Economic analysts all over the globe couldn’t help but react to the consequences of the US debt deal, as it was approved by congress members, securing the United States from a potential default, and the S&P rating downgrade that followed. The US lost its highly valued AAA rating, doubts on the world’s most credible currency rose and more importantly the world reset its view of America’s ability to pay its debt. The major source of worry is not the financial situation of the US itself but its implications for the global economy. Globalisation and interdependence dictate different outcomes than what could be expected a century ago. US government bonds are any investor’s safest haven with China being the largest holder of US Treasuries. It would take more than just a few days for China and the rest of the world to restructure their finances and reduce dependence on the premise that never questioned America’s financial credibility. Gold and silver prices are on the rise as money looks for a risk-free destination.
But does the whole puzzle imply that the global economic system is destined to collapse as trust in the US system is weakened? Many of the financial troubles faced today find their origins in the crisis of 2008. Recovery has been challenging with persistently high unemployment rates in developed economies. But the world did recover from the Great Depression too, amidst increased cooperation and integration. One sees analysts questioning that if the world’s largest economy and the global leader fails to cling on to the AAA rating, then what prospects do other economies like Italy, Spain or even France hold for the future?
Well, the curious case of the United States is different. One often considers the lack of political will leading to misallocation of funds and resources in Pakistan. The same could be true for the United States, with different dynamics of course. The US needs to sustain its ageing population, hence its focus on healthcare programmes and towering social security bills. America’s military adventures all over the world result in its defense budget surpassing that of all other countries combined. This, thus, proves to be its political choice, or more so an economic necessity. Undoubtedly, the US led the world to paths of research and innovation, but not only have emerging powers caught up, they have discovered better and more efficient ways to do it, while the former continues its struggle with an ever rising public debt. Great Britain set the basis for growth through the industrial revolution but the other nations soon caught up. London’s position as the sole financial center of the world weakened. Late industrialisers often save on time, effort and money as they benefit from technology, skill sets and research and development already carried out by industrialised giants. Global focus has shifted before and it would do so again, not necessarily implying a complete chaos.
The recent financial crisis and an outlook on the way economic giants are managing their resources puts questions on capitalism for it being the best mode to do so. Has capitalism and the entire notion of free markets failed? No. It worked for the US. It worked for the world. But it couldn’t just work forever. For the world where it is today, there needs to be an appropriate mix of policies encompassing both the need for profit maximisation and necessary social elements. Intensive interdependence results in a software engineer losing his job in Silicon Valley due the popping up of a new IT company in Singapore. Regions are more likely to take up the status of being global economic powers rather than individual nations in the future, whether it be the Eurozone, keeping aside its own fiscal challenges for a minute, or the Asia Pacific region, with countries like South Korea, Thailand, Singapore and Malaysia leading the way. With regional liaisons of forward and backward linkages and a self-sustaining demand due to rising incomes, these nations would no longer completely need to depend upon the west for export-oriented growth.
The writer is sub-editor, Profit and can be reached on [email protected]
An insightful look into the debt crisis in the US and the authors notion of Capitalism and its sustainability in the world today. A well written piece.
Hey Mashal! Very well researched, well conceptualized and very very well written… It was very informative too.. Looking forward to more articles now so keep posting.. Good luck.. I really appreciate 🙂
Nice article, Mashal! Being from Cali, the part about the Silicon Valley particularly rings true.
A really interesting, praiseworthy insight on the current situation !
To my mind, though, the whole question of capitalism does not lie at the heart of this crisis, but more the ultra-liberal (non-interventionist) application of capitalism.
And I would like to question the relevance and the objectivity of those rating agencies (S&P, Filch, Moody’s…), who create ever-powerful and seemingly unquestionable turmoils over the whole international finance, whereas they are private companies whose vested interests and political bias (Republicans ?…) are famous.
That being said, this article is great food for thought, highly synthetic and introducing major stakes with a demanding and objective state of mind : great job ! 🙂
hey mashal i liked ur article has explained the situation well and i do agree that many regions in many developing countries are picking up on technology and knowledge and will be capble of creating greater and faster growth. The crisis in the west and the problem with the dollar is definately a problem that needs to be addressed quickly. hey mashal i appreciate you for giving a complete picture well descibing the near and long future…….
Extremely insightful look into the present global economic scenario…….the article is well analyzed and extremely well written….keep up the good job Mashal!
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