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.
Controlling inequality—like controlling blood pressure—is good for your economic health. Economies with less inequality generally have lower unemployment and stronger productivity growth, and some researchers also claim better human health and social cohesion. In terms of the rest of the world, the peculiar organization of the United States into a boom/bust economy based on finance and high technology is the exception rather than the rule: We combine record-breaking inequality with low unemployment. But this is a formula that generates massive instability, as well as the resentments that gave us President Trump. Countries with stronger stabilizing institutions built on the principle of countervailing power may be less rich over the short term, but they are better-governed and built to last.
Our long-term safety and prosperity will therefore depend on creating a more just and stable world banking and monetary system. We can either get to work on this ourselves, or accept that other large countries and blocs will take up the task, creating regional alliances that will restructure global trade and finance—as is already beginning to happen. If we are not part of a common process, then ultimately we will be cut out and cut back. No one should think that a policy of provoking and destabilizing Russia, China, and Iran is going to work for us, over the long or even the medium run. No one should think that Europe and Japan will stay US economic allies forever if their interests dictate otherwise. No one should imagine that military power provides enduring safety in a world of multiple major powers with their own resources, technologies, and ideas.