Global rebalancing

Watching global rebalancing at work is kinda like watching a really drunk person walk a straight line. She might successfully walk the line, or she might break something. Stephen Roach has become a bit more bullish in his prognosis, but notes that we're still not out of the fire. No surprises there, I guess. I didn't see anything in there about Opec reducing its dollar exposure. If Opec eventually moves to oil priced against a mix of currencies, rather than just the dollar, that will put a whole new spin on the drop in price of the dollar, exacerbating inflationary pressures in the United States. However, no dramatic Opec rebalancing is likely to happen in the near term.

Cobbling the Financial Times report together with yesterday's post about leaks from the Pentagon and CIA should provide a thorough critique of President Bush's "war on terror" foreign policy. The "war against terror" has:

1. Contributed to the negative impressions of Muslims across the world and helped spawn transnational, anti-American movements of Muslims, both moderates and radicals.
2. Failed to stop terrorist movements and, indeed, made Muslims more receptive to radicals' demands.
3. Intensified the anger of activists working to overthrow secular and, indeed, oppressive Middle Eastern regimes to be replaced with not necessarily democratic governments that will almost certainly be less willing to accede to American demands.
4. Driven oil producers and their financers, for fear of having assets frozen by the American government, to further reduce exposure to the dollar and move more quickly to a different pricing scheme (read: drop demand for dollar, accelerate depreciation and inflation, force the Fed's hand in raising interest rates?)

So, who knew it could possibly fail so spectacularly on so many fronts? Honestly, when the president of Pakistan—the undemocratic president of Pakistan—points out that the US is counter-productively heavy-handed, you have a serious, serious problem (that was in that interview yesterday).

And another thing. When the government announces plans to borrow $1 trillion more dollars to replace the transmission in a Social Security system that needs a brake job, how are foreign creditors going to react? And why isn't anyone bringing this up? A lot? Isn't it just good policy to deal with the Social Security's problems in a couple of years when we'll have the means to do it? As Paul Krugman points out, we're facing a shortfall of 19% of promised benefits. That's doable. What is not doable is borrowing a $1 trillion when people are worried about lending us money as it is! If there's a better modern example of ideology trumping good policy in the US . . . it probably happened under this administration, but I'm too shocked by this one to think of it. It's like giving that drunk friend a shot of tequilla while she's trying to walk a straight line. And then pushing her.

UPDATE: Larger than expected trade deficit. Ummm. Rebalancing? Huh? Is this "steady" rebalancing then? Shouldn't Americans be buying less? I'm going to Ireland tomorrow. Where they use the Euro. Buggers.