The US says it can no longer afford to be the captain of the global financial ship. The world is seeking an alternative before the ship starts to sink.
The dollar falls apart, the centre does not hold. The recent Group of Twenty summit saw a lot of sensible sentiment but not too much tangible action. Everyone agreed to do what they were already doing — even though the evidence indicates what they are doing isn't getting the world economy off the ground. So the US continues to print money. China continues to undervalue its currency. And countries with current account surpluses will glare at those with deficits.
The reason why this isn't enough is that the old financial order is creaking at the rivets. The old order was a US hegemony. In global finance, that is a good thing. A financial hegemon is like a flywheel in an engine, providing balance and drive. The US set the rules for global finance. But in return it was the lender of last resort and provider of demand when all else failed.
There's another problem: Washington is in way too much debt. As Prime Minister Manmohan Singh noted after Seoul, "The international financial mechanism is essentially a power mechanism, and the way the international financial system has functioned so far, creditor countries have always been able to have their way." But the US is now a debtor to China, but the latter isn't ready to be the new hegemon.
Today President Barack Obama says the US prefers not to play that role. It is no longer being driven by a desire to preserve the larger system by taking the odd financial knock, and seems far more focused on short-term economic goals. The umpire has decided to become a player.
The result is financial hardball. The US is shovelling dollars into the debt engine that has been driving its economy for the past few decades. Not a good idea, but Washington is also using the falling worth of the dollar to send a message to China that it needs to bring down the yuan exchange rate. Obama officials believe the US won't see job growth return until China steps up domestic consumption. US manufacturers are calling for a staggering 40% drop in the value of the dollar. Beijing, joined in by other exporting capitals like Berlin, says the American Way of Credit is at fault.
No one is without sin. The real issue is that there is no ruling deity to come in and say, "Let no one cast the first stone," give manna to all and get the world move on. Right now, everyone, including the traditional god of global finance, the US, is tossing boulders at each other. US treasury secretary Tim Geithner failed to get the G-20 to accept a cap on current account surpluses. That he failed is less striking than the blatant self-interest in the demand. The US was acting like the rest of us.
A spooked international system is hunting for an alternative way to impose order and prevent the outbreak of a currency war, trade protectionism, capital flights and other economic plagues. China sees itself as too weak to be Big Daddy. World Bank president Robert Zoellick has spoken of a "modified gold standard" — in effect questioning the staying power of today's system where currency values are based on faith in governmental policy. The French, set to take over the G-20 chair, are speaking of a "framework of coordination" — presumably a consensus among the world's major economies on exchange rates et al. Others hypothesise the world will see the rise of two or three reserve currencies other than the dollar. No one knows. And this uncertainty is why the G-20 is now the most important forum of the world today.