NEW YORK (Reuters) - The world financial system is near a dangerous tipping point of uncertainty and chaos as economic and geopolitical power shifts away from the United States, according to a new book.
In “The World Is Curved: Hidden Dangers to the Global Economy” (Portfolio, $26.25), author David Smick argues that today’s vast pools of global liquidity mean financiers and political leaders are losing the ability to see financial risk ahead.
“A small village in Arctic Norway can see its entire financial future destroyed because its financial managers invested heavily in a Citigroup product called a collaterized debt obligation,” Smick said. “We are being forced to travel down an endless, dangerously twisting road of volatility.”
According to Smick, the signs for this breakdown in the world of international finance have been appearing in the global economic landscape for several years now. But the terrain has changed, and in this newly “curved” world it is harder to spot the bends and the risks in the road ahead.
“The message is not very optimistic, not only because it has become more difficult to spot imbalances, but also because the effectiveness of government solutions for such problems is more limited.
He cites the case of UBS, Switzerland’s largest bank, with major links to the United States, as an example. UBS’s total financial exposure is more than four times the size of Switzerland’s GDP. Result: In a crisis, the government wouldn’t be able to bail out the bank even if it wanted to.
And for Smick, the founder and chairman of a strategic market advisory firm in Washington, the U.S. mortgage and credit crisis is just the beginning and could become worse if policymakers aren’t careful.
He also argues the world is now moving away from the last quarter century’s model of globalization and free-flowing capital markets toward something more reminiscent of 19th century mercantilism — with backroom rivalries, dealmaking, ambitious national political agendas, and capital flows and commodities increasingly controlled by governments.
“One does not have to be a rocket scientist to see the picture emerging: financial wealth and power are moving away from the United States, Europe and Japan,” Smick said.
To be sure, he writes, globalization and the rise of new regional centers of power and money has been an impressive wealth-creating and poverty-reducing event, but America is not yet fully adjusted to this new global financial order.
“In this new globalized world, everybody wants to be an exporter and not a consumer,” Smick said. “And because America is so dependent on foreign capital to fund itself, it is imperative to the country to remain competitive and attractive to investors,” he said.
Smick points to the ongoing conflict between Russia and Georgia, and the concentration of U.S.-denominated assets in foreign central banks and sovereign wealth funds as indicative of the heightened financial and political risks the next U.S. administration will have to face.
“Unfortunately, as of now, neither presidential candidate seems to be prepared to address this tectonic shift in financial power,” Smick said. “There are huge questions about America’s future role in the world and the U.S. doesn’t seem to have a game plan yet.”
Reporting by Vivianne Rodrigues; Editing by Eddie Evans