Where do quantitative easing and other kinds of unconventional policies fit into all this?
These are essentially monetary policy measures driven by central bank policy-making. They have no role to play in the supercycle other than weakening the dollar, sterling, yen, etc., and so pushing up commodity prices and thereby imparting a “lift” to the upleg of the supercycle. This is, of course, not the intention of the central banks that launch these policies, but it is the inescapable effect.
We have seen statements from both China and Japan that they are prepared to buy eurozone debt in order to play their part in helping to stabilize Europe and the euro. What is your reaction to this?
I think that Chinese and Japanese money will be largely symbolic here, but the Japanese have been down this road before. During the worst of the Asian crisis, in late 1998, the Asian Development Bank convened a special meeting at which the Japanese finance minister offered to provide around US$100 billion in seed capital to create an Asian Monetary Fund. At the time this made the United States very nervous at the prospect of Japan increasing its influence in Asia, and the Clinton administration sent their man to stop the proposal in its tracks. The Clinton administration argued that markets had to find their natural equilibrium.
That argument, of course, will not work with the eurozone crisis, and we may find that Europe’s appetite for Japanese and Chinese money turns out to be much stronger than anyone anticipates. That raises the question of Asian influence in Europe, but you also have to look at the way substantial support from Japan and China would play in the light of the current weakness of the euro. This raises the whole notion of the global reserve currency. Today, there is no alternative in terms of depth and scale to the US dollar, and where a year or two back the euro was being offered as a candidate, it now looks far too much the worse for wear. Because of this I cannot see the Japanese and Chinese wanting to transfer serious amounts of their dollar reserves into euros. Moreover, the Germans, the French, and the Dutch, who are very influential in the European Economic and Monetary Union (EMU) are historically very suspicious of Chinese intentions and are likely to want to persuade the Greeks and the Portuguese not to depend too heavily on the magnanimity of the Chinese and Japanese, especially the former. However, we have already seen China making very substantial investments in Greece through the crisis.
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