David H. Levey and Stuart S. Brown write in the latest issue of Foreign Affairs on the US deficit. A riveting read, for those interested in US economics, I know some of you out there enjoy it at least. In their conclusion they look at some precedents:
At the peak of its global power the United Kingdom was a net creditor, but as it entered the twentieth century, it started losing its economic dominance to Germany and the United States. In contrast, the United States is a large net debtor. But in its case, no plausible challenger to its economic leadership exists, and its share of the global economy will not decline. Focusing exclusively on the NIIP obscures the United States’ institutional, technological, and demographic advantages. Such advantages are further bolstered by the underlying complementarities between the U.S. economy and the economies of the developing world — especially those in Asia. The United States continues to reap major gains from what Charles de Gaulle called its “exorbitant privilege,” its unique role in providing global liquidity by running chronic external imbalances. The resulting inflow of productivity-enhancing capital has strengthened its underlying economic position. Only one development could upset this optimistic prognosis: an end to the technological dynamism, openness to trade, and flexibility that have powered the U.S. economy. The biggest threat to U.S. hegemony, accordingly, stems not from the sentiments of foreign investors, but from protectionism and isolationism at home.
3 thoughts on “The Overstretch Myth”
I read that Foreign Affairs article and wasn’t impressed. Paul Kennedy’s thesis may have some flaws but I’m tired of reading these “America is different” refrains coming from certain Americans.
Wait until the dollar declines as a reserve currency in Asia or if (by some slim chance) the Arabs ever decide to price oil in euros. The US is definitely in relative decline. I’m more interested to see if Europe will follow it.
I commented on this article a while ago on my blog, New Economist:
Hmmm. I agree that current account deficits in themselves are not necessarily a bad thing – indeed, they are often the result of robust economic growth. It is their sustainability that matters.
But when I read phrases like “economic superiority” I reach for the bucket… tell that to the Irish, British, Australians, New Zealanders and others who all managed to avoid a recession after the stock market bubble burst!
I have seen a rebuttal. Its called Mything the point of Overstretch
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