Each week, Symposium Magazine invites authors to guest-blog. This week’s featured article is Why U.S. Financial Hegemony Will Endure by Sarah Bauerle Danzman and W. Kindred Winecoff.
Yesterday we explained why the debt ceiling doomsday scenarios are unlikely to occur, and why American financial primacy will endure. We are confident about our assessment, but it is worth considering what the world might be like if we are wrong.
Such a transition has occurred one time in the era of industrial capitalism, and it wasn’t pretty. It took two world wars and a Great Depression before the shift from British to American financial hegemony was complete. Since then, the U.S. has controlled the system despite a number of significant crises, including the collapse of the Bretton Woods system of fixed exchange rates, a technical default on U.S. sovereign debt in the 1980s, and real estate bubbles and crashes in the 1980s and 2000s. A move away from U.S. primacy would likely incur one of the worst tragedies in human history.
So let’s hope our expectation that a shift away from American prominence is correct. It seems that the rest of the world does. For example, China’s Vice Minister of Finance Zhu Guangyao recently described the safeguarding of U.S. debt as “of vital importance” to the American and global economy, noting that China is vulnerable to a default given its heavy investment in Treasuries. Our network analysis shows that there are few parts of the world that are not directly linked to the U.S. in a significant way; indeed, this is why the U.S. is at the core of the system.
This illustrates the power that comes from occupying a prominent position in a hierarchical network. Even your rivals want you to thrive, because their health depends on it. The U.S. has been able to use this power in multiple ways, one of which is by paying very little to service its sovereign debt. According to the Congressional Budget Office, net interest payments are 1.3% of GDP, which is below the rate of domestic inflation. That is, in real terms the U.S. pays nothing for the money it borrows. This is an exorbitant privilege indeed.
Two conditions must be met simultaneously for a transition away from American dominance to occur: the political battle is sufficiently intractable that the U.S. government causes a crisis and cannot adequately respond to it, and another country that is capable of stepping into a leadership position is willing to do so. As we’ve argued, the former condition will likely not be met, because even this Congress is incapable of generating a crisis that large. But it is also clear that the latter condition is unlikely as well.