From Mark Burles,
Senior Vice President Ipsos Public Affairs
As dramatic as recent events in financial markets have been, it’s worth taking a moment to look beyond the latest headlines to examine the implications our current crisis holds for the global economy. This crisis promises to finally force the unwinding of the massive imbalances of savings and investment that have characterized the global economy for at least the past 10 years and usher us into an economic world very different from the one Americans have grown accustomed to.
The global economy in recent years has been characterized by co-dependencies between consumption within the US economy and investment from non-US, primarily Asian, sources. The hard charging, heavy spending US consumer served as the key driver of growth both domestically and globally. Export oriented economies, again mainly in Asia, benefitted from this by providing low-cost, inflation killing products to the seemingly insatiable US consumer.
At the same time, they also channeled massive amounts of capital to US, via the purchase of US Treasuries, in order to keep their own exchange rates stable (and cheap to the dollar). This, in turn, spurred even more consumption within the US as Americans tapped into increasingly creative and seemingly inexpensive financing sources (often access via home related loans) to fund expenditures.
The financial crisis we are in today marks the end of the situation described above. The current crisis has unleashed large, systemic forces that will reduce consumer spending as a percentage of US economy over the long term. Americans will save more and spend less because they have no choice but to do so. For the US consumer, the easy access to credit that allowed consumption levels to go so high, and savings levels to go so low, no longer exists. The financing sources are gone, but the debt remains and will need to be serviced. Because of this, the US consumer market is going to finally give up its central role in driving global economic growth.
At the same time, non-US economic actors are going to become more active in the US market . Foreign sovereign funds, companies, and wealthy individuals who may have been content purchasing US Treasuries in the past, will increasingly be in the market for more tangible US assets. The combination of the sharp decline in asset prices and weakening of the US dollar will make these assets too appealing to be ignored. Think back to mid to late 1980’s, when the strong Yen allowed Japanese corporations to snap up many marquee real estate and corporate entities. The Japanese may be back this time too, but will be joined also by many others from Asia and the oil bearing countries of the Middle East.
The changes described above appear to be fairly negative, at least from the US perspective, but they are only part of the story. Though burdened by debt, the US economy may very well emerge from its current troubles with a much more balanced and sustainable foundation for economic growth moving forward, leaning more heavily on business investment and exports relative to consumer spending. On the trade front, US exporters will have opportunities in foreign markets that we have not seen in recent history. This will be partly due to the decline in the value in the dollar, but also due to formerly export oriented markets being forced to rely on consumption within their own markets to generate growth to a degree that they have not had to in the past.
None of this is certain, of course. Choices will be made within the US and across the world that will play a large role in influencing what the global economy will look like once we finally move beyond our current financial turmoil. But we should recognize today’s upheaval reflects the inevitable transition from an economic order that was, ultimately, not sustainable. Moving forward, the US market will remain one of the wealthiest and most lucrative in the world, but it will be diminished in terms of the influence it holds and deference it is shown around the world. As disconcerting as these changes will be many Americans, we should be remain alert to the opportunities they will bring as well.