Power shifts from West to East: the end of the post-WWII regime in the news

Massive geopolitical changes occur in tiny increments as well as massive shifts. Look closely at your daily newspaper. The journalists report as casual news the small steps of history-making events. In the past few weeks we see tangible evidence of power shifting from West to East.

One: The Abu Dhabi Investment Authority spends $7.5 billion to buy a 4.9% stake in Citigroup (28 November 2007)

By agreeing to purchasing a $7.5 billion stake in the faltering banking giant Citigroup, the secretive, government-controlled Abu Dhabi Investment Authority is breaking with tradition. As the largest sovereign wealth fund in the world, with assets estimated at $650 billion, it poured money in the past into low-return, low-profile investments or small emerging market deals, unlike its flashy emirate neighbor, Dubai. … Flush with cash from its oil exports, Abu Dhabi turned to Wall Street, using a complicated transaction late Monday to buy 4.9 percent of Citigroup, acquiring high-yield, convertible stock that must be exchanged for common stock between March 2010 and September 2011.

Two: Singapore buys 9% stake in UBS. An unnamed Middle Eastern investor spends $1.73 billion to buy a 2% stake in UBS.

Update: Rumors point to Saudi Arabia as the home of the mystery investor.

Three: China spends $5 billion to buys a 9.9% stake in Morgan Stanley.

Power follows money. Creditors usually dominate debtors. These are just the opening rounds in the new great game, as foreign governments take non-voting stakes in major western financial institutions. Plenty of time to tighten the leash later, slowly over time. In the new era money might replace bullets as the last resort of Kings.

For a deeper perspective on this, we go to one of the world’s top experts on global capital flows: Brad Setser, of the Council on Foreign Relations. Here is an excerpt from his article of 19 December 2007:

The irony here is immense.

A few years ago the consensus view in the US financial community was that China’s state would have to relinquish control of Chinese banks in order for China’s financial sector to develop. State ownership was generally considered an impediment to a modern financial system. But rather than selling controlling stakes in China’s state banks to Wall Street firms, China’s state is now buying (non-controlling) stakes in Wall Street firms.

Talk about a change. There was a time not-so-long ago when the US was on a push to export its form of government (and its form of capitalism) around the world. Remember when the US was criticized for using the IMF to foist privatization on the world? Now both the US government and large Wall Street firms rely heavily on non-democratic governments for financing — and the US is, in a limited sense, importing other countries form of capitalism. The US government hasn’t historically owned large stakes in US banks and broker-dealers.

Update

“Is the Sun Setting on US Dominance?”, Joergen Oerstroem Moeller, YaleGlobal Online 

• Part I - Expect Asia to replace the US as the world’s dominant economic force.  (27 February 2008)
• Part II - Presiding over a network of powerful regional alliances, the US can maintain its preeminence  (29 February 2008)

Past posts about the End of the post-WWII geopolitical regime

• A brief note on the US Dollar. Is this like August 1914?  - (8 November 2007) How the current situation is as unstable financially as was Europe geopolitically in early 1914.

• The post-WWII geopolitical regime is dying. Chapter One  - (21 November 2007) Why the current geopolitical order is unstable, describing the policy choices that brought us here.

• We have been warned. Death of the post-WWII geopolitical regime, Chapter II - (28 November 2007) A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).

• Death of the post-WWII geopolitical regime, III - death by debt - (8 January 2008)  Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
• A recommendation to read these bulletins from the front! - (21 January 2008)  A brief note on today’s articles in the NY Times and Financial Times, with Brad Setser’s explanation of why they are important.

• Geopolitical implications of the current economic downturn – (24 January 2008)  How will this recession end?  With re-balancing of the global economy, so that the US goods and services are again competitive.  No more trade deficit, and we can pay out debts.

• Let us light a candle while we walk, lest we fear what lies ahead  (10 February 2008)  Putting the end of the post-WWII regime in a larger historical context.

• A happy ending to the current economic recession (12 February 2008) –  The political actions which might end this downturn, and their long-term implications.