'We're All Mercantilists Now'

by Chris Sturr | February 01, 2009

So says Ambrose Evans-Pritchard. Here’s a snippet:

Yields on 10-year US Treasuries are 2.84pc–lower than Germany (3.3pc) or France (3.81pc). One-year notes are 0.46pc. The worse the crisis gets, the more the world wants to place its shrunken wealth in the care of Washington. The US Treasury is finding it all too easy to suck in enough global capital to fund trillion-dollar deficits.

This is the “exorbitant privilege” of reserve primacy that so vexed Charles de Gaulle. You could hear the gnashing teeth at Davos.

“They can print the dollars,” said a weary Ernesto Zedillo, Mexico’s former president. The injustice of it. The arch-sinner is dodging its own disaster, leaving scores of well-behaved countries starved of capital and exposed to the crunch from Hell.

In Davos, protectionism is a dirty word
The beggar-thy-neighbour phase has begun in earnest. “Buy American” legislation has advanced from a barely credible threat to imminent reality on Capitol Hill in just weeks.

By Ambrose Evans-Pritchard
Last Updated: 11:31PM GMT 31 Jan 2009

The House has voted for a bill that prohibits the use of foreign steel in most infrastructure projects funded by Barack Obama’s $820bn (563bn pound) rescue package. The Senate is drawing up plans to widen that to all manufactured goods.

This is what happens when a country loses half a million jobs a month, and when the state becomes spender-of-last-resort. Taxpayers are tribal. They do not want precious stimulus to feed the foreigner.

Even so, this Dutch auction has the disorderly feel of the Smoot-Hawley Tariff debacle in 1930, though this time the collapse of commerce–if allowed to happen –will have very different consequences for the global balance of power.

Mr Obama can veto the law, should he wish to pick a fight with Capitol Hill from day one. The world watches and waits in horror, especially in Davos.

“Everybody here is talking about protectionism. There’s not a prime minister present not talking about protectionism,” said Peter Sutherland, former (GATT) trade chief and now chair of BP.

Days earlier, US Treasury chief Tim Geithner called China a “currency manipulator” –meaning that Beijing holds down the yuan to boost exports. The term is turbo-charged. It implies mandatory trade sanctions under US law.

Mr Geithner’s bluntness prompted an angry outburst by Chinese premier Wen Jiabao behind closed doors in Davos. Mr Wen later let rip against “blind pursuit of profit” and unstable economic models based on “low savings and high consumption”. Not a word about China’s role in accumulating $1.9 trillion of reserves and thereby helping to stoke a global credit bubble; Mr Wen clings to the fallacy that greedy banks alone
created this disaster. A fat lot of good
it will do him.

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