US economic leadership remains paramount

The US remains the world’s most important world economy, despite its own fiscal difficulties and the economic rise of China under the Chinese Communist Party.  

This is despite the US and the world accumulating more debt to sustain economic growth, a problem that will ultimately need to be addressed.

Of course, rising US debt has been offset by the longstanding role of the US dollar as the world’s primacy currency, although the share of US dollar reserves held by central banks fell to 59 per cent in the fourth quarter of 2020 after being 71 per cent in 1999 when the euro was launched.  

This has resulted in the US paying much less for its foreign borrowing, has allowed the US to finance its high consumption at low cost, has boosted global demand, and provides liquidity as the primary tool for global transactions as many other countries rely on holding dollar reserves which creates massive demand for US financial assets.

Today the US economy still remains important despite its gross domestic product (GDP) declining from 40 percent of world output in 1960 to 24 per cent by 2019 as China’s share grew from 4 per cent to 16.3 per cent with other developing countries also making considerable economic gains including South Korea, Brazil, Mexico, Indonesia, and India.  

Supported by an economic model, financial markets, and legal infrastructure that remain more attractive than most other nations, it is estimated that a percentage-point increase in US growth boosts growth in advanced economies by 0.8 of a percentage point with a slightly lower figure of 0.6 for emerging market and developing economies.  

With an increasingly transnational international economy resulting in the foreign share of US corporate equity increasing from 4 per cent in 1986 to 40 per cent by 2019, helping to offset higher trade deficits since the 1980s, US per capita GDP was around $US65,000 by the end of 2019 while per capita gross public debt was over $US69,000 before exploding to $US80,885 in 2020 as a result of extensive government assistance to address the covid-19 disaster.

Nevertheless, the US remains the most important economic leader despite a 2020 view that the World Bank and the International Monetary Fund remain dominated by the US and a few allied major powers “who work to generalize policies that run counter the interests of the world’s populations”.

The US’s promotion of free trade is a prime reason why China has drastically improved its economic performance since the latter’s entry into the World Trade Organization (WTO) in 2001, thus benefiting many other countries that established trade links with China, while US trade deficits has long been crucial to international economic growth through its high level of household expenditure which creates demand for various goods from around the world.  

Whereas the US had a household consumption rate of 68 per cent of GDP in 2019 before the covid-19 impact, China had a rate of just 39 per cent.

But the rise of authoritarian China is a major challenge for the US (and humanity).  

While China’s bid to internationalise its currency is complicated by its reluctance to make its markets truly open, with the yuan during 2020 still accounting for just 2% of global foreign exchange reserve assets, although Morgan Stanley predicts it could be 5-10 per cent by 2030, China now has the largest foreign exchange reserves (including gold reserves) in the world at over $US3.3 trillion by 2020 which it uses to fund investment offshore in competition with American and other rival firms.

With China’s lending focusing on infrastructure projects that are built by Chinese companies in countries where repayment terms can include natural resource exports or geopolitical favours, recent research found that 165 countries owed debt of $385 billion to China for ”belt and road initiative” projects, including 42 with debt exposure to China that exceeds 10 per cent of their GDP given China’s demand for higher interest rates and shorter repayment periods.

Despite an argument that “unilateral sanctions are rarely effective” as they “tend to impose greater costs on American firms than on the target, which can usually find substitute sources of supply and financing”, President Joe Biden has retained Trump's tough position on China to address China's unfair trade practices, unfair import and export subsidies, and illicit use of American intellectual property.

Have such measures worked? 

With the Trump administration in January 2020 coming to an agreement with China to purchase an additional $US200 billion in American products over 2017 levels in four sectors (manufactured goods, services, agricultural products, and energy) in exchange for lower tariffs against certain Chinese products from 15 per cent to 7.5 per cent, the Biden Administration during October 2021 confirmed that most tariffs would remain on more than $US350 billion worth of Chinese good with the possibility of more duties or other trade restrictions to come.

This was because China was behind in terms of meeting the purchase obligations for US farm goods, had blocked specific imports such as the sale of Boeing planes to Chinese airlines, and had continued to pour billions of dollars into government targeted industries such as steel and solar energy.   

China is hardly accepting WTO rulings, with the US disputing China’s claim that it had implemented the WTO 2019 recommendations with regard to its use of import controls for rice, wheat and corn, this resulted in the WTO deciding to review the matter after the US argued that it was entitled to take “countermeasures” against Beijing.  

During September 2021, the WTO also dismissed all four of China’s claims that a US tariff hike on solar panels breached global trade rules after the US imposed a system of tariffs and a quota in 2018 because US producers complained that imports of certain crystalline silicon photovoltaic cells had caused serious harm to the US domestic industry.

With China seeking economic influence around the world, the Biden Administration during June 2021 also revived the Trump-era plan to encourage other G7 nations to set up a Western alternative (Build Back Better World) to China’s belt and road initiative to raise hundreds of billions in public and private money to help close a $40 trillion infrastructure gap in needy countries by 2035.

At the same time, with the US remaining the largest donor to the United Nations with $US11 billion in 2019, just under one-fifth of the UN’s collective budget intended to meet the needs of poor and developing nations, a 2020 article expressed concern at China’s attempts to make the UN a tool for achieving its hegemonic ambition, which could end up destroying the body from within.

Notwithstanding legitimate concerns about China, and bipartisan support for stimulus packages to revive the US economy in response to the 2007-2008 global financial crisis (GFC) and the more recent covid-19 disaster, there are many Americans who believe that such deficit expenditure cannot go on forever as the ratio of US public debt to GDP has exploded from 62 per cent in 2007 to well over 100 per cent in 2020.

As of October 2021, the threat of a government shutdown and debt default was a real possibility as the US Congress (with a Democrat majority in both houses) had not given Treasury additional borrowing authority to raise the debt ceiling beyond the current statutory limit of $US28.4 trillion.

While the Congress and President Biden avoided a government shutdown by voting to continue funding the government through December 3, division was evident amongst Democrats with progressive members wanting a $3.5 trillion social spending package to go along with the $US1 trillion infrastructure plan, while moderates want a smaller package of about $US1.5 trillion.

With Goldman Sachs warning clients this is the “riskiest debt limit deadline in a decade”, the worst case scenario of not lifting the debt ceiling included much higher unemployment, stock prices plummeting, higher borrowing costs for government and individuals, the US losing prestige as the linchpin of the global financial system, cutbacks to social welfare eservices, and losses to retirement funds given that half of US Treasury debt is held in-trust for future American retirees.

Even if the debt ceiling again increases, something is going to have to give in the near future.

With inflation rising from 1.40% in January to 5.25% by August 2021, and not including rising housing, gold or stock prices, it was argued in June 2021 that the Federal Reserve continues to create asset and credit bubbles that are bound to pop eventually with home prices rising at an annual 12 percent rate and equity market valuations being more than double their long-term average.

While it was noted that the US banking system today was in a much better position to weather a housing market bust than after the GFC, it was believed that a housing market bust triggered by higher interest rates would also burst many other asset and credit market bubbles around the globe because they were fuelled by money printing of the major central banks.

As it stands, solutions will not be easy or even palatable for the many Americans who are well aware that it is the corporations that have benefited most in recent decades as the increasingly transnational nature of the international economy mean that US corporate receipts declined from 3.6 per cent of GDP in 1965 to 1.1 per cent in 2019, before finishing below 0.8 percent of GDP for the 2020 fiscal year.

With the wealthiest 10 percent of American households owning stocks with average related wealth at $US1.7million, the bottom 50 per cent owned stock worth an average $US11,000 either directly or indirectly through funds.

Despite major policy preference differences between Republicans and Democrats, a 2019 article notes that 65 per cent of Americans believe that the economic system unfairly favours powerful interests, including 71 per cent of Republicans earning less than $US75,000 a year (46 per cent of all Republicans) while 76% believed money exerts a higher influence in politics than ever before (including 76% of Republicans).

In the end, no nation can run expansionary policy options forever, especially at times when the economy is stronger, nor should it leave the burden of high debt to future generations or assume that the reserve status of the US currency will last forever.

With an October 2021 article indicating that interest payments on the debt now accounted for nearly 10 per cent of the budget and were expected to rise, this would adversely impact other productive purposes such as medical research and infrastructure needs not to mention social welfare needs.

As argued by Ian Tuft and Peter Wehner, with the latter having served in the last three Republican administrations, the key to addressing high levels of debt was to “successfully manage these balance sheet mismatches through a forced restructuring of liabilities”.

However, this will require political consensus between Democrats and Republicans to better discuss entitlement reforms and the tax structure rather than more of the same with Democrats recently opposing cost-saving entitlement reforms and the Republicans passing huge tax cuts without paying for them.

While it remains to be seen just how the US will fund its future domestic and foreign policy needs, it is highly probable that the US will remain the foremost economic power for some time yet due to its dynamic nature and its position as the world’s major liberal democracy.

At least that is my hope.