The following speech was given by Douglas Rediker for the Truman National Security Project in Washington, DC on May 1, 2009.
Green-shoots and optimism aside, let's agree that no one really
knows how the economic crisis will play out or when it will end. There
are those who believe that we have reached the bottom and others who
believe that we have only reached a "temporary bottom."
But one thing is certain -- from a foreign policy perspective, the
current crisis is likely to be a driving geopolitical force for a long
A month ago, the Director of National Intelligence opened his Annual
Threat Assessment to Congress with the statement that: "the primary
near-term security concern of the United States is the global economic
crisis and its geopolitical implications."
Think about that for a moment. The US is engaged in two military
wars, facing the threat of a nuclear Iran and the reality of nuclear
Pakistan and North Korea, and tackling terrorism, amongst other things
... and yet the number one security concern identified by the DNI was
The financial crisis raises several security and foreign policy
issues that warrant our attention, all of which have serious strategic,
security and foreign policy implications for this country.
First, the crisis poses a risk that some countries may find
themselves in such economic straits that traditional sources of funding
their basic government obligations leave them stranded and desperate.
In part, as the US and other large countries increase their borrowing
to support stimulus packages and other spending, we run the risk of
exacerbating the crisis in these economically vulnerable countries,
because our borrowing needs are so large, that we suck up so much
liquidity from the capital markets that there is simply nothing left
This economic squeeze may thus lead to friends and allies that are
less able to meet defense and humanitarian commitments. It may also
lead to an increased likelihood of "bad actors" (no names here) who may
seek to make mischief as our attention is focused elsewhere.
How we anticipate or react to these situations will have regional, if not global implications.
Second, the crisis puts into play certain basic assumptions about
how the world's fundamental economic and financial systems operate,
including the role of the US dollar and American financial hegemony.
And third, the crisis potentially accelerates a challenge to the
American-led status quo -- a status quo in which free markets, democracy
and the Washington Consensus assure the US of the leading role in
political, economic and ideological affairs around the globe.
In looking at the changing global landscape in the context of this
crisis, the U.S and our allies need to be aware and pay close attention
to countries heading ever closer to an economic cliff. It is in these
countries that economic disaster and domestic political instability
could lead to abrupt political change -- change that could have broader,
We've already seen governments fall in Central and Eastern Europe,
the Baltics and Iceland, and witnessed riots and protests in Western
Europe and South East Asia.
Out of this crisis, we are likely to see certain other governments
acting and reacting differently than they have in the past. Our models
need to be updated, as these other countries operate from shifting
positions of both absolute and relative strength, using levers that we,
in the US, have not recently considered seriously.
The most obvious example of this is China, with its large holdings
of US assets, and its desire to protect the value of those assets. In
recent months, China has stepped up its public and private efforts to
protect its national economic interests, in part by putting the "US
dollar as global reserve currency" question on the table.
First, Prime Minister Wen Jiabao publicly expressed his "worry"
about the possibility of dollar erosion as a result of the US stimulus
and other spending measures announced by the US. Next, the Governor of
the Chinese Central Bank released a public policy paper advocating a
call for consideration of a "new super reserve currency" specifically,
Special Drawing Rights or SDRs, which are international reserve assets
created and managed by the IMF. Then China entered into $95 billion of
Yuan currency swaps with countries around the world, ranging from
Argentina to South Korea. And now, it appears possible that the next
Chinese contribution to the IMF, estimated to be around $40 billion,
could take the form of an SDR-denominated bond issue, rather than
through traditional methods such through the New Arrangements to Borrow
Personally, I do not believe that these steps are at all sinister.
Rather, they are very rational steps from the Chinese perspective -
both economically and strategically. But they are also reflective of a
new more publicly assertive approach by China, which often makes policy
on the basis of according economic interests its highest priority.
As I have stated this on many occasions, I do not see an end to US
dollar dominance as a reserve currency anytime soon. But, global
powers with global reserve currency status gain enormous strategic and
economic benefits from that position, and history demonstrates that
this position can be lost if internal and external economic and
political forces are taken for granted and not adequately recognized
We also must take seriously the potential consequences of this
crisis on the loss of unquestioned US financial hegemony and
ideological leadership in the world.
This crisis has re-opened for debate several fundamental questions
that many, especially in the US, had, until recently, thought were
settled and no longer open for discussion. These include what economic
and political models might best be followed by governments seeking to
advance the development and growth of their own countries in this
difficult economic environment.
These discussions are not merely academic. Rather, with banks and
even entire countries' solvency being called into question, these are
immediate issues that have real world applications. Even our own US
Government is grappling with issues relating to the role of the state
in the free-market, the benefits of pursuing mercantilist policies and
the extent of how we regulate the private sector. If we in this
country are debating nationalization of banks, insurers and autos on
Sunday morning talk shows, then imagine what the debate looks like
elsewhere in the world.
The United States still enjoys sole military super-power dominance.
But, following the collapse of the Soviet Union, we also enjoyed sole
super power status in finance as well. We were central to the world's
capital flows and led the charge in preaching the Washington
Consensus. This dominant financial role provided enormous political
and strategic benefits to the US.
But even before the economic crisis took hold, the financial world
was already becoming increasingly multi-polar. Financial centers in
London, Hong Kong, Singapore and Dubai, increasing central bank
reserves in Asia and in the Gulf and increasingly attractive investment
opportunities around the globe allowed capital to flow into, out of,
and through markets all around the world.
The rapid development of financial centers around the world and the
increasing wealth transfer from richer nations to developing ones,
meant that the US no longer held the only set of keys to the world's
financial markets. The financial world had already become multi-polar.
Then came the financial crisis, and with it a very real and serious
challenge to the existing economic and political status quo. So much
so that, at the conclusion of last month's London Summit, British Prime
Minister Gordon Brown himself declared: "the Washington Consensus is
Now, today, it is not uncommon to hear talk around the world not
only of the death of the "Washington Consensus" but also of its
possible replacement by a "Beijing Consensus."
Those who advance this Beijing Consensus argument can't always agree
on what it is (which makes it hard to call it a consensus) -- but in
general it refers to the allure of some element of public ownership of
the commanding heights of the economy, gradual reforms over shock
therapy, greater skepticism about the free flow of capital and trade
and a belief that economic reform can and should take place prior to
political and cultural change.
I am hesitant to embrace the idea that the world is tilting towards
a Beijing Consensus. Nevertheless, it is hard to argue that some of
its elements have become increasingly present on the world stage.
For example, in sharp contrast to only 15 years ago,
national/state-owned oil companies now own more than three-quarters of
the world's known oil reserves. While in finance, who would have
guessed that a mere 18 months after the frenzy over the alleged threats
posed by state-owned sovereign wealth funds, the US government would
find itself owning large positions in its own banks and insurance
As for the best way to address the international challenges growing
out of the economic crisis, we need to start with three related areas.
The first is to make sure the multilateral institutions we have in
place, like the IMF and World Bank, have sufficient legitimacy and
financial capability to support the next Iceland, and the next Iceland
after that -- to see this crisis through. IMF loans may come with
strings attached, but they are mainly financial strings, not strategic
Second is to recognize that one of the most positive changes brought
on by this crisis has been the elevation of the G-20 group format as
the principal forum for discussing these issues. this forum, while
undoubtedly cumbersome and unwieldy, is nevertheless preferable to the
G-7, in that it is more broadly representative of the regions and
economies of the entire world, not just Western Europe and North
The most tangible result from the G-20 meetings so far has been the
increased financial and political focus on the IMF to ensure that
financial resources are available to those countries that may need them
- thus avoiding the political consequences of a country with no where
to turn for help at its most desperate moments.
The third point, related to the others, involves the transfer of a
basic financial markets concept to the geo-political arena. In
difficult times, cash is king.
Today, the United States is the world's largest debtor, while many
developing nations are among the most cash and reserve rich. We need
to work with cash-rich countries to ensure that they feel that it is in
their individual and collective self-interest to act responsibly and to
use their liquidity to provide support where it is needed, to prevent
economic and political disasters and to act as responsible stakeholders
in the global economic system.
It is imperative that we continue the process begun last month at
the London Summit, and work together to ensure that we minimize the
global impact of the economic crisis and ensure that it doesn't develop
into a political crisis.
How the US responds to this changing landscape will likely determine
the extent of continued US global leadership for years to come.
Luckily, at the recent G-20 Leaders Summit, President Obama and his
team demonstrated a high degree of awareness of the depth of the
challenges that these economic issues pose to the US in the foreign
One recent incident is deserving of special attention. Last fall,
Iceland, a NATO member, found itself facing imminent financial
collapse. When its pleas for immediate help went unanswered by its
traditional allies, it went public with its last ditch approach to
Russia for a 4 billion Euro loan.
While the Russia deal was never consummated, Iceland's prime
minister's words at the time were chilling: "We have not received the
kind of support that we were requesting from our friends, so in a
situation like that, one has to look for new friends."
In spite of an understandable desire to focus inward and attempt to
right our own domestic ship before we look to the impact of this crisis
abroad, we must not lose sight of the global strategic issues that an
economic crisis of this scale presents. Even the optimists agree that
the full force of the global economic crisis has not yet been felt. At
times like these, no country should have to look for new friends.