It is now give or take five years since a finance-centered economic crisis hit highly-leveraged Western economies. While early on there was talk about a major transformation of world monetary arrangements (Roubini, May 13, 2009, in the NY Times here, on the “almighty renminbi”), the US remains the preeminent monetary power in the world.
Still, as recently as October of 2012, Eichengreen stood the course, predicting that soon the “only solution” will be “for the US, Europe and China to share the [monetary] burden. They can do so by putting in place measures to enhance investor confidence in their sovereign issues. And in each case the solution is at least as much political as it is economic” (link).
[a]s emerging markets continue to rise, the US will unavoidably account for a declining fraction of global gross domestic product, limiting its ability to supply safe and liquid assets on the scale required. The US Treasury’s capacity to stand behind its obligations is limited by the revenues it can raise, which depend, in any scenario, on the relative size of the US economy. With emerging markets’ growth outstripping that of the US, the increase in the capacity of the US Treasury to supply safe and liquid assets will inevitably lag behind the increase in global transactions.
So, Eichengreen’s outlook on the US as declining monetary power depends on a critical mass of “investor confidence” in China’s “sovereign issues.” This is no small condition to reach, especially for China, a state-centered economy and society. At the same time, a long history of the US being business-friendly has lent a high threshold for China to match. Could private actors come to believe that China matches the US’s decades- and centuries-long commitment to private property and private action? Who would bet yes?
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So yes, my view of world economic and US macro-economic conditions rests on the US continuing as unrivaled monetary power today and into the future.
More specifically, my view of the Federal Reserve balance sheet — combining unprecedented assets (in the form of mortgage-backed securities) and liabilities (in the form of excess bank reserves) — is similarly optimistic: the ability to be so monetarily innovative is itself a signal of the preeminence. Substantively, there is a lot of subdued money on that balance sheet waiting to inflate prices: to induce recovery. Inflation will be a good thing for economic growth.
Now, whether we politically and culturally turn this recovery into an actually thriving labor market, that is another question. Whether inflation will be a “socially good” form of economic growth is yet another.