Emerginvest Blog

Less than a week ago I wrote a well commented article called “New Economic World Order: U.S. No Longer On Top,” in which I briefly summarized the economic fallout of the last few weeks, and then argued how the US would not continue to be on top of the economic world order. I argued that there were two reasons the US had lost economic power over the global scene.

The first was that regardless of who is to blame for producing the toxic debt (regulators, banks, leveraging practices, U.S. entities, foreign entities, etc.) the fact is that the U.S. produced the majority of it. Many individuals agree that the U.S. already had a tenuous image abroad, and that many foreign individuals, institutions, and perhaps even governments, might blame the U.S. for the current global crisis. Comments on another article I wrote stated that was preposterous - the U.S. was not solely to blame for current market conditions and that many non-U.S. banks imitated the same practices.

I argue that it doesn’t matter. It’s all relative. Foreign individuals are going to have their own perspectives and I strongly believe in psychological attribution theory - that it’s human nature to blame failure on outside factors (in this case foreign individuals blaming the US for the crisis) and success on internal factors (perhaps when markets stabilize on their own bailout packages). In no way am I trying to make a gross generalization and say that this is the case for the majority of foreign individuals – only that it does exist, and I see it growing in the near future. Subsequently, I see the US losing a good portion of its political and economic clout at the global bargaining table.

Secondly, the U.S. has taken the brunt of the economic fallout and will not recover quickly or easily. The clear absence of economic dominance (for the time being) opens a number of possibilities for other nations to fill the gap. Specifically, cash-rich nations like Japan, or emerging power-houses like China or Indiacan step in. I quoted a NY Times article entitled: “Japan considers Bigger Role on Economic Stage,” which stated:

“…the fact they [economic proposals] are being discussed at all underscores the vacuum in leadership being felt across the world in the wake of an American-led economic debacle. The fact they are appearing in Japan, a nation long content to follow Washington’s lead, reflects what many here call a movement toward a new global economic order in which no single country dominates. ‘With the relative decline in U.S. economic and financial power, it is inevitable that U.S. leadership will also decline,’ said Yasuhisa Shiozaki, a former chief cabinet secretary. ‘We are seeing a new, multipolar economic regime starting to emerge.’”

Why am I restating this? Because we saw last week some of some of the strongest language to date coming from China’s official state newspaper. It completely supports the argument that the vacuum of economic power left by the U.S. in the wake of the financial disaster is attracting others to jockey for global position in a sort of pecking-order struggle.

In a Reuters article: “U.S. has plundered world wealth with dollar: China paper,” it stated how one of the leading commentaries “in the overseas edition of the People’s Daily said that Asian and European countries should banish the U.S. dollar from their direct trade relations for a start, relying only on their own currencies.” According to Reuters, the Friday quote read: “’The United States has plundered global wealth by exploiting the dollar’s dominance, and the world urgently needs other currencies to take its place.’”

The commentary certainly does not directly reflect government viewpoints - and few would argue it makes logical sense - but it does appear prominently in the traditionally heavily-censored, chief paper of the ruling communist party.

The Reuters article states further that: “But the commentary, as well as recent comments, amount to a growing chorus of Chinese disdain for Washington’s economic policies and global financial dominance in the wake of the credit crisis.”

This comes at the same time that the ASEM Asian-European financial meeting is taking place. In another article from the Wall Street Journal, “China Backs Europe’s Push for Oversight,” Ian Johnson describes how China officially supports Europe’s push for more global regulation. Johnson describes it quite well:

“On one hand, China values stability and this would seem naturally to support regulation. On the other, it likely doesn’t want international institutions that curb its sovereignty or constrain its financial flows. In Brussels, EU officials said they weren’t surprised China agreed to side with the EU in pushing for new rules for financial markets. ‘They want a seat at the table in whatever is going to happen.’”

I think that last sentence sums it up perfectly. The world knows that China is going to be one of the – if not the – leading economic powers of the next century. It can only be expected that China wants to position itself as one of the leading global players.

Emerginvest’s China and US market comparison over the last year:

I highly doubt we will continue to see this kind of strong language coming from such official sources as the state newspaper, but I do think we will see growing international disdain for the U.S. in light of the crisis. China certainly has her own amalgam of problems to deal with, including an extremely downtrodden stock market and falling commodity prices. Yet, I strongly feel we will continue to see China avoiding any global solution where the United States takes a dominant role. In my opinion, between the EU bloc, India, China, Brazil, the US, and the Middle East, there will be no one entity that comes out of this global economic catastrophe as definitively dominant.

But I think that’s the point: before this I would have said the U.S. without question.

Disclosure: Emerginvest is an international finance portal, helping investors find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.

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Filed under: Commentary on World Financial News, Developed Markets, Emerging Markets, Jonathan (Marketing), World Analysis