Crisis won't upset US dominance

hi, if you find this massage is interesting, share with your friends Crisis won't upset US dominance The American economy has been battered by the present financial crisis. It could take several years for it to get back to normal. Some commentators and political leaders have suggested this could be the beginning of the end of America’s dominance of the global economy. Wrong, says historian Niall Feguson. In an article in the Harvard Business Review (July-August 2009), Ferguson argues that, while America’s financial sector may be end up weaker, American dominance of the global economy is likely to continue. Ferguson is an unabashed Americo-phile and something of an icon to the neo-conservatives in the US. He is the author of a book, Colossus, in which he argued that America’s problem is not that it is imperialist but that it does not take its imperial role seriously enough. Those who contend that the present crisis will be a huge setback for the US put forward several reasons: --> The US economy could take several years to come back to normal. Meanwhile, rivals like China will power ahead. --> America’s national debt is set to explode and this will limit its future growth. --> The US dollar will lose its status as the reserve currency in the near future. --> The American financial system will soon be a pale shadow of what it has been. The IMF expects the US economy to shrink by 2.6% in 2009. Recovery will be slow in coming - in 2010, the US economy is projected to grow by just 0.8%. Many think this could alter the race between the US and its principal economic rival, China, to China’s advantage. In 2007, Goldman Sachs had forecast that China’s GDP would equal that of the US in nominal terms by 2027. If the US economy suffers low to zero growth over the next four years while China grows by 6%, one would think that China could catch up with the US even earlier. Not really. Ferguson points out that, going by the IMF’s forecast (of April 2009), US growth rate will be lower than the growth rate of 2007 by 4.6 percentage points. But that of China would be lower by 6.3 percentage points. So, the present crisis could mean that China won’t catch up with the US until much later than forecast earlier, say, 2040. The crisis will have stretched out America’s dominance instead of abbreviating it. (The IMF’s July forecast raised the growth forecast for China in 2009 but growth will still be 5.5 percentage points lower than in 2007). This applies with greater force to America’s other rivals. Growth in the European Union is expected to shrink this year by 3.2%, in Japan by 5.8% and in Russia by 6.5%. The present crisis has highlighted how central the US is to the world economy. A serious recession in the US and one arising from problems in its financial sector impacts on other economies in two ways. It lowers exports to US and it reduces capital flows from the US and other advanced countries. That is why the present US crisis has translated into a global crisis. Even more perversely, many economies are hurting more badly than the US, which is the source of the crisis. Indeed, there is no dearth of conspiracy theorists who believe the US is interested in prolonging the crisis - and may have even engineered it - knowing that its principal rivals, especially China, would be severely impacted. China has used its double-digit economic growth rate to contain discontent. A decline of five percentage points or so in its growth rate risks fuelling serious disaffection within the country. America’s public debt is set to rise sharply following the resort to a fiscal stimulus as a means of reviving the economy. The federal deficit is expected to exceed 12% of GDP in 2009. Federal debt is expected to rise from 89% of GDP in 2009 to 101% of GDP in 2019, even on the optimistic assumption that the US economic growth rises to over 4% by 2011. India’s combined debt to GDP ratio of the Centre and the states was 73% last March. The consolidated fiscal deficit is expected to be around 12% of GDP in 2009-10. We worry, despite the fact that we can count on a long-term growth rate of 8% and we know that a growth rate of this order renders the fiscal problem self-correcting. Surely, the US should have a problem given its lower growth potential? There are differences in the two situations. The US is still regarded as a safe haven by investors whereas confidence about the Indian economy is nowhere as strong. More importantly, the dollar is the reserve currency and even America’s rivals prefer to invest overwhelmingly in dollars. This gives the US enormous borrowing potential. It can simply print dollars which others will gladly pick up. For all the talk of the dollar losing its primacy, no alternative is in sight. Indeed, the present crisis has underscored the inherent attractiveness of the dollar. The dollar rallied in the face of bad news about the US economy and has defied predictions of a steep decline since. As Ferguson notes, there are practical obstacles to switching to the Special Drawing Rights issued by the IMF. A senior Chinese mandarin summed up the situation very well earlier this year: “Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds... We hate you guys....but there is nothing much we can do.” Because the problems of the US economy hurt the rest of the world, the US appears set to retain its primacy in the world economy. The dollar will remain the dominant currency and the world resigned to financing America’s deficits. If there is a question mark, it is over the future of the American banking system. For the US banking system to regain its vitality, the US government will have to assume control of the top banks at least for some time, organise the disposal of banks’ toxic assets, put in place rules that rein in high leverage in the banking system and get a lot tougher with executive pay in banking. But the Obama administration has so far lacked the will take such decisive steps. This undermines the chances of an early recovery in the US economy and hence the world economy. But for the reasons mentioned above, it does not pose a threat to America’s dominance of the world economy. When the US catches a flu, the rest of the world goes down with pneumonia and the US ends up looking stronger.