you a sampling of national headlines from my morning copy of the Asahi Shimbun:

• "2 more boyfriends of Tottori fraud suspect turned up dead"
• "Gangster kills self after shooting three"
• "Death sentences upheld for cultists"
• "Head of young woman found"
• "Arrow strikes student in forehead"

At least half the headlines were related to violent crime. 

I don't think a pattern can be drawn from one day's worth of headlines.  I suppose it's possible that the English-language editors of Asahi are thinking, "Push the violence!  It's the only thing the dumb, stupid, not-so-bright Americans understand!" 

Still, this sort of thing always reminds me to always cast a skeptical eye towards headlines devoted to acts of individual violence.  The deaths are important; the motivations of the killers, less so.  Unfortunately, the world does not suffer a shortage of variegated homocidal impulses.

UPDATE:  Megan McArdle expresses the point I was trying to make in a more direct, non-jet-lagged manner:

There is absolutely no political lesson to be learned from this.  Gun control would not have stopped a commissioned officer from obtaining guns.  Barack Obama had no power to stop this.   Infectious PTSD is a lousy theory.  And nations certainly do not--and should not--shape their foreign policy around the possibility that a random psychopath will start shooting up a crowd.  Evil people do evil things.  That's all. 

Over at Politico, Eamon Javers notes an odd trend in the Drudge Report: 

On Tuesday, Matt Drudge ran a headline about the weakening U.S. dollar on his website, Drudgereport.com. In and of itself, that would be unremarkable, except that it was the 18th time Drudge had posted a link to a story about the weak dollar this month.

And October was only 20 days old.

Clearly, Matt Drudge has developed a fascination with the declining U.S. dollar.

“He’s fixated on it,” said Tom Rosenstiel, director of the Pew Research Center’s Project for Excellence in Journalism. “There’s no question that Drudge can alter what people are paying attention to.”

Market watchers say it’s unlikely that Drudge is actually moving the currency markets with his relentless attention.

“I don’t think that anyone who seriously trades currencies reads The Drudge Report before making important buy or sell decisions,” said Chris Roush, a professor of business journalism at the University of North Carolina at Chapel Hill. (emphasis added... because that's a priceless quote)

Drudge isn't the only one obsessed about the dollar.  Last week, James Pethokoukis blogged the following for Reuters: 

The aftershocks of the global financial crisis may now be propelling the dollar back to the political forefront. The greenback’s continuing slide makes it a handy metric that neatly encapsulates America’s current economic troubles and possible long-term decline. House Republicans for instance, have been using the weaker dollar as a weapon in their attacks on the Bernanke-led Federal Reserve.

For more evidence of the dollar’s return to political salience, look no further than the Facebook page of Sarah Palin. The 2008 GOP vice presidential nominee — and possible 2012 presidential candidate — has shown a knack for identifying hot-button political issues, such as the purported “death panels” she claims to have found in Democratic healthcare reform plans. In a recent Facebook posting, Palin expressed deep concern over the dollar’s “continued viability as an international reserve currency” in light of huge U.S. budget deficits.

She might be onto something here, politically and economically. A recent Rasmussen poll, for instance, found that 88 percent of Americans say the dollar should remain the dominant global currency. Now, the average voter may not fully understand the subtleties of international finance nor appreciate exactly how a dominant dollar has benefited the U.S economy. But they sure think a weaker dollar is a sign of a weaker America.

OK, let's be as plain as possible about this - as a reserve currency, the dollar is not going anywhere.  Really. 

The dollar's slide in value has been predictable, as the need for a financial safe haven has abated.  By and large, a depreciating dollar helps the U.S. trade balance (though it would help much more if the Chinese renminbi got in on the appreciation).   

Even the Chinese, who have spoken like they want an alternative to the dollar as a reserve currency, are in point of fact not doing much to alter the status quo.  Why?  To paraphrase Winston Churchill, the dollar is a lousy, rotten reserve currency - until one contemplates the alternatives. 

Because all of the alternatives have serious problems.  The euro, the only truly viable substitute for the dollar, is not located in the region responsible for the largest surge of growth.  It would be unlikely for the ASEAN +3 countries to agree to switch from the dollar to a new currency over which regional actors have no influence (the Europeans wouldn't be thrilled either, as it would lead to an even greater appreciation of the currency).  Oh, and the European Union has no consolidated sovereign debt market.  The euro is worth watching, but it's not going to replace the dollar anytime soon.  

The other alternatives are even less attractive.  Most other national currencies beyond the euro - the yen, pound, Swiss franc, Australian dollar - are based in markets too small to sustain the inflows that would come from reserve currency status.  The renminbi remains inconvertible.  A return to the gold standard in this day and age would be infeasible - the liquidity constraints and vagaries of supply would be too powerful.  There's the using-the-Special-Drawing-Right-as-a-template-for-a-super-sovereign currency idea, but this is an implausible solution.  As it currently stands, the SDR is not a currency so much as a unit of account.  Even after the recent IMF authorizations, there are less than $400 billion SDR-denominated assets in the world, which is far too small for a proper reserve currency. 

So, what's really going on here with the dollar obsession?  I suspect that with the Dow Jones going back over 10,000, Republicans are looking for some other Very Simple Metric that shows Obama Stinks.  The dollar looks like it's going to be declining for a while, so why not that?  Never mind that the dollar was even weaker during the George W. Bush era -- they want people to focus on the here and now. 

The thing is, I'm not sure this gambit is going to work.  People who already think Obama is a socialist will go for it, sure, but that's only rallying the base.  I'm not sure how much fence-sitters care about a strong dollar, however.  If anything, populist movements tend to favor a debasing of the currency rather than a strengthening of it. 

Still, I'm just a political scientist -- I'm sure that, "theories on political behavior are best left to CNN, pollsters, pundits, historians, candidates, political parties, and the voters." 

So, have at it, readers!  Will the falling dollar be a source of populist outrage if Drudge links to it enough? 

UPDATE:  contrasting takes from Kevin Drum and Megan McArdle. 

No, that's not the name of my new band -- though, man, that would be a geekily awesome name for a band -- but a cue for my latest bloggingheads diavlog with NSN's Heather Hurlburt.  Topics include Iran, the G-20 summit, and multilateralism more generally:

One follow-up note -- I've been amused to read the reactions to the G-20 summit, which range from (justifiably) mocking the communique to complaining that the summit failed to develop a cure for cancer to worries about a new oppressive global governance mechanism.

I believe that I might be the only blogger who thinks that the G-20 solved the Goldilocks problem of not being meaningless without being so binding that there's no wiggle room.  The peer review mechanism is the best enforcement arrangement that's possible given the heterogeneous cluster of countries involved, and I give the Obama administration full marks for setting its agenda on macroeconomic imbalances. 

That is all

As previously noted, the G-20 has done a much better job than I would have thought possible a year ago.  It now looks like the Obama administration is close to earning consensus on a framework arrangement on macroeconomic policy coordination.  The devil's in the implementation, of course, but the fact that they're close to consensus on such a framework is truly surprising. 

Naturally, the French like to focus on peripheral issues that they are convinced contributed to last year's financial meltdown.  Last April it was tax havens; this time France's pet peeve is placing a cap on bank bonuses (admittedly less peripheral than the tax havens). 

It now looks like there will be agreement on that issue -- in part because the caps will not include specific monetary caps. 

I raise all of this because Nicolas Sarkozy's "bonus tsar", Michel Camdessus, gave an interview to the Financial Times in which he was refreshingly candid about the issue: 

 

France’s bonus tsar on Thursday said that traders’ bonuses were a largely symbolic issue for G20 leaders, and that in terms of money they were the “least important” item on the agenda.

Michel Camdessus, the former head of the International Monetary Fund, said: “If you look at this issue of remuneration in the global agenda of the G20, it is certainly – in terms of cash, money – the least important of all issues on the table.”

Mr Camdessus, charged by Nicolas Sarkozy, the French president, last month with monitoring bonuses of traders at state-aided banks, added: “But if you look at the symbolic value of the issue, it is one of the most important.”

Fine -- it's symbolically important.  But if a symbolic agreement can allow the G-20 to keep their eyes on the macroeconomic prize, then three cheers for symbolic gestures. 

When the Obama administraton announced the decision to slap a 35% tariff on Chinese tire imports, I was pretty sure that free traders would be incensed.  And I haven't been disappointed -- even the financial markets are freaking out over this one. 

We trade enthusiasts are an excitable lot, however, what with everything leading to the falling off of cliffs, crossroads being reached, and red zones being breached.  Seven years ago, the allegedly free-trade Bush administration imposed steel tariffs that were found to be WTO-inconsistent.  There was a lot of gnashing of teeth and wailing at the time about the end of the open economy as we knew it -- yet the world trade system proved to be pretty robust.  So maybe my trade compatriots are exaggerating things a wee bit, yes?  In all likelihood, won't this be resolved via the WTO dispute settlement mechanism about 18 months from now?

For the first eight months of the Obama administration, I've been resisting the urge to shout "protectionism" at the drop of the hat.  This time, however, there are four reasons why I'm feeling much more nervous: 

1)  This isn't your garden-variety protectionism.  Last month, Chad Bown explained the Financial Times why this decision was a very special kind of protectionism: 

[A] little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.

So this trade dispute can metastasize more quickly than most. 

2)  Beijing is not lying down on this.  China's furious and swift reaction points to another problem:  the United States is not the only country feeling protectionist urges at the moment.  Economic nationalism in China is riding quite high at the moment, as Keith Bradsher suggests in the New York Times: 

The Chinese government’s strong countermove followed a weekend of nationalistic vitriol against the United States on Chinese Web sites in response to the tire tariff. “The U.S. is shameless!” said one posting, while another called on the Chinese government to sell all of its huge holdings of Treasury bonds....

China had initially issued a fairly formulaic criticism of the tire dispute Saturday. But rising nationalism in China is making it harder for Chinese officials to gloss over American criticism.

“All kinds of policymaking, not just trade policy, is increasingly reactive to Internet opinion,” said Victor Shih, a Northwestern University specialist in economic policy formulation.

Methinks Shih and Bradsher are exaggerating things a wee bit -- imagine for a moment if U.S. foreign policy was driven by people getting upset on the Internet -- but you get the point.   

The U.S. use of this provision is doubly troubling, because from Beijing's perspective their WTO accession negotiations were seen as a humiliating kowtow to the power of the West.  China is not going to be selling its bonds anytime soon, but Beijing has not quite mastered how to cope with these kinds of domestic pressures, so they could do something really, really stupid.

3)  Politically, Obama has boxed himself in.  As egregious as the Bush steel tariffs were, they were targeted at a sector and not a country.  Furthermore, the Bush administration responded to the hubbub very quickly by watering down the worst effect of the tariffs. 

The Obama administration's new tariff is expressly directed at China.  And I'm not saying that China is blameless here.  But because it's country-specific, the administration has less room to maneuver -- either the tariffs are applied against China or they aren't.  It can't walk this back without it looking like a flip-flop.  Which means that there's little room for concession or negotiation. 

4)  Obama's base scares me on trade.  When the Bush administration did what it did, it was fulfilling a campaign promise to the state of West Virginia steelwokers.  Fortunately, the rest of Bush's winning political coalition was not seeking trade relief.  So the protectionist instinct pretty much ended with the steel tariffs -- and everyone in the Bush administration knew that they'd be overturned by the WTO eventually. 

With the Obama administration, however, this feels like the tip of the iceberg.  Most of Obama's core constituencies want greater levels of trade protection for one reason (improving labor standards) or another (protecting union jobs).  This isn't going to stop.  "Trade enforcement" has been part and parcel of Obama's trade rhetoric since the campaign.  The idea that better trade enforcement will correct the trade deficit, however, is pure fantasy.  It belongs in the Department of Hoary Political Promises, like, "We'll balance the budget by cracking down on tax cheats!" or "By cutting taxes I can raise government revenues!"  It.  Can't.  Happen. 

If I knew this was where the Obama administration would stop with this sort of nonsense, I'd feel a bit queasy but chalk it up to routine trade politics.  When I look at Obama's base, however, quasiness starts turning into true nausea. 

Developing.... in a very, very scary way. 

UPDATE:  More from Brad DeLong, Dave Schuler, and Shadow Government's Phil Levy. 

One of the Economist's leaders this week focuses on the global economy and the nature of the incipient recovery.  They use an alphabet metaphor to explain the possibilities: 

The first step in any recovery is for output to stop shrinking. But the more interesting question is what shape the recovery will take. The debate centres around three scenarios: “V”, “U” and “W”. A V-shaped recovery would be vigorous, as pent-up demand is unleashed. A U-shaped one would be feebler and flatter. And in a W-shape, growth would return for a few quarters, only to peter out once more.

Well, first of all, their description of the "U" trajectory sounds an awful lot like an "L" to me. 

Second of all, if that's the case, well, it seems they were paying awfully close attention to an obscure report entitled "Alphabet Soup." 

Third of all, if anything, I'm more convinced of the likelihood of the "W" path coming to fruition.  The nature of the Chinese recovery and the absence of any other global economic locomotive is playing a large role in my calculations here.

For reasons that will soon become clear, your humble blogger has been reading up on Iceland's financial boom and bust in recent years.  So I noted with interest that yesterday, Iceland's Prime Minister Jóhanna Sigurðardóttir took to the pages of the Financial Times to vent about her country's treatment at the hand of big countries... like the Netherlands.  See if you can spot the contradiction in her statements:

In its efforts to conclude negotiations over compensation for foreign savers in failed banks, Iceland has been accused of a tendency to imagine a British or Dutch conspiracy behind any bad news.

Iceland has no such tendency. It is battling the effects of severe banking and currency crises and a recession that is affecting our part of the world as much as any other. My government, which took over in February and gained a majority in general elections in May, has to deal with the aftermath of the fall of nearly all of Iceland’s privatised banking sector....

The FT has reported how the Dutch opposed the IMF lending to Iceland in order to enforce their demands on Icesave [an online bank headquartered in Iceland that attracted upwards of 300,000 British and Dutch depositors--DD], claiming the UK and Germany as allies. The perception is that Treasury officials in the UK and the Netherlands used their bargaining power against a much weaker party when the Icesave deal, now being debated in the Icelandic parliament, was struck.

This has made it difficult for Iceland’s government to convince the parliament and Icelanders that an agreement on Icesave accounts with the UK and the Netherlands is un-avoidable.

Here's the funny thing -- if you click on the link from the FT about how the Dutch are using the IMF to put the screws on Iceland, you get this story which sources those suspicions to.... Icelandic officials.  The story also goes on to say that, "The view in London is that Iceland has a tendency to imagine a British or Dutch conspiracy behind any bad news." 

To be fair to Sigurðardóttir, she wasn't in power when Iceland got itself into this mess.  Furthermore, Iceland did have help getting into this mess -- reading up, it's clear that EU banking regulations are even more screwed-up than US banking regulations.  And it wouldn't stun me if the Dutch were putting the screws on Iceland. 

Still, reading up on the mess in Reykjavik, it is truly stunning how little Icelanders seem to blame themselves for their current plight (and how much they thought their run of success was completely deserved).  The fault always seems to lie with cabals of hedge funds, rating agencies, foreign central bankers, etc. 

Iceland has had its share of bad luck, and until recently had a political class that was by far the most incompetent in the OECD area (and the competition in this arena is admittedly intense).  Still, reading Sigurðardóttir's op-ed, I can see why Henry Kissinger once described Iceland as the most arrogant small country he had ever encountered. 

For the past week, your humble blogger has not been blogging from home, but rather in the Swiss city of Basel (for those speaking German), also called Basle (for those speaking French), teaching a summer course on the global political economy.

[Ahem, weren't you doing this in Barcelona a few weeks ago?--ed.  Um... well... yes.  I know, I know, my life really sucks right now.]

My students this time are a bit more homogenous -- 85% Swiss, with a few Germans and the stray Russian thrown in. A few minor notes: 

1.  Maybe it's because they're Swiss, but the whole "Americans are manipulating the world" meme isn't as powerful here as it was in Barcelona.  I've been asked the occasional question about the military-industrial complex causing the Iraq War, and one student asked me about whether central bankers timed certain moves to bail out rich bankers during the Great Depression. Those were outliers, however.

2.  Man, if you think the bank bailouts are unpopular in the United States, try the Swiss reaction to the Swiss federal government's bailout of UBS.  It's to the Voldamortian point where they asked me not to say "UBS" because it's so embarrassing. We have compromised -- I can now say "UBS," but must then spit three times over my right shoulder to ward off evil spirits.

3.  McDonald's is the most ubiquitous U.S. multinational in Europe, but I must say I'm impressed at the expanding reach of Starbucks. They now have coffeehouses in 15 European countries. This is pretty surprising to me, because it's not like they have a shortage of good coffee on this continent.  It's not cheap, either -- a tall latte goes for about $6.50 here. 

How can they do this? I don't think it's the superior quality of the coffee -- I don't dislike Starbucks, but speaking personally, I prefer Illy and/or Peet's. 

Rather, I would chalk it up to two other reasons. First, the cafes themselves are quite friendly and open -- chalk a victory for Virginia Postrel here. Second, local cafes don't have anything that approximates the frappuccino. [Aha!!  The secret American plan to fatten up Europeans is working!!--ed.  Shhhh.......]

UPDATE:  A source based in Geneva e-mails an additional explanation for the European success of Starbucks: 

My strong sense of Starbuck's success here is that they have wifi and cheesecake. Forget the coffee - the foreigners love it because it's familiar, and young Swiss who've traveled, because it's fun. But everyone I know goes there mainly because of the easy and free connection plus seats that work if you have a laptop. I often meet people there - Lausanne or Geneva - for informal business meetings.