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“The changing balance of global financial power”, by Brad Setser

22 August 2008

The 20th century was the age of the great democracies — esp. the United States, the leader and largest — and their triumph over Empires, fascism, and communism.  This century appears to be running in a different direction, as Brad Setser explains in the essay below. 

We must either change course or learn how to adapt to this new world.  Neither course will be easy.

The changing balance of global financial power“, Brad Setser, Council on Foreign Relations, 14 August 2008 — Opening:

Not only do we live in a new “age of authoritarianism,” but we live in a world where autocratic governments increasingly finance democratic governments.

Consider a chart that shows the increase in the foreign assets of the world’s more authoritarian governments v the increase in the foreign assets of the world’s democratic government.

Right now, autocratic governments generally don’t finance other autocracies. China’s capital account is closed to Gulf sovereign funds (nearly) as tightly as it is closed to private hedge funds. China’s government is no more able to buy a stake in the Gulf’s national oil companies than private investors. China, Russia and the Gulf are all building up large financial claims on the United States and Europe far faster than they are building up financial claims on each other.

In the first chart, I included Russia and Venezuela alongside the world’s authoritarian governments. That can be debated. Both Putin and Chavez have authoritarian sides, but both have also put their governments up for a vote. But separating Russia and Venezuela out doesn’t change the story much. The rise in the foreign assets of the world’s less-than-perfectly-democratic government is driven overwhelmingly by the rise in the foreign assets of the People’s Republic of China and the Gulf monarchies.

To me, one of the world’s greatest ironies is that US dependence on authoritarian governments for financing has soared over the last four year. US rhetoric hasn’t matched financial reality.

… One thing is clear: the world’s biggest financial powers are no longer the world’s large democracies. A gathering of the countries that matter for global economic coordination will no longer be a gathering of the leaders of the world’s big democracies. Coordination among the large democracies was never easy — and likely will only get harder as additional countries have to be brought in.

And that I suspect this is among the least significant — though among the most visible — ways the world will change as financial power moves away from the world’s big democracies.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about this subject

  1. A brief note on the US Dollar. Is this like August 1914?  (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
  2. The post-WWII geopolitical regime is dying. Chapter One   (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
  3. We have been warned. Death of the post-WWII geopolitical regime, Chapter II  (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
  4. Death of the post-WWII geopolitical regime, III – death by debt  (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
  5. Geopolitical implications of the current economic downturn  (24 January 2008) – How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.
  6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
  7. What will America look like after this recession?  (18 March 208)  — More forecasts.  The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
  8. The most important story in this week’s newspapers   (22 May 2008) — How solvent is the US government? They report the facts to us every year.

To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.

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4 Comments leave one →
  1. Duncan Kinder permalink
    22 August 2008 1:33 pm

    Historical precedent for this would be the Secret Treaty of Dover.

    In this treaty, Louis XIV funded his cousin, Charles II, who was having difficulties with Parliament.

    As a result of this arrangement, Louis was able to secure British cooperation against the Dutch; while Charles was less subject to Parliamentary constraint.

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  2. plato's cave permalink
    22 August 2008 2:53 pm

    The contrast between democracies and authoritarian governments is over-stated. For example, we have always been comfortable dealing with the Gulf monarchies. The difference now is that we now have to treat them as equals, unlike the early days of Anglo-American domination of the ME.

    Nazi Germany would certainly be called an authoritarian regime, but the Bank of London still dealt with them as with any other customer. Russia’s new power is largely based on its importance as an energy supplier to Europe. The buying and selling relation drives the political, not the other way around.

    China’s authoritarian version of capitalism repeats on a larger scale Japan’s and South Korea’s earlier versions. The final players are the capitalist companies. The state nourishes them with trade and credit policies, and military defense of foreign investments, just as the western democracies have always done. IBM, GM and Ford, and some airframe manufacturers, have all agreed to technology-sharing arrangements with Chinese companies, in order to gain access to the Chinese market — a doubtful bargain, perhaps. They weren’t forced to do it by the authoritarian state.

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  3. Barry permalink
    25 August 2008 2:04 pm

    On BBC WS Analysis today the former US ambassador to NATO Robert Hunter said Russia is Saudi Arabia (which to be fair could also have have trouble qualifying as a democracy) with trees. A top Russian said that Russia is totally dependent on gas and oil it has not diversified at all. Its military capabilities have not had any real money spent on them in Putin’s time, eg tanks in Georgia are all 15 years old.

    China is a very different kettle of fish. BBC news quoted US repoters as saying they don’t envy the UK in trying to follow China’s impressive Olympics. Is there anything China is not good at?
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    Fabius Maximus replies: Russia depends on its ample petroleum reserves and spends little on military. Sounds to me like a combination of good fortune and good sense. What is wrong with this picture? Since oil prices have only been rising for aprox 6 years — after falling in real terms for 2 decades — Russia has time to diversify.

    China looks super as it is in the first, massive expansion. Taking peasants from rice fields and putting them in factories. Managing that process will become difficult, esp when they encounter their first serious downturn. Then we will see the quality of their leadership.

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  4. Barry permalink
    25 August 2008 3:38 pm

    Someone said the other day that until recently mineral water was retailing for more than Gasoline; the prices were not sustainable. Will Russia in the long term have enough money to fund a pronatalist campaign that is able to make a difference. Being less than totally democratic might not be a disadvantage when it comes to increasing the birthrate. One could imagine a climate where having a big family made one eligible for a better job, house, medical benifits, ect. and perhaps more importantly where sanctions followed for not doing this. Putin’s youth movement seems to be strongly natalist.

    The opposite seems to be true of China where big family = trouble from officials (unless you are rich of course). Maybe China’s leaders are following a long term policy; only sons are not going to make trouble politically. Considering it’s size can normal demographic arguments be usefully applied to China. A generation from now China could look like a giant Hong Kong, and it and might well be the only current world power that will remain relatively homogeneous. John Derbyshire had a post where he said the intellectual cream of China are 100% behind their government on the 3Ts Turkistan, Tibet, and Taiwan. What happens in a generation if China is a Mega-Hong-Kong but doesn’t have Taiwan.
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    Fabius Maximus replies: Absolutely true. Until recently the retail price of bottled water was greater than that of gasoline. This was a natural consequence of the nature of oil. The giant fields were discovered long before uses for their output. Hence the first age of oil was GLUT. Now we are transitioning to the second era, Scarcity. The third era, in the future, will be irrelevance.

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