Since World War II it has been an economic truism that when the US catches a cold the rest of the world gets pneumonia. The idea is that the US has held such hegemony over the global economy that it and its economy is always the central actor. I believe that the world has now reached the point where that is no longer true. Events of recent weeks are giving us a concrete demonstration of the new realities.
The great financial crash of 2008 originated in the US economy. It then reverberated around the world and caused severe economic disruption in every corner of the industrialized world. This was of course the most serious financial crisis that the US had encountered since the Great Depression. However, in the past we have experienced what were for us relatively mild recessions that caused much more serious problems in other economies.
This time there was the suggestion from 2008 that the world had changed. The US experienced a crash that was about as bad as any experienced any where else. China on the other hand was able to bounce back much more quickly. However, the US was still the central focus of the drama.
In the almost two years since the crash the only national economy which has picked up and shown significant growth is China. The very costly interventions performed by the US, Europe and Japan kept the financial systems on their feet but all of those economies are still essentially on life support. The various governments have acquired mountains of debt from bailing out the banks and the credit markets are still anemic at best.
Europe is now in a major financial crisis. It is not something that will blow away quickly. It is complicated by numerous factors, not the least of which are the structural flaws in the European Union and the European Monetary Union (Euro Zone) which are making it very difficult for the various national governments to act in concert to deal with the problems. The upheavals in Europe are causing panic in all the global financial markets and the exchange rate of the euro has been steadily declining. The US government has been making attempts to prop up the situation without having much impact.
Yesterday an event occurred which I think clearly demonstrates that economic power and control has now become dispersed and is no longer centered in the US. The Financial Times published an article saying that China was reevaluating their policy of diversifying the investment of their $2.5T in reserves between dollars and euros because of the decline in value of the euro. This caused the euro to suddenly drop to a new low. Today China made a public statement to the effect that they weren't inclined to make any sudden changes in their reserve investments. The euro stabilized on that news.
It's not that China has become so economically powerful as to replace the US as king of the economic hill. While they have by any measure arrived at the point of being one of the world's major economies, they occupy a special niche because they are the only economy with a huge pile of cash to invest. The rest of them have a huge pile of debts to service. China has thus gained significant leverage. So far they have been cagey about using that leverage, but it is there. One of the big mysteries in the present chaos is what sort of role they will play. But it does seem definite that they will play a major one.
The take home lesson for the US is that our economic future is no longer something over which we have exclusive control. What happens elsewhere is likely to have as much impact on us as what happens in New York and Washington. There is no longer a king of the economic hill.