The United States of America has reached a very important inflection point in its relatively short history. The country, in its present form, has been around for a few years less than two and hundred and fifty years. Sir John Glubb, in his ‘Fate of empires’ puts the maximum length of empires at two hundred and fifty years. He wrote, rather presciently, “Decadence is a moral and spiritual disease, resulting from too long a period of wealth and power, producing cynicism, decline of religion, pessimism and frivolity.
By Dr. V. Anantha Nageswaran
America’s Moment of Truth is Here
The citizens of such a nation will no longer make an effort to save themselves, because they are not convinced that anything in life is worth saving.” Many in America appear to have concluded that the idea of America is not worth preserving. Amazingly, some of the elites in America agree with them. As Francis Fukuyama wrote in 1989, it is the boredom of the American middle class that has launched the current insurgency against the idea of America itself.
Grievances accumulated over years and decades have coalesced into uncontrollable rage and anger. Events since the outbreak of the pandemic in March, followed by the killing of George Floyd by the Police confirm the near-disappearance of the space for civilised disagreement, debate and decision-making as ‘Cancel culture’ thrives. There is no daylight between mainstream media and alternative media sources. Once respectable media outlets like ‘The Atlantic’ and the ‘National Public Radio’ have respectively stooped to putting out lies and to host an author who justifies looting while protecting her own copyright. Realclearinvestigations.com has documented at least thirty one instances of mainstream media depicting violent and destructive rioting as either peaceful protests or completely downplaying them.
Three decades ago, Jack Goldstone published a simple model to assess a country’s vulnerability to a political crisis. Peter Turchin applied it to the United States. They concluded that America should be prepared to welcome the ‘Turbulent Twenties’. In a joint piece they wrote recently, they reckon that “almost any election scenario this fall is likely to lead to popular protests on a scale we have not seen this century.” A Bloomberg article calls it the ‘most critical one in our life time.’
In his review of Michael Anton’s book, ‘The stakes: America at the point of no return’, Professor Emeritus of International Relations at Boston University wrote the following conclusion:
“In July, the Democratic National Committee engaged some 600 lawyers to litigate the outcome, possibly in every state. No particular outcome of such litigations is needed to set off a systemic crisis. The existence of the litigations themselves is enough for one or more blue state governors to refuse to certify that state’s electors to the Electoral College, so as to prevent the college from recording a majority of votes for the winner. In case no winner could be confirmed by January’s Inauguration Day, the 20th Amendment provides that Congress would elect the next president. Who doubts that, were Donald Trump the apparent winner, and were Congress in Democratic hands, that this would be likelier than not to happen?
Before or afterward, were conservatives not unanimously to roll over, and were a few incidents to result in loss of life and conflict between police forces on opposite sides of the affairs, America might well experience an explosion of pent-up rage less like the American Civil War of the 19th century and more like the horror that bled Spain in the 20th.”
Princeton University Political Scientist Omar Wasow, in his research, showed that “peaceful civil rights protests helped Democrats win white votes, and then violence pushed white voters toward Republicans.” David Shor, a 28-year old data analyst who worked for President Obama’s re-election campaign merely tweeted this study and paid the price for doing so by losing his job. A similar fate befell a reporter, Lee Fang.
This comes in the wake of a prediction of a landslide victory for President Trump by Political Science Professor Helmut Norpoth of Stony Brook University. “The Primary Model has correctly predicted five of the past six presidential elections, and when applied to previous elections, correctly predicts an impressive 25 of the last 27, missing only the 2000 election in which George W. Bush defeated Al Gore and the 1960 election in which John F. Kennedy defeated Richard Nixon — two extremely close and contested votes marred by allegations of voting inaccuracies.”
What he said about the reactions he got is interesting:
““I get a lot of reactions, and I get a lot of mail,” he said. “Some of the comments are unprintable. I do get backlash, and I get it from people whose opinions I value, people who are friends. And I can tell that some people find it difficult. So there is an emotional part that goes on.”
Combining the insight of Omar Wasow and the prediction of Helmut Norpoth, we arrive at the unsurprising recent trend that the race to the White House is tightening. Biden’s seemingly unassailable lead over Trump has shrunk in recent weeks. Importantly, the Harvard-Harris poll published in late-July showed that almost a fourth of those surveyed could change their minds by the polling date. That is a significant number. Further, one noticeable feature of the July survey was that on many issues – pulling down the statues of the nation’s founding fathers, on defunding the police, on law and order in the streets of major cities, on whether city officials are doing their job, on the reputation of the police and the army, on calling the army to assist in the maintenance of law and order in cities and, on China – the majority of those polled were not in alignment with the position of the Democratic party or its ambivalence on those issues. That is unsurprising.
In any country that is rich (per capita income of over 60,000 US dollars), the majority of the population would be concerned with law and order over social re-engineering much as they may be intellectually sympathetic to and supportive of efforts to address social injustice. Yet, those pursuing a different agenda might be indifferent to the popular preference for safety on the street.
As November 3 draws closer, there is a high risk that there would be no one in charge on 20th January 2021 in America. Eventually, the Congress may have to choose a President. Several things will flow from that. That won’t add to America’s prestige, image, clout and hence the dollar’s status. There is a non-trivial prospect of this scenario unfolding.
The Importance of the 20th Amendment
Hillary Clinton, the former Democratic Presidential candidate has advised Joe Biden, the current Democratic Presidential candidate, not to concede the election on the night of November 3, the election date.13 Washington Post in an article has said that, except in the event of a landslide victory for the Democratic Party candidate, they foresee violence in other scenarios.
Hawkfish, a top Democratic data and analytics firm, has said that on election night, President Trump will appear to have won, potentially in a landslide, on election night before mail-in ballots are counted.15 Hawkfish is funded by Michael Bloomberg. So, if Joe Biden appears to have lost on 3rd November, the Democrats would be in no mood to concede. That is the plan.
Trump might not be inclined to concede either, if the race is tight or if he had won on polling day and is being denied the Presidency by Democratic Governors and by mail-in votes. A recent article in Politico notes that only about one-hundredth of 1 percent of in-person votes are rejected, whereas rejection rates of 1 percent are common with mail-in votes, and many states exceeded that during their primaries this year.
‘The Economist’ reminds17 its readers that, during the final televised debate in 2016, before the election, candidate Trump refused to commit himself to accepting the results of the coming election.
Therefore, it appears that, barring a Biden land-slide at the end of the polling day on 3rd November, no other outcome would be accepted by the other side. But, on current trends, such an outcome looks unlikely.
The 20th Amendment to the American Constitution is highly likely to come into play post-November 3, 2020. According to a Wikipedia entry,
“The Twentieth Amendment (Amendment XX) to the United States Constitution moved the beginning and ending of the terms of the president and vice president from March 4 to January 20, and of members of Congress from March 4 to January 3. It also has provisions that determine what is to be done when there is no president-elect.
… The amendment was designed largely to limit the “lame duck” period, when members of Congress and the president served their terms after an election but without being re-elected. By having congressional terms begin before presidential terms, the amendment results in the incoming Congress, rather than the outgoing one, holding a contingent election in the event the Electoral College deadlocks regarding either the presidential election or the vice presidential election. The amendment also establishes procedures in the case that a president-elect dies, is not chosen, or otherwise fails to qualify prior to the start of a new presidential term.”
Section 3 of the 20th Amendment is the important one:
“If, at the time fixed for the beginning of the term of the President, the President elect shall have died, the Vice President elect shall become President. If a President shall not have been chosen before the time fixed for the beginning of his term, or if the President elect shall have failed to qualify, then the Vice President elect shall act as President until a President shall have qualified; and the Congress may by law provide for the case wherein neither a President elect nor a Vice President elect shall have qualified, declaring who shall then act as President, or the manner in which one who is to act shall be selected, and such person shall act accordingly until a President or Vice President shall have qualified.”
The Congress, if it has come under the control of the Democrats, will choose a Democrat as the ‘acting President’. It may not be even Joe Biden. That is a possibility.
If the election outcome turned out to be close and if Democratic Governors had not ratified their electoral college leading to a stalemate up to 20th January 2021, it is inconceivable that the Republican Party or President Trump would accept the selection of the President made by the new Congress on the 20th January 2021.
There is another risk that is receiving considerably less attention. If Joe Biden wins the election by a landslide or if President Trump wins the election on the polling day but figures out that he would not be allowed to assume office on account of any reason – Democratic governors refusing to ratify the electoral college outcomes or if the postal ballots are counted – then the possibility of pursuit of ‘scorched earth’ policies by his lameduck administration between 3rd November 2020 and 20th January 2021 rises markedly. That would include both domestic and international affairs.
If the above scenario unfolds, the risk of President Trump making some radical decisions in the weeks following the Election Day rises markedly. President Trump has reasons to feel aggrieved. He has been pursued by the media and his opponents like no other President has been, since his election in 2016. His campaign was spied on and he was accused of collaborating with Russians to steal the election from the Democrats. All of them have been proven to be fabricated. There was also an unsuccessful attempt at impeachment on these fabricated charges. If he feels that he has won the election and is again being denied the right to hold office, there is a good chance that he would take certain decisions that have far-reaching geopolitical consequences. More importantly, that risk does not diminish much even if he officially concedes the election on the Election Day or thereafter.
That would be painfully destabilising for financial markets that have bubbled over in the last six months thanks to generous provision of liquidity from central banks around the world in response to the economic uncertainty created by the pandemic.
But, the most important questions are:
What has made the stakes so high in this election?
The answer: The prospect of the burial of globalisation once and for all.
For whom are the stakes so high?
The answer: For two sets of people. One is the corporate elites (the boomer generation) who have been the biggest beneficiaries of globalisation and the others are the millennials.
Enter Elites and Exit Class
According to a note18 by pewglobal.com, millennials are those born between 1981 and 1996 and Generation Z refers to those born after 1996. Millennials faced their first crisis in 2008 as many of them were coming of age in their careers. In little over a decade, another crisis has struck them. Most of them have not experienced job security and their savings are meagre. The proportion of young adults (aged 18-24) who live with their parents is at 52% as of July 2020 and is the highest since the Great Depression. Millennials have student debt to deal with, cannot buy homes because they are unaffordable and nor do they have enough to pay their mortgages and they face rising healthcare costs. Millennials have a median wealth of little over 12,000 dollars and about 16% of them do not even have 400 dollars to cover emergency expenses.20
So, the November 2020 Presidential election should have been a battle between America’s have-nots (millennials) and the boomers who have had it better on many dimensions and have made life difficult for the millennials21. But, why has it become a race between races?
In general, African-Americans have reasons to feel that somehow the American prosperity has eluded them and that the American dream has, for them, remained just that. Now, it will be beyond the scope of this note to go into the historical origins and grievances and try to render judgement on the forces, the governments and the people responsible for this perception and reality. However, what is true is that in the last forty years, since the Presidency of Ronald Reagan, capitalism in America has become a ‘winner takes all’ ideology. Shareholder capitalism, managerial capitalism in the wake of unprecedentedly high executive compensation, market concentration with natural and engineered monopolies and the primacy of asset bubbles fuelled by debt to keep the economic engine humming have been its features. Higher education in good institutions has become out of reach for many Americans – white or black. In Harvard, for example, the admission rate for legacy students is about 33% while the overall acceptance rate is under 6%. In general, in about 64 colleges, the legacy admission rate is 31%, higher than the official admission rate for all applicants.
Two professors, who believed in capitalism, Professor Frank Partnoy of the University of California, Berkeley and Rupert Younger at Oxford examined Karl Marx’ ‘The Communist Manifesto’ and found that three-quarters of the original prose deserved to survive, when they attempted to re-write it to fit the present times.
The concluding paragraph of the revised manifesto was this:
“The activists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the Haves tremble at an Activist revolution. The Have-Nots have nothing to lose but their chains. They have a world to win.”
Gulzar Natarajan and I concluded our co-authored book, ‘The Rise of Finance: Causes, Consequences and Cures’ on this note:
“… over the past century or so, have sought to address this problem through sufficient institutional checks and balances against egregious excesses by the dominant classes. These institutions and channels of engagement and negotiations have served as safety valves….Over the past century, faced with the onslaught from communism, these same institutional systems have helped capitalism and liberal democracy survive by giving birth to the likes of labour unions and collective bargaining, consumer organisations, welfare state, social democracies, and so on. It is not incorrect to say that capitalism co-opted elements of communism to fend off the latter…
… Unfortunately … the space now available for such safety valves to defuse may have shrunk and even disappeared. The populist backlash across developed economies in recent times is a manifestation of this reality.
The response of the liberals has been even more disturbing. Instead of realising the enormity of the problem facing us and the near complete breakdown of the social contract, and advocating measures to address it, liberal intellectuals and opinion makers have acquiesced with the elites by going after the convenient straw man in Donald J Trump (DJT).
It is not DJT that is the real problem, it is the elite capture of the rules of the game and the near complete marginalisation of the voices of labour and disenfranchisement of those who struggle to make ends meet. The “thesis” is no longer sustainable, and the “anti-thesis” is chaotic and deeply uncertain. In the circumstances, history teaches us that all we can expect is a tumultuous period leading to a disorderly synthesis. Unless we act now to achieve a more orderly synthesis.”
Historically, poor African-Americans, descendants of slaves, have felt disempowered and not helped by the society adequately. In the last forty years, thanks to the way globalisation evolved and its spoils were distributed, poor whites and those without a college degree have also become increasingly marginalised and left out. Hence, a compelling case had built up for a class alliance of poor, marginalised and disenfranchised (not literally but figuratively) blacks and whites.
Instead of a class struggle, what America and the world face is now an identity struggle in the American society. In a way, it is an internal civilisational struggle with the potential to become an international power and/or civilisational struggle. Why has it evolved in this fashion?
In a class struggle, elites who have prospered unimaginably in the last forty years would have suffered. So, they have devised this alternative. Since elites have a great influence over financing and hence decision-making, the Democratic Party establishment has gone along with identity politics even though historians like Mark Lilla have urged the Democratic Party to reject it. In the 21st century, by and large, that is the only politics that has been in vogue in America.
What happened in France, according to Christopher Caldwell, holds a clue as to what is unfolding in America:
“François Hollande built his 2012 presidential victory on a strategy outlined in October 2011 by Bruno Jeanbart and the late Olivier Ferrand of the Socialist think tank Terra Nova. Largely because of cultural questions, the authors warned, the working class no longer voted for the Left. The consultants suggested a replacement coalition of ethnic minorities, people with advanced degrees (usually prospering in new-economy jobs), women, youths, and non-Catholics—a French version of the Obama bloc. It did not make up, in itself, an electoral majority, but it possessed sufficient cultural power to attract one.”
The logic that propelled Francois Hollande has persuaded the Democratic Party in America. But, what explains the rationale for rich corporate elites to be part of this coalition?
The elites have (correctly, from their selfish perspective) concluded that a coalition of the working class and the poor, cutting across racial lines, will pose a threat to their self-interest. So, they have divided the working class along racial lines and weakened them. Their hope is to influence the political process to restore/preserve the conditions that perpetuate their profits and expand their wealth.
Andrew Sullivan is right about the profit motive behind America’s divide but where he is wrong is in concluding that the ‘detonation of American democracy at its foundation’ is the side effect of ‘making money’. The detonation of democracy has become necessary, in their minds, for the perpetuation of the money-making machine.
Why cannot they do it under Trump and why did they all – technology, financial, pharma, media and entertainment – line up behind Biden?
They cannot accept (they could not accept) being ruled by a President whom they deem inferior in several respects. They have not been able to accept that such a crass individual, who did not belong to the club and one who has not allowed the office to elevate him at a personal level, is their President and the President of the world’s most powerful country. They never thought that he deserved to be in the White House and they still do not think so. He is part of ‘The Deplorables’ as far as they are concerned.
Second, by siding with Trump, the opportunity to divide the working class coalition that was building up under Sanders would not have arisen. They had to get into the Democratic camp to split it. The first success was to ensure that Bernie Sanders did not get on the ballot in 2016 and in 2020. It is interesting to note that Bernie Sanders met with the same fate that befell Richard Gephardt back in 1998 and in 1992. In 2016, they put up a candidate – Hillary Clinton – who would protect their interests. This time, it is Joe Biden. However, they failed with Trump last time before the election and in their attempts to unseat him after the elections. Now, they are determined and desperate not to let that happen. Hence, the division of America and the repudiation of the idea of America itself to protect their interests. Therefore, as much as or more than Trump, they are unlikely to accept the election result.
Having seen off Bernie Sanders and after seeing off Trump (hopefully, from their point of view), the elites will get to work with Biden, co-opt him and own the policy agenda. Elites want to restore the era of globalisation and, if possible, the era of collaboration andcooperation with China. They are also anxious that technology that affects the working class engaged in routine manual labour is not impeded and allowed to develop further.28 What better way to ensure that than to be inside the tent?
Indeed, the trillion dollar question is not just one of acceptance of election results but also of the scenario that would unfold between the working class and elites in the Democrats’ camp. The real battle will unfold then. That presages social conflict and further unrest right up to the Presidential election in 2024 and beyond. In other words, the ‘Turbulent Twenties’ may be still ahead of America even if the election hurdle is crossed. But, that discussion is beyond the scope of this paper. So, we are back to November 2020.
More ambitiously, the elites want to set the transnational agenda. In ‘Unelected Power’, Paul Tucker, the former Deputy Governor of the Bank of England alludes to it.
He wrote that the peak of the administrative state should not be held by some kind of transnational elite immune from domestic constraint and scrutiny. He warned, “… the gradual and cumulative internationalization of policymaking could unobtrusively hand the reality of power, if not its formal accoutrements, to a new transnational meritocratic elite.” The unobtrusive is about to become obtrusive. Elites have internalised his warning quite well and have concluded that that is what they should be aiming for. America is the first stop because the election of 2016 showed that the country had become dysfunctional and, therefore, it was time for them to step in. Once the American citadel is breached, other dominoes in other parts of the world could be made to crumble more easily.
An important milestone in the quest to retain globalisation and financialisation and to relocate democracy to a global plane or, put differently, maintain financial integration and make global financial policy is the American Presidential election. The dilution of democracy is an important pre-condition for it. Hence, there is a need for priming of their constituency into non-acceptance of the result on the election night. In other words, the election result on the 3rd of November might not be a triumph of democracy but could very well be its twilight. That is a possibility. In some respects, what is unfolding before our eyes is an illustration of the ‘Inescapable trilemma’ framework that Professor Dani Rodrik had formulated in 2007. It is depicted below:
According to Prof. Rodrik, only two of the three are possible. What America is facing is that its elites favour deep economic integration with the world and with China, in particular. America is too big to subsume its ‘nation-state’ interests under any multilateral or global framework as smaller nations in Europe did with the European Union. Hence, the only thing that can give way is ‘democratic politics’. Britain had the safety valve of exiting Brexit. Else, the same inescapable trilemma would have played out there as it is playing out now in America.
Andrew Sullivan, former editor of ‘The New Republic’ and columnist for ‘New York’, wrote in his recent blog post (‘We are all algorithms now’ – a very important read):
“My bet on the extinction of liberal democracy in America therefore remains in place, and ahead of schedule. We may even at some point realize that it has already actually happened.
We just didn’t see it in our news feed.
Third, President Trump, by upping the ante on China, has pulled the rug from under their feet. A big market is slowly being taken away from their grasp. The relationship has been so mutually beneficial that both sides fear losing irreversibly from a re-elected Trump. The stories that are being put out in the media that China would actually favour a return of Trump are deliberately misleading. These are false flags.
A report in ‘Nikkei Asia Review’ on the reluctance of corporate America to relocate out of China opens a small window into the corporate rationale.
The article notes, “Of more than 200 respondents that own or outsource manufacturing operations in China, 70.6% said they do not intend to shift production out of the Asian country in a survey published this week by the American Chamber of Commerce in Shanghai.
Just 3.7% are moving some production out of China to the U.S. or its territories as Trump had hoped his tariffs would make them. And of the companies that are moving some production out of China, just 18.2% intend to move more than 30%of it.”
China’s corporate friends in America have not been able to influence the policies of the Trump administration despite their best efforts. As a result, China has begun to cut them out of its economy. That is why both American corporate elites and China have much at stake in the American Presidential elections.
A re-elected Trump would perform the final rites for globalisation that has enriched them immensely. Outsourcing and offshoring of manufacturing and exporting services to the rest of the world has been extremely profitable for American companies. He has reversed course on trade liberalisation and global economic integration. Another four more years would bring the curtain down on the era of globalisation that commenced in the Eighties. That is not good news at all for China with its subterranean economic fragility. Along with American corporate elites, China would be one of the biggest losers in a second term for President Trump. There is much at stake for China which has been the biggest beneficiary of globalisation and offshoring of American and European manufacturing.
As Lee Smith puts it, “The American elite’s financial relationship with China is the key to understanding what’s been happening in America the past four years. Any president, Democrat or Republican, who took on China would have been targeted by the China Class. Because it was Trump flying the Republican banner who sided with America’s working men and women, the Democrats resorted to alliances with powers that now threaten the stability and security of the country.”
China Sees a Big Opportunity
China is the 800-pound gorilla in the room. In February 2020, it looked like Trump was going to win re-election easily. Then, Covid-19 happened. Now, the election is open and so are the consequences. A fractured, divided and embittered America can only be to China’s advantage. In the last one year, many of its policies and international behaviour have come under rigorous international scrutiny, none greater than in America.
While there are reasons for the Covid-19 pandemic to be a natural phenomenon – most open eras end in and end with pandemics – there are also doubts that the origin of the virus could be non-natural. It could have been a leak – accidental or not – from a laboratory. The International Centre for Technology Assessment is due to submit its report to the U.S. Congress this month on the possible non-natural origin of the virus.34 The virus has upended America, crystallised all its internal divisions and has brought them to a climax and hence any connection between the two may not be entirely coincidental. Perhaps, the world did not pay as much attention as it should have to President Xi Jinping’s speech to the 19th Party Congress in October 201735. He was not coy about sharing his desires with the world.
Consistent with that speech, the Chinese President appears to be preparing himself to be in office until 203536, has brought forward the goal of becoming a fully developed nation from 2049 to 2035, has continued to and plans to purge potential rivals in the guise of eliminating corruption. It is likely that he sees an opportunity in the chaos that is developing in America and one which his country might have helped shape, deliberately or not.
The Crash Risk in the Financial Market
From the recent action in the stock market in America, it appears that the world of economics and financial markets is beginning to come to grips with the above scenarios quite apart from the extreme features that have become part of their landscape due to the actions of central banks and desperate investors. A desperate Softbank that has lost heavily in many private equity investments it made in ‘Uber’, ‘Wework’ and ‘Wire Card’ has been betting heavily on technology stocks in America by buying call options worth USD4.0 billion on technology stocks. Institutions that have sold the options have hedged themselves by buying the underlying shares and that is a big part of the explanation for the furious rally in technology stocks especially in July and August.
Warren Buffett has not only remained quiet in the last six months but has exited his investment in airline companies in America, has invested in a gold mining company, has bet on trading houses in Japan38 and has reduced his stake in Wells Fargo.
If the correction in technology stocks in the week beginning August 31 results in a disorderly unwinding of the positions held by Softbank, the resulting market instability would be far greater, in the backdrop of political uncertainty and turmoil.
So, what happens in the event of a stalemate on the night of 3rd November has assumed unprecedented importance. A market crash would amplify and be amplified by the political mood and uncertainty in the country. Stock market losses would generate ‘feel bad’ and reduce space for compromise and agreement. Of course, it would also lengthen the economic recession that is already underway in the country.
The Federal Reserve would respond again with further asset purchases which would again rescue the capitalists. It did so with spectacular success when the initial Covid scare led to a 37% drop in the S&P 500 stock index in March 2020. But, the result was a stock market mania that led retail participants to divert their ‘Payroll Protection Program’ cheques to stock investments, even into bankrupt companies. Seasoned investors have called retail investors’ investment activity downright terrifying.40 A crash would create substantial losses for many of them, pushing them further into debt. It might even resort to buying stocks to support the market, all in the name of restoring financial stability to save the economy from collapsing. But, it might prove to the last straw for the millennials-socialists to call for an end to the underwriting of asset-holders by the nation’s central bank.
Hence, the combined effect of the political uncertainty, social malaise, economic slowdown and the expansion of the balance sheet of the Federal Reserve into uncharted territory might be too lethal a combination for the international status of the US dollar.
The Exorbitant Privilege that will be Lost
China has discreetly put out the story that it would reduce its stockpile of US Treasury bonds it is holding from around USD1.0 trillion to USD800bn. This story has featured prominently in ‘Global Times’.41 It is equally interesting to note that China has continued to allow the Yuan to strengthen against the US dollar with the trend picking up momentum in recent weeks.
The speech delivered by Jerome Powell, the chairperson of the Federal Reserve on the 27th August 2020, while inaugurating the virtual Jackson Hole Annual Conference this year will be viewed, in hindsight, as a watershed moment for the US dollar.
He laid out a new framework for monetary policy that would see the Federal Reserve tolerate higher inflation rate while allowing the unemployment level to keep falling. Interest rates would stay low for longer. The speech marked a break with the post-Bretton Woods era when America still anchored the global monetary and currency regime, although increasingly imperfectly and unilaterally. Its unilateralism that began in the late Sixties ended the Bretton Woods arrangement. Its unilateralism now is going to upend the post-Bretton Woods arrangement wherein emerging economies were operating on a de facto dollar standard.
The attempt is to generate inflation and keep real interest rates as low as they were in the Seventies. In other words, the real interest rate will be negative for a long time. This is a 180-degree turnaround from the policy of Paul Volcker in the 1980s that saw real interest rates in America spike. That sent the US dollar soaring in the 1980s and cemented its dominance in the post-Bretton Woods world. Therefore, it is logical that this new framework would see the opposite effect on the dollar in the months and years ahead. What would it achieve?
It would help America whittle down the debt. At least, that is the aim. Government obligations – real and contingent – have gone up steadily in the last forty years. But, in the last twelve years, the rate of growth has picked up momentum. Ratio of public debt to GDP went up due to the rescues mounted to save the global financial system. Data from the Bank for International Settlements shows that the gross public debt-to-GDP ratio was 71% at the end of 2007. By the end of 2011, it had risen to 100.4%. It rose further to 114.6% by mid-2016. It had begun to decline slowly but the pandemic has halted and reversed the descent. Debt ratios are set to rise very sharply. In its June 2020 update to the World Economic Outlook, the International Monetary Fund projects that the debt ratio for advanced nations would jump to 131.2% of GDP from 105.2% in 2019 and for the advanced G-20 nations, it would jump to 141.4% from 113.2%. For both the groups, it worsens further into 2021 as well.
So, left with a crushing debt burden not to mention social security and pension obligations which represent promises made in good times and are contingent liabilities, developed countries are looking for an encore of the Seventies when the inflation rate was in double-digits, real interest rates were persistently negative and debt ratios plunged. America’s general government debt-to-GDP ratio declined from around 55% in 1961 to around 35% by the end of the Seventies. In the UK, the decline was dramatic. The net public debt-to-GDP ratio declined from 100% to 40% in the same period. This is the unstated objective now for the decade of the 2020s. Central banks of most advanced nations would be pursuing this goal. But, America would ‘win out’. The downside is that confidence in the US dollar would plunge, as it did in the Seventies.
Political uncertainty and turmoil would crown the long-term uncertainty for the ‘store of value’ function of the US dollar that the new monetary policy framework has generated. Given extreme valuation, a nasty post-election struggle for office might prove too much for American stocks and the currency. There is a possibility that the turmoil that ensues could mark the beginning of the end of the US dollar’s reign as the dominant global reserve currency, especially if other rival nations sense an opportunity to begin the process of dismantling the dollar empire. The good news for America is that there is no clear alternative to the dollar. However, there will be more uncertainty as a result.
Unravelling Comes with a Date Stamp
Putting all the jigsaw pieces together gives us a picture that isn’t pretty for America. Political process is at a high risk of becoming uncertain, violent and indecisive. Financial markets are precariously poised driven both by policy-induced distortions and the desperate behaviour of retail and large investors. In search of geopolitical dominance and wanting to end centuries of humiliation, as it sees it, China is sensing an opportunity that it may have created for itself. All of these bode ill for financial assets in America, globally and for the US dollar.
The prospects of political stalemate and a lameduck government pursuing ‘scorch the earth’ policies post-November election will unnerve investors, prompting a rush to exit out of US dollars. An America that would struggle to put together a governance arrangement and one that would appear ungovernable will erode confidence in the US dollar thus vastly undermining its global role.
One of the reasons that Cassandras are not taken seriously is that their warnings do not have a concrete timeline. That is par for the course. By definition, uncertainties are undated. However, this time around, there is a date stamp. That is November 3, 2020. Events that would unfold in the run-up to the election will serve us enough reminders of the significance of the date. We cannot say that we were caught unawares as policymakers said in 2008 about the sub-prime mortgage crisis.
The crisis of 2008 was a good wake-up call for American capitalism. It was not heeded. The Obama Administration that was sworn into office just after the peak of the crisis had passed had a unique opportunity to make a fresh beginning. But, it turned out that it did not believe in the change itself. American policymakers doubled down on preserving the status quo. It was business as usual with even the pretence of reining in financialisation soon fading away. That is what led to the ‘Occupy Wall Street’ and ‘Tea Party’ movements. The result was the election of a rank outsider in 2016 as America’s 45th President.
The Democrats put up Hillary Clinton – a candidate that business interests preferred. Bernie Sanders did not make it to the ballot. Again, in 2020, they have put up a candidate that they prefer. Again, Bernie Sanders lost out. Biden is serving up rhetoric for the millennials who backed Sanders. If he wins, the tensions between capitalists and the millennials will boil over, leading to a possible capitulation by capitalists in 2024. The election of a socialist candidate by America as its 47th President is a non-trivial possibility.
The American ship is sailing farther into deeply troubled waters. There is no turning back.
If you want to dismiss all of the above as conspiracy theory, you are in good company. Cassandras are not blessed to be popular even when they are right. In fact, they are more likely to face the wrath of the public when they are right. In their moment of loss and fear, the public might attribute causality for the event to Cassandra almost as though Cassandra willed the forecast to become reality. If only Cassandras were so powerful, they could have actually prophesied good times and made them roll on forever.
By definition, epochal historical turning points do not come around every year. Thankfully; that is why most of us forget about them in our daily lives and they are erased from our memory. For most of us, in our lifetimes, the arc of history never bends. It is linear. They only see the upward slope. That is why some thinkers make the mistake of projecting history linearly. Peer deeper and longer into the past, you can see the curve. The arc has to bend and it does. There is no reason why our generation alone has to be an exception. We won’t be. To exempt ourselves from the path of history is a sign of hubris, is to live in denial and, above all, is to admit to ignorance. But, true to form, we keep committing the same mistake, over and over again.
At some level, all of us have a natural conflict of interest with extreme and adverse scenarios. If we accept them as possibilities, we have to rethink our lives drastically. In many cases, the raison d’etre for our professional roles will vanish. Second, if we accept grim scenarios as possibilities, we have to act. The implications are likely profound and the actions have to be substantive and prolonged. That takes effort. We recoil from it instinctively. To make our laziness appear both intellectual and acceptable, we dismiss the prognosis as conspiracy theory or scare-mongering. Once we dismiss it away, we can continue with our way of life or so we think.
But, wishful thinking has a BEST BEFORE date now.
This article first appeared in www.vifindia.org and it belongs to them. The author is a research associate with VIF.