On the whole, we do not hold with any of that. Yes, there will be hard times ahead but capitalism is not dead and is not going to die any time soon. Yes, governments will acquire power that they will not know how to use well because they never do know but the financial institutions will, eventually, break free or circumvent the most appalling regulations like the ones that have actually caused the crisis.
But what about America's pre-eminence? Will that disappear? Yes, burble all sorts of people in Europe as well as the New York Times (which will disappear a lot sooner if the present trend of catastrophic fall in readership and share prices will continue). If we are to accept this we have to ask ourselves who is to take her place as the strongest economy, bearing in mind that, no matter what the financial situation is the American economy is doing quite well and actually growing.
Well who? China? Russia? India? Japan? Any European country? The moment you ask that question you can see the basic problem: everybody is in the same mess and many countries are struggling a great deal more because of other problems peculiar to them.
Bret Stephens put it even more strongly in this morning's Wall Street Journal:
Almost in unison, Germany's finance minister, Russia's prime minister and Iran's president predict the end of U.S. "hegemony," financial and/or otherwise. The New York Times weighs in with meditations on "A Power That May Not Stay So Super." Der Spiegel gives us "The End of Hubris." Guardian columnist John Gray sees "A Shattering Moment in America's Fall From Power."Well, it makes sense to me but I would be interested to hear opinions from readers, particularly those more knowledgeable than I am on matters economic.
Much of this is said, or written, with ill-disguised glee. But when the tide laps at Gulliver's waistline, it usually means the Lilliputians are already 10 feet under. Before yesterday's surge, the Dow had dropped 25% in three months. But that only means it had outperformed nearly every single major foreign stock exchange, including Germany's XETRADAX (down 28%) China's Shanghai exchange (down 30%), Japan's NIKK225 (down 37%), Brazil's BOVESPA (down 41%) and Russia RTSI (down 61%). These contrasts are a useful demonstration that America's financial woes are nobody else's gain.
On the other hand, global economic distress doesn't invariably work at cross-purposes with American interests. Hugo Chávez's nosedive toward bankruptcy begins when oil dips below $80 a barrel, the price where it hovers now. An identical logic, if perhaps at a different price, applies to the petrodictatorships in Moscow and Tehran, which already are heavily saddled with inflationary and investor-confidence concerns. Russia will also likely burn through its $550 billion in foreign-currency reserves faster than anticipated -- a pleasing if roundabout comeuppance for last summer's Georgian adventure.
Nor does the U.S. seem all that badly off, comparatively speaking, when it comes to its ability to finance a bailout. Last month's $700 billion bailout package seems staggeringly large, but it amounts to a little more than 5% of U.S. gross domestic product. Compare that to Germany's $400 billion to $536 billion rescue package (between 12% and 16% of its GDP), or Britain's $835
billion plan (30%).
Of course it may require considerably more than $700 billion to clean out our Augean Stables. But here it helps that the ratio of government debt to GDP in the U.S. runs to about 62%. For the eurozone, it's 75%; for Japan, 180%.
It also helps that the U.S. continues to have the world's largest inflows of foreign direct investment; that it ranks third in the world (after Singapore and New Zealand) for ease of doing business, according to the World Bank; and that its demographic trends aren't headed toward a tall and steep cliff -- as they are in the EU, Russia, Japan and China.
Above all, the U.S. remains biased toward financial transparency. I am agnostic as to whether mark-to-market accounting is a good idea; last month's temporary ban on short-selling financials seemed a bad one.
But a system that demands timely and accurate financial disclosure and doesn't interfere with price discovery will invariably prove more resilient over time than a system that does not make such demands. If Fannie Mae and Freddie Mac were financial time bombs of one kind, then surely China's state-owned enterprises are time bombs of another. Can anyone determine with even approximate confidence the extent of their liabilities?