The US has used its three phenomenal privileges to put the financial stability of the whole world at risk, “like a truck full of dynamite heading right toward us,” said the just appointed chairman of the International Advisory Board of the newly formed Universal Credit Rating Group (UCRG).
The first privilege: Control of the currency. As the world has become dependent on the dollar as “the only true currency of world exchanges,” the US decided to take advantage of it and has become the greatest debtor “without ever having to pay back that debt,” he said. “Americans have become the consumer of last resort”; and “Washington is financing its policies” with money borrowed from the rest of the world.
The second privilege: Control of the rules. It’s much easier to win if you’re the one deciding what the rules are, he said. It’s even easier if you can change the rules during the game.
The third privilege: Control of the risk. The US decides “what is risky and what is not,” that is, “where the money should go and where not,” he said. It’s “a way to redirect money” – by undervaluing risk in the West and overvaluing it in countries like China, India, Brazil, or Pakistan. And they can do it because the three American credit ratings agencies, S&P, Moody’s, and Fitch (OK, it’s co-owned by a French outfit, Financière Marc de Lacharrière) carve up 96% of the market. A huge advantage in a world dependent on debt.
To goose their profits, they’d slapped immaculate credit ratings on reeking junk that brought on the financial and economic crisis. But that crisis was “the beginning of a worldwide revolution,” he said: “the beginning of the end of these privileges.”
The speaker was Dominique de Villepin, a fallen and left-behind French politician, former Prime Minister under Jacques Chirac. On October 9, UCRG announced his appointment as Chairman of its International Advisory Board. A day later, he was attacking the US’s credit and dollar hegemony (MP3) at the Foreign Correspondents’ Club in Hong Kong.
UCRG was launched on June 25 in Hong Kong, where it will be headquartered. Its purpose: “to reform the existing global credit rating system,” explained Guan Jianzhong, its instigator and now chairman, and also chairman of Dagong Global Credit Rating of China. That “global credit rating system” boils down to S&P, Moody’s, and Fitch, whose liar ratings, as Villepin pointed out, had played a big role in the credit bubble that then morphed into the financial crisis.
So that a “similar global credit crisis can be avoided,” as Mr. Jianzhong put it, independent, more honest players would have to enter the market. Hence, UCRG, a joint venture between Dagong, Egan-Jones Ratings – the largely ignored credit ratings rebel in the US – and RusRating of Russia. The entity, he said, is to be a “catalyst” for reform of the global economy and “among the first architects of a new financial order, one which will benefit the entire planet.”
Calls to “de-Americanize” the world economy have been made for decades. And one gigantic multinational effort to dethrone the dollar as the sole world reserve currency, after making considerable progress, has landed in a spectacular heap of trouble: the euro. So the road isn’t exactly smooth. But since the financial crisis, it’s the emerging nations where the energy to change the world order is originating.
Before anything serious can happen in that direction, the Chinese yuan must become a fully convertible, freely traded currency – the official priority of Chinese leaders. In addition to numerous steps undertaken by the Chinese government along the way – currency swap deals with other countries, reducing the role of the dollar in its foreign exchange reserves, etc. – there are incessant calls by the official mouthpieces of the government, such as yesterday by Xinhua, for “substantial reforms” including “the introduction of a new international reserve currency that is to be created to replace the dominant US dollar.”
In May, Russia joined the fray with a Kremlin document that laid out Russia’s plan for the BRICS to reform the system. “Given enough political will of the leadership of the BRICS countries to advance their cooperation, this alliance can become one of the key elements of a new system for global governance, primarily in the economic and financial domains,” the document said. And it called for “a representative, stable and predictable system of world reserve currencies” [read the excellent report on that Kremlin document… Russia’s Plan For The BRICS To Dismantle The Dollar System].
So Villepin built his argument. Cheap credit led to a bubble in private, corporate, and public debt – the “global debt disease,” as he called it – that “artificially” created economic growth. The buyout fever hollowed out entire industries and left even the most efficient firms more fragile. And when the bubble blew up, the Fed flooded the market with even more liquidity. “A danger in the long run,” he said. “Instead of limited multiple bubbles, they have created a giant worldwide bubble.”
Credit has become “the key for the central nervous system of the economy,” he said. “Those who control credit, control the economy. Those who control risk control the credit. And those who control information control the risk.” That’s why credit ratings agencies – an American monopoly – have such enormous power.
The US reacted to the crisis by “clinging to the control of credit through its sole privileges, making them even more dangerous,” he said. The Fed “flooded the markets with fictitious money” to keep the US economy afloat. Banking reform in the US and Europe “created a club of well-behaved aristocracy” and “benefitted the restoration of the banking empires in London and New York.” And the continuing public deficits in developed countries are financed through cheap credit “based on their version of risk.”
He called for “a new architecture for the world’s finance and economy,” whose foundation would have to be “a reform of credit” and “a new currency exchange system.” It would end the principle of one “hegemonic currency” due the “obvious conflict of interest between the nation controlling the currency and the need of the world using it.” He already saw that “the hegemony of the dollar” was dwindling. But rather than an alternative currency, he saw a common world currency unit, calculated off the dollar, euro, yuan, and yen (he’d forgotten to ask Russia, Brazil, and India, apparently).
And he called for the creation of “the tools that will vouch for a more balanced circulation of credit around the world.” Most prominent among them: a new credit rating agency. “The three big agencies failed in their mission in 2007 and 2008 because of their methodologies and conflicts of interest,” he said. “Today we need new actors,” that would “create the new international system.” Hence his solution, Universal Credit Rating Group. Quoting Dagong Chairman Jianzhong, he said, “The system as it exists cannot go on. We cannot wait for America to reform it.”
Will all these efforts knock the US off its hegemonic credit and dollar pedestal next year? Not quite. It would take UCRG till 2020 to create a “global credit rating service system with a complete, new credit rating theory, methodology, system and world rating capability,” admitted Mr. Jianzhong. And it would take till 2025, “to have the capability of involving rating issues worldwide, provide credit risk information of every debtor economy for the world, and assume the responsibility of world rating.”
In total: 12 years. This is an estimate for how long it will take to dismantle the US dollar and credit hegemony in a pinprick-at-a-time manner, but systematically, relentlessly, as major countries are joining forces to organize themselves and put in place alternatives to the US-imposed system that has failed so miserably. The new system will certainly come into being – with massive consequences for the US. But it will take time. Unless it all blows up beforehand, which has a good chance of happening given the new and even bigger credit bubble that the Fed has put in place. And that would speed up the process.