
The 'New Game' of Geopolitics and Economics Requires the U.S. and the Federal Reserve to Change
The latest cover story in The Economist, titled "The new game," captures the essence of the evolving world.
The accompanying picture is a cartoon of a card game involving Russian President Vladimir Putin, Chinese President Xi Jinping and President Obama.
Here's an important passage from that article: "For the past 25 years America has utterly dominated great-power politics. Increasingly, it lives in a contested world."
Don't count the U.S. out, however. The Economist writes that "America remains the only country able to project power right across the globe." They add that in terms of economics and finance, "its sway over the financial system is still growing."
In other discussions about the changing world, it is this latter point that seems to be getting lost.
The U.S. possesses the reserve currency of the world. Yes, the pound, the yen and the euro are all reserve currencies, but it is the dollar that is the "go-to" currency when things get tough.
The euro and the yen are relatively important, but they do not have the trust or the scale to compete with the dollar. And the possible collapse of the euro is still discussed because the currency union still has serious problems when it comes to the lack of a sufficient political union behind it.
The rising star, the Chinese renminbi, as was seen this summer, still has a substantial way to go to fully make it into the "major leagues."
The dollar remains the foundation of the international monetary system.
It is truly remarkable to read the new book of Ben Bernanke, former Chairman of the Federal Reserve, titled The Courage to Act: A Memoir of a Crisis and Its Aftermath, and see the role that the Federal Reserve played in the world during the events of the past 10 years.
Right from the start of the crisis, the fall of 2007, the Federal Reserve was discussing swap lines with the European Central Bank and "two or three other major central banks" so that they could borrow dollars directly from the Fed (page 157).
How important were these central bank liquidity swaps? Well during the Great Recession, central bank liquidity swaps reached almost $600 billion. Early in August 2007, the balance sheet of the Fed showed the Fed holding only a little more than $900 billion in total assets.
Also, during the recovery, the Fed pumped up the reserve balances of commercial banks in the U.S. to $2.8 trillion. Of this amount, the cash assets of foreign-related (not domestically chartered) institutions reached $1.5 trillion in the last half of 2014. These institutions were able to direct funds "off shore" in the amount of about $600 billion of net (deposits) due to related foreign offices, in the middle of 2014.
The influence of the Federal Reserve System in the world has not really receded since that time.
In the Oct. 3 edition of The Economist, the editors discuss the possibility of the dollar becoming the world's currency and the Federal Reserve becoming the world's central bank.
The thought is mind-boggling, yet the responsibility of the Fed becoming the world's central bank seems to be moving more and more in the direction of the United States. The Economist states later in a "Special Report" in the issue, "The three pillars of the world's economic architecture, the IMF, the World Bank, and the World Trade Organization, are all in bad repair."
So the U.S. and its Federal Reserve find themselves at the center of things.
There are great benefits of this for the U.S., but there are also great responsibilities, responsibilities that the people of the United States might not be willing to bear.
Ultimately, of course, consent would have to be given by the rest of the world. But, it seems all nations, including the U.S., are still focusing primarily upon their own, sovereign interests.
The Federal Reserve System is limited, legally, to pursuing just two goals: high employment in the U.S.; and low inflation in the U.S.
And, as I have argued, the U.S. has recently acted on this charge, in my mind, to the detriment of the rest of the world, because it could result in a currency war.
I have also argued that the U.S. must begin to look at things a little differently, for the benefit of the world ... and for the benefit of the U.S. within this world.
In the near future, I plan to discuss this issue at further length because the problems are not going to go away and how the world gets to the next stage is going to impact the globe, both economically and financially.
We all are playing in a new game.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.








