Daniel W. Drezner

Who’s your economic hegemon now?

Who’s your economic hegemon now?

Hey, remember how, after the 2008 financial crisis, a lot of Really Smart People said that the United States had reached the end of influence or a post-American world?  How the accumulated ills of the U.S. economy were leading to a decline in American hegemony, or even the end of power itself?  How the BRICS were the new new thing? 

I bring this up because, five years after the financial crisis rally heated up, we confront this New York Times front-pager by Nathaniel Popper: 

Despite a partial recovery in the markets on Friday, tumbling stock, bond and commodity prices around the world over the past month are demonstrating just how reliant the global economy has become on the monetary policies of the Federal Reserve.

In the weeks since the Fed’s chairman, Ben S. Bernanke, first indicated that the central bank might start to pare back its support for the economy, markets in Asia, Europe and Latin America have fallen even more sharply than those in the United States, threatening economic growth in many countries.

While leading market measures in the United States have declined 4 percent over the last month, an index of the world’s stock markets has slumped more than 6 percent.

“The Fed isn’t just the U.S.’s central bank. It’s the world’s central bank,” said Mark Frey, the chief strategist at the Cambridge Mercantile Group….

The selling picked up in markets around the world on Thursday, a day after Mr. Bernanke’s latest comments on the Fed’s plan to wind down the stimulus. While the reason for the shift by the Fed is good — a strengthening of the recovery in the United States — investors are nervous that the global economy may not be ready.

The heavy selling was a sharp reversal after years when low interest rates in the United States encouraged investors to put their money into foreign countries. For investors in once-attractive foreign markets, the fear was that those markets may be on even less firm economic footing than the United States’, and consequently less able to absorb the decline in lending that comes along with rising interest rates.

“When the U.S. embarks upon policies that are appropriate for its own domestic circumstances, it can impose policies on the rest of the world that aren’t necessarily appropriate to them,” said Darren Williams, the senior European economist at AllianceBernstein in London.

Surely, however, that rising economic superpower called "China" is ready to save the day, right?  Wait, what’s this

Thursday was a very bad day for China’s economy, the world’s second-largest and a crucial pillar of the global economy, with credit markets freezing up in an unnerving parallel to the first days of the U.S. financial collapse. The question of how bad depends on whom you talk to, how much faith you have in Chinese leaders and, unfortunately, several factors that are largely unknowable. But we do know two things. First, Chinese leaders appear to be causing this problem deliberately, likely to try to avert a much worse problem. And, second, if this continues and even it works, it could see China’s economy finally cool after years of breakneck growth, with serious repercussions for the rest of us.

Read the whole thing – as well as this Bloomberg story — to understand why China is acting the way it is. 

[But what about the rest of the BRIC economies?!–ed.  Let’s see, Brazil is a bit preoccupied at the moment, Russia is starved of capital, and India has its own problemsOh, OK–ed.]

So who’s your hegemon now, huh?  WHO’S YOUR HEGEMON???!!!

If Americans reading this are beginning to feel jingoistic, however, let me point out that if you think this is all good news, you’re nuts.  From an economic perspective, it’s much better to see all these economies growing robustly.  Since they’re not, Ben Bernanke’s decision to start talking about tapering off quantitative easing seems rather blinkered. This is for a few simple reasons: 

1)  As noted above, all of the other potential growth engines in the global economy are either contracting or screeching to a halt;

2)  The fiscal headwind of U.S. fiscal policy hasn’t been devastating, but it is likely a net drag on the economy.  Oh, and inflation?  That’s nowhere to be seen.  The U.S. economy is doing well in comparison to the other developed nations, but it’s still not doing all that well. Now is not the time to engage in restrictive monetary policy (or terribly restrictive fiscal policy either). 

3)  This week Bernanke has been spelling out what the Fed will be doing in 2014 and beyond.  Which would be peachy if Bernanke was going to be chairing the Fed then — except that every indication is that he won’t be.  So why his word should carry such impact on post-2013 actions is a bit mystifying. 

So the good news is that reports of declining U.S. influence have been greatly exaggerated.  The bad news is that it’s not obvious to me that the U.S. economic leadership is exercising that power responsibly. 

Am I missing anything?