When the World's Sugar Daddy Turns Sour

Is the U.S. about to send the global economy into a tailspin?

The president of the United States is in Africa. Nelson Mandela is on life support. John Kerry is in Israel. Syria festers. America is somehow shocked that its plan to rely on the goodwill of the Taliban and Hamid Karzai to solve Afghanistan's problems isn't working. Edward Snowden seems to have spent the past week playing in the Moscow road company version of the Tom Hanks movie The Terminal.

Yet somehow, in my mind's ear, I hear the ominous music that normally accompanies the approach of an animatronic shark, suggesting there is a bigger story out there -- one whose dorsal fin broke the surface in the past few days, one that is slowly circling us.

You saw hints of the story in the financial markets as they slipped and stumbled from Shanghai to Lower Manhattan. You have seen other elements of it in the streets of Istanbul and Rio. You heard it alluded to in the words of U.S. Federal Reserve Chairman Ben Bernanke. Almost simultaneously, you saw it in the actions of Chinese officials cracking down on the loose credit policies that had created an asset bubble in their underregulated, lend-first-ask-questions-later world of shadow banks.

Yes, the big story of 2013 -- and likely 2014 and 2015 -- is also the big story of 2008 and 2009: the financial crisis, which is far from over. When I talk to current and former Obama administration officials who had responsibility for responding to the financial crisis, they do credit the Bush administration's comparatively swift and politically courageous steps with slowing the free-fall of 2009, but they argue that two-thirds of the most important steps were taken in the months after Obama became president. It is not just pride that leads them to this conclusion -- fiscal and monetary heavy-lifting during those days certainly kept America from spiraling into another Great Depression. (Doubt it? Look at the results in Europe, where such decisive action was not forthcoming.)

But, while these old hands are right that historians will one day conclude that the bulk of the steps required to manage the crisis took place in the Obama years, they are wrong about one thing. Many of the most decisive measures won't be seen to have happened in 2009 or 2010. In fact, they haven't happened yet. And the past week is proof of that.

That is because almost certainly the most critical step taken to keep markets from cratering during the crisis and to help them recover thereafter -- the decision to pump the global economy full of stimulus dollars -- has yet to fully play out. We have seen the benefits of pumping $10 trillion into economies worldwide, of making money easily available, of wrestling interest rates to the floor and holding them down. But we have yet to see how draining that warm economic bubble bath from our tubs is going to make us feel and what it leaves exposed.

Bernanke made a conscious decision to start preparing the markets for this next phase months ago, when he announced that once the U.S. jobless rate hits 6.5 percent, the Fed will begin tightening its money policies again. Then, last week, he suggested that the tripwire might be 7 percent and that the Fed might start winding down its $85 billion-a-month bond-buying spree sooner than expected. Investors, behaving like "feral hogs" in the colorful words of the smart Dallas Fed chief Richard Fisher, detected "a bad scent" and went after it, pressing markets to price in interest-rate hikes well earlier and higher than those the Fed meant to suggest were coming.

Meanwhile, in China, authorities were making less credit available in an effort to let some of the air out of the bubble in Chinese banking, which has been fueled by the aggressive practices of the shadow banks. This spooked Asian markets and later world markets, which were already uneasy because of Bernanke's comments, and the results were big stock market losses, bond market turmoil, and jitters that remain through today.

But this past week's tremors only hint at the problems to come. These problems take several forms. The first is purely economic -- the consequence of reversing the stimulus. Taking $10 trillion out of the economy will inevitably force up interest rates and, if not timed properly, could easily derail fragile recoveries. (Indeed, if Bernanke, who has managed much of this crisis masterfully, misplays this last phase, his repeated signaling of a coming turn in policy will rank right up there with Bush's "mission accomplished" in the pantheon of premature declarations of success.)

The United States, where a recovery seems to be gaining steam and the economy is fundamentally strong, might be able to withstand a little bad timing or market skittishness. But other economies -- economies that have benefited from the unprecedented global stimulus that was led by the Fed and the accompanying coordinated weakening of the major global currencies -- might be much more vulnerable to such missteps. Places like Turkey, Brazil, and Indonesia, not to mention weaker emerging markets, could feel the pinch more severely. Investors are already wondering aloud how much of their recent success has been a stimulus-fed sugar high. And because those countries are just now on the way up, still home to real inequality and unresolved structural challenges, the political consequences of the coming shift in global economic momentum could be quite serious. The political fragility in Turkey and Brazil, whose recent protests have important economic drivers (as did, of course, the Arab Spring uprisings), suggests how ominous this development could be. That reversal of the stimulus policies could negatively impact global commodity prices (as demand slows) will only compound the problem in emerging economies that depend on resource exports.

Of course, the most important emerging economy is China's. The government there has begun -- with remarkable swiftness for a new regime -- to dial back its irrational-exuberance-with-Chinese-characteristics. But should it move too quickly or not quickly enough and/or should U.S. tightening increase pressure on the economy (as there are fewer dollars in the system to invest in potentially risky places like China), one of China's several internal economic bubbles (banking, real estate, etc.) could burst. The resulting disorder could, in turn, spook global markets and particularly hurt emerging economies. And, again, economic crunches often produce political unrest. If that unrest were among disgruntled Chinese citizens in Chinese streets, it would have repercussions far beyond the borders of China. Indeed, a "Chinese Spring" would instantly be the biggest story in the world, a potentially epochal game-changer that would have the planet holding its breath. While Egyptian- or Turkish-style unrest may not seem imminent in China, President Xi Jinping seems to be conscious of the stakes, and his policies -- like those of Brazil's President Dilma Rousseff -- suggest that he recognizes the need to address popular complaints about corruption, cronyism, and enduring inequities.

Nonetheless, even with enlightened leaders, the international system has not evolved to the point that there are anything but informal mechanisms to help coordinate such a massive policy shift. We may all be in the same worldwide economic boat and leaders may be in touch with each other more than ever before, but domestic factors drive how monetary policies like these will play out, and therefore the possibility of misalignments is real.

In other words, change is on the horizon -- change that could have economic and political consequences that touch every corner of the world. How the current crop of international leaders manages it will likely determine how history judges them. And the degree to which they realize that they are dependent on one another may be the decisive factor in their success or failure. That may be why I can't get that damn shark music out of my head.

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David Rothkopf

Leaning Away

Maybe the real failed states are the ones that have the means to help other nations -- but choose to retreat inward.

There are no failed states. There is only a failure of our international system. Yet we persist in speaking of institutional and economic collapse, social discord, and the turmoil associated with dwindling resources as though they existed somehow separate from the world, as though calamity somewhere were not of consequence everywhere.

This is old think. Very old think: Westphalian nation-state nonsense that evokes a 17th-century mentality in which words like "foreign," "border," "us," and "them" meant something very different. But as we have seen during this 350-year nation-state experiment, this old think doesn't simply divvy up the world into manageable chunks -- it also endows countries with the profound and fundamental right to be selfish. As much as it says, "Our business is our own," it also says, "We have the right not to care about others, to pretend they don't exist, to look away when they are in distress or torment or at war with one another."

It is true that within each country's borders, different views exist of the obligations of individual citizens to one another, of provinces and cities to their neighbors, of the large and small private entities in the polity -- corporations, churches, and other institutions -- to society as a whole. Some countries elevate and value community. Some serve the state to the detriment of individual people. And some, like the United States, celebrate individuality to a fault. At least some Americans do, seeing the responsibilities manifest in the actions, sinews, laws, and regulations of government as overreach, an encroachment.

Americans celebrate this independent spirit. Their market ideology is more Charles Darwin than Adam Smith, suggesting somehow that if we value the survival of the fittest, then the casualties of the weak are merely part of nature's grand equation. Even those who don't embrace the most extreme aspects of this frontier fuck-you-ism at home almost certainly do abroad. It is a great American tradition. From George Washington's farewell admonition to avoid foreign entanglements to the isolationism that is by far America's greatest and longest-lasting international policy impulse -- the same inclination that had only 17 percent of Americans in favor of getting involved in the war in Europe even as it raged in the middle of 1940 -- the view of this great nation has more often than not been that the world's problems are not its own.

Sure, Americans went off and fought two world wars. The United States has intervened throughout the past century in every corner of the globe and has put troops on every habitable continent at one time or another. But not only has it done so selectively -- it has helped create international institutions that are only capable of doing so selectively. In the wake of World War II, the United States helped make an international system that had two main purposes: to create the illusion of having one and to help advance U.S. interests. The system's institutions by design are weak, toothless, and possessed of only limited resources.

This approach has clearly failed. Today the greatest problems we face are almost universally the global calamities that demand strong international mechanisms and a global sense of community that do not exist and are anathema to the selfish spirit that was the great contribution of the Peace of Westphalia: global warming, the proliferation of weapons of mass destruction, the cancer of failed and failing states that destabilize their neighbors, spreading refugees and unrest across borders.

This is not abstract. These are the issues of today's headlines. This year, scientists noted that atmospheric carbon dioxide had passed the "red line" daily threshold of 400 parts per million. Syria appears to have passed U.S. President Barack Obama's "red line" threshold of using chemical weapons, and Iran continues, despite the most sophisticated sanctions regime ever conceived, to edge closer to crossing the "red line" of gaining a nuclear weapons capability. In Syria, in parts of Libya, in Mali, and across much of sub-Saharan Africa, failed states and regions fester and promise only conflicts that will deepen and seep across regions like the blood that spills in each daily.

In each instance, we see that the greatest problems facing failed states and more pernicious, pervasive international failures are not somehow endemic to isolated places on the globe. For example, global warming and nuclear weapons proliferation have clear global consequences. But so too would 10 more years of war in Syria, of millions of refugees pouring into places like Turkey and Jordan and Lebanon, of extremist groups establishing themselves as they have in Mali and as they wish to in Syria and northern Nigeria.

In each instance, our narcissistic, head-in-the-sand nation-statism is putting us at risk. Our unwillingness to recognize that our lack of strong international institutions, be they global organizations or multilateral alliances, formal ones or ad hoc efforts, is doing us in. We need the ability to effectively punish states and others that fail to protect or that actively harm the environment, or that make the world more dangerous. We need to endow those organizations with the resources they need and with the sovereign powers we have guarded so jealously that we've actually undercut them. In our zeal to protect national prerogatives, we have made a more dangerous, fragile world -- one from which no single state can protect us.

The problem is made measurably worse by the United States, which used to, at least periodically, reach out and flex its muscles and extend its generosity despite its historical isolationism, but which today seems much less inclined to do so. While book clubs across America debate whether working moms should lean in, nationally the country seems to have made the decision to lean away. Getting involved has had its costs. It has been bungled and abused. And so Americans are washing their hands of it and retreating behind the country's walls.

Which raises the question: Which are the failed states? The ones so weak they can't help themselves? Or the ones that are strong enough to help, yet do not?

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