October 28, 2013

The Ranting Vulnerability

It seems these days that the United States is not living its best days as the world's sole hegemonic superpower. From the way the Syrian crisis has been dealt with, to the way the drone wars have changed the meaning of military conflict, to the embarrassing release of formerly secret espionage programs that force the president to apologize to foreign leaders. The reputation of the U.S. seems to be taking beating after beating.

Yet, despite all this, the role of the U.S. in the world is idealized by many in the U.S. as the paragon of collective virtue and liberty. American Exceptionalism still thrives. The society of the rule of law --the Land of The Free. Outside the U.S., humankind yearns for a leader. A nation to look up to for guidance and hope --a preserver or global stability.

The decades that followed the fall of the USSR have given way to the concoction of multiple purported superpowers that could, like Ivan Drago to our beloved Rocky, crush the U.S. as the sole hegemonic power over the world. The Chinese, with their meteoric economic rise during those decades, have been billed as the much-dreaded cut-throat competitor that will steal the U.S.'s baton.

The problem with this idea is that the Chinese are not really that obsessed with overcoming the U.S. as the world's superpower. They are preoccupied by other things. They seem to react more passionately to local geopolitical matters, are amusingly eager to emulate others in a distasteful effort to fit in, and are frankly much more preoccupied with a potential social uprising arising from their monumentally crushing pollution problems (or from their ruthless, medieval-like justice system). Of course, it is a healthy thing to feel threatened if you are number 1. In fact, the paranoia of losing your No.1 badge might actually be a good thing --if only it encourages you to try harder to be the best you can be.

The political blunders listed at the beginning of this piece do not threaten to plunge the world into disarray, notwithstanding how damaging they might seem for the reputation of the U.S. abroad. But when you witness the inexplicably irresponsible negotiating tactics of U.S. politicians to obtain concessions in their domestically-defined political agenda, you know that the political class does not conceive the U.S. as an hegemonic superpower whose potential default could sink the entire global economy into chaos and depression. When the political class does this, they are definitely not playing the "I am the leader of the world" part.

The fact that the U.S. dollar is the world's reserve currency is a serious matter. It means that the entire world's economic stability rests on the stability of a single currency that is supposed to be guarded by a stable political class --and equally important, a stable economy. There is a reason the Venezuelan bolivar is not the world's reserve currency, and that is because the world does not want to save their exporting proceeds in a currency whose value depends on a political leadership that could renege on its debt on a ranting whim. The U.S. politicians' dumbfounding perception that somehow, in their twisted, bizarro world, defaulting on the U.S. sovereign debt is not really that big a deal makes you question the stability of the world's reserve currency, and that is something that should make us shudder.

The financial world has a major flaw. Its fate overwhelmingly depends on the fate of its leader, exposing everyone to Dragon Kings. When a system is so dominated by a single entity, the weaknesses of the dominating entity become the weaknesses of the entire system, creating the risk of systemic failures every time the leading entity becomes unstable. Unfortunately, our dominating entity is bound to relive the political spasms we just witnessed with the debt ceiling negotiation. The parties have the incentives to repeat it again in February, and we'll be biting our nails again, hoping that they'll get an agreement at the last minute then.

The global markets can't function when what is supposed to be the safest asset in the world suddenly behaves like third-world debt. The consequences of the loss of confidence in the world's reserve currency cannot be overstated. The global financial system is showing structural cracks, and the most worrisome thing is that it seems we are one political rant away from catastrophe.