The world in 2014 is by common consent multipolar. Many are convinced that the US is a victim of secular economic stagnation and that its power and influence are waning inexorably as a result. Yet economic events in the coming year will probably throw up evidence to dispel some of the rhetoric of decline that is currently rife, not least in the US itself.
It is not, of course, difficult to make a gloomy case against the world's great superpower. It is politically dysfunctional, as was shown all too clearly in 2013 by policy makers' readiness to engage in brinkmanship over the fiscal cliff and flirt with sovereign default. The country's waning power was demonstrated by the inability of the Obama administration to act decisively over Syria. Its capacity to act is further impaired by a high level of public sector debt. And its political class has been bought by Wall Street bankers with an astonishing efficiency and cynicism.
Yet the more vociferous American self-critics often fail to see things in relative terms. The US does not, after all, face the huge problems of transition that now confront China and Japan. Yes, it has structural problems, but nothing to compare with those faced by Europe in energy, labour and banking markets. Equally to the point, its notoriously skewed income distribution is increasingly shared by other countries around the world.
The shrinking trade deficit
Falling imports of foreign oil pulled the U.S. trade deficit down in November to its lowest level in four years, offering further evidence that the economy grew faster in the final months of 2013 than previously projected.
A smaller trade deficit increases gross domestic product because it means Americans are selling more U.S.-produced goods and services overseas while buying less from foreign nations.
The U.S. continues to benefit from a booming energy industry that is exporting more petroleum than ever, the result of new technologies that have unlocked large oil deposits that were previously unrecoverable.
"Not only is the American energy boom underpinning export growth, it is reducing American demand for foreign oil," said Jay Bryson, global economist at Wells Fargo Securities.
Over the past year U.S. exports have climbed more than 5%. And if Europe starts to emerge faster from its recent recession - signs of a thaw are increasingly evident - that could give another positive jolt to the economy in 2014. The European Union is the biggest trading partner of the United States.
Economic fundamentals in the US this year are far better than in the other big advanced countries. Since the financial crisis the US is well ahead of Europe and Japan in moving to normalization, with the retreat from unconventional central banking measures already under way.
After two years of fiscal austerity, the budget deficit is less than half what it was in 2010 - an important point in relation to potential decline since stronger public finances are the key to the projection of power around the world. The housing market, meantime, is recovering and there are growing signs of business confidence.
The coming year may not be a supercharged one for the economy but it will be a great deal better than in any of the other leading industrial countries.
Interestingly, global markets have a realistic appreciation of this relative strength. The dollar ended the year up against the rest of the world, which is no mean achievement after all that fiscal irresponsibility on Capitol Hill. It is all the more striking given that the world's need for safe assets diminished in 2013 as the European Central Bank achieved growing success in stabilizing the eurozone sovereign debt crisis, with the result that the euro gained 4.3 per cent over the year against the dollar.
Indeed, one of the important consequences of the financial crisis has been that it reinforced the role of the dollar as the world's most sought after store of value in a storm. The US remains the pre-eminent provider of safe assets to the world despite the shortcomings of American political and economic management for the good reason that neither Europe, China or Japan is likely to offer a realistic alternative for years.
The US has also become the pre-eminent provider of high quality risk assets. Since 2009, powered by the Federal Reserve's liquidity creation, US equities are up 80 per cent in absolute terms or around 30 per cent relative to global equities. The Nasdaq market is 40 per cent above its 2007 high. According to S&P/Dow Jones Indices the US now accounts for 47.8 per cent of global equity market capitalisation. Investors put record amounts into U.S.-listed equity mutual funds and exchange-traded funds in 2013. At these market levels, future equity returns will be more subdued, but the robustness of the relative performance conveys a message about more than central bank pump priming.
There are longer term headwinds. No one should ignore the potential for adverse demographics to exacerbate the debt overhang. But once again, this should be seen in relative terms. Demographics in Japan and Europe are less favourable, as indeed they are in China where the population is ageing far faster than is normal in emerging market countries partly because of the one-child policy.
The conventional wisdom is right that we are in a multipolar world, both geopolitically and in terms of the long run decline in the role of the dollar as a reserve currency. The renminbi is set to increase its role in cross-border transactions, if not as a reserve currency in anything but the very long term. That said, 2013 demonstrated that the tilt in global economic power to the emerging markets had been exaggerated. Subject to caveats about a reversion to extremes of lunacy on Capitol Hill, that theme is likely to persist in 2014, while the notion that the US faces debilitating decline will be recognised as seriously overdone.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.