You are going to see a lot of Tom Barnett here. He is good.
New Core Powers Russia and China Are Connecting
"Putin Calls for Convertible Currency," by Erin E. Arvedlund, New York Times, 27 May, p. W1.
"Booming China Devouring Raw Materials: Producers and Suppliers Struggle to Feed a Voracious Appetite," by Peter S. Goodman, Washington Post, 21 May, p. A1.
Russia's president Vladimir Putin floats the notion that many in the Core are waiting anxiously to hear first and foremost from China: the push to make the currency truly tradable with the rest of the world's convertible currencies. This is a huge form of connectivity, because by linking your currency to the world outside, you let that world start determining the real power of your money beyond your borders-pushing up or driving down the value according to its fluctuating desire to buy, hold, or sell you money. At once you give up a lot of control over your economy while gaining a lot of help in keeping your currency logically priced according global market conditions.
Going convertible is a key step to joining the Core big-time. Once the rest of the Core can hold your money, companies become more comfortable in dealing with your economy, because now they have additional mechanisms by which to manage the risk of entering in and doing business within your economy.
Why is this important to security? The old Pentagon fear about a Russia getting rich and developed and then returning to authoritarianism and outward aggression gets a lot harder to imagine with this sort of economic connectivity. A convertible currency has to be a real one, not the pretend ruble with which the old Soviet Union funded so much of its military machine. By being real enough to leave the country and re-enter it at various prices (exchange rates), the entire world economy gets involved in any government deficit spending, because sovereign debt impacts private debt by raising or lowering interest rates (the cost of money). Governments get into the business of having to sell their debt when they overspend, and that sort of borrowing impacts the value of the currency, making it more or less attractive to buy or hold. In effect, the world gets a say in how reasonable it is for your government to overspend (meaning, how costly), and that means your ability to fund defense is linked to the overall health of your country. In short, a convertible currency makes it a lot harder to isolate the impact of heavy defense spending, so the actual burden on the economy is discovered (the choice between guns and butter).
When other countries buy U.S. debt, they indirectly help us pay for our large defense budget. Other countries are willing to hold dollars because they're easily convertible and hold their value well (the essential global trust in the American economy). It amazes me that the U.S. economy still has coins-right down to the penny. When I lived in the Soviet Union, they had coins that were quite stable in value, primarily because they were unconvertible into anything else. When I spent a week back in Russia in the mid-1990s, all of those coins were gone, as inflation had essentially driven them from distribution (they had become essentially worthless). The painted black-lacquer box I bought my fiancé back in 1985 cost about $80, or roughly half the price I paid 10 years later for another one twice as big and twice as detailed. The difference in rubles, though, was enormous: that box back in 1985 cost about 100 rubles, whereas the one in 1995 cost almost half a million thanks to the runaway inflation of the early 1990s.
The fact that a U.S. quarter is still worth something (roughly the same ballpark range as when I was a kid and not something on the order of one-one-thousandth of that value) shows that America's economic stability is a huge source of its ability to generate the massive military power we enjoy today. We are essentially trusted in the world. We are considered a good bet. By funding our deficits they fund our military and-frankly-I think they expect us to do well by the world when we use it.
That's something very important to remember as we wage this Global War on Terrorism.
As for China, their connectivity grows by leaps and bounds. When I did a workshop on the environment in Asia in 2025 with Cantor Fitzgerald back in the summer of 2001, I ginned up a briefing on the results. One slide (shown here) depicted what Wall Street thought China would demand from the world within a few short years-damn near everything and in huge volumes. This prediction has come true in spades-not to mention ion ore, steel, lumber, you name it.
Now they global economy has a name for it: the China Syndrome. This syndrome explains, as the Post story reports, "why as many as one-fifth of the bulk freighters in the world are effectively unavailable on any given day and why the cost of moving bulk freight has more than doubled in just over a year."
Here's a great bit:
"Once a major coal exporter, China is now consuming almost all of its production, putting pressure on that global supply.
`We were blindsided by the sudden surge in demand,' said Peter Coates, chief executive of Xstrata Coal, a primary shareholder in Port Waratah Coal Services Ltd., which own and operates the loading terminals at Newcastle, 100 miles north of Sydney.
`How many people in the world were able to forecast the massive commodities boom in China? Suddenly, around the world, stockpiles of everything from copper to coal disappeared.'"
Talk about carrying coal to Newcastle!
None of this was unpredictable whatsoever. All you needed to see was China open up, reform its state-heavy economy, realize that all that labor needed jobs, start importing FDI like crazy across the 1990s, and then all you needed to do was read the Department of Energy's long-range predictions on energy use and their 20-year projections jumped dramatically upward with each annual issue. That simple bit of analysis said China was heading on a far different track than the one we were used to plotting for its plodding Communist leadership.
Plenty in the Pentagon see only economic might leading to military power. But I see a huge economy becoming addicted to global connectivity in the worst way-meaning the world is becoming almost as addicted to China!
thomaspmbarnett.com |
