If the next administration accepts that the US can no longer be the world’s sole hegemon and starts managing the US economy to lift the return on invested capital in risk-taking industrial activities, the sky will be the limit for the US economy, said analysts from Gavekal Research on Thursday.
Analysts described this as an existential choice for the US, and explained that the US dollar became the world’s reserve currency not by design but because other countries felt more comfortable holding US dollars than other currencies.
This status is achieved when a country meets several key criteria: cultural dominance, military control of sea lanes and world trade, and scientific leadership driving growth through creative destruction, analysts added.
Analysts also noted that if the next US administration attempts to maintain monetary preeminence, it would spell doom for both the US economy and its global power, leading to a more dangerous world.
Historically, the US also dominated industrially by producing superior weapons, agriculturally by feeding allied populations during crises, financially by allowing other countries to borrow in its markets, and legally by protecting non-residents' assets as if they were owned by its citizens.
These factors, analysts noted, were present in 1945 and further solidified when Saudi Arabia agreed to price its oil in US dollars, granting the US significant economic leverage.
According to analysts, this economic dominance allowed the US to operate without a foreign trade constraint, as other countries had to invest their current account surpluses in US dollars, funding the US deficits.
This “imperial privilege,” as described by French economist Jacques Rueff, meant that the US only needed to implement restrictive monetary policies when inflation was a threat, not because of trade deficits, said analysts.
However, analysts also pointed out that in the last 20 years, the US has seen a decline in these characteristics, now fulfilling only two of the necessary conditions for issuing the world’s reserve currency: dominance in creative destruction and control of the world's sea lanes.
Analysts noted the significant decline in the US industry and the middle class, with the rich getting richer and the poor getting poorer.
They also noted that many non-Americans no longer believe they will be treated fairly by the US legal system, nor do they see US universities as the best globally. Additionally, the rise in the US budget deficit and current account deficit has been used to finance living standards and the purchase of foreign goods, respectively.
To finance these external deficits, analysts explained that the US has relied on establishing large oligopolies in the information industries and encouraging foreigners to invest in these oligopolies by promoting indexation as the best way to allocate capital.