http://www.mepc.org/articles-commentary/speeches/there-great-disorder-under-heavens-situation-excellent
http://chasfreeman.net/great-disorder-excellent/
There is Great Disorder under
the Heavens! Is This Situation
Excellent?
Remarks to China Renaissance Capital Investors
Ambassador Chas W. Freeman, Jr. (USFS, Ret.)
2 November 2013,
Macau S.A.R. of China
Many years ago,
surveying an apparently collapsing China, Mao Zedong coolly observed that there
was “great disorder under the Heavens and the situation is excellent.” By this, he meant that the disappearance of
the old order offered the opportunity to build a new one. In many ways, our world’s political economy
now seems to be in the midst of the sort of disorderly decay that precedes
eventual regeneration. Some new
approaches to managing world affairs are clearly needed. But few today are inclined to call the
situation excellent.
For sixteen
days last month, the United States government was partially shut down because
it had too little revenue to keep itself in business on a “pay-as-you-go” basis
and hadn’t been able to pass a budget for the new fiscal year. A year or so earlier, after teetering on the
edge of a similar “fiscal cliff,” the U.S. Congress decided it wouldn’t even
try to set spending priorities. Instead,
the United States began disinvesting in both its present and future through
mindless across-the-board spending cuts.
In part to
offset the deflationary effects of this default on this most basic of all
legislative responsibilities, the U.S. central bank began to buy large
quantities of U.S. government debt, printing massive amounts of money to boost
consumption and exports. When it
appeared that the “Fed” might begin to phase down this practice, there was mild
panic in capital and currency markets, not just in America but around the
world. The “Fed” pulled back from its
proposed “taper.”
Two weeks ago,
the world looked on in horror-filled fascination as its cornerstone economy –
the United States – prepared to halt payments of both interest and principal on
the huge amounts of money it had borrowed to keep itself in business in the
past. Short-term interest rates on U.S.
government debt spiked as the perceived risk of default grew. At the last minute, the U.S. Congress
reopened the government and adopted a three-month suspension of its threat to
implement a still undefined form of national bankruptcy. The global financial system shuddered. It did not, after all, shut down. But there is ample reason to fear that in
January the world may once again be held hostage by American politicians
engaged in blackmailing each other at the expense of the full faith and credit
of the United States. This is the sort
of folly that accelerates history.
There is little
chance that the American republic will soon return to orderly government. A substantial bloc of American legislators
now sees playing “Republican roulette” with U.S. fiscal policy as a fun game
with no personal consequences. They
think that wrestling on the edge of fiscal or monetary cliffs is a safe sport
in which they can rack up points with their constituents. They believe that, however risky their behavior
may seem, the foreigners who buy U.S. debt, hold the dollar as their reserve
currency, and settle their trade in dollars do so because they have no
alternative. Whatever doubts these
legislators’ statements and actions raise about the competence of the U.S.
government and its willingness to meet its obligations to its many creditors,
they insist the dollar is for many reasons inherently stronger than all other
currencies and that T-bills will always dominate global debt markets. They are sure that there is no safe haven
comparable to the dollar.
For now, they
are right. But those who live outside
the United States may be forgiven for the conclusion that they had better now
find or create alternatives to the dollar and to reliance on U.S. debt. In time, of course, they will. It’s notable, in the meantime, that both
Americans and foreigners currently frame the issue in terms of an unstated
presupposition that American hegemony can only be succeeded by that of another
hegemon.
Who might
replace America?, they ask. The answer,
despite a lot of ill-founded speculation about China doing so, is that no one
can. America dominates global finance in
ways no one has since Spain in the 16th century. In the case of America today, like Spain
then, no one wants to imagine the end of such hegemony or what might follow
it. But we can no longer afford not to
think about the consequences of America’s eventual displacement from its
seven-decade-old monetary dominion. This
could happen in any one of three ways: suddenly,
following congressionally-induced fiscal thrombosis; gradually, in response to global hedging against future American
irresponsibility; or slowly as others
prudently expand their role in global monetary affairs and that of the dollar
naturally retreats. But, one way or
another, it’s going to happen.
The United
States now accounts for only about 20 percent of global GDP, down from about
two-thirds after World War II and one-third as this century began. U.S. trade is about 10 percent of the current
world total, slightly smaller than China’s.
Yet about 60 percent of the world’s monetary reserves are still in U.S.
dollars. About the same percentage of
American currency is in the hands of non-Americans, with only 40 percent of dollars
circulating domestically. About ninety countries peg their currency to the
dollar, which is present in almost 90 percent of currency exchange
transactions. Somewhat over half of
cross-border loans and deposits are in dollars.
Almost half of the world’s private debt is dollar-denominated. About 36 percent of world trade is invoiced
in dollars, while about 38 percent is in euros.
These ratios don’t match up.
The world is as
grossly over-dependent on the U.S. dollar as the dollar is overextended. However one measures change, the global
financial restructuring that American political recklessness has just
thoughtlessly kickstarted threatens tectonic shifts in the world’s financial
system, not just an earthquake or two.
Delaying restructuring just exacerbates the underlying problems in the
U.S. and global economies. It’s hard to
overestimate the potential for economic disruption as uncontrolled change
proceeds.
The staggering
irresponsibility of the U.S. Congress in recent years has forced thoughtful
people to contemplate the previously unthinkable: a world in which America no
longer reigns financially supreme. In
such a world, the United States will no longer issue debt able to collateralize
most banking transactions. The U.S.
dollar will no longer be the measure of all currencies and accepted as the
universal medium for monetary reserves and trade settlement. Washington will no longer enjoy the
“exorbitant privilege” of global “seigniorage,” the ability to pay for imports by
printing money rather than exporting goods and services. But, contrary to widespread presupposition,
no single currency, country, or bloc of countries is likely to succeed the
dollar or the United States in any of these roles. The renminbi yuan will not replace the
dollar. Nor will the euro. The dollar will still be a reserve currency
and means of trade settlement. But the
U.S. currency will not retain its hegemony.
Instead, we
will have a period of financial anarchy and depression, confusion and
recession, or gradual adjustment – depending on the extent to which the U.S.
trades its credibility for “deadbeat "status, otherwise diminishes its credit by generating
financial risk, or yields gracefully to the inevitable. Then a new, multipolar monetary order is likely to arise. It seems certain that the euro, which has
stubbornly refused to die, will play an important role in such an order. In time, so will the Chinese yuan – the
internationalization of which Beijing has just accelerated, with London
farsightedly making a play to become a global trading hub for the renminbi. So, very likely, will other currencies
willing to risk a significantly greater place in global reserves, including
some still-to-be crafted plurilateral
currency linkages within the various regional trading blocs that are emerging
from the disintegration of global efforts at trade liberalization.
Whether the
transition to a new world financial order that has been set in motion is
catastrophic or manageable depends in large measure on how the United States
handles it. Some elements of change can
be managed without reference to Washington.
Some will likely prove unmanageable by anyone. Currency markets will be volatile.
The period
before us is likely to be defined in part by a broadening international effort to
find work-arounds and substitutes for reliance on the dollar and dependence on
the United States. A recent example is the proliferation of Chinese currency
swap arrangements, including the unprecedentedly large swap contract that was
just made between China and the European Union. Another is the ongoing
international effort to forestall the extraterritorial application to trade
with Iran of U.S. policies and laws by avoiding dollar settlement or the New
York-based U.S. banking system. Trade
settlement in currencies other than the U.S. dollar is growing, with use of the
yuan rising especially rapidly. China’s
emergence as the world’s biggest oil importer has boosted its efforts to buy
oil in its own currency rather than dollars.
The euro’s difficulties temporarily scared off those trying to stitch
together new, plurilateral currency arrangements. Now these efforts are resuming among
groupings as diverse as ASEAN, the Gulf Cooperation Council, the Union of South
American Nations, the West African Monetary Zone, or the so-called
“BRICS.” Given widening fears of
overdependence on the dollar, there will be others yet undeclared who begin to
explore doing the same.
Demands to set
aside American dominance in the key institutions of global financial governance
are certain to become steadily louder and more insistent. In the normal course of events, China and
other countries whose share of the global economy is increasing would have
expected their part in global governance to grow apace with their expanding roles
in global trade and investment. After
the latest irresponsible behavior by the U.S. Congress, their efforts to seize
control of global financial institutions or develop alternatives to U.S.
financial hegemony are bound to accelerate.
The Xinhua News Agency’s editorial calling for a “de-Americanized” world
is a portent of this.
The United
States is unlikely gracefully to yield the positions of privilege it has long
occupied at the apex of the international financial order. Widespread dissatisfaction with American
politicians’ casual indifference to the international effects of their quarrels
over domestic issues guarantees the outbreak of struggles over governance in
the IMF, IBRD, and other economic and financial institutions. If these global bodies cannot be made more
transparent and “democratic" through deals to share power between America
and newly rich economies, plurilateral arrangements will supplant them.
This has
already happened in negotiations over trade and investment issues since the
Doha Round went into a coma. For the
past seven years, liberalization of economic intercourse between the world’s
nations has proceeded almost entirely through regional and bilateral talks
rather than at the global, multilateral level.
The same trend away from American-dominated multilateralism now promises
to appear in the monetary sector.
Unwelcome as
this devolution of authority and accountability may be, it parallels
developments in other spheres. After
all, the transformation of the U.S. image and the ebbing of American global political
leadership over the past two decades have also had the effect of distributing
power to the world’s regions.
Increasingly, in the Middle East, Europe, Latin America, Africa, and
Asia, regional affairs are driven mainly by regional actors, not external
powers. U.S. military prowess remains
without peer at the global level, but most problems are not amenable to
military solutions. All political
decisions are local. Few abroad still
defer to American interests or policies.
In part this is
because, when the world now looks at the United States, it is no longer
reminded of the “decent respect for the
opinions of mankind” with which the country began. Nor does America evoke thoughts of “freedom,” “hope,” constitutional “democracy,”
or the “rule of law.” Instead, the world
sees aggressive electronic invasions of privacy even in American allies, an
inordinate fear of terrorism, government shutdowns, Guantánamo, and drone
warfare. The sky once seemed the limit
for an idealistic, affluent, and purposive America. Now references to Washington bring up images
of a lowering debt ceiling and profligate monetary policies that flirt with
“tapering” but shrink from it. America
appears to be in the midst of a national nervous breakdown. The United States has never seemed less
capable, less wise, or less inspiring than it does now.
In addition to
declining prestige abroad, America suffers from an accumulation of serious domestic
problems and impairments. These include
decaying physical infrastructure and school systems that no longer produce
workers with the competence needed to compete with their peers in nations like
Germany, Japan, Singapore, Finland, or even China without significant remedial
training. The U.S. tax system badly
misallocates investment, exacerbates the maldistribution of income, and impedes
social mobility. The country now ranks
well below other industrial democracies in terms of equality of opportunity. It has acquired a permanent proletariat in
its cities. By most metrics, standards of public health in America are now
among the lowest in the developed world.
Post-crisis financial
regulations and banking practices are choking off the flow of capital to small
and medium-sized enterprises.
Participation in the labor force has dropped to historically low levels.
Innovation, once a remarkably robust feature of the American economy, is
beginning to slip. The United States
continues to live beyond its means, pampering its military by pyramiding debt
while disinvesting in its civilian economy and running persistent global trade
and balance of payments deficits.
Most Americans
imagine that the United States continues to be the world’s best in each of the
categories I have mentioned. There is a
strong belief in American exceptionalism that fuels complacent denial about the
country’s condition. It is therefore
unrealistic to expect that the United States will confront and correct its
problems in the short term. But it would
be a huge mistake to count America out in the longer run. The United States may now be badly off its
game but it’s still gifted with greater strengths than any other nation of
comparable size. The causes of both its
distress and the world’s dissatisfaction with it are self-inflicted political
paralysis and parochialism. If forced by
circumstances to awake from denial and to address what ails it, America has the
talent and resources to rebound and to do so with uncommon vigor.
Let me
illustrate the potential for American recovery by using the example of China,
which many put forward as a plausible candidate to succeed the United States as
global hegemon. (It’s indeed hard to
think of another.) But, if global dominance
were the aspiration of China’s leaders (which I don’t think it is), they would
give anything to have the United States rather than their own country to work
with.
The United
States is flanked by wide oceans and bordered by Canada and Mexico, two of the
least menacing and most congenial neighbors one could hope to have. In its 237-year-long existence, the United
States has been raided three times – in 1812, 1941, and 2001 – but never
invaded and occupied. In contrast,
across a narrow sea from China lies Japan.
Within the memory of the oldest living Chinese, Japan invaded China and
killed perhaps 35 million of their relatives and friends. China shares land borders with fourteen
nations, among which are numbered some of the toughest customers anywhere –
Afghans, Indians, Koreans, Mongols, Pakistanis, Russians, and Vietnamese. For four of the last ten centuries, China was
ruled by foreign occupiers. U.S.
intervention in the Taiwan Strait divided China sixty-three years ago. To this day, Taiwan’s military confrontation
with the China mainland is backed by the United States. China is pinned down by the realities of
geopolitics in ways that Americans cannot begin to imagine.
There are also
great disparities when it comes to natural resources. The United States uses 12.5 percent of the
world’s arable land and about 10 percent of its water to feed and clothe a mere
4.5 percent of its people before exporting a huge food surplus. China must sustain 19.5 percent of the
world’s people on about 7.5 percent of its arable land, with less than 7
percent of its water. It is the world’s
largest importer of oil seeds and other food crops. America has never had to be concerned about
starvation. It has a vast, if notably
inefficient, system of public health to protect it against disease. China, where many pandemics originate, cannot
help but worry constantly about the possibility of mass disorder or death from
famine and pestilence.
The United
States has been the global leader in science and technology for over half a
century. Its language is the lingua
franca of international commerce, engineering, and the internet. It commands a network of alliances that
enable it to aggregate the capabilities of most of the world’s great powers to
its own when the need arises. It has
comprehensive military capabilities that no other country aspires to
match. China is just beginning to regain
a significant role in science and technology and to spread knowledge of its
national language. It has no allies,
though it has clients that it must be prepared to protect. China's military is only now developing a
credible capability to defend its territory and the approaches to it in its
near seas.
Until recently,
at least, U.S. civil liberties and social mobility have been the envy of the
world. Enormous numbers of foreigners
have aspired to transform themselves and their families into Americans. There are many ethnic groups in the United
States but none seeks independence or is in a state of rebellion. The last serious effort to dismember America
occurred a century and a half ago, in the war between the states. By contrast, China has no political allure
for foreigners. It attracts no foreign
immigrants. Several of its ethnic
minorities and regions seek to separate themselves from it, sometimes through
violent means. As recently as the 1960s
and 1970s, it experienced a state of anarchy.
The
difficulties that are now making China and other countries impatient to end
U.S. financial hegemony originate neither in American weakness nor lack of
potential. They stem almost entirely
from the growth of political incivility, gridlock, and indecisiveness as well
as bad financial practices in the United States. America’s financiers continue to be too
clever by half. They contrived a
financial collapse into recession and lower long-term growth rates not just for
the United States but for the developed world.
They remain unrepentant, unreformed, and unconscionably willing to risk
other people’s money and well-being in the service of their own unconstrained greed. There is nothing wrong with America and the
world that greater realism, revitalized leadership, and more farsighted
policies cannot cure. If the United
States adopts these, it can reinvent itself and bounce back. I believe it will. But that will take a while.
In the
meantime, China is doing very well despite having far fewer natural advantages
than the United States. Assets
denominated in renminbi yuan are likely to be more secure than most. But China has too many domestic and foreign
policy distractions to wish to replace America as the manager and mainstay of
the global political economy or to be able to do so. China will react defensively, as it must, to
the problems posed by the collapse of the American-led world order but it will
not take the lead in resolving them. Nor
will other rising powers, none of which is up to the task of replacing America
in the roles it has played in global governance over the past seventy
years.
We are entering
an era in which there is no alternative to global power-sharing. The world will have to get used to crafting
collective solutions to problems rather than looking to American presidents to
imagine, invent, announce, and impose them.
This is true in foreign policy, where it is now universally recognized
that there is no made-in-America solution to the problems of the Middle East,
the territorial disputes in East Asia, and many other issues. It is also true for much-needed changes in
the global monetary and financial systems.
There is indeed
great disorder under the Heavens. We
must be prepared for the shocks and uncertainties of transition. But the defiant optimism of Mao Zedong should
inspire us. Rather than bemoaning the
crumbling of the old order, we should be looking to build a replacement for it
that is less vulnerable to unilateral abuse, equally responsive to the
requirements of increased flows of trade and capital between nations, and at
least as stable and predictable. That
will not be easy but, if we focus on the opportunities for innovation inherent
in inevitable change rather than on the difficulties of adjustment it presents,
we will find those opportunities.
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