Jose Antonio Ocampo (Professor at Columbia and former Minister of Finance of Colombia) has a short, insightful post on the Project Syndicate website that touches on a subject that barely came up during the recent silliness in Washington but that is, in my opinion, the real major consequence of these repeated budget theatrics: the growing consensus to eliminate the U.S. dollar from it privileged position was the world’s “safe” currency.
Here is an excerpt:
The ongoing political stalemate in the United States holds two major implications for the international monetary system. The better-known consequence has been deepening uncertainty about the US dollar, the main global reserve currency, and US Treasury securities, supposedly the world’s “safest” financial asset. Not surprisingly, the major investors in US Treasuries, China and Japan, have expressed alarm. Simply put, the global economy has at its center a dysfunctional political regime that generates recurrent threats of default on the world’s major reserve asset.
The second implication is further postponement of the International Monetary Fund’s 2010 quota and governance reforms, which would double member countries’ contributions and modestly increase major emerging economies’ voting power. Prior to its approval by the IMF Board in December 2010, the reform, agreed at the G-20 Seoul Summit, had been hailed as a “historic” breakthrough. But history has stalled without approval by the US, which has an effective veto over major IMF decisions.
The threat of a US default may well end in a political agreement to raise the US government’s debt ceiling, as occurred in 2011. But, whatever the outcome, the latest episode makes it abundantly clear that our globalized world deserves a better international monetary system than the current “non-system” that evolved in an ad hoc manner after the collapse in the early 1970’s of the initial Bretton Woods arrangements.
Prof. Ocampo is dead-on right. When this opinion finally takes over the psychology of financial markets, the negative implications for theU.S. and the average American will be disastrous. It’s amazing that all the politicians who claim not to be worried about a U.S. default fail to even mention the one seismic consequence of U.S. political dysfunction that (a) has already begun to take root and (b) once in motion will be impossible to stop.