Tuesday, January 29, 2008

America's economic barometer


America's Economic Barometer
The Current Discussion: If countries around the world are doing so well economically, why are they still catching a cold when the United States sneezes?

In a more interdependent world, we simply can’t ignore the economic wellbeing of the world’s largest economy. A further slide in the U.S. cannot remain an isolated event. The U.S. dollar remains the major reserve currency, with all the major commodities being priced in U.S. dollars – so it is hardly surprising that the weakness of the U.S. financial system will have international ramifications.

A major fall of the U.S. dollar or its stock market will more than likely affect other economies as their financial assets in U.S. markets contract. That spells trouble for economies, as their asset base is mostly denominated in U.S. dollars. However, one has to admit that the economic landscape is changing in large measure as other economies are expanding, and while they would be affected by a U.S. slowdown it does not mean a compete breakdown will occur. The emergence of China and India as two major economic players, not far from becoming major economic powers, implies that the economic balance is changing. However, these markets are more likely to attract capital investments into their manufacturing and service sector and not their stock markets, mainly because it is hard for them to compete with the efficiency of the U.S. market.

However, the immediate impact of U.S. stock market changes is more a barometer to which other markets react, as is the case today. However, in the GCC (Gulf Cooperation Council, i.e. the rich oil producers) generally the economic performance is relatively immune to a U.S. recession, even though their stock markets do have knee-jerk reactions. The question remains: in a world where globalization seems to be the direction of economic progress, will the woes of the U.S. dominate economic performance? Perhaps for some time to come the financial impact will be there, as the U.S. dollar remains a major reserve currency and perhaps the largest financial market. However, as other markets mature the direct impact will be minimized (though never really absent) as the impact of globalization will also mean that other economies like Europe, China and India will also be able to impact global economic performance.


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