The New World Order

The case for re-electing Donald Trump (Financial Times)

 The three pillars of US foreign policy under Biden (Financial Times)

Most Nato countries set to miss military spending target (Financial Times)

Five Keys to a Transatlantic Agenda on China (Rhodium Group)

The upcoming Westad-Chen book on China’s long 1970s (A.Batson)

The continuation/evolution of US foreign policy will have a meaningful impact on the shape of the new world order in the coming years. The Trump electoral victory was able to seize upon popular anger against the “globalists”, though policies enacted lack strategic direction and clear objectives. Meanwhile, Biden’s foreign policy ideas remain ambiguous at this juncture. Policies are always circumstantial to an extent, the willingness and ability for the US to assume leadership/maintain hegemony in global finance and military security will also evolve as underlying conditions shift.

Many neoliberalists long for a return to the “post-war international liberal order” (some believe can be partially restored under a Biden administration) but benefits to the US are no longer obvious. Global security and trade architecture depend largely on the US which consumes both military and economic resources. Globalisation required US leadership in creating the institutional infrastructure and gaining global acceptance of this shift. The Cold War provided US the commitment and motivation in safeguarding this arrangement.

In recent years, Allies have played a diminishing role in its own security, focusing instead on their own economic development (some developed export-oriented models ultimately reliant on US demand). Post-Cold War and into the “end of history”, the ascendancy of neo-liberal and neo-conservative (globalists/ interventionists) ideals and their dominance in US policy-making led to a period where the US continues to play its global security role (albeit with many mishaps) without a clear raison d’etre. The US security arrangement and the accompanying global economic structure enabled conditions for surplus economies to tap into global demand, while deficit economies were able to attract financial capital. Large corporations gained (trade liberalisation/regional stability/security of sea-routes), Wall Street enlarged its global financial footprint (global financialization).

However, following the ascendancy of a popular “revolt” reflecting poor socio-economic outcomes, the US are likely to turn towards addressing domestic grievances no matter the election outcome. These will include i) the international trade architecture which led to large/persistent external imbalances and the distributional effects for US industries and communities, ii) the international security architecture and its inherent burden-sharing with regards to costs (finances, military resources and lost economic opportunities), iii) reforming global institutions based on shared principles (rather than legalistic rules-setting) and enforcement mechanisms, and iv) minimising wastage of resources (foreign military campaigns not aligned to US welfare and lacks burden sharing).

Global Re-balancing

China’s Surplus is Rising Rapidly. So is the U.S. Deficit. The IMF Cannot Turn a Blind Eye (B.Setser) 

Europe is on track to repeat its fiscal policy mistakes (Financial Times)

Global rebalancing requires a strategic rethink of global economic growth models rather than just reflecting circumstances. We think much of the “improvement” in external balances post-GFC is “forced” rather than “structural”. The sharp re-widening of global imbalances YTD reflects the difference in the immediate economic policy response to the pandemic amongst major economies – whether this represents a continued rigidness/reluctance to change depends a lot on the political will to rebalance towards domestic demand within surplus countries.

China’s FX Intervention

Matthew Klein on China’s ‘Hidden Hand’ 

We have previously highlighted the lack of direct FX intervention by the PBoC (FX intervention is no longer done via the accumulation of official FX reserves). RMB’s relative stability amidst external surpluses in Q2/Q3 likely reflects indirect intervention via other economic agents. For example, banks’ net foreign assets accumulation amounted to >USD 250bn across Q2-Q3. 

Money-based Fiscal Expansion

Stephen King on Modern Monetary Theory (Financial Times)

The debate surrounding MMT intensifies. Most arguments, however, fail to comprehensively lay out the underlying conditions upon which money-based fiscal expansion may be more/less appropriate. Money-based fiscal expansion or fiscal-monetary coordination can take place in many different forms – whether they can help support sustainable growth (before hitting real economic constraints) depend essentially on i) how assets/liabilities shift between economic agents, ii) socio-political-economic structures which determine the quality of spending and income distribution, iii) an economy’s inherent capacity to adequately absorb a larger wealth stock, iv) the global economic structure/financial architecture, and v) the political mechanisms through which such policies are implemented. 

We expect fiscal-monetary policy coordination to be increasingly common globally in the coming years; and will seek to explain further in future posts.