But that opens up its own set of issues. China’s focus on exports has been a successful growth strategy, possibly doing more to reduce the number of people in dire poverty than all the foreign aid ever deployed. Anything that might slow the country’s growth juggernaut is risky, and strong political constituencies in China — namely exporters — are arguing against it.
There’s a more subtle risk from a U.S. perspective. Right now, U.S. borrowing rates are extremely low despite high budget deficits. If China and other Asian nations started buying fewer Treasury bonds, the U.S. economic situation could become worse. If the housing market seems terrible now, wait until mortgage rates hit 8 percent instead of 4 percent.
So creating a more durable global economic system would be hard enough if it included just the United States and China. But most of the world’s major economies will have to make similarly difficult transitions.
In Europe, for example, Germany may gripe about profligate spending by southern European nations, but there are two sides to that coin: When Spain and Italy spend beyond their means, they are buying goods made in German factories, and using money that the savings-oriented Germans have been happy, until recently at least, to lend them.
A new global approach
What would a new global financial system look like? World leaders are gradually hammering out an approach to reduce imbalances that rests on putting international pressure on countries that run persistently large surpluses or deficits.
It will be hard enough to move toward agreement while the world is still in crisis-fighting mode; European leaders are understandably more focused on their immediate debt crisis and risks to their common currency than setting up a new financial framework for the decades ahead.
But the more fundamental problem is enforcement. Suppose the international community decides that countries that spend more than 3 percent on top of what they make are in violation of the norms of the new economic order. What then? The German chancellor cannot order the U.S. president to go sit in a corner as punishment.
Other ideas could address certain aspects of the failed post-Bretton Woods economic order. For example, if all countries enacted a small tax on financial transactions, it might cool down the hot money that has made countries more vulnerable to rapid inflows and outflows of capital. It would even help lower budget deficits.
But for it to work, it would need to be truly global. If Germany enacted the tax but Britain didn’t, much of the financial activity in Frankfurt would migrate to London, and so on. And U.S. government has consistently opposed such a tax, viewing it as unlikely to succeed. It would also be highly damaging to an industry at which the United States excels, which is to say high finance.
That weekend in 1971 when Nixon ended Bretton Woods, the president and his aides knew it would roil markets immediately and have long-lasting consequences. Paul Volcker, then a Treasury Department official and later the Federal Reserve chairman, joked that if he were he free to trade in markets to take advantage of the move the government was about to make, he could earn enough to pay the federal government’s entire budget deficit for the year.
At a conference in Bretton Woods this past spring, Volcker mused about those days, when the old international monetary regime was crumbling and the world’s leaders sought a new order for the economy. A civil servant named George Willis, Volcker recalled, had been at Bretton Woods 40 years ago and was the most knowledgeable person in the U.S. government on international monetary affairs.
“All the wisdom of the U.S. Treasury was in that one man, George Willis,” Volcker said. “And he had gotten on in age and was kind of a crusty old guy anyway. . . . I would adjourn these meetings, and we would discuss what to do about the monetary system. . . . Whatever the proposal was, at the end, I’d ask George, ‘What do you think, George?’ And he would say, ‘It won’t work.’
“Well, I finally got a little exasperated and said, ‘George, what will work?’
“ ‘Nothing,’ he said.”
“And,” Volcker added, “that’s where we still are today.”
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