Today's date:
Winter 2009

China’s Stimulus and the Fall of the Dollar

Jacques Attali, the founding president of the European Bank for Reconstruction and Development (EBRD), has been an economic adviser to French President Nicolas Sarkozy. His latest book is A Brief History of the Future.

NPQ | The g-20 summit proposed by President Sarkozy will reconvene again in April with President Barack Obama in attendance. Some are talking about the need for a new “Bretton Woods”—the set of institutions such as the World Bank and International Monetary Fund (IMF) set up in 1944 to create financial and economic stability in the wake of World War II. World Bank President Robert Zoellick has said there is a need to “modernize multilateralism and markets for a changing world economy.”

As the architect of the only major new institution created since Bretton Woods—the EBRD after the Cold War—what is your view on whether the old institutions are still adequate? If not, what ought to replace them?

Jacques Attali | The Bretton Woods institutions were created for a very specific moment toward the end of World War II and for a very specific purpose: to reorganize the gold exchange standard. The idea of John Maynard Keynes, the architect of Bretton Woods, was to create a new world currency—the Bancor. It never worked. Instead, currencies were fixed to the value of the dollar backed by gold—at least until the 1970s under (President Richard) Nixon. The IMF and the World Bank survived, although the IMF, under the control of the United States, was deeply impaired as an international equalization fund held in the currencies of the participating nations.

Today we are not going through a currency crisis—although we will probably get there later when the dollar fails and we have to invent a new reserve currency. We are going through a financial crisis. That means we need governance of the financial markets, not exchange rates.

Rather than create a new institution from scratch, it would be simpler to assign the task of global regulation and supervision of all finance, from hedge funds to banks, to the IMF. Beyond that, the status of rating agencies, who misled the world about sub-prime mortgage securities, should be transformed. They should not be profit-making agencies because, as we’ve seen, there is a conflict of interest. Either they should be stand-alone non-profit companies or owned by the IMF.

The Americans will resist such changes because any change in the IMF challenges their full control of what, in essence, is a subdivision of a subdivision of the US Treasury. The United Kingdom also will not accept the necessary financial controls. “The City” is the last asset of the former empire. The City is, in reality, an offshore haven. If the British accepted regulation of offshore havens, then they’d have to accept global supervision of The City. They won’t do that.

So, it will take some time. Let’s look at the history of how we got to Bretton Woods. The crash in 1929 is equivalent to what we have been facing these past few months. FDR’s establishment of the Tennessee Valley Authority in 1933 to jump-start growth in the depressed South might be similar to what we can expect to see in Obama’s proposed stimulus package. The Bretton Woods institutions were not put in place until 1945.

No one would have agreed in 1933 to establish an IMF. That took 12 years of continuing depression and millions of dead in war to get to the point of creating that tiny step forward that produced the IMF and the World Bank.

Can we do better now? Or do we have to go through the agony of depression—which I think is coming—to get some radical change?

NPQ | If prospects of a global New Deal are far off, at least China has taken the lead and proposed a nearly $600 billion stimulus for its economy. Does that help?

Attali | It helps China, yes. China will take care of itself. In doing so, it will inevitably withdraw all its reserves invested in US Treasury bills and put them to work at home. Its growth model will shift from exports to domestic consumption.

The consequence of this will be the free fall of the dollar. Once the world realizes that China has decided it is more important to sustain domestic growth than sustain exports by sustaining the dollar, it is only a matter of time before the dollar collapses. This readjustment of global imbalances will sink the dollar and hasten the decoupling of China’s economy from that of the US. Then, America is dead.

NPQ | What about the other surplus countries, particularly the oil-rich Gulf states?

Attali | They will be the lender of last resort. Three years from now they will have an asset value of $10 trillion. That will be the only available source of savings to tap on a global scale.

NPQ | So, we are facing a depressed world economy in which the dollar has collapsed, China has decoupled and the Gulf states are the world’s banker?

Attali | Yes. Nothing is being done so far that will stem this eventuality. What is particularly startling about this moment after Obama’s victory is that while, in the past, America could be proud of it economy and ashamed of its politics, now it can be proud of its politics, but ashamed of its economy.