Constricting Debate in the Public Square: The Case of Gun Control

The managements of large corporations attempt and, I submit, often succeed at keeping the most financially threatening alternatives in public policy off the public’s radar by pressuring media and using public relations campaigns. As U.S. president Obama’s health-insurance proposal was being debated in Congress, health insurance companies deftly either kept the single-payer proposal off the media’s discussion or relegated the policy as radical. This term, if stuck to a proposed policy, is the kiss of death in a society of incremental change. Such change, if the only game in town, can unfortunately come to be viewed as constituting major change. The gun-control debate in February, 2018 after the shooting of 17 people at a high school in Parkland, Florida is a case in point.

In step with the National Rifle Association, U.S. president Trump supported “efforts to strengthen the  federal background-check system for firearms.”[1] He also supported a ban on “bump stocks,” which enable a gun to shoot hundreds of rounds  per minute. Congress had considered such a ban, but could not in the end resist pressure from the NRA. So in terms of political viability, going beyond tightening background checks and banning bump stocks to ban the assault weapons themselves could easily be perceived as radical and thus a waste of time to include in the debate. Yet such a course ignores the possibility that the debate could render the infeasible, feasible. Moreover, restricting debate to the politically feasible gives the impression that at least some of the alternatives being considered are major rather than tertiary in nature. Banning bump stocks and tightening checks could seem like solutions rather than things that should have been done long before the shooting in Florida.

Putting the alternatives being considered as part of the debate in the media into perspective can be accomplished by including the stance of Al Hoffman, a prominent Republican donor. In the wake of  the  shooting, he had had enough. He demanded that the Republican Party, which at the time controlled the governments of Florida and the U.S., “pass legislation to restrict access to guns.” He “vowed not to contribute to any candidates or electioneering groups that did not support a ban on the sale of military-style firearms to civilians. ”[2] He was saying that his monetary support would go behind a ban on assault weapons.

With the debate restricted to background checks and bump stocks, Hoffman could be perceived as advocating something radical and politically infeasible. The artificially restricted debate ensured the continuance of such infeasibility as well as the perception of the ban being radical in nature rather than reasonable. It is no accident that the NRA’s management declared that a ban on assault weapons was not debatable. For the organization to have been able to keep such an option off the table and perceived societally as radical and infeasible suggests that the news media was not operating in the public interest. So too, I submit, does the media restrict or contort reporting and discussing matters of public policy relevant to corporations. Like the NRA, large companies can effectively steer public discourse on to less threatening alternatives as if they are central  rather than secondary in importance.

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[1] July Bykowicz and Srobhan Hughes, “Trump Open to Tighter Gun Checks,” The Wall Street Journal, February 20, 2018.

[2] Alexander Burns, “”GOP Donor’s Ultimatum: Guns or Money,” The New York Times, February 18, 2018.

Upside-Down Corporate Governance at AIG

I contend that Robert Benmosche, CEO of AIG, had an incorrect understanding of corporate governance when he told Harvey Golub, then-chairman of the board, on July 14, 2010, “One of us should stay and one of us should go.” He should have, “Please let me know if the board would like me to go.” Put bluntly, the CEO works for the board, not vice versa. The previous May, Benmosche told Golub, “We can’t work together. I need a partner who I can bounce ideas off and give me advice.” However,a CEO and a chairman do not work together as partners. Rather, the chairman—and the board more generally—act on behalf of the stockholders to oversee the management, which the board has hired. In other words, a CEO is an employee whereas a chairman is not. Benmosche’s comment is actually rather presumptuous.

Benmosche’s upside-down approach to corporate governance is evident from the way he went about trying to sell AIG’s biggest overseas life insurer, AIA, to Prudential. Rather than being surprised that Golub did not support the sale, he should have taken note of Golub’s surprise that he had not informed the board earlier. As another example, rather than being annoyed that the board didn’t push Treasury’s pay czar harder to sign off on his $10 million pay package, Benmosche might have asked the board if they supported the proposed compensation.

One of the principal jobs of a corporate board is to assess the CEO (and hence the management) and to fire him or her if the board decides it would be in the stockholders’ interest. The CEO works for the board, not vice versa. It is not a partnership arrangement. It is the CEO’s responsibility to act within the support of the board, rather than to threaten its chair for not playing ball. Benmosche illustrates the arrogance that come occur when an employee is over-compensated and spoiled.  Benmosche should have been grateful to the AIG board for having agreed to a compensation package of $10 million rather than critizicing them for not essentially working for him in pressuring the Treasury.

From this case, we can extract the following lesson. A CEO should not chair the board whose task it is to assess him or her. Such duality is a contradiction in terms—effectively attempting to interiorize within the CEO accountability that is external (i.e., interpersonal). As Benmosche had already turned to Robert Miller, who replaced Golub, for advice and found him to be supportive, AIG may have essentially installed a puppet—hence compromising the board’s role in overseeing the CEO.

I once asked Armstrong when he was both CEO and chairman of ATT whether he saw any conflict of interest in his chairing of the body tasked with assessing him. He replied that the buck stopped with him—that he needed the authority to integrate cable, computer and telephone technologies into broad-band. However, in hiring him, the board should have signed off on his strategy, hence giving him all the authority he needed to implement it. In effect, Armstrong was over-reaching in claiming that such authority was not sufficient. When his strategy failed, the external accountability function of the board was compromised.

In general terms, CEOs are too powerful with respect to “their” boards.  In being an enabling partner rather than a parent, too many boards are unwittingly undercutting their raison d’etre. To the extent that the managements of banks contributed to the crisis in September, 2008, corporate governance with real accountability can be seen as critical not only to our financial system, but to the economy itself. We can ill-afford too many spoiled adult-children.

Source: Joann S. Lubin and Serena Ng, “Battle at AIG Board: You Go, or I Do.” The Wall Street Journal (July 16, 2010), pp. C1, C4.

On the Strategic Use of Regulation: Financial Reform at the Bequest of Wall Street

According to The New York Times, Wall Street bankers were busy working on how to weaken the regulations or otherwise profit from them before the ink was dry on the financial reform law of 2010 . First, regarding trying to profit from the new regulations, BOA, Wells Fargo and other big banks that were faced with new limits on fees associated with debit cards were imposing fees on checking accounts. Compelled to trade derivatives in the daylight of closely regulated clearinghouses rather than in murky over-the-counter markets, titans like J.P. Morgan Investment Bank and Goldman Sachs were building up their derivatives brokerage operations. Their goal was to make up any lost profits — and perhaps make even more money than before — by becoming matchmakers in the vast market for these instruments. That critics were pointing to them as a principal cause of the financial crisis made no difference to those bankers. Even when it comes to what is perhaps the biggest new rule — barring banks from making bets with their own money — banks found what they thought was a solution: allowing some traders to continue making those wagers as long as they also work with clients.

Lest one conclude from the banks’ stretegic responses that the new law passed in the wake of the financial crisis of 2008 goes strongly against their interests, it is important to remember that the reform is more geared to giving government officials adequate power to mop up a future mess than to enabling them to prevent one in the first place by clamping down on the banks. The devil is in the details. This in itself can be an opportunity for banking lobbyists to work over regulators who depend on information from the industry and can be swayed by legislators who have received campaign contributions and fund-raisers from the bankers. Regulators are tasked under the new law with writing the specific rules of the road governing limits on risk-taking by financial firms and previously unregulated trading. By leaving so much to the discretion of existing regulators, the new law is “a boon to Wall Street lobbyists, who will now be working behind the scenes to influence the regulators,” according to John Taylor, president & CEO of the National Community Reinvestment Coalition. Furthermore, in enforcement, there is evidence that regulators are apt to look the other way. The wave of predatory lending that sank the housing market, for example, could have been largely prevented if the Federal Reserve had enforced existing rules on mortgage lending, according to Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University.

Under the financial reform law of 2010, banks and other financial institutions are overseen by a council of  regulators. That group is charged with identifying the kinds of “systemic” risks that spun out of control in the collapse of Bear Stearns and Lehman Bros. in the financial panic of September 2008. But there’s little to be gained by entrusting that task to the same regulators who failed to spot the causes of the panic the first time, said Isaac, the former FDIC head. “If a bank went to the regulators and said, ‘We’ve got a good idea: we’re going to put our lending officers in charge of risk management,’ that bank would be put out of its misery immediately,” said Isaac. “That’s what the government just did. It put the regulators in charge of assessing their own performance. It’s a very bad system.” While the law creates a separate agency with a single consumer mandate, even it remains beholden to those regulators, who retain the power to veto its regulations and enforcement actions. That setup, said Taylor, could seriously hamper the board’s effectiveness. “That club of regulators is very insular, and usually in agreement,” he said. “They can kill serious reform, and the financial lobby remains much more influential with regulators than consumer advocates.”

The problem can be broadened by considering that President Obama brought to head his economic team people like Larry Summers, who while in the Clinton Administration lobbied against regulating derivatives, and Tim Geithner, who had been appointed as President of the New York Federal Reserve at the urging of Citigroup and its major stockholder. In other words, it is not just a matter of relying on the same regulators; the construction of the law involved the same advisors.  Indeed, that members of Congress listened to the banking lobby at all even as the banks were complicit in the financial crisis of 2008 can be viewed as going back to the same. At a fundamental level, the banking industry may have too much leverage over top government offiicals, whether legislators or regulators.

Sadly, according to Newsweek, “the bill does more to help regulators detect and defuse the next financial crisis than to actually stop it from happening. In that way, it’s like the difference between improving public health and improving medicine: The bill focuses on helping the doctors who figure out when you’re sick and how to get you better rather than on the conditions (sewer systems and air quality and hygiene standards and so on) that contribute to whether you get sick in the first place.” This might be because it is in the big bankers’ interest that the government come in and clean up, but not restrict them in the meantime.  In the 1980s, the financial sector’s share of total corporate profits ranged from about 10 to 20 percent. By 2004, it was about 35 percent. According to Newsweek, “What you get for that money is favors. The last financial crisis fades from memory and the public begins to focus on other things. Then the finance guys begin nudging. They hold some fundraisers for politicians, make some friends, explain how the regulations they’re under are onerous and unfair. And slowly, surely, those regulations come undone.”

In the wake of the financial crisis, the American people had a chance to brake up the banks too big for our republics, but even then the bankers were able to quietly get this option off the airwaves. I contend that the too big to fail systemic risk is actually greater with respect to the viability of the US than to the financial system. That is to say, the ability of Wall Street to dodge the bullet even when it was culpable for a near melt-down of the financial markets may mean that we are living in a plutocracy rather than a democracy—the latter being mere window-dressing. Even when Wall Street is “bad,” it owns Congress, according to Sen. Dick Durbin of Illinois.  This ought to tell us that the game is over, yet with regard to the regulators I suspect the games will go on for some time.

Sources:

http://www.msnbc.msn.com/id/38266914/ns/business-eye_on_the_economy/ 

http://www.newsweek.com/2010/07/15/five-problems-financial-reform-doesn-t-fix.html  http://www.cnbc.com/id/38272518

On Educated Representatives and Large Districts: A Critique of Democracy

Democrat Georgia Congressman Hank Johnson said during an Armed Services Committee hearing in late March, 2010 that Guam would be in danger were more US troops sent there. “My fear that the whole island will become so overly populated that it will tip over and capsize,” he said in all seriousness. “We don’t anticipate that,” responded Adm. Robert Willard. Did Hank Johnson's constituents want their representative in the U.S. House of Representatives to be at least nominally educated?  Lest one replies with "of course," it could also be that people may want their represenatives to be like them, or at least to reflect what they value. 

It could be that Rep. Johnson's district was inhabited by people who didn't value education. My hometown is such a place. Going to graduate school is tantamount to evading the real world. The implication is that investing in one's education is to waste one's time on something of little value. Of course, you can't fight ignorance or change people's values where they are convinced that they are correct.  It is perhaps not a surprise that representatives could be found in government having that mentality where it is common among constituents.

It is also true that larger the electorate, the less it can make an informed decision regarding the candidates campaigning to represent it. This is why the delegates to the US Constitutional Convention said there is more democracy at the level of state legislatures (e.g., more retail, less wholesale, politics). The EU Parliament has almost 800 reps (newly expanded, though I understand not yet filled), yet is not twice the US population, so the electorates per rep are smaller. However, a governmental body so large is apt to be cumbersome. The state governments in the EU, like those in the US, have smaller districts for their legislative lower houses (and perhaps their senates as well). In smaller districts, the candidates and the elected representative are more apt to be known by a given voter (or by someone the voter knows). Two (or even three) degrees of separation are better than relying on tv commercials, which are geared to presenting a given candidate as he or she wants to be seen. A viable republic ought not rely on a candidate’s preferred self-presentation because judgments in governance involve the actual person–hence the voters ought to know it.

A major implication from my reasoning here is that both American and European state governments ought not allow the balance of power to shift too much to the US and EU level, respectively. On the last day of the U.S. Constitutional Convention, George Washington, who had kept quiet throughout in his role in presiding, asked the delegates if they would make one change. Rather than a U.S. House representative to represent at least 40,000 inhabitants, the minimum should be 30,000 because that would allow for greater democracy. Of course, the setting of a minimum is far different than a maximum; the average district population has never been 30,000.  At the turn of the twenty-first century, it was more than 600,000.  The constitutional delegates would have thought such an arrangement to evince an aristocrisy, there being so few representatives relative to the population. The average citizen's voice would surely be lost, the designers of the U.S. constitution would be wont to say.  I suspect their response would be not just to send more power back to the state governments, but also to urge many of the large and medium states into federal systems themselves. Particularly where a state is heterogeneous, it makes sense for it to have a federal system with states ranging from large metro areas to four or five counties (as in Germany, whose Lander span from Bremen to Bavaria).  Unsere grosse Staaten sollten von Deutschland lernen. It could be that in modernity, the West has grown too accustomed to larger and larger electorates.  Has the E.U., for example, set any limit to its expansion from the vantage point of its democracy deficit?  Furthermore, has the U.S. tackled the problem of how to reconcile the large districts in the U.S. House with the problem of that body itself having too many members?  If it continues to be assumed that Congress can and should legislate on virtually anything, the tradeoff between representation and the size of the House must be addressed.

Corporate America's Apathy toward Federalism

In October of 2009, the U.S. House Financial Services Committee voted to give the federal government the power to block the states from regulating large national banks in some circumstances. The compromise approved by the House allows the Comptroller of the Currency to override the states, but only if that office found that the state law “significantly” interfered with federal regulatory policies.  This clears the way for a new federal agency to protect consumers from abusive or deceptive credit cards, mortgages and other loans.  Adoption of the compromise was a partial setback for the banking industry, which would have preferred to avoid having to comply with state laws that are sometimes stricter than federal rules.  Barak Obama and Barney Frank were pushing in the other direction—for subjecting banks to the relatively strict state laws with no chance of appeal to the US. Government.

This case of compromise points to the influence of large corporations on the Congress as a culprit in the on-going eclipse of federalism.  Large corporations operating in many of the American republics would rather have one regulatory infrastructure, so they push the U.S. Government to assert itself at the expense of the State governments using pre-emption.  Even where the federal government is silent in a policy domain, it can keep the State governments out. This is not to say that industry is the only force behind the march toward consolidation.  Obama and Frank were no doubt assuming that health-care and education are properly directed at the level of the U.S. Government rather than by the States.  This involves adding strings to the spending clause of the U.S. Constitution.

While it might be more convenient to have Washington as the point-person, we might miss the checks and balances permitted by a viable federal system wherein the State governments can hold back an encroaching federal government.  Moreover, we might wonder whether one legislative size fits all in a Union of republics that spans a continent.  There is a reason why the delegates in the constitutional convention designed a federal system; they weren’t just acting on a whim.

So here is my basic point: the present holders of power might have incentives to use it at the expense of the long-term viability of our system of public governance.  In other words, it might not be in the interest of our federal officials and corporation executives and boards to maintain the viability of our federal system. To the extent that their interest prevails in spite of the inherent diversity in the United States, this could be the empire’s undoing before our eyes.

Source:  Compromise Bill Could Block States on Bank Rules

Instant Gratification Rules in American Fiscal Policy

With an expected deficit of $1.2 trillion for 2018-2019, the U.S. Government in December, 2017 enacted a tax cut with an expected revenue loss of nearly $1 trillion over a decade (assuming some growth from the tax stimulus) and, two months later, a budget deal passed adding $300 billion to federal spending in the next fiscal year.[1] All this was done with the U.S. debt at over $20 trillion—higher than the annual GDP at the time. With the  economy humming along with a low unemployment rate, the prospect for any fiscal discipline was bleak. Put another way, if budget surpluses could not come at the boom end of an economic cycle, then deficits would be likely in good times and bad. Behind the structural imbalance of contiguous deficits and an ever-growing debt is the all-too-human preference for instant gratification without a corresponding value being placed on self-discipline.

In a republic, the electorate elects representatives in part because direct democracy has no constraint on the immediate passions of a people. In the case of the U.S. Congress and White House,  the representatives had not by 2018 at least resisted the instinct for immediate benefit for the good of the American republics and their peoples—which together constitute the United States. Thomas Jefferson and John Adams agreed in retirement that an educated and virtuous citizenry is vital to a viable republic. The $20 trillion federal debt reflects back on Americans not in a good way in this respect.

For a republic—including one that is also a federation of republics—to be viable over the long term, some allowance for the long term must be made in the form of fiscal discipline. This is essentially self-discipline on a societal level. In the case of the tax cut and additional federal spending, Americans could “expect some of the strongest economic growth” in years.[2] This made the urge for instant gratification particularly alluring. In the medium term, Americans would face “more risk of surging inflation and higher interest rates—fears that were behind a steep stock market sell-off” in early February, 2018.[3] Notice that the negatives begin only in the medium term; hence they do not detract from the instant gratification. In the long term, the U.S. could have less flexibility fiscally in enacting a stimulus to combat a recession or even a crisis like that which had hit Wall Street in September, 2008. Additionally, “higher interest payments could prove a burden on the federal Treasury and on economic growth.”[4] The short term boost in an already booming economy could be expected at the time to hamper economic growth perhaps at a time of recession! Yet the force of this anticipation had no power in the enacting of the tax cut and additional spending. Knowledge, it appears, requires virtue manifesting as self-discipline. That it was missing reflects especially on the elected representatives of both parties, but also on the American electorate that elects and re-elects those representatives with impunity.

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[1] Neil Irwin, “Austerity Era Comes to End,” The New York Times, February 10, 2018.

[2] Ibid.

[3] Ibid.

[4] Ibid.

Foreign Policy in International Business: BP Trading a Libyan Terrorist for Libyan Oil

Senator Kirsten Gillibrand, D-NY, claimed in July of 2010 that the UK government should investigate what role BP played in Britain’s decision to free Abdel Baset al-Megrahi in August 2009. Al-Megrahi is the only person convicted of carrying out the 1988 bombing of a Pan Am airliner in which 270 people were killed over Lockerbie, Scotland. This is not to say that he acted alone. In February, 2011, Gadhafi's justice minster, Mustafa Abdel-Jalil, who resigned in protest against Gadhafi's massacre of unarmed protesters, told a Swedish newspaper that Gadhafi had ordered the attack. Abdel-Jalil also claimed that Megrahi threatened to "spill the beans" unless his return to Libya were secured. It would appear that BP, a publically-traded stock corporation, played a vital role between Gadhafi and the British government. If so, then aside from Gadhafi's sordid role, this case presents us with an issue of business ethics. Specifically, does a corporation, which is essentially private wealth but with responsibility befitting the power that comes with such wealth, cross a line when its employees engage in foreign policy? The ethical problem inherent in interfering in a juridical sentence is troubling enough; if an unelected corporation becomes so powerful that it can affect international relations between (and foreign policies of) countries, then the issue involves not only business ethics, but also democratic governance. As the line between private and public blurs, the respective bases of legitimacy can become conflated or transposed.

In May 2007, BP signed a $900 million exploration agreement with Libya. Also that month, Britain and Libya signed an agreement that paved the way for al-Megrahi’s release from a Scottish prison. A spokesman for BP has admitted that people at the company lobbied the British government over the prisoner transfer deal with Libya in late 2007, but the company’s spokesman denied that the lobbying played any role in the government’s decision to release al-Megrahi nearly two years later. Senator Charles Schumer, D-N.Y., argued that ”the whole thing has deep circumstantial evidence that points to the fact that there was a trade-off — release the terrorist in exchange for an oil contract.” Schumer and three other US senators — Kirsten Gillibrand, Robert Menendez and Frank Lautenberg — wrote to Secretary of State Hillary Clinton asking that the State Department investigate whether BP had a hand in the release. “Evidence in the Deepwater Horizon disaster seems to suggest that BP would put profit ahead of people — its attention to safety was negligible and it routinely underestimated the amount of oil gushing into the Gulf,” they wrote. “The question we now have to answer is, was this corporation willing to trade justice in the murder of 270 innocent people for oil profits?” The answer appears to be “yes.”

In an interview with the Daily Telegraph (September 4, 2009), Jack Straw admits that when he was considering in 2007 whether the bomber should be included in a prisoner transfer agreement (PTA) with Libya, Britain’s trade interests were a crucial factor. When asked in the interview if trade and BP were factors, Mr Straw admits: “Yes, [it was] a very big part of that. I’m unapologetic about that … Libya was a rogue state… . We wanted to bring it back into the fold. And yes, that included trade because trade is an essential part of it and subsequently there was the BP deal.” In short, BP employees have admitted to the lobbying and Jack Straw has admitted that BP’s contract was a factor—the two sides meet and the knot is tied.

Analysis:

Even BP’s lobbying effort was not decisive in the exchange agreement, the involvement of BP managers even as they and BP stood to gain from an oil exploration contract evinces a conflict of interest that should have been barred by ethics guidelines at the company. Moreover, the company had no standing in the prisoner exchange matter such that it had any business in lobbying. At most, the legal person legal doctrine and the associated “money as free speech” doctrine pertain to a company’s main business. The doctrines ought not give a company all rights of citizens because corporate charters are delimited to particular domains or functions. Furthermore, to expect a company to put ethics ahead of profits is to conflate a firm with a human being.  To be sure, a company is made of people (and capital). However, the association is focused rather pointedly on one thing: maximizing shareholder value through profits. Accordingly, managers know legal requirements, whereas ought and should are more difficult to translate into cost-benefit analyses. In other words, a company is like a shark in that both are single-minded feeding machines. To expect a machine to obviate its next feeding because of an ought is to treat it as something other than what it is.  I suspect that as onlookers we tend to project our own values onto company managements—even companies themselves—instead of coming to terms with what a company is.  It is a feeding machine with one directionality and an expansive appetite, which includes venturing into other domains such as (hypothetically)  lobbying for an exchange of prisoners in exchange for a lucrative oil contract. In other words, companies are designed to transgress even their own charters. They are like Hal in the film 2001—the computer that took on a life of its own. Ideally, a company would convert anything in a given society into a commodity, with price being the universal measure. The US senators are objecting, in effect, to the commodization of the prisoner exchange, and to the “boundary issues” of BP.

The “so what” of this analysis is the following: it is particularly dangerous for a company or industry to be so powerful that it can unduly influence a government both in terms of a judicial sentence and in relation to other countries. Given the expansive nature of a company, society must have a means of keeping corporations within their proper domain of providing goods and services.  In a plutocracy (rule by wealth),  private wealth is the basis of government. This is not the case in republics, which are characterized by representative democracy.

Sources:
http://www.msnbc.msn.com/id/38256677/ns/world_news-africa/
http://www.heraldscotland.com/news/home-news/megrahi-threat-to-reveal-truth-over-lockerbie-1.1087516?utm_source=twitterfeed&utm_medium=twitter

On the Danger to the United States of Living off Government Debt: The Case of the Dollar as World Reserve in 2010

Given the $13 trillion of U.S. Government debt in 2010, the dollar was losing out at the time in percentage terms to other currencies as the global reserve currency. To be sure, in absolute terms, there were still more dollars being held abroad than twenty or thirty years earlier, but as a report from Emma Lawson of Morgan Stanley showed, other currencies were taking on more of a relative presence. The lesson concerning excessive public debt was not grasped at least through the 2010's, as the debt continued to increase trillions of dollars more.

The Euro had been making the greatest strides in percentage terms, particularly in 2002. The slight downturn in 2009 might have reflected the impact of the financial crisis of 2008 in Europe, though the Greek debt issue had not yet reached a boil (it would be interesting to see the figures from 2010).  In any case, the dramatic drop in the dollar’s percentage terms also came in 2002, before the Iraq war and the bank bailout spending (i.e., the $13 tillion dollar debt). The drop could have been in reaction to September 11, 2001, though it would seem an exaggeration even then to say that the US financial system would be undone by the attack.  Even so, as we know from 2008, irrational exuberance can take hold in even a global market. We ought nevertheless not lose sight of the fact that the number of dollars held in reserves around the world increased. The pie got bigger, and even though the dollar piece became larger, it was a smaller proportion of the pie in 2010.  Even so, the $13 tillion in US Treasury debt, the decision of the Chinese to allow their currency to appreciate to a limited extent, Russia’s call for a mix of global reserve currencies, and the EU’s bailout of the Greek bonds all pointed to trouble for the US dollar as “the” reserve currency. Also troubling was the UN report at the end of June, 2010, which urged that the US dollar is no longer stable enough to be the world’s reserve currency. Ouch! The dollar slid %5 in June. Fortune reports that central banks had been preferring gold to the greenback.

Lawson believed that  ”over time we anticipate that reserve managers may reduce their holdings further.” She is looking at the significance of small percent changes over a short time—and this I see as perhaps susceptable to overblowing small trends. For example, she found that central banks had dropped their allocation to U.S. dollars by nearly a full percentage point to 57.3% from 58.1%, and calls this “unexpected given the global environment.” But was such a change, relative to those shown in the chart, really significant? She argued that other dollars - the kind that come from Australia and Canada - had been benefiting from skiddishness on the dollar. The allocation to those currencies, which fall under “other” in the data, rose by a full percentage point to 8.5%, accounting almost exactly for the drop in the U.S. dollar allocation. She was undoubtedly assuming that the trend would continue, but a look at the chart can demonstrate that even the dramatic changes in 2002 had not continued at such a rate (e.g., for the euro and the US dollar). 

Even so, Treasury’s huge debt could not but undermine the US dollar over the long term. This point ought not to be minimized or ignored under the fiscal pressure to push the US economy out of recession. Even if the US did not admit that the debtload was too high to be paid down one day (the debt then approaching the annual GNP of the US), the market rendered its verdict. Relative the huge debt facing the US dollar (and remember there are huge state debts, such as in California, Illinois and Florida!), the “crisis” facing the euro in 2010 paled in comparison.  As of mid 2010, the euro was still over $1.20. Years earlier, it had been at parity. The media frenzy on Greece's debt in 2010 ought therefore to be put into some kind of perspective, and the impact of the dollar’s public debt not be lost. 

It’s not clear to me that the human mind can conceptualize a trillion, not to mention thirteen of them. Yet we glide over the public debts in the US as though they were sustainable. If the US falls, it will be from within--from consolidation at the empire-level.  Such a fall will likely come as a surprise to most Americans, who in being oriented to external threats tend to miss the gravity of the black hole amassing under our very noses.  To be sure, the additional debt enables us to live beyond our means as a society, and such a condition can be very addictive.  Perhaps the parallel question for us to reflect on is whether Rome fell from within or simply from the Goths.

Sources:

 http://www.businessinsider.com/morgan-stanley-dollar-euro-reserve-holdings-2010-7#ixzz0tBDYFjMd

 http://wallstreet.blogs.fortune.cnn.com/2010/07/09/central-banks-start-to-abandon-the-u-s-dollar/