America more firmly at the center of the world economy than ever
Back in 2006 and 2007, some economists (for instance, Brad Delong) were worried that America’s time as an economic super-power was coming to an end. They worried that the central government was running up too much debt, and that the nation’s trade deficit was leaving the nation hopelessly in the grip of foreigners.They worried that other countries would lose faith in the American dollar, causing a catastrophic disruption of America’s supply chains.
It’s become increasingly clear that the current crisis is not the one they were worried about. Surprisingly, almost every nation on earth is going to suffer more than America will, for a financial disaster that was started in America.
Europe Is in Bigger Trouble than the U.S.
This is a theme that Simon in particularly has been sounding. Now, according to the Telegraph, a confidential European Commission memo confirms this.
To review, the basic problems, relative to the U.S., are:
- Disproportionately large banking sectors (the Iceland problem) in some countries, such as the U.K.
- High exposure to U.S.-originated toxic assets (up to 50% of those assets, I have heard estimated).
- Major exposure to emerging markets, primarily Eastern Europe and secondarily Latin America, which have been harder hit by this crisis than anyone else.
- Higher pre-crisis national debt levels (for many but not all countries).
- For countries that use the euro, no control over monetary policy.
In a crisis, the world looks to America for leadership:
The real issue is that no one is yet ready to take on the deeper underlying problem – the political power structure of modern finance. While this structure is a particular problem – and particularly obvious right now – in the US, all industrialized countries today share some version of the same problem. We supersized our banking systems, allowed them to load up on risk that could threaten the macroeconomy, and gave them a mindboggling put option – in other words, the taxpayer is on the hook for a vast amount of downside. Across the industrialized (and coming soon to the industrializing world), the message from bankers is the same: give us the bailout money, or your economy will suffer.
Coming to terms with this reality and doing something about it will take leadership – the skills, popularity, and vision needed to really take on bankers (and preferably, win). That leadership is unlikely to come from Europe, Japan, or Canada. It’s also unlikely to come from the G20 (which is basically the G7 plus large emerging markets), whose next heads of government meeting is on April 2nd.
Everyone and everything, in some sense, waits for the US and for President Obama. How long will it be before he is able to fully and personally take charge of sorting out banking at home – and help those trying to do the same abroad?
The British pound used to be the international reserve currency. But the British pound lost its authority after World War 1, and the US dollar emerged as the only currency that people would trust in a crisis. Some economists (back in 2006 and 2007) were worried that the nations of the world would lose faith in the dollar, just as they once lost faith in the British pound. Clearly, this is not the crisis that they were worried about – instead, the dollar has rallied against other currencies.
For those who worry about the historical comparison with the pound, it is worth remembering this – the last new technology in which Britain lead was the railroad investment craze of the 1840s. The pound lost its status 70 years later. Britain missed out on every new technology of the late 1800s – electricity, light bulbs, refrigeration, telephones, automobiles, steel, etc.
By contrast, America lead the Internet boom of the 90s, which ended just 9 years ago. No nation can lose its position that fast, even when the nation has been poorly managed.
There is the potential that America will eventually lose its first-rank status. But that crisis is still two or three decades away.