Brad Setser

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The changing balance of global financial power

by Brad Setser
August 14, 2008

Not only do we live in a new “age of authoritarianism,” but we live in a world where autocratic governments increasingly finance democratic governments.

Consider a chart that shows the increase in the foreign assets of the world’s more authoritarian governments v the increase in the foreign assets of the world’s democratic government.


Right now, autocratic governments generally don’t finance other autocracies. China’s capital account is closed to Gulf sovereign funds (nearly) as tightly as it is closed to private hedge funds. China’s government is no more able to buy a stake in the Gulf’s national oil companies than private investors. China, Russia and the Gulf are all building up large financial claims on the United States and Europe far faster than they are building up financial claims on each other.

In the first chart, I included Russia and Venezuela alongside the world’s authoritarian governments. That can be debated. Both Putin and Chavez have authoritarian sides, but both have also put their governments up for a vote. But separating Russia and Venezuela out doesn’t change the story much. The rise in the foreign assets of the world’s less-than-perfectly-democratic government is driven overwhelmingly by the rise in the foreign assets of the People’s Republic of China and the Gulf monarchies.


Both graphs, incidentally, are drawn from a paper that I have been working on over the summer, so stay tuned. The graphs include estimates for new inflows into sovereign funds (and the increase in the foreign assets of Chinese state banks) as well as the growth in central bank reserves. And yes, they indicate that the increase in the foreign assets of the world’s governments – particularly governments in the emerging world — over the last four quarters has been truly extraordinary.

Earlier this week Gerald Seib noted — quite correctly — that high oil prices have increased the financial power of the world’s less-than-democratic oil exporters. Throw in the fact that high oil prices have yet to put a dent in China’s current account surplus or the accumulation of China’s foreign assets, and the shift in financial power away from from democratic governments is even more pronounced.

To me, one of the world’s greatest ironies is that US dependence on authoritarian governments for financing has soared over the last four year. US rhetoric hasn’t matched financial reality.

Though I guess it is equally ironic that Russian purchases of Treasuries over the past few months have helped to finance the current US aid mission to Georgia.

One thing is clear: the world’s biggest financial powers are no longer the world’s large democracies. A gathering of the countries that matter for global economic coordination will no longer be a gathering of the leaders of the world’s big democracies. Coordination among the large democracies was never easy — and likely will only get harder as additional countries have to be brought in.

And that I suspect this is among the least significant — though among the most visible — ways the world will change as financial power moves away from the world’s big democracies.

Update: Both Paul Krugman and Steve Waldman touched on similar themes today. Both are worth reading.



  • Posted by Twofish

    I really don’t think it makes that much of a difference. Saudi Arabia, Russia, and China may be authoritarian governments, but for the most part they are governments that don’t seek to overturn the world economic system, and actually want to make relatively few changes to the world political system. China’s only geopolitical aim is reunification with Taiwan. Other than that it doesn’t care what other governments do (and it gets into trouble precisely because it doesn’t care what other governments do).

    I really do think that the last few weeks marks the end of some sort of era. In the space of a few weeks, you’ve had the collapse of the Doha round, a Russian incursion into Georgia that the West can do pretty much nothing about, and the Beijing Olympics.

    I do think that there was an golden opportunity that was squandered somewhere. At some point someone decided that rather than spread democracy by deepening and improving the quality of democracy in the United States and letting the results speak for itself, that the way of spreading democracy was to march through the world and impose it at a the point of a bayonet. Trouble with that approach is that no one looked at the cost of a bayonet.

    I suppose though things could have been much, much worse. If you look at what the neoconservatives were talking about in 2002, Iraq was merely the first step in a global crusade for democracy that would have meant war with Iran, Russia, and China.

  • Posted by MMcC

    bsetser: “China’s capital account is closed to Gulf sovereign funds just as tightly as it is closed to private hedge funds.”

    I thought this article gave a compelling visual aid to the shift in balance of spending power, so I hate to nit-pick, but… I’m not as certain as you are of the truth of that statement, although I may have misread your intent.

    On Gulf states, we can’t know who rents quota, but I’d discount that as unlikely avenue of approach for Gulf sovereign funds. For publicly listed shares, I don’t have data, but there’s little evidence to suggest reportable holdings from Gulf investors. For private and pre-IPO stakes, I think it’s a different story: we know that Dubai is now one of the key stops for private Chinese companies raising capital. They’ve been flying there weekly for more than a year now and I doubt that pattern would have continued in the absence of deal successes.

    It is widely believed here that Gulf money forms one of the key components of private equity investment here, of which there is no shortage. Moscow and Dubai are two of the most typical flights taken out of Shanghai/Beijing for PE guys who are sourcing deals here. I don’t work (and haven’t worked) this side of the street, so I can’t describe the mechanisms by which cash is moved into China for such investment. I do regularly overhear golf course discussions by PE principals about who’s more annoying to have as an investor in China: Russians, Americans or Arabs.

    Private hedge funds (Western and domestic) most certainly are here and have been for years. It’s not at all difficult to go long a domestic stock while shorting the CSI 300 (or equivalent) from abroad, or vice versa. It’s just expensive (although significantly less so of late)… For other hedge purposes, things are less straightforward and the majority of the hedgies I meet here are somewhere on the PE/alt borderlands.

  • Posted by guest

    Nice to see that.

    Chavez is autocratic and G.W. Bush is democratic…

    Brad, you should start working for Council of Domestic Relations!


  • Posted by anon

    Has the US depended on authoritarian governments for financing, or have they depended on the US for export revenue?

  • Posted by bsetser

    MMcM —

    Tis certainly true that the Gulf SWFs were major buyers of the IPOs of China’s state banks, tho the sums involved are small relative to the Gulf’s external surplus. I don’t doubt that Gulf funds (and wealthy individuals) are major players in the PE world. though my sense was that there were limits on what a foreign PE firm could do in China — see Carlyle. And my sense is that the domestic PE industry is domestically financed.

    All in all, i would be surprised if China absorbed more than say $10b of the Gulf’s maybe $350b current account surplus — which would meet my definition of small.

    I probably overstated things a bit; i should have noted the SWFs investments in the state banks as a (limited) exception to the rule, but I stand by the argument that:

    a) China’s capital account is basically closed not open to portfolio flows, with (limited) exceptions.
    b) Two surplus regions don’t finance each other in equilibrium (tho some GCC flows could be showing up in China’s reserves)
    c) the overwhelming majority of the Chinese and Gulf surplus is still invested in the US and Europe.

  • Posted by Dennis Redmond

    Brad –

    Good analysis, but Venezuela and Russia are not autocracies. They are bona fide democracies. This doesn’t mean they’re perfect or above criticism – they have plenty of flaws. But Chavez and Medvedev were democratically elected, and have genuine mass support for their legislative programs of resource nationalism and social investment.

    If the US government was serious about democratizing the world, it would applaud Russia and Venezuela as models of democratization and civil society development for the other petro-exporters — not just the Middle East, but countries like Angola, Algeria, and Nigeria.

  • Posted by MMcC

    bsetser: “a) China’s capital account is basically closed not open to portfolio flows, with (limited) exceptions.
    b) Two surplus regions don’t finance each other in equilibrium (tho some GCC flows could be showing up in China’s reserves)
    c) the overwhelming majority of the Chinese and Gulf surplus is still invested in the US and Europe.”

    That I agree with wholeheartedly, although I’d suggest that the number of opportunities for really large-scale Gulf investors are more likely to increase than decrease in the next two years. We’re not miles away from a regulator-approvable structure for mega-development trusts – land, infrastructure, development and project management all in one package – that I think many Gulf investors will find tempting. There aren’t that many places you can safely drop USD3-5bn+ in one go while both putting a smile on the recipient government’s face and not necessarily being the lead investor…

  • Posted by mark turner

    You may not agree with its government, but calling Venezuela “not a democracy” is simply incorrect, Brad. This is not a point of discussion.

    I’m not smart enough on Russia to comment.

  • Posted by bsetser

    I take it that I probably should have just used graph #2 then. I tried to qualify things in the paragraph that followed the first graph, but i guess not sufficiently.

    obviously putin and chavez have been elected. there is certainly a sense that the russian election was less than free and fair — largely b/c of the government’s control over the media and b/c of its ability to access financing from firms like Gazprom. My sense is that Chavez has some authoritarian tendencies (and i fully realize that US democracy is less than perfect).

    Putting Russia together with the world’s democracies when a US presidential candidate is suggesting kicking it out of the g-8 didn’t feel right, but lumping it together with china and the gulf may push too far —

    any suggestions for a label that doesn’t create enormous reactions and detract from the argument?

    I can also adjust the label on graph 1.

  • Posted by Simon

    Russia failed due to labor mis-allocation. America and other western countries may fail through capital mis-allocation which as I understand it is much the same thing.

    Russian communism failed in Russia by economic failure. American capitalism may fail similarly. It will suck for all of us if does.

  • Posted by bsetser

    p.s. I am having a bit of trouble uploading a revised graph 1 through a slow wireless connection; it may need to wait for the morning.

  • Posted by Franz

    China’s state of government is in flux, who knows what it will be 15 years from now. China will never allow a massive revolution like the ones that created the USA or modern Russia, post-USSR.

    But China really is into the slow evolution thing. They are making improvements in things like contract law, intellectual property law, the rule of law in general, independent courts, even referenda and local elections to get rid of truly awful authorities.

    Will this make China a democracy? Well, not quite, at least not in the USA mold. But they won’t really by authoritarian, either.

    Even pro-democracy activists in China don’t trust the USA model, considering that our “democracy” has basically broken down into ideologically-rigid factions, with a misinformed populace and politicians bought and sold by business interests, along with truly embarrassing shouting matches like the ones in the Democratic and Republican primaries in 2008.

    China’s moving more toward a kind of “meritocracy” of government, with some kind of vetting for choosing leaders who have actual skill– but tempered by a quasi-democratic referendum system to kick out leaders if they become really awful. It’s checks and balances with some elements of democracy, but not a US-style system. It’s Chinese sui generis.

  • Posted by Edward Hugh

    Hello Brad,

    Fine post I think. Looking at what has been happening in Georgia in the last week or so, Russia would now seem (impelled I feel by its ever deteriorating demography) to be heading on the one hand along the now well trodden path (Libya, Venezuela etc) of oil financed “rogue states”, while on the other along the path laid out in the ex-Yugoslavia of ethnic-hatred-driven inter-communal strife. Ukraine may well now be the place to watch.

    But I also just had a rather “naughty” thought about the underlying issue you are raising. Basically the US path is being kept sustainable from two quarters right now, the one you are drawing attention to, and also from the desire on the part of some Europeans to replace the hegemony of the dollar with the hegemony of the euro. Let me explain.

    As you doubtless already know US headline
    inflation just hit 5.6%. The issue is, is this a bad thing?

    In the short term it obviously is, since consumers get angry, and it
    hits purchasing power (although if the currency also adjusts downwards in the
    longer run it does restore competitiveness to wages, which are effectively reduced if the central bank maintains some reasonable degree of control on second round effects, which as far as I can see they are doing on the wages front).

    But what about in the mid term? The big issue as we all know in the US is the housing
    market, and the levels of domestic indebtedness. Now inflation basically helps
    those in debt, and harms savers. But as luck would have it people in the US do a lot of
    borrowing, and comparatively little saving. The saving is done for them – as you so ably point out – by the petro dollar people, the Chinese and the Japanese. So basically they are the ones who take the hit. The US has effectively exported – or “outsourced” – one part of its problem (at this point you may well say, yes, but for how long, and the answer would be for as long as these people don’t find something rather better to do with their money).

    This is one reason why I think Bernanke has the room to manoeuvre on prioritizing the correction and mid term growth over short term inflation that, for example, the ECB doesn’t have. With inflation at 5.6% and house prices only stationery the US market would soon enough correct, and, as we
    know, house prices are falling. So with – as Yves Smith continually points out to us – government and households and companies all heavily in debt, inflation could be argued to be in the national interest (basically this was what Keynes argued in his excellent pamphlet “How To Pay For The War”, although clearly he
    wasn’t thinking about Iraq) – always assuming of course that one group of “suckers” are prepared to keep stepping up to the plate to do your saving for you, and while another group of “suckers” – we Europeans – maintain our enthusiasm for seeing the euro supplant the dollar, thus allowing a lower dollar to soak up the most
    of the competitiveness issues, while double whammy “suckers” like the Italians and the Spanish get to test the pain bearability threshold.

    What is most curious in all this is that not only has the fortress of market capitalism just managed to socialise a big chunk of its financial system, but that what was once the bastion of Friedmanite monetarism just became the last remaining redout of what is really pretty orthodox Keynesianism: what you don’t want is anything even vaguely resembling long term debt deflation, so burn off the fat lads, burn off the fat.

    Just a thought,


  • Posted by Speaker73


    Solid analysis.

    In response to Dennis above – “Venezuela and Russia are not autocracies. They are bona fide democracies.”

    This is simply not true. Leaders in both countries were elected, but in the absence of a free press, free right to association, and some semblance of rule of law, the election itself is almost a meaningless exercise. I mean, Robert Mugabe recently won an election. Is Zimbabwe a bona fide democracy?

  • Posted by Rien Huizer


    Looks like you ventured outside ecomonist’s territory into comparative politics, where scholars waste each others’ time by trying to classify countries along the democracy/autocracy (“dictatorship sounds so rude, you never know if some new university is going to look for visiting politics professors and you would not like to have offensive language on your record would you?”). I believe the APSA follows the Pzreworski convention, i.e. any country in a long observation period (say 40 yrs) without a political rotation (i.e. a ruling party losing power) is non-democracy. Venezuela and Russia are then clearly not non-democracies, although their rulers may be an acquired taste (I guess Putin is alright, but Chavez is a creep, or is it the other way around, and let’s not forget, a guy called Hitler did pretty well in probably the most democratic constitutionality ever designed (by a fellow called Weber); he then did the right thing and closed the door behind him).

    Anyway, there are some genuine non-democracies in the set, China, the Gulf plus a number of countries -and this is where your analysis could have become very interesting- that are either (1) institutionally deficient democracies (in my book, countries that need supervision by a responsible parent) Nigeria for instance, (2) deliberative non-democracies like Abu Dhabi (citizens may not live in a democracy but they are probably not that different from the classical Athenians who relied on foreign workers (“slaves”), independent residents and overseas investments to support their peculiar social preferences; Abu Dhabians can influence what the ruler does, or (3) institutionally proficient non-democracies (i.e. no rotation) like Singapore and until 1993 (more or less, it was fluke, should not count), Japan. In fact, many Asian democracies conform to the Pzreworski criteria but still, one would have a lingering feeling that something could be improved..

    So where does an economics analysis using a dichotomous comparative politics model lead to? I have no idea, but intuitively, being increasingly dependent on guys with an authoritarian bent is not the sort of future I would look forward too. Even if they are nice today. Problem is, can we avoid it. Democracies have some inherent problems (that is why they need dictatorial carve-outs like an independent central bank and independent judges) and modern mass politics are not making that easier. The current US administration has been able to undermine that quite a bit, not exclusively as a consequence of its won actions of course, but still, Noblemen would have made more of an effort). Anyway.

  • Posted by bsetser

    Rien –yes, i got over my head by venturing into comparative politics. My training in political science is rusty. And this is obviously a loaded topic that I needed to handle with a bit more care — point taken.

    Edward Hugh — I think you hit on all the key points about high inflation (which Steve Waldman also touches on). it helps debtors to the extent that the inflation was unanticipated and not factored into rates. At least to a degree. and it hurts creditors — notably external creditors — to the extent it leads to a dollar depreciation that wasn’t priced in, or to the extent that external creditors care about their US purchasing power.

    Now, the $ has increased recently against the major currencies and against oil, as long as that continues external creditors shouldn’t worry too much about the high inflation level — though they clearly lost when the $ slid relative to the euro and oil earlier. They should worry though if more depreciation is in order.

    and i am not sure a world where:

    a) home prices are sliding in nominal terms (cutting into the value of most individuals largest assets/ making it hard to repay nominal debts)
    b) wages aren’t keeping up with inflation
    c) there is a big wealth transfer to commodity exporters

    is all that great for american consumers. it produces adjustment, but it is of the unpleasant kind. a more pleasant kind of inflationary adjustment would require that asset prices of say homes stay constant in nominal terms while wages and prices rise, cutting into their real value and making the asset more affordable again. but that is precisely the kind of inflation that would raise worries at the fed (see krugman). so i don’t think we are in waldman’s inflationary world right now …

  • Posted by Dave Chiang

    The U.S. doesn’t like foreign democratic elections that don’t go its way. The Palestinian people freely elected the Hamas party on the West Bank and Gaza territories that was promptly overthrown by the Israeli Army with full support of the Bush Administration. Strategic ally Saudi Arabia, is completely controlled by the 4,000 Al-Saud Royal family princes. In Saudi Arabia, if you are not an Al-Saud family member, you are literally a piece of dirt. By contrast, Iran holds popular elections as a Muslim democracy. President Ahmadinejad was elected by huge popular margin by the Iranian people. Too bad that Ahmadinejad is at the top of the “hit list” for regime change with 5 Nuclear Aircraft Battlegroups enroute to the Persian Gulf at this moment to enforce a Naval blockade to cripple Iran’s economy. And while China isn’t a democracy, the Communist government has to provide improving living standards and greater economic transparency to stay in power. From the IHT, “Eight out of 10 Chinese say they are satisfied with the way things are going in China”. That’s somewhat better than the US popular ratings for the Bush Administration. In the US democracy, the people are provided with the freedom to protest as much as they want, but the Washington Consensus elites still do whatever they wish such as illegal wars in Yugoslavia and Iraq, taxpayer bailouts for politically connected Wall Street firms, etc.

    China poll shows most are content

    BEIJING: Eight out of 10 Chinese say they are satisfied with the way things are going in China, according to survey results, in a sign that robust economic growth is outweighing social tensions over the income gap between rich and poor.

    The 81 percent satisfaction rate is an increase from the 72 percent recorded in 2005, the Pew Global Attitudes Project said in a public opinion poll of 15 countries. Those Chinese who were unhappy with the state of the nation dropped to 13 percent, from 19 percent a year ago, according to results released Tuesday.

  • Posted by fatbrick

    I really do not think that it is a big deal. 20 years ago, the capitalist investors funded China when it began to open. People back then have doubts too. Would the foreign money control the country eventually? Some ultranationists still argue that China has falled in foreign interests’ hands. Now I see the same reponse here. A little bit ironic.

    Take a different angle, why don’t you see Beijing has a pretty strong faith in US’s long term economic future?

  • Posted by Dave Chiang

    Foreign direct investment in China up 44.5 percent
    by Staff Writers
    Beijing (AFP) Aug 12, 2008

    Foreign direct investment into China rose 44.5 percent in the first seven months of the year compared with the same period last year, the government said Tuesday.

    Foreign companies invested 60.7 billion dollars in China in the period from January to July, the commerce ministry said in a brief statement posted on its website.

    The ministry did not give a figure for the month of July alone.

    Foreign direct investment is one of the factors behind rapid growth in China’s foreign exchange reserves, which topped 1.8 trillion dollars at the end of June.

  • Posted by Laurent GUERBY

    “My sense is that Chavez has some authoritarian tendencies”

    That’s MSM bias showing.

    Look at the guyes who ran a coups d’etat in Venezuela, they’re not in prison and free to run around and present themselves to elections.

    I’m curious on how you match “authoritarian” with the above fact, would you mind elaborating?

    If you dig for about five minutes to get past MSM disinformation you will find plenty of interesting facts about Venezuela. And Putin and Chavez are not at all at the same level…

    For your own information, and since it’s oil related (data-wise), I recommand you read the following Guardian article about Transparency International and Venezuela oil company PDVSA:

  • Posted by bsetser

    Fatbrick —

    there are a couple of key differences

    a) foreign investment in China was private; Chinese investment in the US isn’t

    b) foreign investment in China was generally FDI in plant and equiptment; Chinese generally buys US bonds

    c) It is hard to square the expected loss on China’s investment in the US with a sense that the investments are motivated by faith in the US. they seem far more to be a byproduct of a domestic Chinese policy decision to resist appreciation which has as a byproduct a need to accumulate reserves than a byproduct of a decision that we think there are better investment opportunities in the US than in China (or in the world’s resource exporting economies)

    my 2 cents

  • Posted by Anon1

    Brad: Russia is starting to shift its oil trade into Rubles. How will this affect the USD???

  • Posted by bsetser

    the dollar share of Russia’s reserves (now close to $600b) matters far more than whether or not Russian oil settles in dollars or rubles. if you need to pay rubles for oil, you need to trade dollars for rubles — and right now, that trade often involves the central bank (not so much recently — Georgia and all), as the Russian central bank is intervening to resist RUB appreciation. so long as that continues, Russia will end up accumulating dollars.

    in the first instance, the oil companies get paid in $ (and pay taxes to russia’s treasury in dollars), in the second instance, oil buyers trade dollars for rubles with the central bank (which accumulates dollars) and then pay the oil cos in rubles (and the oil cos pay taxes in rubles). either way, the russian gov ends up accumulating dollars.

    there are circumstances in which the currency used for pricing matters (forward pricing especially) but i suspect that what really matters is the composition of the foreign assets of the big oil exporters …

  • Posted by Jesse

    Perhaps we are witnessing the result of a capitalist system encumbered by years of imbalance, misallocation of capital and malinvestment.

    How can an economy so heavily weighted to consumption and financial speculation possibly be productive of real wealth?

    It has little to do with democracy versus autocracy. It has more to do with priorities and policies.

  • Posted by Jesse

    As I recall, the 1920’s saw a growing inequality in the distribution of wealth up to the onset of the Great Depression.

    One might consider that this sort of ‘moving the wealth around the plate’ is not a sign of a robust and sustainable economy.

    I believe we are in a similar situation today, based on figures I’ve seen, although as always our tortured redefinitions of deflators tend to distort a bit.

  • Posted by fatbrick


    You are right on the differences. It is all about economic development. Private money tends to flow to the undeveloped areas to pursue the excess return. Public money tends to go to the developed areas for safety and long term stability. There is nothing political about it. Lots of Asian and Latin American countries increased their fx reserves in the past decade. It really has nothing to do with political system.

  • Posted by gillies

    who voted in alan greenspan ?

    – and do they intend to issue an apology ?

  • Posted by B

    “Both Putin and Chavez have authoritarian sides”

    So does Bush and Cheney (a well-documented one for the letter), what’s your point? The division you present is basically between us, the good guys, and them, -obviously- the bad guys.

    It’s like someone in the previous thread call Chinese and other “not-ours” governments clowns. Seems like quality of the discussion is deteriorating and “we” are running of arguments based solely on economics.

  • Posted by Dave Chiang

    During the Cold War, Russia and China were the reactionary powers bent on exporting revolutions to foreign sovereign nations across the developing world. Ironically, Russia and China are today, the status quo powers that seek to maintain the existing multi-polar world political order. Today’s U.S. foreign policy under the influence of Neo-conservative think tanks is reactionary. What is really happening in Georgia to incite massive Russian retaliation.

    Mikhail Gorbachev, writing in The Washington Post on August 12, observed:

    “What happened on the night of Aug. 7 is beyond comprehension. The Georgian military attacked the South Ossetian capital of Tskhinvali with multiple rocket launchers designed to devastate large areas. Russia had to respond. To accuse it of aggression against “small, defenseless Georgia” is not just hypocritical but shows a lack of humanity. . . . The Georgian leadership could do this only with the perceived support and encouragement of a much more powerful force.”

    “The U.S. has long been involved in supporting ‘freedom movements’ throughout this region that have been attempting to replace Russian influence with U.S. corporate control. The CIA, National Endowment for Democracy . . . , and Freedom House (includes Zbigniew Brzezinski, former CIA director James Woolsey, and Obama foreign policy adviser Anthony Lake) have been key funders and supporters of placing politicians in power throughout Central Asia that would play ball with ‘our side’. . . . None of this is about the good guys versus the bad guys. It is power bloc politics . . . . Big money is at stake . . . . [B]oth parties (Republican and Democrat) share a bi-partisan history and agenda of advancing corporate interests in this part of the world. Obama’s advisers, just like McCain’s (one of his top advisers was recently a lobbyist for the current government in Georgia) are thick in this stew.”

    “Washington’s bloody fingerprints are all over the invasion of South Ossetia. Georgia President Mikhail Saakashvili would never dream of launching a massive military attack unless he got explicit orders from his bosses at 1600 Pennsylvania Ave. After all, Saakashvili owes his entire political career to American power-brokers and US intelligence agencies. If he disobeyed them, he’d be gone in a fortnight. Besides an operation like this takes months of planning and logistical support; especially if it’s perfectly timed to coincide with the beginning of the Olympic games. (another petty neocon touch) That means Pentagon planners must have been working hand in hand with Georgian generals for months in advance. Nothing was left to chance.”

  • Posted by bsetser

    B– my point is that the world has changed, and that the conditions that characterized most of the past 50 years, namely that a set of wealthy democracies (and yes, I know well of the imperfections of the US system and the veep’s expansive view of executive power) were also the world’s most financially powerful countries has changed. any system of political categorization produces controversy — see the discussion above. but i don’t believe that “money is money” and that a world where the US deficit is financed by the governments of Russia, China, Singapore, Saudi Arabia, and a few Gulf sheikdoms is quite the same as a world where deficits are financed by private investors in Japan and Europe. Lots of folks on the street don’t want to touch this b/c well, non-democratic governments’ investment funds now produce loads of revenue (and supply capital) but it seems a bit naive not to note that the US isn’t just financed by other governments, but it is increasingly financed by other governments that either:

    a) aren’t its political allies and have a different system of government (how different can be debated — China doesn’t hold elections; Russia does but they aren’t anchored in the same institutional structure found in say Europe)

    b) are political allies but have quite different systems of government — and while the government itself may be allied with the Us, much of population doesn’t support the alliance (that is one reason why the gulf funds aren’t trnasparent about their holdings; they don’t want their own population to know how much financing they provide the US).

    Doesn’t this set of circumstances warrant a bit of discussion?

    You are right to say that I do prefer democracy to other forms of government. i put a high value on my vote and the ability to organize to change the government if it doesn’t perform well. I don’t trust even a meritocracy — and (twofish) i am not sure a true meritocracy would spend over 5% of its GDP subsidizing US borrowing, that seems like a decision driven by interest group politics and a fear of change.

    But I don’t presume that the US is always right: to me one of the biggest puzzles is why China / others have been so willing to finance the US over the past few years even as the US turned its back on the UN/ pursued less than ideal economic policies.

    Reducing my argument to US good/ others bad over-simplifies my argument enormously. But it is true that i do worry that the United STates need for financing from its current group of creditors is a constraint on its policy, and I am not sure that is a good thing —

  • Posted by Dave Chiang

    So why are Brzezinski and his backers in the foreign policy establishment demonizing Putin and threatening Russia with “ostracism, isolation and economic penalties?” What is Putin’s crime?

    Putin’s problems can be traced back to a speech he made in Munich nearly two years ago when he declared unequivocally that he rejected the basic tenets of the Bush Doctrine and US global hegemony. His speech amounted to a Russian Declaration of Independence. That’s when western elites, particularly at the Council on Foreign Relations and the American Enterprise Institute put Putin on their “enemies list” along with Ahmadinejad, Chavez, Castro, Morales, Mugabe and anyone else who refuses to take orders from the Washington.

    One state and, of course, first and foremost the United States, has overstepped its national borders in every way. This is visible in the economic, political, cultural and educational policies it imposes on other nations. Well, who likes this? Who is happy about this?

  • Posted by Twofish

    bsetser: i don’t believe that “money is money” and that a world where the US deficit is financed by the governments of Russia, China, Singapore, Saudi Arabia, and a few Gulf sheikdoms is quite the same as a world where deficits are financed by private investors in Japan and Europe.

    I certain think that it is different. The difference is that I think it is ***better*** to have global financial power being distributed evenly throughout the world, since it means that a larger fraction of the planet is connected to the global financial system.

    Also, I really don’t see why having financial power in the hands of unelected, non-democratic governments is that much worse than having financial power in the hands of unelected, non-democratic multi-national corporations, unelected non-democratic central banks, or unelected non-democratic international institutions.

    If anything having yet one more set of actors with different interests helps to distribute power and make sure no one country, one region, one type of institution gets too power. I think that’s a good thing, not a bad thing.

  • Posted by B

    “Russia does but they aren’t anchored in the same institutional structure found in say Europe”

    “i put a high value on my vote and the ability to organize to change the government if it doesn’t perform well. I don’t trust even a meritocracy — and (twofish) i am not sure a true meritocracy would spend over 5% of its GDP subsidizing US borrowing, that seems like a decision driven by interest group politics and a fear of change.”

    Discussions are good. However, until there is an agreement on what a democracy is, it seems that all this “democracy” rhetoric is empty, purely emotional and self-interested sorting out of those who we like from those whom we don’t. Obviously, American democracy is not a “real” democracy in the Greek sense. So, what is a democracy? Can we arrive at an agreement? Without a solid measure, “democracy” looks very much like a euphemism for “us”. China may as well advance “harmony” as a euphemism for them. I don’t know whether injecting this kind of division into economic analysis helps, we already know from the mainstream media and analysis who is “democratic” and who is not.

  • Posted by Twofish

    bsetser: To me one of the biggest puzzles is why China / others have been so willing to finance the US over the past few years even as the US turned its back on the UN/ pursued less than ideal economic policies.

    Because China cares about China and not the United States, and Beijing (rightly or wrongly) thinks that funding the US is in the Chinese national interest, and it probably is.

    bsetser: I do worry that the United STates need for financing from its current group of creditors is a constraint on its policy, and I am not sure that is a good thing.

    The one great fallacy of US foreign policy during the Bush administration was the believe that US economic and military power was unlimited. US foreign policy was always constrained, it’s just that the US interventions in Iraq caused it to hit its constraints.

  • Posted by bsetser

    2fish — i don’t see financial power distributed evenly right now. it strikes me as uncomfortably concentrated, even if the (pick you descriptive name)countries that have it haven’t necessarily used it —

    you can make a reasonable case that the ability to access financing from other countries has allowed the current administration more freedom from democratic accountability than otherwise would have been the case. financing a war with the sale of bonds to other central banks is easier than financing a way by raising taxes. and the regulatory price that would be associated with the use of taxpayer $ to recap the banks is a lot higher than the price extracted by SWFs.

  • Posted by FG

    2fish: I think it is ***better*** to have global financial power being distributed evenly throughout the world,

    Aside from brad’s argument, there is a saying: “The desert having not given competition to sand, great is the peace in the desert.”

    Jesse: It has little to do with democracy versus autocracy.

    I think a lot of what happened in the US has to do with the willingness of politicians to please masses, or at least create a benign climate. For example: their determination to avoid cyclical recessions, or to paper over bad effects by printing money.

    Franz: China will never allow a massive revolution like the ones that created the USA or modern Russia, post-USSR. […] Even pro-democracy activists in China don’t trust the USA model,…

    The main advantage of democracies is not necessarily that better decisions are taken. It is that they can change government without a revolution. Revolutions are expensive. It’s not obvious that China can avoid one in the long term, by integrating dissent in other ways. I’m also sure the Chinese government has many factions fighting each other.

  • Posted by Rien Huizer


    I think your problem -or rather intuition- is that the transfer of investable funds (or wealth or accumulated savings over investment, whatever) from the private sector (happens to be mainly western) to the public sector (mainly non-western -bad term, east-west if you see those nationalist Korean ads about the Eastern Sea), may or must have effects on other distributions or distribution mechanisms as well. And that is an interesting proto-issue. I wonder what would happen if we would look at

    (a) total national wealth (gvt accumulated surplus, net worth private sector non-financial business (perhaps stock market cap as a proxy, but a poor one in many countries), net worth banking, savings, life insurance system, forget housing, that i a consumption durable, usually financed to a high degree and anyway not monetizable to any degree as we are seeing now again) per capita, per country
    (b) national wealth/ gdp
    (c) national wealth/ cap and national wealth/gdp grouped along a scale of more or less democratic regimes (such scales exist, they may be subjctive but probably ueful fro this purpose)
    (d) the public sector share of national wealth

    I have never looked into the availability of data (probably poor in many countries, classification problems, maybe far too much noise especially for the construction of ratios) but it would be interesting to see if there are patterns in these data if collected also in the form of time series.

    Like we have seen massive shifts in the employment shares of most western countries over the past 100 years (up, down, up again after WWII, down again after Reagan, and fairly broadly spread (with a lag) across the OECD there may also be large, slow movements in these variables, so that if patterns show some kind of oscillation, that may provide some intuition at to what the next swing may bring in the form of accompanying effects. It is nor relly my field so apologies for the vague and non technical language.

    One thing one would come across would be two types of wealth that do not exist anymore (or hardly) state wealth of colonial empires and state wealth of centrally planned states. It could well be that what we see now is simply an effect of some of that former type wealth moving outside borders once closed (China, Russia) and looking for investment abroad despite plenty of investment need at home, and some of the former colonial wealth (Emirates, Brunei, Abu Dhabi, etc) showing up independently. Perhaps we need to re-colonize and re-erect the iron curtain? Or should we try to put our own houses in order? Who would elect the politicians promoting the latter?

  • Posted by Rien Huizer

    Apologis, Abu Dhabi (final para) should have ben Nigeria, Indonesia, Malaysia and Kazakhstan (in both camps))

  • Posted by Judy Yeo

    Not too sure if Russians or other countries, particularly in the EU see a non-authoritarian side to Putin or Chavez for that matter. Putting your government up for election is fine but is it democratic if it’s almost certain that there is no real alternative, i.e. you’ve eliminated your rivals one way or the other?

    Perhaps the more interesting hypothetical question is whether democracy will still prevail when taxes are unbearable, all manner of services are crap and the government is embroiled in its own mindgames politically and the wealthgap stirs frustration? NB any si milarities to real life situations is purely coincidental and unintended

  • Posted by Rien Huizer


    A very interesting question indeed and one that kept a prominent Singaporean very busy when he was young. The answer to your hypothetical question is: you do not want to know.

  • Posted by Rien Huizer

    Perhaps I should have added that few people in Western Europe believe that some of the Eastern new members have become a lot more democratic after the Russians left. But that may be traditional western european prejudice against these backyard countries that went from the Ottoman Empire to the Austro-Hungarian one, liked Hitler and then ended up in the Russian sphere of influence, usually with the same families manning the bureaucracy. The western European democracies are probably the most democratic countries on earth (but postmodernist of course and that makes them sceptical about everything, including their own -probably as history teaches us- temporary luck). Democracy is, as Stalin and Bismarck would have agreed, a luxury for communities that get it for free, because very few communities would make great sacrifices for attaining it if there was not a foreign power supporting elites likely to benefit from it. I am glad to live in such a democracy and hope it will last a while. But there is nothing natural or effortless about it. People are just not altruistic enough.

  • Posted by ak

    “But it is true that i do worry that the United STates need for financing from its current group of creditors is a constraint on its policy, and I am not sure that is a good thing”

    This group of creditors has just as much of a problem. They import dollars through CA surpluses, as well as from ongoing maturities of existing assets. What choices do they have without self-destructing their investment value in the US?

  • Posted by alajac

    When the people who are profiting from the wsale of bayonets are the main backers of the regime, war seems much more likely. Same thing happened with LBJ, he was also a Haliburton boy (back when they went by Brown&Root).

  • Posted by Stock Shotz

    Very interesting article and proof that we should drill in ANWR and the OCS. This huge transfer of wealth to our enemies is terrible for our future generations.

    I wrote a recent article on my blog about the need for increased domestic drilling.

  • Posted by Rien Huizer

    Stock Shotz,

    What a crazy idea. Try reducing consumption first, then smart substitutes (ethanol from corn is not so smart but gets votes in Iowa), then offshore drilling outside the arctic, then occupying Saudi, then occupying Russia, then ocupying Canada and Venezuela and then…

  • Posted by Rien Huizer


    On what kind of rifles do people put bayonets these days? Lee Enfields?

  • Posted by JKH

    The attached paper by Stephen Roach includes reference (via IMF) to the fact that the absolute sum of current account deficits globally is now about 6 per cent of global GDP.

    That surprised me. It suggests the US CA deficit is only about 1/3 of the global total. I though it was a much larger proportion of gross global imbalances.

  • Posted by bsetser

    I suspect the IMF total includes the (large) deficits inside the eurozone (i.e spain). Deficits in parts of eastern europe are also quite large. finally, High oil prices have also increased the size of many deficits.

  • Posted by FPR


    Comparative politics? You write for a website dedicated to US hegemony. There was always an unstated assumption behind your China monomania and that was the Chinese economic threat to US political power. It’s good you finally got it out in the open because capitalism has no country.

  • Posted by bsetser

    FFR — I am rather surprised that you consider China capitalist …

    state ownership. check
    state control over key prices. check
    state subsidies for key industrial inputs (like energy). check.
    state rationing of credit. check
    state intervention in the fx market. check.

    i fully realize that China’s success has been linked to some forms of liberalization — and the notion that China’s economy is planned form beijing is off. but describing China as capitalist is also — in my view — an oversimplication. China’s government is the one investing abroad, not China’s citizens.

  • Posted by don

    I hope this is not too far off topic, but there may be another balance changing – the balance between U.S. borrowing needs and the supply of excess saving from Asia and oil exporters. U.S. consumers are starting to spend less and, while part of the shortfall in borrowing demand is being made up with U.S. government borrowing, the U.S. current account (which is the net of public and private borrowing) is improving slightly. My question is, does this imply greater pressure needed to match the global supply and demand for credit and, perhaps, greater dollar appreciation?

  • Posted by Stormy

    Despite the flaws mentioned (how we classify countries), this post is a rough start on something very important.

    Question: Where is India?

    Suggestion: Include in your second graph the average price of oil for each year. What you will see that the shift you indicate occurred well before the rise in oil. While oil certainly has dramatically accelerating the wealth of the petro-states, it does not account for China.

    Following are just additional suggestions:

    1. Use slightly different categories: Democracies = Europe, Japan, North America.
    2. You might want to start with graphing each of the major countries…and tuck the rest under “Other.” Categories might suggest themselves then….those with important resources, for example.

    Again, you are on to an important shift–

  • Posted by Glen

    Brad says: i fully realize that China’s success has been linked to some forms of liberalization — and the notion that China’s economy is planned form beijing is off. but describing China as capitalist is also — in my view — an oversimplication.

    You are obviously right in terms of what criteria we would use to define textbook capitalist systems. Question is if those criteria are actually met, and whether ‘our’ systems are actually working like that today. I’m not so sure. Living in China, being Danish and having been everywhere in the Western world, I am convinced that I’ve never met a more naturally capitalist people than the Chinese though.

    Btw. when you look at China, the current is always interesting, but as Franz correctly said, China is about long term planning – and things are looking up, however gradual and often problematic.
    Napoleon adviced to let China sleep. In many ways China is only just about to wake up still, and the state investments are simply a preample to what will come when the Chinese people and companies have less constraints on them. I know its ‘off’ in terms of what you wanted to say, but I really think it is a necessary abstraction.

    Rien: Very interesting comments as per usual.

    Judy Yeo wrote: Not too sure if Russians or other countries, particularly in the EU see a non-authoritarian side to Putin or Chavez for that matter.


    The vast majority? Surely not. We have MSM too, you know… Most put the Ossetia debacle squarely on Russia and the obvious story is dismissed as the stuff of conspiracy freaks.
    Again – there’s very little enviable about the Kremlin rule if you believe that Western IDEALS are basically mostly good (and I profess to do so), but that doesn’t mean that the prism most Europeans use to understand for instance Russia isn’t ideologically and historically skewed to the n’th degree.
    That Russia is only – at best – quasi-democratic should be a trivial conclusion though. Politkovskaya cannot have died in vain that much.

  • Posted by gina

    I find it almost amusing that people call GW a democratically “elected” presided . He was appointed by the supreme court (a rather unconstitutional move on their part) the first round and blatantly stole the second term. Face facts we have lost the right to call America a democracy it is a fascist state rapidly devolving into a police state

  • Posted by Joe Hoofnagle

    This change in global financial power is a direct result of the insane US policy fir the last 30-40 years of not exploiting our natural resources (OIL) and instead, obtaining it from foreign sources by transfering OUR wealth to THEM. The environmental lobby has successded in weakening us to the point where we are now unable to defend ourselves against foreign aggression (such as 9-11). Ref the comments here about spreading democracy at the point of a byonet for example. HORSE SPIT!! Geo W was attempting to defend us against further aggresion by radical Islam by spreading democracy to them, and if we fail we die.

  • Posted by Joe H

    gina, I have news for you, the FIX was algore trying to steal fla by only recounting those precencts favorable to him rather than recounting the whole state of fla. It has since been proven that a recount of the WHOLE state proved GW won fla. Since the fla supremes agreed with algore’s attempt to steal fla in this manner, the US supremes was the only avenue left to save our dempcracy from the algore thievery. GW won; algore lost. GET OVER IT!!

  • Posted by Charley2u

    “Though I guess it is equally ironic that Russian purchases of Treasuries over the past few months have helped to finance the current US aid mission to Georgia.”

    I think this is on target, but misses the real insight: all US military spending since 1970 have been funded by the US trade deficit.

    The fact that the source has changed is of less consequence than this fact.

    The true consequence, for us, is that in the absence of such funding the vastly larger expenditures of the US versus the rest of the world on its military will have to come at the expense of domestic consumption.