The Quiet Coup

In a word: no. This is the price of that ‘exor­bi­tant priv­i­lege’…

To para­phrase Joseph Schum­peter… every­one has elites; the impor­tant thing is to change them from time to time. If the U.S. were just anoth­er coun­try, com­ing to the IMF with hat in hand, I might be fair­ly opti­mistic about its future. Most of the emerg­ing-mar­ket crises that I’ve men­tioned end­ed rel­a­tive­ly quick­ly, and gave way, for the most part, to rel­a­tive­ly strong recov­er­ies. But this, alas, brings us to the lim­it of the anal­o­gy between the U.S. and emerg­ing mar­kets.

Emerg­ing-mar­ket coun­tries have only a pre­car­i­ous hold on wealth, and are weak­lings glob­al­ly. When they get into trou­ble, they quite lit­er­al­ly run out of money—or at least out of for­eign cur­ren­cy, with­out which they can­not sur­vive. They must make dif­fi­cult deci­sions; ulti­mate­ly, aggres­sive action is baked into the cake.

But the U.S., of course, is the world’s most pow­er­ful nation, rich beyond mea­sure, and blessed with the exor­bi­tant priv­i­lege of pay­ing its for­eign debts in its own cur­ren­cy, which it can print. As a result, it could very well stum­ble along for years—as Japan did dur­ing its lost decade—never sum­mon­ing the courage to do what it needs to do, and nev­er real­ly recov­er­ing. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Cer­tain­ly no one at the IMF can force it.

The ‘opti­mistic’ sce­nario (there’s a worse one)

The con­ven­tion­al wis­dom among the elite is still that the cur­rent slump “can­not be as bad as the Great Depres­sion”. This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more inter­con­nect­ed and because the bank­ing sec­tor is now so big. We face a syn­chro­nized down­turn in almost all coun­tries, a weak­en­ing of con­fi­dence among indi­vid­u­als and firms, and major prob­lems for gov­ern­ment finances. If our lead­er­ship wakes up to the poten­tial con­se­quences, we may yet see dra­mat­ic action on the bank­ing sys­tem and a break­ing of the old elite. Let us hope it is not then too late.

The whole arti­cle repays read­ing. Ben Muse drew my atten­tion to it.

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