Driven by the success of America’s vaccine rollout and massive government stimulus, the US economy is expected to grow as fast as 7% this year and is currently leading the world recovery. The commentariat was talking up an “American Renaissance” as the nation celebrated the 245th anniversary of its independence on Sunday.
But there is a problem: America just went through an economic renaissance. It’s not likely to be reborn again.
A decade ago, in the wake of the 2008 financial crisis, Standard and Poor’s downgraded US government debt for the first time ever, triggering dire forecasts of American decline. Instead, the 2010s saw an expansion of American economic power, driven by its tech prowess and its relatively quick resolution of the debt crisis.
The US share of global GDP rose from a 2011 low of 21% to 25% last year. Average incomes started the decade 26% higher in the US than in Europe and finished more than 60% higher. The US income lead over Japan grew even more dramatically. By early 2020, despite talk of “despair” in the jobless middle classes, US consumer and small business confidence hit highs unsurpassed since the 1960s. Unemployment fell to 50-year lows.
As a financial superpower, the US reached even greater heights. Its stock market rose 250%, far outpacing all rivals over the course of the decade, and its share of global stock markets increased from 42% to 58%. The US dollar emerged more dominant than ever, helping the US extend its lead over other developed nations.
By late 2019, 75% of all overseas loans to individuals and corporations were denominated in dollars, up from 60% before the crisis of 2008. Six of every 10 countries used the dollar as their “anchor” – the currency against which they measure and stabilise the value of their own currency – near a record high. China’s efforts to challenge the dollar as the world’s favourite reserve currency also failed utterly during the 2010s.
After a comeback decade, America is unlikely to rise anew in the 2020s. As I argued at the start of the pandemic, booms that are potent are almost always followed by a long hangover.
The US economy led the world in the 1960s, but in the 1970s it worried about falling behind the oil-fuelled Soviet Union. In the 1980s it fretted over an ascendant Japan. The US came roaring back during the tech boom of the 1990s, but the 2000s were all about the rise of emerging markets led by China.
Forecasts for another US surge rest in part on faith that it can keep extending its lead in technology. But the US internet giants already face challengers in emerging markets from Asia to Africa, where local entrepreneurs are building national and regional market leaders in e-commerce, e-banking and search.
Europe is closing the innovation gap in fields such as robotics and AI, and European startups are attracting more private equity money than ever before. The European share of global venture capital has also been mounting steadily, and its tech sector is worth four times what it was just five years ago.
Booms are often killed by complacency, which grips the US now. Major voices in both parties have argued that America should continue to borrow and spend freely, thanks to the unrivalled status of the dollar as the world’s most wanted currency. Pushed upward by stimulus to fight the pandemic lockdowns, US government debt spiked last year from 109% to 131% of GDP – well above the developed world average.
Easy money flowing out of the Fed is threatening to weaken the dollar and feeding the rise of the zombies – companies which earn too little to make even interest payments on their debt. They barely existed in the US 20 years ago, but accounted for 6% of listed companies by 2010, and almost 20% by last year.
The federal government and corporations are now so deep in debt, it is hard to imagine how they can further boost the economy. In 2010, the US owed the rest of the world $2.5 trillion, a sum equal to 17% of US GDP. By early last year, those liabilities had risen to $10 trillion and more than 50% of GDP – a threshold that has often triggered currency crises in the past. Currently they are $14 trillion and 67% of GDP.
Optimists believe American consumers will spend freely as the pandemic passes, driving a new boom, but so far they have used a large part of their stimulus checks to pay down debt or speculate in the markets.
None of this means that American declinists, so wrong in the 2010s, will finally be proved right. China’s rising share in the global economy has come largely at the expense of Europe and Japan. Declinists, still convinced the US will soon be overtaken by China, overlook the fact that China has huge debt problems too.
What is more likely is that the US will have a mediocre decade, weighed down by the excesses of its recent boom. Relative to other markets, US stocks are at a 100-year peak. Valuations that high reflect the new optimism: After a decade of unanticipated US success, many analysts now expect more of the same. Alas, this may be as good as it gets for America.
Views expressed above are the author’s own.
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