Summers Time

Larry Summers has posted a blog entry (http://larrysummers.com/2015/04/05/time-us-leadershipwoke-up-to-new-economic-era) that does a reasonable job of describing major challenges facing the
United States and most other western countries. Summers is a charter member of the group of
economists and financiers who have had such a great influence over western governments for a
generation that they must take considerable responsibility for the problems he writes about.
Summers is an important figure whose pronouncements have to be carefully drawn so as to not cause
consternation among the massed ranks of the media and mediocre politicians. Since my writings are of
interest only to a Small Circle of Friends, I can be a little more direct.
He mentions that March was the moment that the United States may have lost its dominance over the
global economic system. It is clear that the U.S. lost much of its economic clout a long time ago as it is in
third place after China and Europe in international trade and manufacturing. What he should have said
is that the U.S. may have lost dominance over the global financial system, the last bastion. The
establishment of the Asian Infrastructure Investment Bank is the milepost, as most significant countries
are rushing to join, including many American allies and clients. Efforts to reform the IMF and World Bank
to reflect the increased importance of other countries have been stymied in Congress so everyone else
is going to go around them.
Summers is right to complain that internal U.S. politics are paralyzed by ideologies and party squabbles.
This is an annoyance to other countries, as effectively America slowly replaces the rule of law with the
rule of partisanship. The ideologues in Washington have attempted to impose their viewpoints in places
where they have less and less influence as their ability to deliver anything concrete declines. There is a
lot of finger-pointing, but if the group as a whole fails to perform, the group as a whole is responsible.
In addition to moves like creating the AIIB, China, Russia and others have been working for some time to
develop alternate methods of transferring money in order to neutralize U.S. dominance over the SWIFT
payment system, a major vehicle for imposing sanctions on those whom Washington does not like. The
Chinese currency is rapidly becoming a major channel of global trade with bilateral deals having been
struck with nearly everyone who matters.
An excellent example is the slow collapse of sanctions against Iran and Russia. The Iranians have been
using barter deals to sell their oil for some time and now the Russians have made it public that they are
trading about 500,000 barrels a day of Iranian oil for wheat, lumber and other goods. ``Other`` includes
SA300 antiaircraft/antimissile systems. I believe this trade has being going on for some time but Russia
now feels that they no longer have to hide it. India has also been trading for Iranian oil in large
quantities. Iran and Russia can trade with China and other countries in their own currencies so we are
beginning to see the beginning of the end of the ability to easily punish countries by non-military means.
Of course, this all implies a declining role for the U.S. Dollar. Having the world reserve currency has been
a tremendous advantage for a long time, abused extensively. Countries wishing to avoid pressure from
Washington have been reducing their holdings of U.S. denominated instruments and increasing

payments that avoid the U.S. Dollar. Along with a loss of influence, in the medium term America will be
less able to finance a trade deficit by paying for things with IOUs. We are reaching a place where the
main effect of economic sanctions will be to reduce the export of things Made in the USA.
Larrys second point is that the prevailing global agenda combines elite concerns...while offering little to
those in the middle. This is going to be increasingly important as a source of political conflict in many
places. Globalization has been very beneficial to work forces in poor countries and to the bottom line of
the top 1% elsewhere. The effect on the daily life of the working and middle classes in developed
countries has been to reduce job opportunities while capping wages. What they get in return is the
availability of cheaper goods made elsewhere. If they buy them, they are slowly cutting their own
throats. Also, it is not just factory jobs that are outsourced. Skilled and technical jobs are going as well.
Free Trade does increase efficiency but the profits have been creamed off by the rich and powerful. It is
assumed that those who are displaced by outsourcing to other countries will magically find new jobs and
careers and that has not been particularly true for some time. Support for Globalization is a mile wide
and an inch deep. If the bottom 99% doesnt get a substantial benefit from free trade, they will
ultimately vote for the restoration of barriers using their overwhelming electoral power. It only remains
for the appearance of politicians willing to take advantage. Where these parties fall on the political
spectrum is a crap shoot, so expect major changes.
We will probably see an increase in realism like Summers as many important figures slowly realize that
the situation is getting out of hand and the spiral of increasing paralysis may be hard to stop.