The US economy remains, by some distance, the world’s largest. Despite rising inequality, Americans remain relatively wealthy.
While the global financial crisis has damaged America’s economic power, its position remains superior to many other countries. The US was among the first nations to be affected. Financial market traders believe that: “If you are going to panic, panic first”. America benefited from first mover advantages during the crisis.
American policymakers, unlike their counterparts, moved aggressively to recapitalise financial institutions to reduce the risk of contagion. Large government budget deficits and specific industry programmes (for the motor car industry) helped prop up demand, reducing the effects of the financial problems on the real economy.
The US economy is now growing, albeit modestly.
On a comparative basis, even America’s debt statistics are better. Total debt (government, corporate and household) has fallen to about 330 percent of GDP from its peak of 359 percent in 2008.
Government net debt at around 84 percent of GDP is higher than Germany’s (58 percent) but well below that of weaker European nations. Household gross debt (86 percent of GDP) is higher than that of many countries. But US household net debt (gross household net debt adjusted for financial assets and liabilities) is negative 235 percent of GDP, that is financial assets are greater than liabilities. This is better than most nations and only less than Japan among developed countries. Corporate net debt (83 percent of GDP) is in the middle of the range of comparable economies.
Financial institution debt (88 percent of GDP) is lower than that of all developed countries except Canada’s. Banks have decreased leverage, having been forced to aggressively deleverage by selling off assets and raising capital. Banks also have only modest exposure to sovereign debt (8 percent of GDP) compared to banks in Europe (13-35 percent) or Japan (83 percent).
America is also less vulnerable to external shocks than comparable economies. US gross external liabilities (161 percent of GDP) are lower than most developed countries. US net external liabilities (amount owed to foreigners adjusted for a country’s international investment position) are a manageable 26 percent of GDP.
The US is less reliant on the world with its economy focussed on its substantial domestic market. The US remains a major food producer with agriculture being a major industry. It is a net exporter of food, controlling almost half of world grain exports.
Historically dependent on oil imports, which constitute a substantial part of its $600 billion trade deficit, the US is seeking to cut imports and increase its energy independence through increased production of shale gas and oil.
US oil output has risen 25 percent and is forecast to increase an additional 30 percent, to 11.1 million barrels per day by 2020. In combination with energy conservation measures, increased production has reduced US petroleum imports to around 40 percent of total consumption from 60 percent in 2005. American shale gas production has increased to more than 35 percent of total natural gas production from two percent in 2012.
While US energy independence is not likely in the near term, increase in domestic energy production and reduction in imports provides America with a significant competitive advantage and reduces its reliance on foreign suppliers.
American dominance of key industries makes it an indispensable monopolist, ensuring demand for many of its products. In technology and software, pharmaceuticals, complex manufactured products (aerospace, defence hardware, heavy machinery), entertainment and services, the difficulty in finding substitute suppliers or high switching costs limits potential loss of markets for American products.
A weaker dollar and lower energy costs, which reduces the cost base of domestic production, have encouraged a shift of production, manufacturing and assembly work back into the US—reshoring and relocating offshore production back to America.
This should assist in creating jobs needed to reduce unemployment. Stronger growth and lower unemployment will help reduce the large US budget deficit and address its public finances.
The US central bank’s ability to use quantitative easing (QE) to monetise its debt gives it flexibility to deal with its problems. Japan, the UK and Switzerland, although not the eurozone, have similar options. But the US dollar’s share of world trade and investment is extraordinary and out of proportion to its economic role, giving American policymakers greater options.
The dollar remains the principal currency for invoicing and settling trade. Around 85 percent of foreign exchange transactions involve the dollar. Fifty percent of stock of international securities is denominated in US dollars. Central banks hold 50 to 60 percent of their foreign exchange reserves in dollars. This is despite the fact that the US’s share of global exports is only 13 percent and foreign direct investment is 20 percent. Before the crisis, at one stage, around 85 percent of global capital flows was flowing into the US, including a significant portion (around $400 billion per year) into US government bonds.
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(This story appears in the 17 October, 2014 issue of Forbes India. To visit our Archives, click here.)