Monday, August 10, 2009

Crisis won't upset US dominance

That's the title of my last ET column. Several commentators have predicted the eclipse and decline of the US consequent to the crisis just as gloomier commentators have forecast the demise of capitalism. They are both wrong. Capitalism will reinvent itself, with fresh rules for the financial sector, and the US will retain its pre-eminent position.

One reason, as historian Niall Ferguson points out, is that when the US has a serious recession, its principal economic rivals suffer sharper setbacks to growth, so the US ends up the winner. Another is that the dollar does not have a serious competitor- does anyone seriously believe that the world's central banks will hoard their reserves in remnimbi?

America's economic dominance is to some extent derived from and supported by its military and political dominance. The US can, if it is really pushed, exert pressure on its oil producing allies to rein in oil prices. It can get economies with surpluses to park these in US treasuries. It has a major say in the creation of rules for the world economy through institutions such as the IMF, World Bank and WTO.

There are two areas in which the US is far ahead of the rest of the world: military power and higher education. Its lead in these areas will serve to ensure its pre-eminence in the world economy for as far as we can see now.


K.R.Srivarahan said...

In the second paragraph, rivals are misspelt as revivals causing some confusion.
Capitalism has reinvented itself so many times already that the present American economic system can hardly be called capitalism.Ayn Rand would turn in her grave. Similarly, what China practises is authoritarianism and not communism.

It is true that America's economic dominance is bolstered by its political and military superiority. However, Renminbi is no match for the US currency mainly because other economies do not have adequate faith in the Chinese government and therefore will not accumulate FX reserves in Renminbi.

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wnwek said...

I would echo the concern of Chinese mandarins (pun not intended) who proclaimed that there is no credible alternative currency for fund managers to hold cash and cash-like instruments, remnibi included.

One could say the nearest or the most credible competitor is the Euro, but it hasn't acquired enough depth as much the remnibi could have, had it been on free-float.

Khalil Sawant said...

>> There are two areas in which the US is far ahead of the rest of the world: military power and higher education.

"higher education"
Is there a point to be taken here for us :)

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