April 18, 2012
The New Statesman

The Beginning of a New World Order

The financial crisis has seen the global economy turned on its head. And it is China rather than America that is set to dominate through both soft and hard power

by Martin Jacques

The 2008 financial crisis marked a fundamental shift in the relationship between China and the United States. Nothing could or would be quite the same again. The management of the US economy was revealed to have been fatally flawed, a lightly regulated financial sector almost allowed to shipwreck the entire economy. In a few short months, the crisis served to undermine a near-universal assumption of American, and western, economic competence; in contrast, China's economic credentials have been considerably burnished. The crisis at the same time exposed the huge levels of indebtedness that have sustained the American economy, accentuated since by the financial rescue package, while underlining the financial strength of the Chinese economy, now the world's largest net creditor with its massive foreign exchange reserves. Although hardly new, the crisis finally woke Americans up to the fact that China had become their banker, with all this meant in terms of the shifting balance of power.

But this was only the beginning. Immediately after the financial meltdown, the American economy contracted, and when it began to grow again, it was at a very slow rate. The Chinese economy, on the other hand, confounded expectations and continued to expand at a barely reduced rate, thereby emphasising the success of the government's stimulus package and the ability of the Chinese economy to withstand the worst western financial crisis for seven decades. To compound matters, it is now abundantly clear that the financial crisis raised the curtain on a new and protracted period of painfully low growth and greatly reduced expectations in the west, with the American economy -- like its European counterparts – facing the prospect of years of austerity, with swingeing reductions in both government and personal expenditure, combined, for Americans at least, with the urgency of greatly reducing its trade deficit. Burdened by sovereign debt crises in Greece, Ireland, Portugal, Spain and Italy, the European integration project threatens to unravel, condemning the euro to oblivion in the process. Meanwhile, the western economies continue to teeter on the brink of another recession, with a further banking crisis and a full-scale slump not to be excluded. In contrast, the Chinese, buoyed by huge foreign-exchange reserves, large trade surpluses and a high level of savings, can look forward to many more years of fast economic growth. All this adds up to an extraordinary and irreversible shift in power from the west in general, and the US in particular, to China.

. . . history seems likely to judge America's political system extremely harshly. The political class (as also in the case of Britain) allowed itself to become the captive of the financial sector and its interests. The American government has since found itself in a state of near paralysis, beleaguered by a polarised society, its authority constantly questioned and impugned, decision-making too often bought by powerful lobbies, of which Wall Street remains by far the most influential. It is difficult to think of a time when the American government has seemed less capable of responding to and dealing with the profound challenges that the country faces. Of course, it boasts a democratic system that has been the envy of much of the world, but that is little compensation if it is unable to deliver what is the sine qua non of a state, namely the ability to govern, cohere and lead society. . . .

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Martin Jacques is a journalist and academic. He is currently a visiting fellow at the London School of Economics Asia Research Centre and at the National University of Singapore. Jacques previously edited Marxism Today and co-founded the think-tank Demos in 1993. He writes the World Citizen column for the New Statesman. The second edition of Martin Jacques's When China Rules the World: the End of the Western World and the Birth of a New Global Order has just been published by Penguin as a paperback.

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[Russia and China are leading the charge. More than a year ago, the two nations made good on talks to move away from the dollar and have been using rubles and renminbi to trade with each other since. A few months ago the second-largest economy on earth - China - and the third-largest economy on the planet - Japan - followed suit, striking a deal to promote the use of their own currencies when trading with each other. The deal will allow firms to convert Chinese and Japanese currencies into each other directly, instead of using US dollars as the intermediary as has been the requirement for years. China is now discussing a similar plan with South Korea.

Similarly, a new agreement among the BRICS nations (Brazil, Russia, India, China, and South Africa) promotes the use of their national currencies when trading, instead of using the US dollar. China is also pursuing bilateral trades with Malaysia using the renminbi and ringgit. And Russia and Iran have agreed to use rubles as a means of currency in their trades.

Then there's the entire continent of Africa. In 2009 China became Africa's largest trading partner, eclipsing the United States, and now China is working to expand the use of Chinese currency in Africa instead of US dollars.--Marin Katusa, "So Long, US Dollar," caseyresearch.com, April 25, 2012]

Paul Craig Roberts, "Brewing Up a Conflict With China: A New Long-Term Cold War," counterpunch.org, May 1, 2012

Noam Chomsky, "On the History of the U.S. Economy in Decline," counterpunch.org, May 8, 2012