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DECKER: Ditching the dollar, a horror story

- The Washington Times - Thursday, June 3, 2010

LOSING CONTROL: THE EMERGING THREATS TO WESTERN PROSPERITY

By Stephen D. King

Yale University Press, $30, 279 pages

Reviewed by Brett M. Decker

Stephen King has a scary new book out that will have you hiding under the sheets afraid to take a peek at what's outside. What's really horrifying is that this new release wasn't penned by the bestselling thriller novelist from Maine but the chief economist for the HSBC Group in London. The monster lurking outside the window isn't a vampire or a werewolf but our Frankenstein economy run amok.

The sometimes friendly ghost in this tale is globalization. Despite the impressive ability to accelerate wealth creation by maximizing efficiencies across borders, vulnerability is inherent to the global economy. In the wake of globalization, "individual nations are struggling to cope with some of its other effects: greater economic instability, heightened income inequality and financial market turmoil," Mr. King explains. Because so many diverse economies are so interconnected, a hiccup in one place can cause cardiac arrest somewhere else. The global chain is only as strong as the precarious state of its weakest links.

The euro zone offers a heart-stopping case study in that the economic health of a powerhouse like Germany is chained down by a basketcase like Greece. German Chancellor Angela Merkel initially was dead-set against any bailout package to stave off a Greek collapse but was forced to flip-flop out of fear that a Greek default would start dominoes falling that could knock down the European Union. Such disruptions do not only travel upstream, as tweaks to large economies have a disproportionately negative impact on weaker systems, especially in regards to inflation.

For context, the author takes a brisk jog through the history of globalization. One surprisingly candid observation is that the West's growth and dominance cannot be credited to free-market forces alone. "Western nations became wealthier because they were increasingly able to rig the global economy to suit their own aims, using a combination of economic, political and military power," Mr. King writes. He cites the British East India Company's use of mercenary military forces to conquer markets in India and China to show that coercion was as important as consumer choice for the West to become prosperous.

The reality of state capitalism is that parochial interests always will be in conflict with what sometimes is vaguely referred to as the "greater global good." Some of the most powerful tools in this conflict are monetary instruments. "The Federal Reserve's decisions have a direct impact on many emerging economies precisely because these countries link their currencies to the dollar," Mr. King states, while positing that such dependency is a bad thing. A view of the sprouting Shanghai skyline provides the British economist an opportunity to comment on the symbolic and literal explosion of the Chinese economy in recent years and the unnecessary danger of China's symbiotic relationship to the U.S. dollar.

The author argues that one way to protect against dollar fluctuations is to diversify capital holdings to lessen the influence of the American greenback. Until recently, it was hoped that the euro would serve as a stable alternative to the dollar, but the euro's flameout has global monetarists looking for love in new and unlikely places - most notably the Middle Kingdom. Mr. King acknowledges the numerous flaws in having the Chinese yuan serve as a reserve currency, but he waves them off. Contrary to his nonchalance, the communist government's lack of transparency, pathetic rule of law, strict capital controls and prejudice against private property will make China's currency unreliable for trade and capital-market transactions long into the future.

In the end, in Mr. King's estimation, one of the biggest threats to Western prosperity is the United States and the American penchant for living beyond our means. U.S. debt is definitely a mounting problem. But more people have been brought out of poverty since the 1980s than any time in history largely because more nations followed a previously responsible U.S. economic model, which can make a comeback. Progress was also possible because of the relative stability provided by a Pax Americana. Displacing America as the lone superpower and undermining the supremacy of the dollar will only lead to more political and financial conflict.

"Losing Control" is not all doom and gloom. It's just that the scary parts are enough to keep you awake at night.

Brett M. Decker is editorial page editor of The Washington Times.

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