The World Makes Alternative Arrangements

Normally I don’t quote myself, but this item from my “Inner Workings” blog at Asia Times might be of interest to First Things readers.

Gaming the collapse of the dollar reserve system remains a favorite pastime of forex and commodity traders. Japan’s new prime minister Yukio Hatoyama is talking about an “Asian community.” The Reuters dispatch cited below indicates Japan’s dilemma. Japan doesn’t want to “exclude” the US or the dollar from an Asian community or a new monetary arrangement, but the risk is that the failure of American policy on all fronts will force the rest of the world to do for self. That, as I wrote earlier this week, is why the gold price continues to rise.

TOKYO, Sept 16 (Reuters) - Japanese Prime Minister Yukio Hatoyama said on Wednesday his vision for an Asian community didn’t mean he wanted to diminish the role of the dollar or exclude the influence of the United States from the region.

Hatoyama’s comments may do little to ease market jitters about Japan’s new government and its stance on the dollar after remarks from newly appointed Finance Minister Hirohisa Fujii caused the yen to jump to a seven-month high against the greenback.

 

“I think (a community) is the right direction to consider in Asia, in East Asia in particular, over the medium- to long-term,” Hatoyama told reporters after his Democratic Party took control of the government.

 

“That is not aimed at excluding the dollar or the United States. Rather, I envision an Asian-Pacific community beyond that.”

 

The dollar slid to 90.12 yen, the lowest since February, after Fujii said he didn’t think the yen’s recent gains against the dollar were rapid and that a strong yen could benefit Japan. It was later trading around 90.35 yen.

Other Democratic Party lawmakers have also made comments suggesting they would rather let the yen strengthen to benefit households and that Japan should generate more returns from its $1 trillion in currency reserves, the bulk of which are believed to be held in dollars.

Of special interest is the bit about benefiting households by allowing the yen to strengthen. As I’ve argued in the past, an aging population depends increasingly on savings invested in fixed income. Inflation generally represents an intra-generational wealth transfer because it benefits debtors (who tend to be young) at the expense of creditors (who tend to be old). An aging society has a stronger constituency for deflation.

In the past, Japan’s export industries (and their workers) protested vehemently against a rising yen, which of course prices some of Japan’s exports out of the market. As Japan becomes a nation of pensioners and rentiers, the coupon-clippers’ constituency for deflation may prevail.

More broadly, the world in the wake of Obama’s first sallies into the big world brings to mind Robin Williams 1970s nightclub act. He announce an impression of President Carter addressing the nation on the eve of World War III, and say: “That’s all, good night, yer on yer own.” Even the Israelis are considering alternate arrangements to their longstanding alliance with the United States, not only because the Obama administration seems willing to throw them under the bus, but because the United States has become unberechenbar – incalculable, as former German Chancellor Helmut Schmidt used to say of Ronald Reagan.

But Reagan was quite a calculable. No-one knows what Obama has in mind. WIll he surge or scurry out of Afghanistan? Will he brown-nose or bomb the Iranians? Will he placate or plaster the Pakistanis? Will he start a trade war with China or forge a new economic alliance? And what will his economic policy turn out to be?

Speaking of economic policy, it is quite unclear who is running what in Washington. Larry Summers, who wears his ego on his waistline, earned himself a long stay in the doghouse by talking down to the President at a number of late-night sessions. Timothy Geithner’s impression of Stan Laurel continues and persuades no-one. For all intents and purposes, Ben Bernanke is running American economic policy, but his board is more split than a Fed board has been since the 1980s. American economic policy is the most incalculable thing of all.

No-one wants the United States to disappear from the scene: No-one wants to shoulder the burden of being the world’s policeman-cum-mediator, of providing a global reserve currency, of sending aircraft carriers to put the bad guys in their place. An Australian politician with a longstanding interest in foreign policy was seated next to me at a Melbourne dinner a couple of weeks ago, complaining bitterly that Australia would have to start spending huge amounts on defense to replace the lost presence of the US.

No-one wants to see the US go, but everyone is busy making alternative arrangements. It reminds me of the end,  rather than the beginning, of the Carter administration. It’s going to be a long, long three years.