At Pandemic Capitalism James Meadway speculates that the global financial system that has prevailed for nearly 50 years is being replaced. Among the passages in the piece I found interesting were this characterization of what has happened under the present financial system:
National-level financial systems could integrate with each other and, in defiance of the nationally-organised system of the original Bretton Woods design, disintegrate the relationship between domestic production and consumption in favour of the integration of domestic consumption into the value chains organised globally.
This disintegration of the national economy was the crucial element in the financialised reorganisation of the world economy over the years of globalisation. As organised through the neoliberal model of governance, applied in some form to close to every economy in the two decades after 1990, the opportunity to run domestic consumption entirely out of kilter with domestic production was more than an extension of the venerable principle of comparative advantage, in which the commodity grasp of economy could be extended by mutually beneficial trade; it was, importantly, the extension of the principle of international trade deeper into the sphere of production: of the finer and finer division of labour, on an international basis, and the search for the lowest relative cost of production available.
That evolution has been a lot better for some people than for others. It hasn’t been particularly good for most Americans but it been absolutely fabulous for a fairly narrow sliver, viz. the enormous concentration of wealth that has taken place.
What does he see happening?
Periods of hegemonic shift – as with, say, the passing of the sterling-oriented Gold Standard into the Bretton Woods system – are periods of dangerously radical instability. If we are not in the transition to a different hegemon – and it would be an ambitious stretch to claim China is anything close to this – but to a world where there are multiple, potentially competing world-currencies would be a radical departure. So, too, would be the return of a commodity money-form as one of those competing “world-moniesâ€, in the form of the commodity-backed renminbi. The contradiction here would be less internal to the monetary regime, as external, occurring in the clashes between the different monetary regimes. This needn’t involve a clash of equals: a smaller, more tightly regulated commodity-money regime could confront a looser, but larger credit-money regime.
with
The presence of multiple, competing world-money forms threatens something still more dramatic. If we take what Charles Tilly called the two “master process†of the modern era, “the creation of a system of national states and the formation of a worldwide capitalist systemâ€, it has been the formation of global monetary system, with a single, hegemonic world-money at its centre that allowed these two potentially conflicting processes to be reconciled: not without tensions, obviously, as the somewhat potted history above suggests, but at least organised to the point of not provoking outright collapse. Multiple world-monies, and the presence of competing forms of world-money – commodity-money (“outsideâ€) versus credit-money (“insideâ€) suggests a radical new indeterminacy for the world-system as a whole, without the obvious means to reconcile them.
Throw in the instability of the environment – surely now the overdetermining factor in all considerations about the future – with the disruption to the fundamental processes of material production that this implies, and the future prospects for the presumed public goods of the modern world (peace between nation-states; prosperous national economies) are shaky indeed.
What goes unstated are the consequences of the disintegration of the relationship between production and consumption for the country which has benefited from it most—the United States. Reconstituting our ability to produce more of what we consume will be nothing like as much fun as eroding our productive capacity in favor of consumption has been. I doubt our political or social institutions are prepared for what is to come.
It has been argued that having the world’s only reserve currency (or nearly so) allows the US to finance its consumption by borrowing the savings of foreigners, China being the prime example.
So, if the efforts of Russia, China, India, Iran, Brazil et al. succeed in establishing alternative payments systems that do not include the dollar or SWIFT, will that crush American consumption and immiserate the American people?
I tried to read the whole article, but when he got to Nixon without mentioning LBJ & 1968, I skimmed the remainder. He did not mention the Fed creation or Glass-Steagall, but while vital to the topic, those can be assumed in most discussions of the topic. He does mention swaplines which are vital to understanding the topic.
The only “reserve currency” is gold or some other commodity like gold. Bretton Woods had a gold requirement for its “reserve currency”. When Nixon stopped redeeming dollars with gold, its “reserve currency” ended.
In a credit backed currency regime, credit acts as gold. Because dollar based financial assets substantially outnumber other currencies, the dollar is used for trading. To replace the dollar as the prefered trading currency, these assets would need to be replaced.
I dislike credit backed currency, but with hard/commodity money, an economy becomes “hide-bound”. With a hard dollar, the size of the US economy would be bound by M1, or possibly M2. The size of today’s GDP requires financialization, but this is not the same as a financialized economy.
The transition to a financialized economy was from 1968 to 1998. Deregulation allowed exotic financial engineering, but in addition to an enormous trade deficit, it allowed an enormous government budget deficit. Like government debt is a result of accumulated deficits, global dollar based financial assets are the result of accumulated trade deficits.
In reality, there is no trade deficit, The US produces dollar based financial products, and these are traded for foreign produced goods. These dollar based financial products are priced according to the value assigned by the foreign producers.
(NOTE: It is more complicated than a Chinese dog food producer determining the value of a US credit default swap. The value is determined by the global financial-based system and the interaction with domestic monetary systems. China manages this through the yuan and the renminbi, but this limits the yuan as a trading currency.)
Deindustrialization was facilitated by financialization, and as long as there is a demand for dollar based financial assets, reindustrialization will not occur. There are ways the government can lower the non-financial product trade deficit, but as long as foreign buyers demand dollar based financial products, they will be produced.
Using the financial system to punish Russia could decrease this demand. Essentially, the US can de-value a privately owned asset based upon a government’s actions, but this affects future value, as well. The value of a dollar based financial product must include the possibility that it can be voided at will.
In a credit backed monetary system, the central bank’s influence is minimized. The global financial system determines monetary valuations. The government’s influence is mostly limited to financial regulations. (It is really securities regulations, in general.)
Anyway, this is the short version. I had a much longer screed, and it was only getting longer.
On that we are materially in agreement. One way of testing that is if Fed actions are less effective than they were 25 years ago. We should know soon.