Zachary Karabell: America and the New Financial World
[Mr. Karabell is president of River Twice Research. His latest book, "Chimerica: How the United States and China Became One," will be published next year by Simon & Schuster.]
Soon enough, America's financial crisis will wind down -- maybe in a month, maybe in a year. Yet regardless of when, this crisis marks the beginning of a new era for the U.S. For more than six decades, from the end of World War II in 1945 until now, the U.S. was the hub of global capital and capitalism. In the years to come, it will remain a vital center, but not the center.
In 1945, after an exhausting three decades of exertion against Germany, the United Kingdom emerged militarily victorious only to see itself economically exhausted. A year later, it was bankrupt, unable to find capital and on the verge of collapse. It had nowhere to turn but the U.S., which then dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain, and our creditors in China are not yet as we were then. But absent a more humble and realistic attitude toward capital in Washington, that is the path we're headed down.
What is happening to finance today is similar to what happened to manufacturing beginning in the 1970s. Until then, U.S. manufacturing accounted for as much as half of all global output. By the 1970s, Germany and Japan began to exert themselves as manufacturing titans. So did Taiwan, Singapore, Korea and others that had benefited from American aid. The globalization of manufacturing continued, and was accelerated by the information technology revolution of the 1990s. While the U.S. today continues to produce a decent share of global manufactured goods, it is one among many and employs only 13 million people (10% of the workforce) in a sector that in the middle of the 20th century accounted for a third of all jobs. The same thing is now happening with finance.
In the past five years, there has been a transfer of wealth from the U.S. and Europe to Asia, the Middle East and Russia of trillions of dollars for oil and raw materials as well as inexpensive manufactured goods. Whether or not that transfer has been positive or negative for the U.S. economy writ large -- and there is considerable debate on that subject -- the outflow of wealth is a fact.
You can argue that the transfer of dollars to goods-producing countries, China above all, has provided American consumers with products that might otherwise be unaffordable but has had a negative effect on the U.S. labor force. The transfer of wealth to oil-producing states and countries rich in base metals has been an economic drain, especially as the price has spiked and the cost has risen.
That wealth transfer occurred just as the U.S. financial system began to expand its exposure to the housing market. The movement of capital away from the U.S. was one reason hungry banks turned to more absurd forms of leverage. That disguised the erosion of real capital.
Even as that was happening, however, American financial institutions still wore the mantle of global leadership. As China, the Gulf region, India, Brazil and other parts of the world have increased in affluence, they relied on the expertise, acumen and advice of Wall Street. Go to any region of the world and you will find central banks and investment banks staffed by people educated at U.S. business schools and graced with resumes that include time at the formerly premier institutions of Wall Street. Few major deals were brokered without involvement from a U.S. bank or access to Wall Street financing. That is now at an end.
It is at an end for two reasons. One is structural. There are now vibrant economies that don't depend on the U.S., are not heavily levered, and have a burgeoning, confident and ambitious middle class. But it is also at an end because those newly affluent regions of the world do not find the U.S. a welcoming home for capital....
Read entire article at WSJ
Soon enough, America's financial crisis will wind down -- maybe in a month, maybe in a year. Yet regardless of when, this crisis marks the beginning of a new era for the U.S. For more than six decades, from the end of World War II in 1945 until now, the U.S. was the hub of global capital and capitalism. In the years to come, it will remain a vital center, but not the center.
In 1945, after an exhausting three decades of exertion against Germany, the United Kingdom emerged militarily victorious only to see itself economically exhausted. A year later, it was bankrupt, unable to find capital and on the verge of collapse. It had nowhere to turn but the U.S., which then dictated terms that amounted to a withdrawal of Great Britain from the world stage. The U.S. is not yet in the position of Great Britain, and our creditors in China are not yet as we were then. But absent a more humble and realistic attitude toward capital in Washington, that is the path we're headed down.
What is happening to finance today is similar to what happened to manufacturing beginning in the 1970s. Until then, U.S. manufacturing accounted for as much as half of all global output. By the 1970s, Germany and Japan began to exert themselves as manufacturing titans. So did Taiwan, Singapore, Korea and others that had benefited from American aid. The globalization of manufacturing continued, and was accelerated by the information technology revolution of the 1990s. While the U.S. today continues to produce a decent share of global manufactured goods, it is one among many and employs only 13 million people (10% of the workforce) in a sector that in the middle of the 20th century accounted for a third of all jobs. The same thing is now happening with finance.
In the past five years, there has been a transfer of wealth from the U.S. and Europe to Asia, the Middle East and Russia of trillions of dollars for oil and raw materials as well as inexpensive manufactured goods. Whether or not that transfer has been positive or negative for the U.S. economy writ large -- and there is considerable debate on that subject -- the outflow of wealth is a fact.
You can argue that the transfer of dollars to goods-producing countries, China above all, has provided American consumers with products that might otherwise be unaffordable but has had a negative effect on the U.S. labor force. The transfer of wealth to oil-producing states and countries rich in base metals has been an economic drain, especially as the price has spiked and the cost has risen.
That wealth transfer occurred just as the U.S. financial system began to expand its exposure to the housing market. The movement of capital away from the U.S. was one reason hungry banks turned to more absurd forms of leverage. That disguised the erosion of real capital.
Even as that was happening, however, American financial institutions still wore the mantle of global leadership. As China, the Gulf region, India, Brazil and other parts of the world have increased in affluence, they relied on the expertise, acumen and advice of Wall Street. Go to any region of the world and you will find central banks and investment banks staffed by people educated at U.S. business schools and graced with resumes that include time at the formerly premier institutions of Wall Street. Few major deals were brokered without involvement from a U.S. bank or access to Wall Street financing. That is now at an end.
It is at an end for two reasons. One is structural. There are now vibrant economies that don't depend on the U.S., are not heavily levered, and have a burgeoning, confident and ambitious middle class. But it is also at an end because those newly affluent regions of the world do not find the U.S. a welcoming home for capital....