Nouriel Roubini on the future of money

Nouriel Roubini, in today's New York Times:

The 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

. . . .

National credit-worthiness

Data-images from Krishna Guha's report in yesterday's FT Times.

I hear it said sometimes that national boundaries mean less today than they used to. The word 'globalization' is thrown around. We have come to the end of 'national soveriegnty.' Nations now are all 'in it together.' 'Interdependent.'

I don't doubt the people who say these things are right, and that globalization is significant. But we all still live in nations, whether we like it or not.

In fact, I think Americans are right now facing a major problem that sits squarely at the feet of us as a nation: As a people our collective debt/wealth, taken together, is worth far, far less than it was sitting at 21 months ago (see the middle data-image above). Some of us are doing fine anyway. Some of us aren't. There are major differences among us. But together, no matter where you are, your life is affected by the dramatic depression in the value of American debt. Financing like we've enjoyed the past decade just isn't available right now, and companies as well as households are forced to cut back in this world without such easy money.

Have you heard the phrase 'toxic assets'? That our banks hold toxic assets is the crux of the current financial crisis. So what is a toxic asset? Toxic assets mean debt nobody will purchase.

I have to say, I find that so remarkable, that our debt is near worthless. The most followed economist of the last fifty years -- Milton Friedman -- figured he'd never see the day the collective debt of private Americans couldn't find a market. And here we are, living through precisely that, getting to look at it with our own eyes. But Mr. Friedman was right: he didn't live to see it. He passed on in 2006, bless his soul, a full year ahead of the meltdown that began in August 2007.

So, anyway, I assume economic growth is the goal. How then do we achieve it? The situation we have is the following, and it's not pretty. Either we quickly re-store our national credit-worthiness to past levels and beyond, trying to maintain the system we have enjoyed so much in which the world stockpiles dollars and finances American debt. Or we use political power to create a new system that is, like the previous one, built toward our interests.

Put another way, the question is, have we hit the peak of diminishing returns of the old system? Should we scrap it? Oh, but then we can't forget: Are we intellectually smart enough to create a robust and prosperous new system? And I guess we even need to ask: Are we that politically powerful any longer? After Iraq, and with the rise of China, ignoring this question seems untenable.

It might just be me, but it seems to be the case that, for the first time since WWII, economic growth in America has a highly uncertain future. If so, that means, cautiously speaking, that we are entering an entirely new kind of America from that which anybody under the age of 60 has ever experienced.

(1) A contraction of jobs and (2) a financial meltdown

--Yesterday I linked to an economist's article in the Wall Street Journal arguing that President Obama is using scare tactics when he says we are in the worst economic crisis since 1929-1933.

The article's argument was unconvincing. One problem was that, with little touch, the economist compared unemployment statistics across historical eras. He observed, for example, that today's unemployment rate of 7.6 does not approach the 1930's rates in the twenties. Nominally true. It seems obvious, however, that unemployment statistics, like all data, are put together in social contexts, and these contexts differ across history. In other words, the numbers can't possibly mean today what they meant back then. Different procedures, different motivations, different political pressures, different media environment, different public-relation norms. Without dealing with these differences, or at least acknowledging them, a comparison across social eras can throw analysis down the wrong path.

I suspect it did with this particular economist. Taking just one example, the economist did not cite the U-6 unemployment number, which might be more tenable as a comparison to the 1930's number, and which today is up to 13.9. Also, he made no mention that job losses are growing in intensity just about every month, suggesting that the worst is still to come.

--So, as I've said before, in contrast to this economist, the data of the moment suggest to me we are living through a historic contraction of wealth we haven't seen since precisely the years President Obama cites.

--And it's not just jobs. For example, take stock market data. Some people scoff at these data. I eat them up. To me, the financial markets and the value of the Dow and the S&P are crude but meaningful representations of the wealth of our private organizations.

Mr. Schiller suggested Nov 1 1981 to Nov 2 1982 was as bad as, maybe he was even arguing worse than, today's contraction. But it's hard to make that argument if you believe at all in the data of financial markets.

November 1981 - November 1982:

Dow: Up 16.0 percent

November 2 1981

866.82

November 1 1982

1005.70

In sum: Starting from Nov 2 1981, the Dow was off on August 12 by 10.4 percent, but rallied to be up by 16.0 percent on Nov 1 1982.

December 2007 - February 2009

Dow: Down: 43.25 percent

December 3 2007

13,314.57

February 17, 2009

7,555.63

In sum: The current contraction includes a 43 percent drop in the wealth of America's most prominent economic organizations.

--So what explains these different data?

One difference might have to do with the reasons for the contraction. In the eighties we cut jobs and raised interest rates to fight inflation. Today, we are contracting as our companies are forced to mark down the value of their assets. All their debt is less valuable today than it was in the period leading up to the contraction. This time, we appear to be marking down wealth, not to fight inflation and protect our wealth, but because we aren't as wealthy as previously conceived.

What we have today is a contraction of jobs and a financial meltdown over which we are able to exert very little control.