That's the conclusion of three economists who a decade ago
characterized the reshaped global economy of the new millennium as 'Bretton
Woods II' - a monetary system aping the fixed exchange rate regime
after World War Two.
In reviewing their oft-cited research from 2003, Deutsche Bank
economists David Folkerts-Landau and Peter Garber and Cabezon
Capital's Michael Dooley last month reckoned that this mutually
reinforcing regime of currency pegging and hard currency stockpiling
had much further to run.
Still-powerful driving forces behind the system, they insist, are
the industrialization of the remaining tens of millions of poor,
under-productive agricultural workers in China and then another
phase - perhaps just starting - when India adopts a similar model of
mass employment in manufacturing and exports.
If they're correct, the prospect of a 'secular stagnation' of the
rich world over the next decade looms ever larger: workers' incomes
will continue to be clipped by the greater access of multi-national
corporations to these new and cheaper pools of labor overseas.
While that's likely to intensify simmering tension between western
wage earners, capital and asset holders, it will also act as yet
another lead weight on inflation. Combined with the recycling of
emerging market savings sustaining the framework, long-term
borrowing rates will remain depressed for far longer.
While the political stress may build, the economists reckon another
wave of cheap industrial labor can just about be managed as China
quickly graduates into a core rather than periphery world economy
and helps balance a subsequent 'India phase'.
"The 2008 financial crisis was the end neither of the international
financial system known as Bretton Woods II, nor even of its China
phase," the authors concluded in their report.
"The old industrial center has seen its manufacturing and white
collar clerical labor force displaced, and one might think it cannot
stand yet another cheap labor giant like India pushing in," they
added. "But now that China will be in the center, the center's
capacity for absorption of another massive labor force will be a
The election of Bharatiya Janata Party leader Narendra Modi as
Indian Prime Minister in May on a platform of export-led development
and labor-intensive industrial growth sets India on a similar path
to China, they wrote, prolonging the life of the Bretton Woods II
BRETTON WOODS WHO?
The sub par recovery of the rich world from the credit shock, 'Great
Recession' and euro crisis of the past seven years has left
households uncertain, unequal and unnerved.
For governments, central banks and investors, the headline rebound
has barely masked the legacy of high unemployment, spare capacity
and a persistent threat of deflation.
With high debts, slack demand, low inflation and near-zero interest
rates, theories abound on everything from a 'new normal' or 'secular
stagnation' for years to come. Looming pressures from ageing and
retiring baby-boomers only add to the gloom.
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Yet the attraction of the Bretton Woods II idea is that it straddles
both pre- and post-credit crash periods and draws a link between the
rise of China after the collapse of communism, growing western
inequality and cheap credit, the seeds of the credit bust itself and
a spluttering rebound.
The nub of the analysis from 2003 was that in deliberately pursuing
an export-led growth strategy to bring 200 million poor subsistence
farmers into modern industry and services, China fixed its exchange
rate at an undervalued level.
This kept its exports cheap and competitive, boosted growth and
attracted waves of foreign direct investment. Intermediating these
inflows at a fixed exchange rate, the central bank then built vast
hard currency reserves which it banked back in western government
bonds - holding interest rates and yields on these bonds
Even though western workers' pay suffered from the surge in the
global labor force, goods and credit remained cheap and
multi-national companies benefited from offshoring staff and plants
and lifted margins.
Many have suggested that the Bretton Woods II idea, after
underscoring the destructive private sector credit binge and bust in
the west, ended with the global recession of 2008/2009 as the huge
surpluses and deficits that defined it halved and China turned
toward consumption from exports.
But the authors insist it has endured the downturn and show that in
dollar terms Chinese surpluses and savings are just as large as ever
- even if lower as a percentage of its still booming economy. That
much is clear from the continued climb in its foreign exchange
reserves to almost $4 trillion in June this year - almost twice 2008
levels and 10 times that of 2003.
What's more, they reckon that of the 200 million workers China
needed to bring into the modern economy back in 2003, only 153
million had make the transition by 2013. This means Beijing will
most likely keep its yuan and capital accounts under control for a
few more years until these workers are absorbed.
At that point, it's India's turn to pick up the baton and China can
help soften the pain. If China doesn't, the trade friction and
political backlash may well be severe.
(Graphics by Fathom Consulting; Editing by Ruth Pitchford)
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