Global Realignment, It's Not the Dollar

Accepted Wisdom

In 2005, economists and analysts were fretting over the dollar's steady decline, wondering what the effects of a weaker dollar would be on commodities and trade. They thought the dollar's slide was the result of normal market forces.

Inference Reading

Picking Up the Critical Facts

In 2005, we were observing actions that suggested something much deeper in purpose and effect than just markets driving down the value of the dollar.

Some rather aggressive rhetoric coming from world leaders, even close allies, suggested that the U.S. was out of line politically, economically and attitudinally. An exemplary quote came from the prime minister of Luxembourg: "I think there's an underdeveloped sense of hearing in the United States."

The U.S. became the first country whose currency served as a de facto reserve currency for the world while at the same time being a net debtor nation.

We noted that in Latin America, Asia and Africa regional trade groups were taking shape, which seemed to contradict the publicly avowed interest in global free trade as institutionalized in the World Trade Organization.

Developing and resource-rich countries were increasingly making government-to-government deals (without the participation of private companies) with countries such as China and Russia.

European countries were distancing themselves from the U.S., upping the intensity of relations with Latin America and Asia.

Deductive Inference

Diagnosing the Change

We suggested the metaphor of an iceberg fitted the overall situation, wherein everyone talked about the dollar (the visible part of the iceberg above water), but the real concerns went very deep and the critical actions were out of sight (the mass of ice below the water's surface).

As Power Centers (China, Russia, Europe and the U.S.) were competing for resources and geopolitical influence, their actions were giving rise to a global Great Game that was intensifying conflicts between governing systems and that would ultimately challenge the Washington Consensus – the set of ideas that had mostly guided international markets for several decades.

As a group, these new Power Centers preferred managing their economies, overseeing their critical resources (or using government wherewithal to obtain those resources), leveraging foreign policy for economic and political advantage and managing their public messages, all of which represented challenges to the neo-liberal, "Western" model.

Inductive Inference: Identifying Areas of Impact

The "financial architecture" in place since World War II – with the IMF, World Bank and eventually the World Trade Organization at its core – would be challenged by models from the new Power Centers, and new global institutions would arise from those Power Centers. In 2007, the China-Africa Development Bank alone had ready access to more capital than the IMF and the World Bank had given out to the entire world in all of 2006.

Sovereign institutions, such as state-owned enterprises and sovereign wealth funds, would alter market dynamics, as they increasingly competed with international companies that had to show quarterly profits. These state-owned institutions, as we wrote, "were challenging the idea of profit as the primary purpose of financial institutions."

Developing-country growth, protectionism, commodity-market stresses, regionalism, government-to-government deals and lack of consensus on global economic issues all would result from this dynamic.
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