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China and the West: The Roles of Exorbitance and Prudentiality in Economic Crisis

China and the West: The Roles of Exorbitance and Prudentiality in Economic Crisis

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An essay for the 2012 Undergraduate Awards (International Programme) Competition by Dilley Leslie. Originally submitted for International Relations at University of California, Berkeley, with lecturer T.J. Pempel in the category of International Relations & Politics
An essay for the 2012 Undergraduate Awards (International Programme) Competition by Dilley Leslie. Originally submitted for International Relations at University of California, Berkeley, with lecturer T.J. Pempel in the category of International Relations & Politics

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Published by: Undergraduate Awards on Aug 31, 2012
Copyright:Attribution Non-commercial


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Paper Word Count;
Paper Abstract;
This paper discusses the effect of the derivative-market financial crisis of the2000's and the perspective of the Chinese financial regime. It builds a game-theoretic lens thatallows a fuller-view on Chinese economic and financial mechanisms which allowed them tominimize damage from the global shock of 2006-2008; China's particularly state-capitalistic banking appartus allows them to relatively insulate their national industries from outsideinfluence. Paper provides insight into understanding nation-state 'exorbitance' in terms of those privileged versus those 'exploiting.' Economic crisises continue to strike the globalized world,and without some sort of defensive mechanism, nations will continue to take extensive social, political, and economic damage from future crisises. China has, to some extent, exploited aglobal economic game so as to allow for their nation's continued success.
Paper Key Words;
'Exorbitant Exploitation', Game-Theory, Realpolitik, Prudentiality,Economic-CrisisChina and the West: The Roles of Exorbitance and Prudentiality in Economic CrisisCapturing and understanding a phenomena as it unfolds is never easy. Attempts toexplicate the intricate workings of causality often suffer due to an inability to properly clarify theissues in question. In the case of the financial crisis of 2007 – 2008, appreciating the systemiccauses of this market failure is especially important in terms of evaluating a new age of state-to-state relationships (Eichengreen, 2011; Cohen & Delong, 2011). The collapse of LehmanBrothers - and the subsequent interactions that followed - resulted in key structural andsystematic shifts in the global poli-economic environment. The unprecedented collapse of thecredit market
 for Western nations
served as a warning for capitalist systems globally; economicsystems that rely too heavily on incumbent advantage as a 'recipe-for-success
'are increasingly
The plausible scenario for a dollar crash is not one in which confidence collapses on the whims of investors or as the result of a geopolitical dispute but rather because of problems with America’s own economic policies. Exorbitant Privilege
, pg 162
at risk of suffering systemic crisis. In the United State's case, this can be seen as an over relianceon 'exorbitant privilege
'.However, incumbency in financial and economic markets has not lost all value and theUS dollar retains much of its clout today; the currency still maintains a high degree of value withregards to its counterparts in terms of risk and yield(Bremmer, 2010; Cohen & Delong, 2010)andthe Federal Reserve Bank & the Treasury department can still apply traditional methods of monetary and fiscal policy (Halper, 2010; Eichengreen, 2011)-albeit with a lesser degree of effectiveness than prior to the crisis. In the Post-Lehman global economy, the economicregulatory bodies of the United States cannot repeat the same kind of 'stop-gap' measures they performed I order to mitigate the crisis post-Lehman; to do this would be to tempt mass-migration by investors worldwide away from the dollar; Barry Eichengreen sums this fairly well,
The Fed [could] again step into the breach [in the event of another systemwide shock], buying up bonds to support the market and prevent treasury yields from spiking. But in contrast to the previous scenario [the first time, circa 2009], in this case the Treasury will at the same time beflooding the market with additional debt. The Fed will be compelled to buy this debt, too, if  private demand has evaporated. Investors will see this as a process without end. They will see theFed’s bond purchases and the cash that it is pumping into the economy as auguring inflation,which will mean further dollar weakness, and worse. The decline in the currency will feed onitself. In the face of these problems, there really could be mass migration away from the dollar.(Eichengreen, Exorbitant Privilege, pg 162-163)
So to overly discount the near-collapse
of the United States is to risk ignorance of the truecondition behind the global economy today. In turn, those seeking to understand the true natureof the US dollar and its role in finance and economics today will gain significant clarity andinsight through analysis of the particularly intriguing - often anomalistic (Laporte & Ansell,
Although 'exorbitant privilege' as a term has been salient in economics and finance for some time and thus has a number of connotations, here it is taken as Barry Eichengreen's intuition into financial and economic incumbency advantages. Giventhat the current economic system(circa Bretton Woods) was created with the dollar as an international currency of choice,the dollar then certainly enjoys a degree of this 'incumbent advantage'. Consequently, the use of the dollar across the globehas resulted in a number of economic, political, and financial irregularities; One of these is the dollar's role in a significantamount of international trade(Bremmer, 2010; Cohen & Delong, 2010). Another is the role as the dominant reserve currency,essentially functioning as a 'lowest-risk' currency asset(Kawai & Prasad et al, 2011).
Its not so much 'failure' as an abrupt paradigm shift that has resulted in the 'West' or 'Advanced Economies' outputing ZEROreal GDP growth between 2007 and 2011; “At the beginning of 2012, the total REAL GDP of the rich economies will be nohigher than it was at the end of 2007.” -Economist: The World in 2012
2011) - behaviors that particular markets and nations have exhibited before, during and after theLehman-crisis.The gift of hind-sight certainly allows for perceptive analysis of the aforementioned, butas we 'much' know about the past - even given near-perfect information - proving causalrelations is none-too-easy. Consequent to the nature and reality of that particular Herculean task,this paper does not seek to explicate or unravel the “causal nexus”(Kawai & Prasad et al, 2011, pg 140) that is the myriad relationships betweenfinancial, economic, and political actorsworldwide; given that “the dynamics [of systems and games] are not always transparent,”(Schelling, pg 146)makes fulfilling this particular research imperative
unlikely given thismedium. Given this limitation, the paper will instead focus on certain 'irregular' tendencies thatwe have seen arise in the global economic environment; in doing so, we hope to gain insight intothe current day.In order to effectively approach the near-present, this analysis requires a perspective that- with proper framing - allows for understanding pertinent issues along the timeline relevant tothe Lehman crisis. This calls for a two-pronged approach; A) search for clues in thesuperstructure of the global poli-economic environment prior to, during, and after the Lehman-crisis and B) find a measure of evaluation that takes into account the many factors that set thestage or enabled 'the recovery' while simultaneously avoiding the urge to grapple with anoverabundance of empirics. If successful in this regard, the process
– and the information weglean from it - should hold enough theoretical salience to expose pertinent shifts in thesuperstructure of the global system. By sticking to the rigorous analytical framework denoted
With such a high degree of complexity inherent to the causal nexus, and with the very nature of interactions & actors having both hidden and expressed motives makes for an insanely high degree of complexity; gaining further insight into Schelling's“fantastically complex system” (pg 20-21, Micromotives and Macrobehaviors) is certainly something to consider in futureresearch endeavors.
Unfortunately, we must also recognize that “in the aggregate, it hard to discern which [particular] motivation[s]”(Schelling, pg 154)are most deserving inquiry.

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