Strategic Asia 2009-10: Economic Meltdown and Geopolitical Stability

The Global Economic Crisis and U.S. Power

executive summary This chapter examines both the effect of the global recession on the prospects of capitalism remaining the predominant mode of economic organization and the impact of the downturn on U.S. power and hegemony. main argument: Although the current capitalist system is acutely susceptible to crises, capitalism as a model of economic organization has been far from irreparably harmed by the current economic crisis. Instead, capitalism will continue to persist as it has for centuries, its capacity to evolve and ability to efficiently distribute resources being its greatest strengths. Though capitalism may not be at risk, its current form, fundamentally shaped by U.S. economic and political hegemony, could be challenged. These challenges will be greatest if China experiences a quick recovery while the U.S. economy languishes interminably. However, current projections of U.S. economic growth, combined with a Chinese stimulus package emphasizing increased production rather than consumption, make such disparate recoveries unlikely. In sum, the current crisis is not a watershed signaling the shift of hegemony from Washington to Beijing. policy implications: • Sustaining U.S. hegemony over the long run will require engineering a controlled global adjustment of the international economic system that does not put the U.S. at an inordinate economic and geopolitical disadvantage. • Overcoming structural disincentives to avoid reducing budget deficits and devising a non-inflationary exit from present deficit spending are key medium-term challenges to preserving hegemony for the U.S. • Decreasing the current accounts and budget deficits through both lower spending and steady dollar depreciation is essential in protecting the dollar as the dominant international reserve currency. This exorbitant privilege of being the world’s banker is fundamental to the preservation of U.S. political hegemony. Overview The Global Economic Crisis and U.S. Power Ashley J. Tellis The current global recession is certainly the worst economic crisis that has afflicted the international system since the Great Depression. What began in the United States in 2007 as a financial crisis centered on failing subprime mortgages soon expanded into a larger recession that engulfed the real economy and thereafter was transmitted globally. The Business Cycle Dating Committee of the National Bureau of Economic Research has now concluded that the current recession in the United States began in December 2007 when payroll employment peaked before beginning the downward slope from which it has yet to recover.1 By September 2008, when the shocking bankruptcy of Lehman Brothers publicly signaled the advent of the financial crisis, the recession in the United States had indeed become severe measured by either the contraction in national output or the aggregate hours worked in the national economy. At the time of this writing in June 2009, the current national downturn has already exceeded the longest previous contraction since the Great Depression—the 1981–82 recession, which lasted sixteen months.2 Thanks to the consequences of globalization, this recent crisis has left a dramatic impact on the international economic system as a whole. 1 “Determination of the December 2007 Peak in Economic Activity,” Business Cycle Dating Committee, National Bureau of Economic Research, December 1, 2008, http://wwwdev.nber.org/ cycles/dec2008.html. 2 “US Business Cycle Expansions and Contractions,” National Bureau of Economic Research, http:// www.nber.org/cycles.html. Ashley J. Tellis is Senior Associate at the Carnegie Endowment for International Peace and Research Director of the Strategic Asia Program at NBR. He can be reached at . 4 • Strategic Asia 2009–10 The transmission of the deepening U.S. economic crisis to the global economy has occurred through multiple paths. For starters, weakening U.S. demand has depressed the imports of foreign goods and services, thereby affecting all of the United States’ major trading partners irrespective of how healthy their own economies might have been otherwise. The slowing of U.S. economic growth has also affected the major natural resource exporting states, including oil and energy producers, whose own economic prospects are tied substantially to the high resource prices that were the norm during periods of sustained growth. Further, the failing financial markets in the United States and the falling stock prices in all U.S. bourses not only eroded the asset base of many multinational businesses but also undermined the ability of numerous foreign firms to raise capital in the United States. Declining securities prices in U.S. stock markets led to a dilution of the values of assets traded in other foreign stock...