Friday 17 Aug 2018 | 21:01 | SYDNEY
Friday 17 Aug 2018 | 21:01 | SYDNEY

When other countries have the money


Mark Thirlwell

12 February 2010 10:07

Stephen Cohen and Brad DeLong have written a very nice book looking at the changing global balance of financial power and the consequences of the US becoming the world's largest debtor. It's an easy read, and it's short: I managed to complete it across the space of a week's commuting on the Manly Ferry

It's also full of interesting ideas. It's written for a US audience and, just occasionally, this produces the odd jarring note. But this is a very small quibble. Some snippets:

After almost a century, the United States no longer has the money. It is gone, and it is not likely to return in the foreseeable future. (p.143)

When you have the money – and 'you' are a big, economically and culturally vital nation – you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains lose power, especially the power to ignore others...And you lose influence. (pp 2-3)

The United States will continue to be a world leader – perhaps even the leader.  But it will no longer be the boss. The other countries, after all, will have the money. (p.14)

Back when the United States had the money, it used it to pay attention to other governments only when it chose and to make certain that other governments paid attention to the United States even when they wished to not so choose. (p.19)

The rapid growth of sovereign wealth funds has reinforced long-standing worries of foreign ownership and control of domestic enterprises. To be bossed around even indirectly by foreigners with money is not ideal. To be bossed around by foreign governments that need not have the transparent, money-grubbing objectives of bosses and shareholders worldwide, but rather the potentially very different objectives of governments is more disturbing. (pp.69-70)

The basic function of the finance system is to round up savings from all over and to channel them to the most productive use. The American financial system dreadfully failed in the performance of its key function, and it was that failure...that transformed the fundamentally unsustainable imbalance in America's foreign trade and debt position into a financial and economic crisis of global and historic proportion. (p.111)

Finance...had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding of elected politicians, its seconding of its top executives to posts throughout the regulatory apparatus of government...all cumulated to finance's full-blown capture of government and culture. (pp.112-113)

The current crisis is beginning with a worldwide reaction against what are perceived to be both the excesses and the defects of neoliberalism, the “leave it to the market and get the state's hands out” is likely to end with governments...unafraid to use the substantial ownership stakes they will have amassed in a host of distressed national firms in finance and industry. (p.119)

Americans like to say scornfully that industrial policy is about “governments picking winners.” Picking winner industries is not that hard – even for governments...Even at the leading edge of the technological frontier, the industries that governments are tempted to promote are largely the same ones picked by the analysts and brokers at investment firms...Right now, yet again, governments and analysts alike are all picking clean tech, nanotech, and biotech. Picking “winner industries” is not the hard part; winning is.’ (pp.121-122)

State-led economic development by the developmental states of East Asia such as Japan and Korea has been a wonder of the world, cutting decades if not generations off the predicted times for their emergence as prosperous, modern economies...Now that the financial crisis has freed them from the fetters and blinders of the Washington consensus and the neoliberal ideology, the governments will attempt to deploy their market-rigging economic instruments – their money, their sovereign wealth funds, their stimulus packages, along with the various nonmonetary instruments at their disposal – to accelerate their rise to prosperity. Will they succeed? Probably not...But they will try. (pp 122-123)

Money is just one power available to those governments, especially China. There is also the power of access to, and success in, the Chinese market...Economics talks a lot about market power, but little about the power of a market if you control access to it. (pp.130-131) the future, governments are likely to take a more active role intervening in their economies to affect market outcomes than they have over the past generation...And the governments that accumulate enormous pools of money in their reserves, in their sovereign wealth funds, and in the companies they directly and indirectly own or control will attempt to play an important role in the fate of not just their own economies but also those of others. (pp 144-145)