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US monetary leadership here to stay

US monetary leadership here to stay

Nothing much has changed since 1971

by David Marsh in Madrid

Mon 21 Oct 2013

For all the fury and confusion swirling around the US government shutdown and threatened default, and the likelihood of more squabbling in the New Year, there’s no alternative to American economic and monetary leadership in the world.

The clumsy torment of American politics, and the intense psychological separation between the leading reserve currency country and the international community, are obvious. But as Churchill said, the Americans generally do the right thing after they've tried everything else. The Chinese news agency Xinhua, propounding a de-Americanised world, documents the irritation and impotence of the world’s No. 2 economy. As the Chinese know, it'll be years before the renminbi is a real world currency.

The Europeans roll their eyes at their bumbling American cousins, and claim to know better. But if we have an Americanised world, it’s partly the Europeans’ fault. Their inability to solve the euro crisis has undermined the world’s second reserve currency and secured US currency hegemony.

The Americans’ leaning to grandiose shows of less-than-optimal behaviour shouldn’t make us think they’re vulnerable. More the opposite: on display is a capricious sovereignty. There’s a clear link between troubled international economic conditions and the dollar’s dominance. Things haven’t really changed that much since 1971 when the Europeans tut-tutted fruitlessly over President Richard Nixon’s decision to go off gold.

Then and now, at a time of worldwide monetary uncertainty, the US toys with its international credit standing. This testifies less to recklessness than to an innate feeling of superiority. A less self-confident nation would worry about the repercussions. A real hegemon doesn’t bother. America believes that the exorbitant privilege of the dollar is here to stay.

The US has carried on for 40 years calling the bluff of the world’s monetary agencies and private institutions about holding the dollar. This will continue. In world of pygmies, the taller guy doesn’t have to be ultra-competent or ultra-convincing.

Power games within different political systems reflect the varied nature of nations. The internal state of the US, and the economic position of its leading corporations, indicate recovery is gaining ground.

Both the Chinese and the Europeans face far more difficult and contradictory situations. For China to translate economic strength into real political power, the Communist party would have to relinquish significant elements of control, threatening the economic cohesion on which its potential is built.

Europe is in a still more parlous state. The euro is still being held together by a patchwork of compromise that could come apart at the seams. As a weekend poll in the Financial Times showed, elections next May to the European parliament, the institution that is supposed to be a repository of a new unified continent, will show a full-scale move towards euro-scepticism. Europe is further away than ever from taking over American power.

Neither the Chinese nor the Europeans can break the dollar’s supremacy. Only the Americans can do that. That would be a miscalculation from which even an American president not really interested in economics, and an obstinate and contradictory Congress, will shrink. Something tells me it’s not going to happen.

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