KH: Ed points out that the crisis is essentially one of debt deflation. Another way of saying this perhaps is that the world is deleveraging fast. He wants us to acknowledge that there are winners and losers in a deflation, just as there are in inflation.
AA: That reminds me of Keynes’s great piece in Essays in Persuasion (1931) about who wins and who loses as a result of inflation and deflation. In the first case, creditors and people on fixed incomes lose and debtors win; in the second, property holders (shares, real estate) lose and anyone with cash can pick things up cheaply. What is interesting about this crisis is that until very recently the central banks were worried at least as much about inflation as deflation. This was because of the temporary bubble in commodities after the housing market crashed. The Europeans kept interest rates up for too long and now it may be too late. That’s because economic policy has been driven by the banks for three decades and they worry most about inflation. It still seems like the banks are calling the shots. The Wall Street bailout was at first intended just to redeem their bad paper without any consideration of homeowners, for example. Now the story is all about which bank is going to fold next and will they all be nationalised? Krugman has a fairly technical paper where he argues that the issue is one of capital shortage, not liquidity (buying and selling). Several commentators have been saying something similar, that what is needed is a major injection of capital.
KH: Of course that leads us to the people who have the surplus capital, the Asians and the Gulf oil exporters. What are they going to do with the money and how does that bear on shifts in relations between the US, Europe and China? Did you see that piece by Thaksin in the FT, “An Asian bond could save us from the dollar”? Brian Holmes posted it to nettime with a sharp commentary:
“Here is a simple and ingenious scheme which gives you a hint of what may emerge in the future. It involves creating a regional Asian bond as an “offshore dollar” intended at once to prop up the Asian credit markets, help stabilize the American dollar in which all the Asian countries are heavily invested, and slowly displace control over the international reserve currency from Washington to an as-yet inexistent pan-Asian capital market, which the bond would create by its very existence.
“Recall how both the Bretton Woods institutions and the European Community were created as highly technical economic and monetary arrangements whose immense historical significance was hidden, for decades, by a veil of technical complexity. A proposal like Thaksin’s does not say anything about an Asian monetary fund, a common currency, or anything that would shock people with the thought that an immense new financial power is emerging. Yet it would have the same effect. I am not saying Thaksin’s proposal will go anywhere. But just such a proposal could have immense significance. Watch the news for any major innovation in the current structure of Asian economic relations. The future may be hiding exactly there.”
AA: They’re talking about an emergency new G8 to come up with a second Bretton Woods (really the third, if you buy the “Bretton Woods II” argument.) Bretton Woods II is supposed to be the US-China deal after the dot com bust. The story goes that Greenspan was so freaked out at the prospect of Clinton’s trillion dollar budget surpluses creating de facto socialism (a sentiment he openly expressed) that he pushed for the tax cuts with the effect ultimately of placing the US in hock to China, on the understanding that East Asian currencies would be kept artificially low and the dollar artificially high to allow cheap Asian imports to make up for the stagnation or decline in US real wages under Bush. The arrangement couldn’t last forever and is now going up in smoke. Hence the European push to convene the G8, effectively for a Bretton Woods III.
KH: I understand the need for shortcuts when we’re talking about relations between the US, Europe and Asia. But I don’t personally go for the Greenspan as Machiavelli line. The neocons (and that includes Bush, I don’t subscribe to the notion that he and his pals are too dumb) genuinely thought that pushing for capital accumulation and a new military phase of imperialism would establish a US third reich for a thousand years. That included undermining the eurozone where possible (with an overpriced exchange rate) and exchanging treasury paper for Asian imports fuelled by a cheap money housing boom. They have also been printing dollars like there’s no tomorrow for two years now. It was a game of Texas hold ’em, assuming that the Asians (the Japanese have three times the bonds that the Chinese do) have nowhere else to go but the dollar.
Let’s remember what Bretton Woods was: a meeting between Keynes and Harry Dexter White which White won hands down. OK there were all the other signatories, but this was a US show and the postwar institutions were designed and controlled by the US. I think talk of BW II is fanciful for the US-China deal after 2001. I would imagine that the next round will be US and Asia, not just China, with the Europeans left out. They are too disorganized to count and both the other parties have an interest in sending them to the wall or at least ignoring them. The Middle East sovereign wealth funds have enough cash to get a place at the table. Basically the next round will be based on the US with less control by them. When the rubble has been sorted out, the US will still have a third or more of the world economy and Asian capital still has nowhere else to go. Obama will offer himself as a new deal for the others from a position of strength not weakness. We have yet to see how the Chinese cope with a savage downturn. It will come.
AA: What does it tell you about the future that the non-Western rich want to buy up English football clubs? Thaksin is only banging on about an Asian bond because he lost Manchester City to the Emirates.