And the beat goes on. Global markets have begun to digest the fallout from Standard & Poor’s scurrilous downgrade of American sovereign debt, and equity markets in Asia and Europe opened lower. Odd pockets of perceived safety rallied, like Swiss francs, and of course gold soared, as investors attempted to win the game of musical chairs on the deck of the Titanic.
All of this unfolded against a backdrop of European Union finance ministers rumbling into action to prevent a further slide into panic over Italian debt issues. It’s a shame that Shakespeare only wrote of winters of discontent, because the past weeks have surely ranked as a summer of malaise.
And yet the world today is not much changed from what it has been during the past years. Skittish markets notwithstanding, there isn’t an alternative to the current system. The Chinese gleefully excoriated the United States over the weekend, with economists decrying the state of U.S. finances, warning that the days of easy financing are over and announcing that China will start more aggressively diversifying its $3 trillion in reserves. Last Tuesday, one Chinese ratings agency, Dagong, cut the U.S. to an A, with much harsher language than S&P used in its downgrade Friday. And various Chinese officials repeated earlier calls for a new global common currency to replace the dollar.
Strong language, but still just words. Yes, China wants a new reserve currency and doesn’t want to be handcuffed to a dollar that is going down and an American economy that is as well. The Chinese are worried about their trillion dollars in U.S Treasuries and anxious about continued weakness in the U.S. economy. But other than enjoying the role reversal of lecturing the Americans rather than being lectured to, the fact remains: China, like the rest of the world, has nowhere else to go.
That makes the sharp sell-offs in global equity all the more futile. There are no real, long-term safe havens that are immune to synchronous shocks. Most of the flight to gold is flight not into the physical metal but into financial instruments based on the metal, most notably exchange-traded funds for gold. Those instruments are vulnerable when the system begins to crack, unless you are stockpiling physical gold. If the global system is veering again toward some of the instability last seen in the fall of 2008 and into 2009, the reality is that all the buying and selling in the world is unlikely to do more than pass the buck of pain. Even traders who make money shorting the market and companies tend to lose when that happens, as they try and fail to time the markets and cover their shorts early or not soon enough when the markets bounce, as they inevitably do.
So Asian markets are sharply lower, and Europe is following suit. Yet you could argue that with the dive in sentiment over the past week, anything short of a complete market crash will demonstrate not the fragility of the current system but its stability and the absence of alternatives.
It is a dollar-denominated global commercial system anchored by a large, lumbering but still affluent United States and a surging, complicated China, bolstered by a large, disjointed but still affluent Europe, a stable but dull Japan and a panoply of new centers racing ahead on a commodity-fueled, emerging middle-class boom. It is a system that sees multinational companies, industrials and technology and consumer giants above all, making more money than ever imagined, with wages in the developed world stagnant and wages in the emerging world rising.
And nothing that has been going on the past week changes that system. All the shifting and selling and buying of stocks and bonds the past week and continuing today, with increasing confusion and panic, only highlights that there are no current alternatives to the dollar or to U.S. Treasuries. The world cannot absorb the nearly $10 trillion of U.S. debt held by the public. The Chinese want to diversify away from their $1 trillion in U.S. bonds, but how and to where? There is no buyer at an acceptable price of the U.S. Treasuries that China owns. China is building a vibrant consumer market, one that will need the United States for years to come—whether the Chinese like it or not. And the United States will need a thriving global economy anchored by China, whether it likes it or not.
Eventually, if the U.S. continues to weaken relative to emerging parts of the world, the dependency on the dollars and U.S. bonds will shift. And the events of the past weeks show that this is the current path. But there is a world of difference between being on the road to a new system and actually having one. The current global paroxysm is intense and alarming, but it is a tremor not an earthquake.
These tectonic plates are likely to shift gradually, and this is part of it. But the system described above is powerful and intact; it was true before the events of 2008 and it became even more true after. It was true before mid-July—and, spasms of market selling notwithstanding, it’s true today. This remains the greatest period of wealth creation—not destruction—the world has ever seen.
No fewer people are going to access the Internet in China tomorrow because of S&P or Italian yields; no fewer people are going to eat tomorrow; and it’s likely that Apple and Samsung will see no decline in demand for their gadgets. Those realities are easily forgotten in the summer of fear, and they should not be.