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  • Jul 25, 2014
  • Updated: 9:43pm
Monitor
PUBLISHED : Friday, 13 September, 2013, 12:00am
UPDATED : Friday, 13 September, 2013, 3:00am

Five years on, US fights back as China and India struggle

Doomsayers said it was only a matter of time before the Asian giants would rule the global economy but the United States still leads the way

This weekend it will be five years since the implosion of Wall Street investment bank Lehman Brothers alerted the world to the deepening crisis in the US financial system.

Since then the world has changed - but not in the ways that many commentators predicted in the immediate aftermath of the Lehman collapse.

As Washington was forced to stump up US$1 trillion in public money to fund an emergency bailout of America's banking, insurance, home loan and automobile sectors, pundits around the world were quick to announce the end of US economic primacy.

The crisis exposed the hollowness of the US model, they argued. With its weaknesses revealed, America's sun was now setting, to be eclipsed by the ascendant Asian economic superpowers of China and India.

Five years later, it's clear developments haven't followed their script.

Far from tipping into an irreversible slump, the US is successfully clawing its way out of its post-crisis downturn.

The United States is successfully clawing its way out of its postcrisis downturn

In the financial markets, instead of declining in value since the Lehman failure, the US dollar has strengthened against a broad basket of currencies. And rather than losing its place as the global currency of choice, the greenback has consolidated its position. According to the Bank for International Settlements, the US dollar is now involved in 87 per cent of currency transactions, up from 85.6 per cent before the crisis.

Meanwhile, the US stock market has gained an impressive 35 per cent over the past five years to hit new record highs.

And lest sceptics dismiss those gains as an artificial rally, pumped up solely by Federal Reserve-generated liquidity, it's worth pointing out that US companies are trading at the same valuation today - around 16 times earnings - as they were when Lehman blew up; a testimony to the strength of their profit growth in the meantime.

Away from financial markets, in the real economy the banking sector has rebuilt its balance sheets, while American consumers have slashed their debt burden.

Before the Lehman failure, US households were spending a record 17.5 per cent of their disposable income on servicing their debts. Today that proportion has been cut to around 13.5 per cent, its lowest level since the early 1980s. (see the first chart)

Even better, most of that reduction comes from paying down debt, rather than from lower interest rates. Even if benchmark rates were to climb 5 percentage points back to 2007 levels, US households' debt service ratio would not exceed a sustainable 15 per cent.

The combination of stronger bank balance sheets and lower consumer leverage has helped boost the US property market. Today housing prices - blamed as one of the main causes of the financial crisis - are some 4 per cent higher than they were when Lehman collapsed.

Put all this together, and the result is gross domestic product up more than 5 per cent in real terms since the Lehman collapse. And with the US government having cut its budget deficit from 10 per cent of GDP to 4 per cent in just four years, economic growth is now set to accelerate. With no fiscal drag, US growth should pick up from 1.5 per cent this year to 2.8 per cent in 2014, believes Jörg Krämer, chief economist at Germany's Commerzbank.

Meanwhile Asia's emerging giants are running into trouble. India's growth is stalling and capital is flooding out. And China has only maintained its high growth with an expansion of debt reminiscent of pre-crisis America.

Now, with its competitiveness eroded by a combination of fast-rising wages and currency appreciation, (see the second chart) China is facing a slowdown that threatens to puncture its own credit bubble, further weighing on growth.

All of which just goes to demonstrate the old adage: it's tough to make predictions, especially about the future.

tom.holland@scmp.com

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austin.murphy.1481
What happens in Greece doesn't stay in Greece unfortunately and the blowback from this whole crisis will still come back to haunt us ****www.reuters.com/article/2009/08/18/us-markets-sovereign-joint-idUSTRE57H3C820090818
dunndavid
Americans are less optimistic about their economic prospects than Mr. Holland apparently is. I just heard the breakdown: real income for Black Americans is down 9%, Hispanics -6%, Single mothers -7%, union members -6% all major voter blocks for Obama. Obama's policies have hurt most the very voters that gave him the strongest support. For whites, about 75% of American voters, their real income is down about 4%. A tremendous number of Americans have left the labor force because their aren't enough jobs (google U.S. labor force participation rate), particularly for low skills workers.
The absurdly misnamed Affordable Care Act, known to most Americans as Obamacare has not even been fully implemented, and already insurance premiums are way up. American's are so upset that recent polls indicated that on just about every issue the Democrat Party and the Republican Party is ascendant.
clc2
Might be good to remind those high and mighty Shanghainese that it's not smart to bet against the HK Cantonese, either.
bajie.zhu.908
What is less reported is the fact that China's industrial production is already $3.7 Trillion nominal, and $4.7 Trillion in PPP terms by 2012 (compare to $3.0T and $3.2T respectively for the USA). Moreover, China's industrial production continues to grow at double digit clips (latest qtr. was almost 11%). This is REAL WORLD growth, not the get-the-whole-nation-to-gamble-at-50-to-1-leverage derivatives economy of the West.
In another decade or two, China's industrial production can hit $10 Trillion a year.
Moreover, that is not the only impressive sector. China's agricultural production also leads the world by far: $831 B nominal, and $1.03 T on PPP basis, by 2012 (contrast $188 B and $161 B for the USA).
$700 Trillion (current size of the American led derivatives casino) in derivatives trading merely moves money from some pockets to others - the activity does not produce anything - not a single hamburger or car, not even a single pair of underwear, let along the many cable TVs that Americans can't live without.
America today leads the way in post-industrial shell games - moving dollars from some pockets to others without producing anything. The TPP is very much a tool to expand that shell game; the TPP demands that all member countries must dispense with capital control and maximize "banking reforms", to allow marauding by Western banksters. If anything, China should not be blindly following this "leadership." 2008 was the warning.
honkiepanky
Derivatives don't count in GDP, and financial services are only around 5% of U.S. GDP. Care to try again?
 
 
 
 
 

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