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Will America Decouple From The Global Economy?

By: Steve Johnson

2/2/2009 - 30 Comments

The big questions that economics have debated for years, is if the US economy will decouple from the economies of the rest of the world.

So far, we have a global recession with ALL central banks struggling and reacting the same way, by increasing their currency supply and lowing interest rates to near zero. 

If the US continues to struggle, who will lead the world out of this financial mess and how will they do that without much capital?  Capital has been drastically reduced around the world.  The US economy is built on and is very dependent on the free flow of capital. 

Recently, many economists point to the corresponding drop in foreign markets and US markets in 2008 as proof that the economies of the world have not decoupled from the US economy.  And therefore the US needs to lead the world out of the global recession.   

Asia doesn’t want to decouple from the US because the US is their best customer, helping China grow into the producer of the world over the last 15 years.  China, India and Japan desperately want the US economy to rebound as soon as possible. But, if it doesn’t, they will be forced to look elsewhere to grow their economies. 

Hinged on Confidence

The big question is when will the US economy turn the corner, 2009, 2010 or 2015?  The sooner the better for everyone, but if Asia looses confidence that the US will come out of the recession within a reasonable amount of time that they are willing to wait, then the decoupling process could begin. 

If Asia looses confidence in a US economic recovery, others are likely to also loose confidence as well – resulting in a sudden and devastating drop in the value of the dollar – which will be next to impossible to recover from. 

The Obama administration only has maybe another year at the most before the patience of Asia wares thin and the decoupling process begins.  If and when this happens, Asia and the global economy will need to find a new way to grow their businesses and a new way to fund their capital markets.  The present market conditions do not support an answer to these pressing questions. 

Confidence is the key. Everything depends on the confidence in the US government to get the US consumer spending again, even though they are flat broke and in debt up to their ears. 

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