By Michael Moran
NEW YORK –
Odds favor it, but then in the United States the debate has moved on. Solid job figures, manufacturers’ surveys, producer prices – and of course the stock market – all point to an economy ready for weaning, even if Yellen cares more about the long-term unemployed than her predecessor.
But the rest of the world, particularly that segment known as the emerging markets, is angry. The concerns given voice in January by India’s central bank chief, Raghuram Ragan, that the gradually diminishing flow of hard currency into emerging market economies due to tapering betrayed a lack of foresight or even ingratitude on the part of the Fed strikes many Americans as absurd.
The US public suffers from a profound fatigue after failed interventions and an economic downturn that appears to have torn away many of the props that exaggerated the boom that preceded it. The idea that the nation’s monetary policy should be concerned with anything but American interest simply does not rate.
While this attitude accurately reflects America’s mood – and there is something to be said for pointing to the crocodile tears streaming from the faces of emerging market central bankers – in the longer-term this courts serious risks for the United States. Outside an apology for tapping their phones, or perhaps for creating a precedent in Iraq for Vladimir Putin’s moves in Ukraine, Americans may well feel they owe little else to BRICS leaders whose triumphal summits and incessant crowing about “the end of the American century” has failed to ingratiate them here.
The Fed has, in fact, taken great pains to telegraph its tapering to minimize (though not eliminate) disruptive surprises. The idea that tapering should simply continue unabated – or that the Fed is bound by its “forward guidance” not to raise rates until the end of 2015 irrespective of the state of the American economy – is absurd. For all its global clout, the Fed – like the US military,
Nonetheless, Americans should not assume this means they have no responsibility to measure the impact of US monetary policy on other nations. Besides the obvious question of contagion through lowered returns and regulatory chaos affecting US multinationals and emerging market investment funds, there are profound long-term risks in blithely taking for granted the enormous benefits America’s economy garners from the fact that most of the world’s trade is denominated in US dollars.
The “exorbitant benefit” of issuing the world’s reserve currency – as a former (presumably resentful) French leader once put it, is much debated. But most economists agree that there are significant advantages to issuing the dollar – in effect, a capital gains effect of between 1 percent and 6 percent. More simply, the price Americans pay for most commodities (oil, for instance, or food) is just a bit lower than the same commodity purchases with, say, Indian rupees.
More importantly, because the Fed alone controls the number of dollars in circulation, America can sustain policies – like the near-zero federal funds rate that has prevailed since the financial crash – that would have global bond markets baying for the blood of any other nation. These low rates effectively lower the ultimate return-on-investment foreign creditors will receive for purchasing American debt through the sale of US Treasury bonds and other government securities.
But these perks of global dominance will erode along with America’s hegemony, and erratic or insensitively propagated policy measures in Washington will speed the arrival of that day whether they emanate from Congress, the White House or the Fed.
Already global markets are chirping, led by China and Russia, that the dollar be supplanted as the global reserve currency by something else. There has always been a good measure of resentment in these pronouncements, and people laughed aloud when then-President Dmitri Medvedev suggested the ruble as an option in 2010. But there are viable options, too – a basket of currencies, the IMF’s “special drawing rights” vehicle, or, God forbid, Bitcoin.
Does issuing the reserve currency impose on the US certain responsibilities? Yes, but mostly these are consistent with self-interest (including the one that says, “Don’t run around threatening to default”).
The fact is, no rulebook or international compact governs the responsibilities of the central bankers who happen to set policy for the world’s global reserve currency. If such a book existed, after all, it would have been torn up time and again – in 1931, when Britain ditched the gold standard, in 1944 when the Bretton Woods deal was sealed, and again in 1973, when the US finally followed Britain and embraced a floating, fiat currency. Yet another new print run would have followed the 2008-2009 crisis as central banks, led by America’s, embraced the unorthodox policies that unleashed the tidal wave known as quantitative easing that is only now beginning to diminish.
BRICS leaders and others had their complaints then, too: Dilma Rousseff, for instance, complained repeatedly after taking office in 2011 that the “expansionist” Fed policies were hampering Brazilian growth and stoking inflation.
So it is that calls for the US Federal Reserve to consider the effects of tapering on emerging markets tend to fall on deaf ears in the United States. But Americans should not kid themselves. Just as there is no rulebook for managing the global reserve currency, it is nowhere written in stone that the US dollar will remain in that position in perpetuity. As in so many other things since the turn of this century, America must balance its justifiable desire to pursue its own national interest against the burdens of its still unrivaled place in the global economy. To do otherwise will merely hasten the day when the desire for an alternative to the greenback moves from a mischievous outlier to a global consensus.
Michael Moran is vice president of global risk analysis at Control Risks, an international political, integrity and security risk consultancy. He is also author of The Reckoning: Debt, Democracy and the Future of American Power. For more analysis, sign up for a free trial of our Country Risk Forecast.
