We live today in a world of information and communications technology. For all the wonders it can work, it is actually quite fragile, dependent on a whole host of things to ensure it operates smoothly.
One of those things is batteries. However brainy and communicative your latest laptop may be, it is not worth the paper it prints on if it happens to be running on batteries and those batteries are about to go dead.
There is another very important aspect of today’s world that is also running on batteries. That is the United States economy. Its finances are not plugged into an independent energy source. The economy’s huge current account deficit is being sustained by financial batteries that are of foreign manufacture.
One of those batteries is called Japan. Another increasingly significant external source of financial energy has the name China stamped on it. The latter is going strong and looks to grow much stronger yet. The former has been running low for quite some time.
A frequently asked question about the U.S. economy is the one about how large its current account deficit can grow without causing mayhem. Would it be 3 percent of U.S. GDP? 5 percent? 1 percent? A fascinating question, to be sure. Yet given that the economy is running on batteries, it is the wrong question to ask.
In the circumstances, the sustainability of the U.S. deficit should be measured not against its own GDP, but against the resources of its main financial supporters. America needs its batteries to be fully charged and in good working condition. Whatever the productivity miracles it may be able to perform, the economy is a dead cause without functioning batteries.
So it is with dismay that one looks at what is unfolding in the foreign-exchange markets. The United States may be feeling triumphant that it has finally got the yen going up, and China feeling compelled to at least talk about renminbi revaluation. This may help the Bush administration gain points with its supporters in the exporting industry.
But it could well turn out to be an own goal if the outflow of money from dollar assets becomes unstoppable. That would be a case of the sorcerer’s apprentice in extremis. Alternatively, if the deflationary pressures caused by the currency appreciation become unsustainable for Japan or China, that would be the equivalent of the batteries suffering a sudden death. Furthermore, a renminbi devoid of a dollar anchor could just as well depreciate as appreciate.
A fashionable line of thought is that, with the cold war regime now behind us, the United States is the world’s only superpower, and that we are now living in a unipolar world. This may be true in terms of military muscle. Yet those very military muscles are also reliant on foreign batteries for financial support. In this respect, this is not a unipolar world that we inhabit, but a nonpolar one.
In this globalized society of ours, no single pole can exist on its own strength alone. Everybody is dependent on everyone else. Everybody is somebody else’s battery. The world is now a mutual aid society of the collectively suboptimal. What we should collectively aim for is to at least make it collectively optimal.
But alas, this kind of mutual aid society can all too easily turn into a mutual hate society if one decides to play the blame game. In the hope that the mudslinging in the currency markets and elsewhere doesn’t get too out of hand, this piece will end here. For my batteries are about to run dry.