Financial power easing from the West to East

March 2, 2012

, NAIROBI, Kenya, Mar 2 – The ballooning debt levels in many countries around the globe beckons a shift in the balance of economic and financial power from the West to the East, a writer has forecasted.

Philip Coggan, the author of “Paper Promises: Debt, Money, and the New World Order” argues that the western world which has dominated the financial markets for the last century or so, is drowning in debt and such cannot continue to call the shots in the world economy.

Those shoes are however likely to be filled by China which has the resources, the clout and the capability to be the dominant power.

“The collapse of this (current) system will bring out a new order in the world and any new order that emerges will be set by China, which is the largest creditor nation,” he stressed.

With at least $1.1 trillion in United States Treasuries in August 2011, China is currently the largest foreign holder of America’s debts. It also has about $3 trillion in foreign exchange reserves.

Analysts argue that the possession of all these elements of power points to Beijing’s gradual but sure ascent to its position in the world even as America’s reign as the sole superpower declines.

USA was thrust into this position by among other factors the Bretton Woods Agreement of 1944 which abandoned the ‘gold standard’ which pegged the value of currency to the value of gold, instead introducing the fixed exchange rate with the dollar as the only currency that was formally linked to gold.

‘When the Bretton Woods collapsed in the 1970s, they moved to a new system of floating exchange rates. There was an immediate inflationary problem in the 1970s but that was dealt with by having strong central banks with the mandate to control inflation,” Coggan explained.

This system ensured that consumer inflation was kept under control and one that gave creditors the confidence that their loans would not be inflated. However, this system is facing an imminent collapse just like the gold-standard set by Britain in the 1930s when it was the creditor nation of the world.

Coggan points out that the current situation pits creditors, who insist on the form of sound money against debtors who demand that their value for money be ‘flexible’ through for instance the printing of more currency in times of crisis or the exchange rate to float in the market to allow them to devalue their debt.

As these two ideologies clash, the world has been thrust in a financial crisis like The Great Depression of the 1930s and the meltdown of the 1970s which have change the nature of the monetary system.

The writer however reckons that although these crises pushed up the countries’ debt levels, the current (debt) rates are unprecedented and unsustainable.

According to an analysis by The Economist, the world’s global public debt is currently at $38.9 trillion. US’s debt stands at $8.9 trillion against the $949 billion accumulated by China.

This scenario is replicated in most of the developed world whose debt ratio to Gross Domestic Product (GDP) is between 300 and 400 percent giving credence to Coggan’s argument that the reshaping of the economic world order is nigh.

The implications are that governments the world over are unlikely to meet their obligations and honour their promises for instance of health care and pension.

“Economic history going forward is all going to be about a battle to decide who gets the wrong end of the stick. We will see tax payers battling public sector workers; the young battling the old; the rich battling the poor and some countries arguing with other countries about how much debt they should pay off and how much should be forgiven,” he predicted.

To some extent, these ‘wars’ are already happening between some African countries and the debt ridden West.

However, even in these scenarios, Africa particularly the sub-Saharan countries whose economies have been surpassing the average global growth rates in the last decade, are likely to play a significant role in the new order.

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