The race for becoming a global superpower is now China’s to lose
Misguided American policies may have set the stage for China to win the geopolitical sweepstakes
The more I think about it, the more I feel that the risk of the US losing its global dominance in many areas—economics, finance, capital markets, education and culture—has risen substantially in recent times. Specifically, I am now prepared to contemplate the possibility that China might get the better of America by 2030. American society, macro policy and capital markets have all decayed and remain decadent. The simultaneous bubbles in multiple asset classes (and some of them are not assets at all) is a tell-tale sign of a society that has lost its bearings, perhaps beyond redemption. Whether it’s crypto currencies, technology stocks, electric vehicles and homes, or shares peddled in chat rooms, non-fungible tokens and blank-cheque companies, its lack of concern for the disconnect between value and price (and for potential losses) is reflective of a culture that has debased hard work and thrift, and of a policy framework that has debased money.
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1 min read . 07:34 AM ISTAmerica is still sending stimulus cheques. Its labour market is recovering spontaneously. Small businesses are hiring. There is no need for a pork- barrel fiscal stimulus. But, that is what’s coming. Just two examples. Steven Rattner, who served the Barack Obama administration, thinks (‘Too Many Smart People Are Being Too Dismissive of Inflation’, New York Times, 5 March 2021) that the stimulus package would put $422 billion into the pockets of millions of Americans who were unaffected by the crisis. Second, the $510 billion now on offer to states and localities could be pared down to as low as $86 billion. Stimulus cheques are likely to be diverted for speculation in stock markets.
Monetary policy is craving inflation so that the US debt burden can be reduced through rising prices and higher nominal gross domestic product growth. In August 1987, a new chairman who was appointed to the Federal Reserve faced a stock-market crash within two months of his appointment. Then, from May 1988 to March 1989, he raised the Federal funds rate and inverted the yield curve. A recession followed, aided by other factors, including a doubling of the price of crude oil. A crisis in thrift institutions (savings and loans) followed. The Federal funds rate came down to 3% and stayed there for a couple of years. The real interest rate dropped to zero, which put off the bond market. Despite the US inflation rate staying stable at around 3%, its 10-year Treasury yield rose by 200 basis points. The bond market calmed down only after the Federal funds rate climbed to 5.5% from 3% over the course of 1994. A rise in real yields was needed to convince bond investors that their real returns won’t be eroded by inflation.
Today, the Fed is not prepared to offer that assurance. If anything, the US central bank’s reassurance is the opposite of what the bond market seeks. The outcome will be an erosion of the credibility of American monetary authorities and confidence in the US currency. This drama has started and its climax is a few years away. The Fed is also dismissive of financial stability concerns. But asset bubbles will burst. The Fed will double down again with loose policies that will only accelerate the arrival of the above outcome. Macroeconomic policy, both fiscal and monetary, is thus dysfunctional in America. The Japanification of the American economy without the protection of Japanese social cohesion and social stability is a likely prospect.
Finally, there is corruption. Whether it is academia, government or the financial industry or corporate sector, in general, all are compromised to varying degrees in their pursuit of various narrow agendas—internally or externally—to the detriment of the nation. This is not just confined to America, but applies to many Western nations. That is what The Hidden Hand by Clive Hamilton and Mareike Ohlberg has painstakingly documented. Lastly, though this space is too short to elaborate, there is the tyranny of ‘woke’ conformity that’s sweeping America.
Geopolitically, Europe is far more willing to put commercial considerations ahead of other value-based concerns in its dealings with China. Large swathes of Asia and Africa, too, feel that they have no choice but to be vassal states of China.
In contrast with the West’s, China’s current monetary and fiscal policies are prudent. For now, its authorities appear to have learnt the lessons of their response to the 2008 global economic crisis. China had panicked and ordered banks to lend to create capacity in infrastructure and other sectors that was far in excess of what was needed. Today, China is not splurging in response to the covid crisis. Its stimulus is calibrated and measured this time round. The International Monetary Fund calculates that the Chinese general government fiscal deficit will remain high well into 2025 and hence its government debt ratio will be rising. But the case with many Western nations is the same, and they are still doubling down. China, on the other hand, is de-leveraging. Of all the major central banks in the world, only one is seeing its balance sheet shrink. That is China’s.
Barring internal accidents, it does appear to be a case of game, set and match to China by 2030 in the global geopolitical sweepstakes.
These are the author’s personal views.
V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister.
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