The choice is indeed becoming a hard one. In trying to protect the US economy (the symbolic dollar), the world is increasingly endangering itself. Surprisingly, the end-objective â€˜slips sliding awayâ€™.
There unfortunately arenâ€™t many pleasing alternatives as policy-makers and regulators fretted away the more workable solutions over the years, expecting that nothing can happen to the Dinosaur of the global economy.
In the worst possible scenario â€“ the choices, if we can call it choices and not the choice, boil down to two. Let dollar weaken, or let the world economy weaken. Experts from the pro-American groups would say that the two choices are effectively the same. Global economy and financial markets over the last year testify that.
Thatâ€™s broadly right. So the challenge would be to decouple global economy from the contagious US economy, as much as possible and as fast as possible. Following the other alternative, i.e. trying to protect dollar with the petro-dollar linkage, isnâ€™t easy for the rest of the world. The signs of a strong dollar must 1st come from the US itself, in actions and not in playing with words, in the form of more taxes for those who can pay, less trade deficit and an interest rate in line with the rest of the world.
The rest of the world, in-spite of having a much better economic health and growth rate, increased interest rates. Itâ€™s a symbolic gesture that money comes with a higher price tag, and thereby the demand for money slows. However the aggregate good work of the rest of the world is wasted away by the actions of the Fed. (and itâ€™s counterpart, Bank of Japan, who fueled carry-trade elsewhere). The ECB is now more inclined to join the rest of the world.
Itâ€™s not a blame game. The rest of the world has as much a role to play as they allowed the situation to aggravate, starting with the 1960s. They have poured good money after bad money year after year, and now they need to do more of that. The choices are indeed difficult. Many even see it as Europeans and Asians not being fair. Itâ€™s not so â€“ because the problem canâ€™t be helped by the ECB or by the poor Asians. The commodity boom driven inflation can be controlled only by the US (and to some extent by Japan), the two so-called largest economies of the world and producers of cheap money.
On the other hand, there are millions of underprivileged families and kids in South Asia and in Sub-Saharan Africa, who are more likely to go hungry with present level of food inflation. Though no firm single answer can ever come if one kid asks his/her mom why they canâ€™t afford food any more, an answer like â€˜we need to protect the American economyâ€™ from the mother may not be much off the mark, as it summarizes many of the possible causes.
The innocent kid may naturally ask: â€˜Why? Are they poorer than us?â€™
The mother would answer: â€˜No, dear. They are nearly 100 times richer than us. But they are used to consume more than they earn. And we collectively lend them money.â€™
The kid would surely be puzzled how it can be possible. â€˜The world is crazyâ€™, s/he would have said as the Gauls did. The mother may not explain how that lending helps the kid to get half-square meal a day as that credit-driven consumption drives the global economy.
The rest of the world produces more than it can consume, the extra-produce therefore must find a market. Rather than giving credit to the poorest of the poor to generate additional sustainable demand, who probably have better prospect of paying it back, the rest of the world prefers to lend it to the richest so that they can consume even more. According to many, the richest, collectively as a nation, are in the verge of bankruptcy by virtue of their spending habits.
People have been shouting on top of their voices since ages: ITâ€™S NOT SUSTAINABLE.
And the World Bank, the IMF and the policy-makers from the rich nations, with their muscle power or market power, or by playing the race to the bottom, time and again made it look as if that’s the best sustainable alternative the world has.
The whole of BRIC and OPEC blocks, along with other nations with their rising power and influence as the US declines, can help in bringing forward small steps of change. There would always be geo-political games played by OPEC, BRIC and others, however the time for an alternative to dollar has already passed.
Unless OPEC or Fed. does something drastic, all the efforts to protect dollar by the rest of the world, over the longer term in a sustainable manner, may still fail. OPEC would cry for dollar stability, whereas the ultimate price would be paid by the poor and that hungry kid.