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May 16, 2011

The United States of Obama’ Unfinished Economic Revolution

  People are widely convinced that financial crisis of 2007 and economic crisis of 2008 dealt a fatal blow to the States’ status as an unchallengeable superpower. The crises have pushed up debt-to-GDP ratio higher than it should be. Turbulences in financial market gave rise to an unprecedented capital flight from US to developing countries, especially emerging ones. For second time just in a decade, US economy went into recession in conjunction with high uncertainties about long-term economic performances. United States is also running a large trade deficit with its counterparts thanks to the losing of competitive edge. Scholars believe that Uncle Sam’s economic debacle dissolved Americans hope of gaining a second term as the most powerful country in the 21st century.
On the contrary, I don’t share those views. Hilary Clinton once interesting said that America is still around. It would be naïve to label recent crises as a failure of America. The ones are indeed an unfinished economic revolution. For the rest of my piece, I am going to defend hidden fact that the crises are running in favor of America.
In 2008, Bush administration and Congress approved 700 billion dollars bailout package to prevent the economy from being brought down by a great shock in financial market. In 2009, 787 billion dollars bailout plan and 825-billion-dollar economic stimulus package were approved to buy Treasury bonds and mortgage securities. Barry Ritholtz, co-author of Bailout Nation, estimated that the bailouts were valued at $4.1615 trillion dollars, even bigger than India economy in 2010 measured at PPP basis. So, the money that the Fed injected into its economy is surprisingly large. For now, US consumers are having confidence on their economy and they start to spend more as investors are in a mood to feel a sense of a secure doing business environment despite there are concerns about rising oil prices and unrest in Middle East. As US economy mired in recession, there was a massive capital flight from US to developing countries. From a different perspective, capital flight is beneficial to US economy. We must not ignore that fact capital flowing from US has made currencies of receiving countries more expensive in comparison with US Dollars, viz. China, India Brazil and Russia. Leaders of those countries are having their hands full dealing with a large inflow of US dollars. US is going through a dilemma, so do developing countries. Inflow of US dollars presents both opportunities and challenges. US investors get high interest rates from their invested money in host countries. Although the inflow of US dollars to the rest of world is largely speculative, I am optimistic that most of US investors will eventually find that developing countries are a lucrative place to do business. Against the backdrop, we shouldn’t think that capital flight is happing in US. Put simply, investment, on the contrary, plight has been happening. China, India, Brazil, Russia and other emerging economies have been largely benefited from the inflow US dollars although there have been recently fears of out-of-control inflation and asset bubble. US, in turn, will benefit from a faster rising middle classes of both emerging markets and developing countries. Home truth is that US can’t afford not having a richer, faster-growing Sothern world. The rise of purchasing power of people living in countries will be a check to US debt. The faster they rise, the faster they lose competitive advantage. In addition, they create a high demand for US goods and services. Weak US dollar, caused by low performances in economy, has been an advantage for US exporters and also has decreased trade deficit with developing world, especially with China. I expect US economy will see a healthy recovery. Consumers spending, innovation and investment should be an indispensible driving force. Investment now is a key factor for US economy to grow. It’s a matter of time that the trillion dollars the Fed injected into the economy become effective and it will be long before the economy to lose its momentum. At the time, US leaders will be busier dealing with inflation than deflation.
Furthermore, the economic crisis served as a best pretext for Obama administration to initiate and approve a law reforming US financial market that made an invaluable contribution to its credibility. Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law by President Barack Obama in 2010 aimed at reducing risks in financial system , minimizing the gain of the rich at the expense of the poor and giving the Fed more powers to oversight the economy. Economic crisis is also reducing global imbalances which post a serious threat to global economy and more reformed are expected to come.
Both President Nicolas Sarkozy of France and IMF managing director Dominique Strauss-Kahn have proposed that financial transaction be taxed for the sake of financial risks prevention. Should the proposal is implemented, governments of developed countries will find partial solutions to their debts and deficit and United States will get the most benefits. For sure, it is inappropriate to say that America is in decline. From my point of view, America is in transition.