New Economic World Order: U.S. No Longer On Top

One year ago, the economic world was a tremendously different place. What were whispers of a credit problem, have since turned into one of the largest single economic events in history. The numbers, which have been extolled in virtually every major international article, speak for themselves (taken from the Emerginvest heat map):

click to enlarge

Indexes across the world - from China to Canada - have shed well over 50% of their entire value. We have heard the word depression floating around for one of the first times in 90 years. Countries and leaders around the world are clamoring for a resolution.

Looking back over the rocky road of the past year, I would say that 98% of average investors couldn't have had any idea this was coming. The news simply just continued to get worse. The toxic debt kept getting unearthed and it seemed like in a whirlwind, a flurry of major banks collapsed before we knew what was happening.

And then the fallout.

Before most major countries announced their gargantuan bailout packages, most global indexes shed 20-30% of their value in that horrific global week. In rushed meetings, governments announced their unified front against the flood of economic retreat. As most people reading this know, the US government gave nearly a trillion dollars to help bailout banking institutions. Governments around the world did the same: South Korea: $100B, Russia: $120B, Germany: $650B, UK: £37B, etc. Countries like Iceland have faltered and many others are on the brink.

The point is that global repercussions of this scale have not been seen in recent history and neither have international responses of this magnitude. No matter how you slice up the blame (no pun intended), there is plenty to go around: US banks initiating the practice of sub-prime mortgages and predatory lending, international banks following suit, the massive leveraging, governments for not keeping tighter control, etc. The fact is that the US produced the major portion of it and that has an impact on two areas in my mind: international perspective, and financial health.

The first point is that regardless of how many American investors view it, there are plenty of foreign individuals who see the US as having produced the majority of the toxic debt which does not bode well for an already faltering American image abroad. The second point is that US banks were left holding major portions of it – so much so that US firms have had much larger write offs so far than any other country.

Previously, the US was *the* international economic powerhouse. Today, I'm not so sure. An article published on October 20, 2008 in the New York Times entitled: "Japan Considers Bigger Role on Economic Stage," says it perfectly:

Just six months ago, five or six "bulge bracket" investment banks stood astride the globe virtually dictating the terms of engagement of international finance — managing deals, pronouncing companies (or countries) investment-worthy or not, and dispensing advice that companies (and countries) ignored at their peril. Now those brash American institutions have been swept away or tamed.

The question becomes, what does the new world economic order look like? It could still have the US as the major dominant party on the international scene, but I think that after the dust clears and the remaining fallout is absorbed by global markets, there will be a number of powerful players (including the US), versus one super-powerful player. For a basic metaphor: a shift from monopoly to oligopoly.

Who else do I see at the table? I'm not quite sure. I certainly see the EU as one economic bloc, India, China, Japan, and perhaps Brazil. The point is that in the absence of power, there inevitably comes reorganization. It can be violent, or it can be extremely subtle, but it will inexorably occur. The New York Times article cited above focuses on how Japan is heavily debating jockeying for a major position:

Japan could use some of its formidable $2 trillion in reserves to help troubled nations, including South Korea, should that country's own recent bailout of its banks prove inadequate. 'The dominance of American financial giants has been shaken,' said Takatoshi Ito, a professor of economic policy at the University of Tokyo. 'Now the tables have turned, and an Asian country like Japan can have the role of white knight and capital provider.'

The article further underscores my point perfectly:

…the fact they [economic proposals] are being discussed at all underscores the vacuum in leadership being felt across the world in the wake of an American-led economic debacle. The fact they are appearing in Japan, a nation long content to follow Washington's lead, reflects what many here call a movement toward a new global economic order in which no single country dominates. 'With the relative decline in U.S. economic and financial power, it is inevitable that U.S. leadership will also decline,' said Yasuhisa Shiozaki, a former chief cabinet secretary. 'We are seeing a new, multipolar economic regime starting to emerge.'

Another article from CNN also published on October 20, 2008 entitled "Bush to Host Global Summit" takes a different angle. It describes how President Bush answered the call of the EU to hold a global economic summit by the end of November by stating he would host it (without a date associated but presumably by the end of November). The announcement came alongside President Sarkozy of France and EU Commission President Barroso.

However, I give serious doubt as to the influence President Bush still has amongst the international community for the kind of measures that are being considered. Regardless of political leanings (which I am honestly attempting to avoid), the fact is that he is imminently transitioning out of office. The article briefly references that: "And with only three months left in office, reforming the global financial system likely will fall to his successor. It's unclear whether the winner of the upcoming U.S. presidential election would attend the first summit." With a diminished political stance, failing banks, and economic whiplash, I don't see the U.S. presiding as the unchallenged dominant player at the upcoming summit.

What does the new international stage look like? Who will lead the world in growth? Can the U.S. cope with not being the single economic superpower of the world, should it happen?

Only time will tell.

But I think one thing that is certain is that the economic world will look much different one year from now than it does today.

Disclosure: Emerginvest is an international finance portal, helping investors find investments from around the world. Emerginvest provides impartial information about world stock markets, and does not have any holdings in foreign equities.

Comments

[Michael Comeau:]

Well, it's difficult for any empire to stay on top with a declining economy. However, maybe the rest of the world will also fall apart, which could push the US further up the ladder.

2008 Oct 21 03:05 PM

[cyclingscholar:]

I really suggest you read STRATFOR's analysis of this similar issue, you political and economic lightweight. Alot of good trade surpluses, economic integration, and socialist safety nets did to protect people in England, Germany, Switzerland or numerous Asian economies. Their markets are down more than ours.

Go ahead and cheer the Euro...a currency backed by no taxing power, by countries that have military and intelligence networks so impotent they can't handle soccer hooligans, a region more dependent upon russia for petrofuels than a fetus is on its mummy for food and oxygen.

Europe comes to America hat in hand for rebuilding of a world financial and trade order. The only question: what will the Americans demand this time?

2008 Oct 21 03:05 PM

[swygert@law...:]

Jonathan: your article is insightful. Cyclingscholar: I suggest your scholarship include Will Durant's History of Civilization (albeit over 5,000 pages). One of this materpiece's inescapable conclusions is that every nation (and, for that matter, civilization) throughout history has a life span. For the sake of my grandchildren and their children, I hope we can at least slow down the inevitable economic and moral decline of the United States of America. But nothing, absolutely nothing any president, fed chair, US treasuer, or Congress does or fails to do will change the final outcome. In time we all die and so do, sad as it is, nations a fact which in the case of America is very very sad. My only thought, I will die long before my beloved country, I fervently hope.

2008 Oct 21 03:31 PM

[Smarty_Pants:]

Ummm, ... $10+ Trillion reasons why the US is losing its recognition as the leading economy on the globe. The debt is so large as to be incomprehensible and it continues to grow apace.


"There are 10^11 stars in the galaxy. That used to be a huge number. But it's only a hundred billion. It's less than the national deficit! We used to call them astronomical numbers. Now we should call them economical numbers." Richard Feynman (1918 - 1988)

2008 Oct 21 04:31 PM

[Tony Petroski:]

The Decline and Fall of the American Empire. I've been hearing it all my life--and yet we're still going. Japan is an aging country with no future as a world leader. China is an obvious choice except they have enormous political problems that will be readily apparent when their emerging middle class says "Hey, I'm glad we're driving Fords and Chevys rather than bikes and rickshaws, but why do I have to be ruled by the sons of the oligarcs. India is a rival but very far off as is Brazil. Russia? Just a regional bully. Europe? Eurabia? Don't write off the U.S. just yet.

2008 Oct 21 06:06 PM

[MarvinMBA:]

What difference does it make...The Bush Administration destroyed our
credability a long time ago. Our so called allies joke about this administration and now that we caused this economic downdraft our
reputation is further destroyed.

How much power we will be able to project (military and economic) is
certainly up for grabs and we will not know until this whole mess
moderates and things look clear....I'd say its going to take a few
years to sort this stuff out. Meanwhile try to develop personal strategic
plans and tactics to cover your personal life on what projected
problems could face you and your family in the future...start planning
now...you will have a couple of years before we know what this country
is going to be all about....MarvinMBA

2008 Oct 21 06:07 PM

[Alex_G:]

Hmmm, ok, you write a blog dedicated to emerging markets and then produce this drivel. Cyclingscholar has far more insight than you do. Nothing relevent, nothing new and horrible analysis if the data. I only hope you don't run other peoples money.

2008 Oct 21 11:31 PM

[avg.guy:]

Understandably most Americans have a very strong emotional attachment to their place in the world and in history. This type of strong emotional attachment can prevent one from acting as a truly rational player. They will likely be the last persons on earth to recognize a downgrade in the status of their great nation, a fact that makes this type of slide more probable.

I do not know if now is the time, but I do know that there are a lot of smart people out there that want to limit their exposure to a world economic model based too heavily on any one nation's economic policies and performance. A more distributed world economic system seems likely.

2008 Oct 22 12:05 AM

[Moon Kil Woong:]

Although the fiat $ system makes some sense, blowing it up by paying 0% attention to inflation, allowing excessive leverage, asset bubbles, no attention to trade imbalances, no regulation of derivatives or lending standards, and the transfer of debt obligation to overseas holders of an increasing amount of your dollars pretty much wins you a F in any economics class modeling. It's a wonder the US lasted as long as it did. What the US needs is a austerity program, not another re-inflation of money supply.

Of course, that's what it is going to get because the Fed, Treasury, and current administration are absolutely clueless and have trampled on any concept of a capitalism, and a free market. Add that to the loss of civil liberties and you can call it America as many times as you want but it is already gone.

2008 Oct 22 01:37 AM

[Dave P:]

The world economic leader is not going to be a socialist nation. Political systems simply do not adjust fast enough to the changing economic climate. Free market economies take the lead, even when there are huge market disruptions--in fact, ESPECIALLY when there are huge market disruptions.

2008 Oct 22 09:19 AM

[captainjohann:]

The decline started with American Presidents lying to the people like Nixon/watergate,Lyndon Jhonson/gulf of tonkin,clinton/Lywinsk... and WMD.As americans loose moral leadership, their CEOs think they can also do anything like Enron etc.
Read ten commandments and see how people are demanding Gay marriage,catholics hiding child sexual abuse etc and see your nation has been sliding long back from ETHICS. today i believe Ahmedijinad more than Bush and i am from India.

2008 Oct 22 11:45 AM

[trilomaxx:]

america will not go under, as the life span of nations and imperial powers is about 350 to 500 years. but there will be adjustments. the first that will have to be done is to get rid of the dollar in its fiat construction. it will be interesting to see how this will happen. this means everybody gets 40 new dollars to start with (you can keep your house if it is paid off). if this is not done the american people will be separated from their money by hyperinflation or by deflation. hyperinflation only destroys the currency and the economy but deflation also destroys the country itself.

2008 Oct 22 01:55 PM

[JasonC:]

America hater and high as a kite. The dollar is soaring, submerging markets are crashing and burning on an epic scale, only the US and Japan have credit and credibility, with the EU a distant third. The commodity producing periphery that was supposed to inherit the future instead can't borrow a dime to save their lives.

It is a capital strike, and the developed world gets its own or nobody gets anything.

2008 Oct 22 03:02 PM

[nmelendez:]

So what happens when China starts printing Yuan's like crazy? Or India decides it's exchange rate with the dollar is a 10 to 1? Or EU decides the dollar is worth 2 dollars, fixed? Now, who decides what currency is worth what?
I am ready for my minimum wage of 300 bucks/hour. :)

2008 Oct 22 06:35 PM

[CLH:]

What garbage you write Jonathan. When the US market goes up the whole world goes up and when it goes down the world follows like a band of sheep.

2008 Oct 22 11:26 PM

[Lin:]

Cruise9806 ,
You can forget US minimum wage at 300 hour . The chinese make approx 28 cents per hour / for 12-14 hour days . The US cannot remain competitive if it has high wages , high cost products to export . In the 1st great depression , US was #1 . Chinese , malaysian + Indian workers were not an issue . This is no longer true. recession = 2 or more consecutive down quarters . Depression = when the standard of living of the masses decreases drastically . Welcome to the " greater depression "

2008 Oct 22 11:57 PM

[i_investor:]

get financial news at investornewsdaily.co.u...

2008 Oct 23 03:39 PM

[i_investor:]

investornewsdaily.co.u...

If history is anything to go by, then no civilisation has prevailed for too long, be it Roman, Greek, Egyptian....

If Asia is rising today, it could be Africa's turn next?! who knows...

2008 Oct 23 03:42 PM

[floyd2466:]

Don't know why people like cyclingscholar have to be so virulent in their replies! You may not agree with the article, but its perfectly logical and well-argued!

For my part, I think the US will remain king simply because there is no other country yet ready to replace it. The EU is far too fractured to ever act as world leader and, in any case, history shows that nations only have one go at being top dog and Europe has had its day. Japan? Rich, plenty of reserves, but far too insular and consensus-driven to ever have the strength to act as a leader - simply being able to lend money does not make you a leader. China? Very likely one day in the future (if it doesn't disintegrate in social upheaval), but certainly not now. Despite its impressive growth, it is still very much a developing country.

All that by default leaves the US as still very much the nation that essentially leads - if not necessarily drives - the world economy.

2008 Oct 23 09:45 PM

[Polaris:]

The world is now at an inflexion point. The US dominance of the world order, both economically and politically, is over. The changes now taking place in the geo-political landscape were always inevitable as China, Russia and India fulfilled their potential and Europe consolidated. However the current crisis, precipitated by the chronic mismanagement of the US economy, has accelerated the rate of change.

What is now clear to everyone, except perhaps the US leadership, is that the US economic model of laisser-faire self regulating markets is fundamentally flawed. The idea that there is an invisible hand of rational-self-interest guiding the market as Adam Smith proposed is now shown to be a dangerous misconception. After all rational-self-interest is now exposed for what it is, a euphemism for greed, which poses the question- can unfettered greed, the most base of all human traits ever be a power for good in human society. Greed is a powerful motivating force, but like nuclear power it has to be focused and regulated or it runs out of control causing disasters like Chernobyl and Three Mile Island.

The experiment of self-regulating markets is over. We now need to forge a new global paradigm, a new way of controlling and focusing markets to tame and focus rational-self-interest... To many in the US this will be dismissed as socialism an anathema to the free-wheeling wild-west mentality that has brought us to this economic disaster.

The US faces a stark choice. The days of the US neo-cons are over. It will not be allowed to dictate the terms of the new world order. It must either come to terms with the will of the rest of the world or face the inevitable split of the world into two disparate economic regions. One region consisting of increasing co-operation of what might be called a Eurasian trading group - Europe in association with Australia, China, India and Russia on the one hand, using the Euro or a basket of currencies as a basis with a compassionate regulated capitalism, a caring market economy. On the other hand the US isolated with a rapidly devaluing $US and a world that will no longer finance the US budget deficits.

The US is at a cross roads. It can at the forthcoming conferences co-operate with the leaders of the major economies on the basis of equals to hammer out a way forward for the global economy. This of course would be to accept a gentle and controlled decline in the US influence on global geo-politics. Or it can try one last time to impose its flawed economic and political concepts on the global economy and so lose all credibility and influence and sink rapidly into second rate status.

2008 Oct 24 01:37 PM

[snobird:]

Our current nation-wide economic problem could have been prevented if our home mortgage, investment banking and judicial systems leadership had bothered to read and implement Adam Smith’s 2nd book end work, THE THEORY OF MORAL SENTIMENTS. You may recall it is the bookend companion to Smith’s THE WEALTH OF NATIONS, “invisible hand” market place theory. In it, Smith calls for a “visible hand” (regulation & enforcement) in the market place. The problem we have today is our US, Free Enterprise system leadership has fully embraced the theory of the “invisible hand,” but we have not had the self discipline to put the principals of the “visible hand” into place. What is the visible hand? Making sure JUSTICE is done by funding needed regulation and enforcement.
Snobird
October 24, 2008

Adam Smith warned in his 2nd work, when there is no one watching (regulating and enforcing) avaricious greed is likely to corrupt and the social system will become unstable. Currently, very complex and non-transparent financial instruments have been allowed to run unchecked in our financial market place. All brought great wealth to these Financial Industry leaders on Main Street and Wall Street. And now we have these same leaders trying to off-load their losses on the American public. When will Justice be done?

In America, we have police and fire protection in every town and city. No one disputes the need for these public services. So how is it we have never gotten around to addressing the gaps in regulation and enforcement in our HOME MORTGAGE, INVESTMENT BANKING AND JUSTICE institutions?



On Oct 24 01:37 PM Polaris wrote:

> The world is now at an inflexion point. The US dominance of the world
> order, both economically and politically, is over. The changes now
> taking place in the geo-political landscape were always inevitable
> as China, Russia and India fulfilled their potential and Europe consolidated.
> However the current crisis, precipitated by the chronic mismanagement
> of the US economy, has accelerated the rate of change.
>
> What is now clear to everyone, except perhaps the US leadership,
> is that the US economic model of laisser-faire self regulating markets
> is fundamentally flawed. The idea that there is an invisible hand
> of rational-self-interest guiding the market as Adam Smith proposed
> is now shown to be a dangerous misconception. After all rational-self-interest
> is now exposed for what it is, a euphemism for greed, which poses
> the question- can unfettered greed, the most base of all human traits
> ever be a power for good in human society. Greed is a powerful motivating
> force, but like nuclear power it has to be focused and regulated
> or it runs out of control causing disasters like Chernobyl and Three
> Mile Island.
>
> The experiment of self-regulating markets is over. We now need to
> forge a new global paradigm, a new way of controlling and focusing
> markets to tame and focus rational-self-interest... To many in the
> US this will be dismissed as socialism an anathema to the free-wheeling
> wild-west mentality that has brought us to this economic disaster.
>
>
> The US faces a stark choice. The days of the US neo-cons are over.
> It will not be allowed to dictate the terms of the new world order.
> It must either come to terms with the will of the rest of the world
> or face the inevitable split of the world into two disparate economic
> regions. One region consisting of increasing co-operation of what
> might be called a Eurasian trading group - Europe in association
> with Australia, China, India and Russia on the one hand, using the
> Euro or a basket of currencies as a basis with a compassionate regulated
> capitalism, a caring market economy. On the other hand the US isolated
> with a rapidly devaluing $US and a world that will no longer finance
> the US budget deficits.
>
> The US is at a cross roads. It can at the forthcoming conferences
> co-operate with the leaders of the major economies on the basis of
> equals to hammer out a way forward for the global economy. This of
> course would be to accept a gentle and controlled decline in the
> US influence on global geo-politics. Or it can try one last time
> to impose its flawed economic and political concepts on the global
> economy and so lose all credibility and influence and sink rapidly
> into second rate status.
>

2008 Oct 24 02:56 PM