Extreme Inequality Creates Global Disorder

Global inequality is a security risk—and not just because it breeds resentment, violence, and mass migrations. It also makes the entire system prone to collapse.

By James K Galbraith and cross-posted from The Nation

The principal driver of global inequality—both within and between countries—is the global financial regime. This has been a feature since the end of the Bretton Woods system in 1971, with recurrent catastrophic effects following the onset of the 1980s debt crisis, including the collapse of the socialist nations and the 1997 Asian financial crisis. Back then, it was a conservative stroke of genius to institutionalize “market exchange rates” on a global scale. Those markets work well enough for rich nations, but they guarantee problems for everyone else. Each exchange crisis has wiped out a decade or more of progress against inequality, as anyone in Brazil, Argentina, Mexico, or much of Africa will tell you. The rise of China, on the other hand, has everything to do with its refusal to play the game of open capital markets. And while inequality in China rose rapidly for internal reasons beginning in the 1990s, it stabilized more than a decade ago.

Global inequality is a security risk—and not just because it breeds resentment, violence, and mass migrations. It also makes the entire system prone to collapse. For over 40 years, the United States has enjoyed the advantage of issuing the world’s reserve currency, running a trade deficit, and living well off the work of others. But the respect that would be due to exercising that role responsibly has been squandered by our behavior.

Reckless interventions have demonstrated the limits of military power—as our professional soldiers can attest, and as the current state of Afghanistan, Iraq, and Libya demonstrate. A self-centered economic strategy is only a bit more subtle. Yes, even when a financial crisis originates in the United States, as happened with the subprime-mortgage debacle of 2007–09, funds still flow to the safety of the US dollar and government bonds. So long as this pattern holds, the United States actually benefits from economic insecurity and instability, both at home and abroad. But you have to be very optimistic—or flat-out crazy—to think that this can go on indefinitely

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