Rough Week, But America's Era Goes On – Part I & II

Nice articles I found on GPB

Rough Week, But America's Era Goes On – Part I

Does Wall Street's meltdown presage the end of the American century? ~~~ http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091902804_pf.html ~~~ Many commentators have warned that the past week's financial mayhem signaled a major political setback for the United States as well as an economic one. "Why should the rest of the world ever again take seriously the American free-market model after this debacle?" a leading British journalist asked me [Niall Ferguson] last Thursday. This crisis, he argued, was to economics what the Iraq war was to U.S. foreign policy: a fatal blow to the credibility of American claims to global primacy. ~~~ We are living through the end of a phenomenon that Moritz Schularick of Berlin's Free University and I christened "Chimerica." In this view, the most important thing to understand about the world economy over the past 10 years has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world's land surface, a quarter of its population, about a third of its gross domestic product and somewhere more than half of global economic growth in the past six years. ~~~ For a time, this symbiotic relationship seemed almost perfect: One half did the saving, and the other half did the spending. Comparing net national savings as a proportion of gross national income, U.S. savings declined from more than 5 percent in the mid-1990s to virtually zero by 2005, while Chinese savings surged from less than 30 percent to nearly 45 percent in the same time frame. This divergence in savings allowed a tremendous explosion of debt in the United States, because the Asian "savings glut" made it much cheaper for households to borrow money. Meanwhile, cheap Chinese labor helped hold down inflation. … Energy exporters in the Middle East and elsewhere also found themselves running surpluses and recycling petrodollars to the Anglosphere and its satellites. But Chimerica was the real engine of the world economy. ~~~ In essence, the rest of the world's savings had helped inflate a real estate bubble in the United States. Easy money was (as is nearly always the case in asset bubbles) accompanied by lax lending standards and downright fraud. Euphoria eventually gave way to distress and then to panic. ~~~ What are the geopolitical implications of all this? One possibility is that the "great reconvergence" between East and West is speeding up. If you go back to the very first report that Goldman Sachs produced about the "BRICs economies" (Brazil, Russia, India and China), China was projected to overtake the United States in gross domestic product in 2040. But in more recent reports, that has been brought forward to 2027. Maybe it will be even sooner. For one inevitable consequence of the credit crunch is that the United States will grow more slowly for the foreseeable future -- at closer to 1 or 2 percent per year, rather than the 3 or 4 percent it has grown used to. By contrast, China's semi-planned economy can comfortably maintain growth of 8 percent or more per year, propelled forward by state-led investment in infrastructure and growing consumer demand. Because net exports are no longer the key driver of China's growth, an American sneeze need not necessarily cause an Asian cold.

Rough Week, But America's Era Goes On – Part II

The days when the dollar was the sole international reserve currency may also be coming to an end. Reserve currencies do not last forever, as the British pound makes clear. Once upon a time, sterling was the world's No. 1 currency, the unit of account in which most financial transactions were done. It died a long, lingering death, sliding from $4.86 in 1930 to very near par with the dollar at the pound's nadir in the early 1980s. The principal reason were the huge debts that Britain had run up to fight the world wars. The second reason was slower growth: Britain's economy was the underperformer of the developed world in the postwar decades, right down to the early 1980s. ~~~ If the main fiscal consequence of the credit crunch is a huge increase in the liabilities of the federal government -- already substantially increased by the nationalization of Fannie Mae and Freddie Mac -- the United States could find itself in a similar situation. The dollar could follow the pound into the category of former reserve currencies. And the United States would lose the convenient facility of being able to borrow from foreigners at low interest rates in its own currency. ~~~ With China decoupled from the United States -- relying less on exports to America, caring less about the yuan's peg to the dollar -- the end of Chimerica seems nigh. And with the end of Chimerica, the balance of global power is bound to shift. No longer so committed to the Sino-American friendship established back in 1972, China can explore other spheres of global influence, from the Shanghai Cooperation Organization that groups together China, Russia and four Central Asian nations to China's own nascent empire in commodity-rich Africa. ~~~ But commentators should always hesitate before they prophesy the decline and fall of the United States. America has come through disastrous financial crises before -- not just the Great Depression but also the Great Stagflation of the 1970s -- and emerged with its geopolitical position enhanced. Such crises, bad as they are at home, always have worse effects on America's rivals. ~~~ The same is proving to be true today. According to the Morgan Stanley Capital International index, the U.S. stock market is down around 18 percent to date this year. The equivalent figure for China is 48 percent, and for Russia -- the worst affected of the world's emerging markets -- it is 55 percent. These figures are not very good advertisements for the more regulated, state-led economic models favored in Beijing and Moscow. ~~~ Moreover, because investors continue to regard the U.S. government's debt as a "safe haven" in uncertain times, the latest phase of the financial crisis has seen the dollar rally, rather than sag further. ~~~ Of course, this could yet prove to be the safe haven's last gasp, especially if U.S. authorities are unable to avert a fresh wave of bank failures in the days ahead. Nevertheless, the caveat is clear. The hubris of recent years has certainly been followed by a terrible financial nemesis. But it is much too early to conclude that the American century is over. Like so much else made in the United States, this nemesis is proving an all-too-successful export. ~~~ nfergus@fas.harvard.edu ~~~ Niall Ferguson is a professor of history at Harvard University. His latest book, "The Ascent of Money: A Financial History of the World," will be published in November.