A new world financial order in the making

or are they? The TAX HAVENS ARE NO MORE, agreement on the 15% tax floor has caused a lot of discussion, but Jayati Gosh from UMass, Amherst thinks this is insufficient. She has written that some received truths in development economics are simply wrong. That the Trump tax cuts would pay for themselves, and actually they would reduce the budget deficit proved wrong, for instance. The archetypical idea of Laffer many decades ago, baptized the “Laffer curve”, was also incorrect. Don’t tax the rich, tax the poor; this is what it basically said. The untaxed rich will bring in more investment and more jobs, etc., so prosperity would increase. Again consider the idea of Chamley back in 1985 that conjectured that the optimal capital tax was (is) zero. This idea has also been challenged. It is positive. Now that governments have to collect money, tax has to be collected. Because everything has been done over the last 13 years to stimulate economic activity, but with the advent of COVID both central bank balance sheet expansions, money supply increases, low rates and very high budget expenditures have accumulated in a nexus of unsustainable policy mixes. The nature of employment is changing, fossil fuels should be discarded, fast, and technological innovations are increasing at an astonishing pace. Who will clear the house? Certainly not bankrupt governments. Big business has to pay a bit, at least a bit.

IMPERIALISM, GLOBALIZATION, FINANCIALIZATION, OR WHAT?

Should we call it a new imperialism? Is Biden, with all his international policy initiatives, only aimed at a super make-up, leaving the essence of things as they were after 1980? Or is this the end of financial imperialism, if this term means something truly? Well, the late Giovanni Arrighi already clearly signaled in the opening sentences of his short – but analytically very well argued - study on the geometry of imperialism that the term imperialism was surrounded by a “profound ambiguity”. To wit, the seminar that was called for a scholarly discussion on imperialism in 1969 at Oxford proved to be at cross-purposes; references to imperialism lacked coherence, and only generated further misunderstanding and spread disenchantment among scholars at that time. As Arrighi reports, in the late 1960s and early 1970s, there were at least ten themes related to the over-burdened term imperialism. Imperialism in international affairs can be seen as the first, and mostly vulgar, reference and it was surely not confined to leftist circles. What were the others? Imperialism and underdevelopment, imperialism and capital accumulation, imperialism as the monopoly stage of capitalism (also the last and highest stage in the Leninist lexicon), imperialism as finance capital, imperialism as the cartel solution to an oligopoly game (in the meaning of Kautsky, thus leading to ultra- or super-imperialism), imperialism and uneven development, imperialism as tendency to war (first between imperialist powers, then among underdeveloped states as provoked by imperialist powers). We should also add a qualifier here, to the effect that imperialism manifests itself as militarism before tending towards universal war mongering. Contrary to Hobson, Arrighi claims in passing that imperialism could be characterized as an unstable and temporary phenomenon, which we may as well add to our list of attributes. So, which is it today, or else is there a tractable definition of what ‘imperialism’ could be now beyond ‘folk theorems’? I doubt it. In a world where China is emerging as Defender of free trade, and where the foreign capital share in Chinese manufacturing hovers around 35%, there is no other way. As such, such global linkages and long-term foreign investments can also be seen as Defensor Pacis, i.e. ‘the defender of peace’ worldwide, even though Marsilio da Padova didn’t intend the title of his 1324 book to be used in this vein. Is Biden the new Defensor Pacis?

U.S. PUBLIC FINANCES, USD AS RESERVE MONEY, AND SO ON

So, what is this? Is the recent proposal by Mark Carney, Governor of the BoE, to the effect that the USD could well be replaced by a CBDC (Central Bank Digital Currency), only a technical matter? Has it nothing else

to do with financialization of stupendously flamboyant proportions after 1979, or even after the gold anchor had been dropped entirely during the Vietnam War? Or did the two oil shocks of 1973 and 1979 not change an iota in the financial system? Is the almost exclusive use of the USD as a means of payment, as a common denominator of global debt issuance, as a store of value, etc., a bygone fact, a reality of life somehow, or is it destined to be changed soon?

For instance, the coming of Trump was no accident. What will be left of the various political and economic vicissitudes that characterizes his term except deterioration in public finances and a lot of harm done to global and US trade? Empirical research on U.S. public deficit sustainability has emphasized the importance of taking into account the possibility of regime shifts in U.S. fiscal policy. Most of the studies that tested for the presence of these shifts consider models with structural breaks, where the breakpoints are either chosen arbitrarily or are endogenously determined. Accordingly, it may appear that the U.S. budget deficit is sustainable in the long run, but it has undergone regime shifts. These results are also consistent with those of many existing empirical studies, as the aforementioned ones are. Interestingly, regime shifts can be explained by the extent of the change in the deficit. More specifically, only when the increase in deficit per capita reaches a certain threshold will fiscal authorities intervene to reduce the deficit. Hence, a strand of research identifies two regimes, with budget deficit following different dynamics in each one of them. These results provide support for the existence of trigger points in the U.S. fiscal policy adjustment.

We should bear in mind therefore that there might be a threshold beyond which debt dynamics may experience a qualitative change. That point may come right after the elections and bears the potential of drastically modifying the outlook of the dollar/ euro exchange rate. The recent fluctuations in the parity could just be symptoms of a deeper divergence of opinion and might symbolize the co-existence of two contrasting data generation processes. Therein may lie the essence of international tax reform.

AUTHORITARIANISM AND ECONOMIC TAIL RISKS

The graphic depicts some landmarks perceived as leading indicators of systemic risks. If anything, after the “soft power” rhetoric of late 1990s, which by the way was nothing but an artefact of PE in S&P500 between 1996 and 2000, itself caused by overseas investments to American stocks, political risks increased. And there were wars and civil wars, and proxy wars, and terror everywhere. Amid lots of changes, politically, militarily – Russia is a force to be reckoned with again, and yes, China is coming up with giant steps, especially its navy, and economically, the old wisdom of 1990s is definitely lost.

REFLATION BLUES

The cycles may all look alike but in major upturns and downturns policy errors might make a huge difference. As the pre-C•VID cycle matured, any excessive tightening could convey the wrong signals and could turn a maturing recovery-cum-stabilization into a global slowdown. Hence, irrespective of the arguments related to the shape of the American yield curve or regardless of the current momentum in the U.S. economy, China-cum-Europe could bring the global recovery to a halt, well almost 7 years into the upturn. After all, GDP has reversible double-direction cyclicality during the short and medium-term cycles.

But the pandemic changed everything all of a sudden. Now the job to be done is more complex because “scars” will remain. So, amid fears of slowdown, steady state commodity and oil prices just a little bit up from here, a truce with China (trade war interregnum), spending and easy money in the U.S. ahead of presidential elections, a strong services sector in Europe, Brexit at last, etc., risk appetite stable for EMs… A nice, good, optimistic picture it was until now. The world isn’t suitable for a goldilocks economy though. It is coming to an end, sharp and fast.