To understand what is happening, it is worth borrowing a graph recently published by the Financial Times to accompany a text by the editorialist Martin Wolf. The title is eloquent: "The old global order is dead". The question is what other global order are we building to replace the current one and what are the reasons (and wrongs) of the United States in wanting to re-balance the last thirty years of multilateralism, economic and technological progress. In the response process, Carlo Altomonte, associate professor of Economics at Bocconi University, former advisor to Mario Draghi during his time at Palazzo Chigi, tried to provide some answers.
Altomonte points out that the United States has seen its net financial position increase over the last ten years, going from a deficit of 7 to around 21 trillion dollars. This is now a quarter of the world's GDP.
This exponential rise in debt to the rest of the world has come under the scrutiny of various administrations and now the issues have come to a head: "The US is trying to change this (for them) bad trade balance. To do so they know that their role is still profoundly central: for the hegemony of the dollar that places them as the linchpin of the global payment system. Because they are above all the leading country in technological research, a global innovator hub. Therefore, the rest of the world continues to export capital to the United States: an appetite that has never stopped and this still provides a window of opportunity", explains Altomonte.
On one side we have the United States as the party of global demand, based on internal consumption, structural trade deficits and attraction of foreign capital; on the other China, Germany and other "mercantilist" countries, tied to a model based on the containment of internal demand, the development of exports and the accumulation of trade surpluses. The propensity to consume in the United States is steadily around 67–68% of GDP, compared to less than 55% in Germany and around 38% in China. «The US system supports global demand — even with debt. The German and Chinese models, on the other hand, are based on low wages, forced savings and structural surpluses: they are exporting economies not because they produce more, but because they consume less», Giovanni Di Corato, CEO of Amundi RE Italia SGR.
However, this dynamic creates a distorted equilibrium in the balance of payments. Because, Altomonte points out, «the more we export capital to the United States, the more their trade deficit with the world increases. This deficit is no longer just private consumption, historically driven by their hyper-consumerist model. But it has now become public consumption (deficit). In fact, the United States absorbs global demand, whether from private or public consumers, and the effect becomes politically complicated for the White House».
Why? Because it increases the cost of the debt itself by raising interest (and yields) for those who subscribe to American bonds given the growing risk of default and compresses the room for maneuver of public spending. But large flows of financing compress above all the well-being of the middle class, producing ever greater social inequalities. Those who hold shares on the stock exchange have seen their prices increase, but the middle class is crushed by rising prices and wages that do not see the same proportional increase. And the government has not put in place sufficient subsidies to curb this landslide created by the inflation of energy goods in recent years.
From here comes the third negative consequence: «Since the United States is a consumer country, they also need to produce in order not to see their strategic sovereignty disappear. It is a shame that in recent years their industrial base is being eroded. The GDP of US manufacturing has gone from 15% to less than 10%. The minimum efficient scale to compete with China for some strategic productions such as microchips is disappearing», explains Altomonte. Hence the desire to bring back to the US some productions considered fundamental.
China and Europe sell to Americans but do not care about the fact that this produces a high deficit for the United States. So, how can this relationship that arouses discontent in the Trump administration be re-balanced? Here several paths open up, including that of duties chosen by the American president. «But it does not get very far. There is strong resistance from the global value chains that are very rooted - says Altomonte -. This means that it is difficult to dismantle them without risking having empty shelves in supermarkets». Furthermore, the professor adds, "the path of tariffs can be bypassed by the rest of the world. Because 87% of global trade does not concern the United States, which only determines the other 13%".
Add to this that if imports to the United States fall because of such heavy tariffs, revenues will also fall in the long term, Altomonte points out. And to bring some production back to the US, it is necessary to find internal skills, an adequate and qualified workforce, but the very restrictive approach to immigration does not help. Hence the recent financial crisis in the US comparable to that of an emerging market. With a collapse of the stock market and the simultaneous increase in the interest rate on government bonds. An apparent contradiction that has however signaled how the market has registered a serious crisis of confidence towards the United States and led to an influx of capital abroad.
"The other way to change the balance of payments is to devalue the dollar, avoiding losing the hegemony of the global currency, but maintaining a minimum grip on the system", Altomonte points out. They are two opposing forces, explains the Bocconi economist: "If you devalue it, you risk losing hegemony, but if instead a currency parallel to the physical dollar were created, but linked to it through adequate collateral, the rest of the world could use it without the demand for American assets diminishing. Hence the project to promote 'stablecoins', cryptocurrencies linked to the greenback with which they are convertible, with a system similar to the one in force for the Bretton Woods agreements that held until the 1970s. But what happens at a certain point if confidence in the stablecoin is lost and creditors ask for convertibility into physical dollars?", Altomonte asks.
Stablecoins have a stable value that is almost always linked to the dollar, not subject to fluctuation like Bitcoin. The issuer of a stablecoin can change it into dollars at any time at par – one for one – if it has sold it at par. How does it do it? With the funds it collects by selling you stablecoins, the issuer of this cryptocurrency buys almost only US government bonds, i.e. US public debt; therefore, it behaves in such a way as to have a more or less stable value to support the cryptocurrency it has issued.
It is a payment instrument similar to a credit card, usable from your smartphone, but it has none of the costs of a card or even offers a small income if the issuer of your stablecoin shares with you part of the profits it obtains by investing its reserves in US government bonds. Like a credit card, it can be used to pay for a retail purchase in much of the world. Credit card companies such as Visa are preparing to use stablecoins: the payment service between customer and seller bears the old name – Visa – but the entire network behind it is different and completely cuts out traditional banks.
The Fed generally guarantees the purchasing power of the physical dollar, but it is not a given that it will do so for stablecoins, especially if these are mainly used abroad. "At that point the burden of adjustment in the event of a crisis of confidence in the stablecoin would fall on the governments of the countries in which they are used, which at that point would have to save their financial systems without physical dollars," says Altomonte. What is certain is that the trade war is only the beginning of the game.
https://www.ft.com/content/49e38ee8-f37e-47da-8ee4-1631175d2224
