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US Decoupling Is Underway

By: Steve Johnson

6/10/2009 - 29 Comments

The idea that someday the US economy would no longer be the driver of global economic growth is often referred to as ‘decoupling’.

Many economist and politicians have dismissed the idea of ‘decoupling’ and instead hold on to the belief that the US will remain the global economic leader for decades to come. 

Their assumptions are based on the fact that the US economy consumes much of what the world produces and remains the largest economy in the world.  The US economy makes up 25% of the global economy.

Manufacturing

While the US manufacturing industry has maintained in a leadership position in several markets, like construction and agricultural equipment, it has been shrinking in many other markets for many years.

If true wealth is only produced by savings and production, then it will take a US manufacturing industry coupled with a renewed increase in the savings rate to lead the US out of the recession.  But, with negative savings rate and trillions in consumer and national debts pilled sky high, along with a much smaller manufacturing industry then during the industrial revolution, the US is not likely to strengthen its economy or lead the globel economy

China recently stated their distaste in the US budget plans to further borrow and spend trillions of dollars, in an effort to juice the US economy.  This plan puts China is a difficult situation in which they are now considering their options to diversify their dollar based investments to avoid a loss in value of their investments.

China would prefer that the US cut spending and increase savings and production to lead the world back to economic growth. 

Decoupling

The decoupling process that has been overlooked and discarded by many economists is accelerating.  The theory of why decoupling would not happen is bases on if the US consumers are no longer consuming, then many of the producer nations will be in big trouble - unless of course, other nations begin consuming the products that the US was consuming in the past. 

The two largest producers in the world, China and Japan, are seeing steady increases in their exports.  But, how could this be if they are dependence on US consumers?

Japan Industrial Output Recovers, Up Most in 56 Years

China manufacturing sends stock futures sharply higher

What seems to be happening, as the US economy remains in recession, is that the economies of the world that have savings to spend are increasing their consumption.

The end result of decoupling could be very damaging for the US.  Once the producer nations realize that the US consumers are no longer going to be their best customers, then they could reduce their investments in the US.

Much of these investments end up in the hands of US consumers – by way of credit.  The longer the US remains in recession, the more decoupling we will see. 

The process of decoupling is well underway. The nations that are wealthier then the US (in which wealth is defined as savings and production) have begun leading the world out of the global recession and are leaving the US behind in the process.

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