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50/50 chance of US lapsing back into recession: economic historian

Renowned economic historian Barry Eichengreen speaks to Global India Newswire.

(This interview was first published by the Khaleej Times and the International Business Times.)

By Asif Ismail

Barry Eichengreen Eichengreen is a professor of economics and political science at the University of California, Berkeley. A former senior policy advisor at the International Monetary Fund, he is an expert on the history of the global monetary and financial system. His book "Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System" was published earlier this year. He co-edited "Emerging Giants: China and India in the World Economy," which was published last year. 


Is there any historical precedence to what the S&P has now done - downgrading the credit rating of the preeminent economic power of the era?

It is hard to think of a precedent. But then it is hard to think of an equally irresponsible debate among the political leaders of a preeminent power, where elected officials seriously entertained the possibility of default on the country's debt if that was necessary in order for them to attain their narrow partisan political goals.

China reacted to the S&P move very harshly. Do you think it has weakened the US position with regard to China?

I think the debt-ceiling imbroglio weakened US standing in the world, not just with China. But it was the spectacle of the debt-ceiling debate and not the S&P downgrade that mattered. S&P in its statement was simply affirming what everyone already knew.

You have documented the decline of dollar (as well as its rise in the last century). Will it hasten the inevitable fall of greenback?

Again, S&P is not a widely respected institution. Its statements have no implications for the dollar one way or the other. More important is that, in the eyes of many people, the U.S. Congress is no longer viewed as a respected institution. The latter certain represents a problem for the dollar, and for the U.S. more generally.

There are a lot of speculations about how the downgrading is going to impact Americans. In your opinion, what will be the biggest impact?

The impact will be zero. The S&P downgrade is irrelevant. As you saw, interest rates on U.S. treasury bonds went down on the first trading day following the downgrade.

How is it going to impact emerging markets, such as India?

The rating downgrade will have no impact on emerging markets like India because it has no impact on the United States. What the markets are reacting to is evidence of a weakening economy - growth even slower than expected. That's why both stocks and interest rates are going down. And a weaker US economy - worse yet, an outright double dip - will not be good for the world. It certainly will not be helpful for India.

How strong are the fundamentals of the U.S. economy?

Short term fundamentals? In that case, I'm increasingly worried, like many other observers about the danger of U.S. lapsing back into recession. After [Tuesday's] limp response by the Fed, I would put the odds of this happening at 50/50. Long term fundamentals? Here the U.S. continues to have the strengths of flexible markets, a start-up- and entrepreneurship-friendly climate. Aging infrastructure, cuts to education and training budgets, and a dysfunctional political system, on the other hand, do not bode well for the longer term.

In your opinion, what is the way out of the U.S. debt crisis? The rise of the Tea Party right has made any tax increase very difficult...

You're right. And without additional revenues it will be impossible to get a handle on our medium term fiscal problem. Incidentally, I'm not enamored of your use of the phrase "debt crisis." We had a crisis over raising the debt ceiling, which was a politically manufactured crisis and not a debt crisis. Debt service costs in the United States are low. Medium term fiscal challenges we have, debt crisis today we don't. That said, I agree that the rise of the Tea Party makes solving these problems more difficult. But what rises can also fall. There's another election in 2012.

You have argued that more than one currency can play the role of an international currency, including dollar. Do you think we are moving towards that?

I'm still of the view, that, 10 years from now, we will have three major national currencies competing for a place on the global stage: the dollar, the euro and China's renminbi. The dollar isn't going anywhere, though it could lose market share faster than otherwise if we see more political circuses like that which occurred at the end of July and beginning of August. The euro is one of those irreversible historical processes. The Europeans are going to have to figure out how to make it work. I continue to believe that they ultimately will, despite their best efforts to convince me otherwise. And the Chinese are making faster progress at internationalizing the renminbi than many people appreciate.

Are BRIC countries in a position to play a constructive role in stabilizing the international financial and monetary system?

The G20 and IMF are the main places where international monetary reform discussions are taking place. I know that India is an active and vocal participant. I'm told that China is increasingly outspoken as well.

Many thought the global economic crisis would lead to a reform of the IMF and other global institutions of governance. India and other countries are not happy that it hasn't happened so far in any significant way. Is their frustration justified?

Again, the G20 process is one important international venue where emerging markets are well and fully represented. The World Bank, I think, is making reasonable progress at becoming more transparent and accountable and listening to its emerging-market members. That leaves the IMF. We just saw a selection process with one candidate from an advanced economy, Ms. [Christine] Lagarde, and one candidate from an emerging market, Mexico's Augustin Carstens. The playing field wasn't exactly level, but at least - for the first time - there was a playing field. I certainly agree that the IMF should move faster in its reform efforts. We'll soon find out whether Ms. Lagarde agrees. (Global India Newswire)

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