The Wall Street Journal’s lead story the other day carried this headline: "Global Currency Tensions Rise: Japan’s Abe Calls on Central Bank to Resist Easing Moves by U.S. and Europe." The story that followed should send a shiver of fear down the spine of anyone who cares about the global economy—and America’s.
That includes Barack Obama. Yet the president seems remarkably unhinged from the ominous realities reflected in the Journal article. Having maneuvered the opposition House Republicans into a position of political vulnerability, he seems bent on going in for the kill, defined by victory on the matter of whether taxes will rise on the top 2 percent of Americans while remaining at George W. Bush-era levels for everyone else.
Indeed, the Washington Post reports this week that congressional Democrats have somehow got religion on those Bush tax cuts, which is remarkable given the emotional opposition to that policy prescription they manifested back when Bush was pushing for it. The Democratic opposition then was "visceral," said R. Glenn Hubbard, dean of the Columbia Business School, who helped fashion the Bush tax cuts during a stint in government. He calls the newfound Democratic affinity for that policy "deeply ironic."
So a remarkable political consensus has emerged on nearly all of the Bush tax policy. That would seem to suggest a fiscal consensus could emerge relatively easily under the president’s leadership. But instead he remains fixated on the big victory he anticipates on tax rates for 2 percent of the American population at a time when, as the Journal piece makes clear, the global economic order is under severe strains that could upend it. One must wonder what kind of presidential leadership that represents.
The Journal piece refers to the "increasingly tense global currency markets." It warns of "currency spats that could heighten tensions among countries." It quotes Japan’s incoming prime minister, Shinzo Abe, as going after the U.S. Federal Reserve’s policy of pumping dollars into the market through its purchase of massive amounts of Treasury bonds and other assets. "Central banks around the world," said Abe, "are printing money, supporting their economies and increasing exports. America is the prime example."
Abe declared that his country must defend itself against such activities, particularly by the United States and Europe, through policies designed to push down the value of the Japanese yen in order to promote exports by Japanese manufacturers.
Thus, Japan joins other countries that publicly declare their commitment to managing their exchange rates to keep them in line with the U.S. dollar. China’s currency manipulations are well known to Americans, largely because China has been under pressure for years from policymakers in the United States and other countries. But, according to the Peterson Institute for International Economics, more than a dozen nations currently are manipulating their currencies against the dollar for trade advantage.
History tells us that such beggar-thy-neighbor initiatives can lead to currency wars, trade wars and increasingly tense relations among nations intent on preserving their edge in world trade. Mervyn King, governor of the Bank of England, recently expressed concerns about this growing threat to the international trading system. "I do think 2013 could be a challenging year," he said, "in which we will, in fact, see a number of countries trying to push down their exchange rates. That does lead to concerns."
David M. Smick, the international economic consultant and publisher of The International Economy magazine, goes further in framing the dangers facing the global economy. "The globalization model of the past thirty years," he writes in his magazine’s current issue, "is at risk of cracking up. And there appears to be no new model to replace it."
Smick points out that the annual growth rate of total global exports has collapsed—at a time when many of the world’s important economic powers are highly dependent upon exports for GDP growth. The World Trade Organization, he notes, has slashed its trade-growth estimates, while similar ominous projections come from the UN Conference on Trade and Development and the International Monetary Fund. Leto Research analyst Criton Zoakos, adds Smick, sees rapid Chinese wage inflation and new software-based cost-cutting manufacturing technologies in the Unites States as threatening the globalization model with extinction.
Further, the free flow of capital across national borders, for years a foundation of the globalization trend, also is under immense pressure. Regulatory barriers enacted following the global financial crisis have forced banks to be more nationalistic in their lending practices. This "deglobalization" trend is heightened by bankers’ concerns about getting overextended once again through unsound lending.
The Eurozone crisis is contributing as well. European banks, traditionally the source of nearly 80 percent of trade financing in emerging markets, are curtailing such lending severely as they become increasingly undercapitalized. Smick notes that "it is not clear that the U.S., Japanese, or Chinese banks are in a position to fill the gap." Although the United States is much less dependent on exports for its economic growth than these other nations, says Smick, global developments are generating serious U.S. investor nervousness, thus "contributing to a debilitating risk-averse financial environment."
The globalization era of the past three decades or so represents one of the greatest periods of economic growth in world history. It more than doubled the global free-market labor force. It generated close to $1 trillion in global wealth each year for decades. It boosted the Dow Jones Industrial Average from 772 in August 1982, at the start of the Reagan bull market, to more than 13,000 by the end of 2007, when the financial crisis hit. (It remains at roughly that level today.)
Much of that growth surge was fueled by aggressive bank lending, which got out of hand for a host of reasons—with the results we all know so well. But now, says Smick, "American banks are overregulated, risk-averse, and unwilling to fuel much of an economic expansion."
This is serious stuff. And yet the leaders of the major industrial nations—the so-called G-20—seem to be sleepwalking through crisis, "having tea and scones sitting serenely in the parlor," as Smick puts it.
But the big question for American is: Where is our president on this? While Fed Chairman Ben Bernanke contributes to the increasingly destabilized global currency regimen with his massive infusion of dollars into the system, Obama is silent. Meanwhile, he presides over an expanding national public debt—currently at 73 percent of GDP—that threatens the country’s financial health. Forget the fiscal cliff, a largely artificial deadline that has tied the government in knots. The real problem is the fiscal tsunami that bears down on the country with a terrifying force.
In my most recent book, on the presidency and how it works, I discuss what I call "split-decision presidents"—two-termers who failed to retain their party’s control of the White House after their second terms. Looking at them closely, we see successful first terms followed by significantly or at least moderately less-successful second terms. Studying them even more closely, we see flaws and weaknesses that were apparent to political experts during the first term but which didn’t generate sufficient national problems to thwart reelection. George W. Bush is a good example. So is Woodrow Wilson. Dwight Eisenhower’s second term was only slightly less successful than his first—but sufficiently less successful to make possible John F. Kennedy’s ascendancy.
Obama’s weakness is that he obsesses over inconsequential matters that he considers crucial to his redistributionist ethos while ignoring the sputtering national machinery that is crucial for economic growth. Unless he changes his ways in the face of the national and global economic threats on the horizon, he will be another of those split-decision presidents.
Or, as Smick puts it, "Barack Obama and the Democratic Party could, after four years, be out of power for a generation. The economic challenges are that daunting."
Robert W. Merry is editor of The National Interest and the author of books on American history and foreign policy. His most recent book is Where They Stand: The American Presidents in the Eyes of Voters and Historians.