The incoming presidential administration faces grave economic challenges ahead that could spell the end of the dollar’s global dominance, argues James Meadway

Joe Biden can expect to move into the White House at the end of January and inherit an economy that is recovering faster than many expected after the devastation that COVID-19 has brought to the country.

The huge stimulus package this year – the biggest in the world, in both absolute terms, and as a share of the economy – has undoubtedly had an impact. But you don’t have to look too far below the figures on growth to see the real underlying weaknesses. Biden will be able to do little more than attempt to tackle them.

US economic growth, ahead of the Coronavirus pandemic, was being driven by a heady (and familiar) combination of colossal Government deficits – dramatically widened by Donald Trump’s tax giveaways to the rich in 2017 – and ultra-low interest rates. The US central bank, the Federal Reserve, is continuing to hold its own rate for bank lending at near zero levels.

Deficit-fuelled growth has been a habit of Republican presidents since the 1980s when Ronald Reagan oversaw both hefty tax cuts and sizeable increases in the military budget – actions serving to pump more and more demand into the economy, sucking in imports from the rest of the world, and beefing-up domestic growth. All Republican presidents since have tried the same trick, with only Democrat Bill Clinton actually shrinking the deficit during his time in office, driven by pressure from Republicans who, naturally, accused his government of overspending.

The US has immense leeway to behave like this because it has the exorbitant privilege of being able to issue the dollar. With the dollar still in heavy demand for global trade (key products like oil are still traded in dollars), 40% of all debt in the world needing to be paid back in dollars, and the dollar making up 60% of all countries’ foreign exchange reserve, the greenback remains in heavy demand. And as the dollar is the one genuinely global currency, the US Government has an immense capacity to borrow in dollars without seriously worrying about repayment.

This includes its use of quantitative easing (QE) since the 2008 financial crash – the Federal Reserve issuing around $7 trillion to pump into the financial system. Over the course of this year, this flood of new money has been a primary cause in driving shares prices to ever greater heights – to the evident delight of the current President.


Fall of the Dollar

The factors keeping dollar domination in place are not guaranteed, however. And, as the US has grown increasingly dependent on borrowing to finance its domestic consumption, investment – outside of a few, admittedly critical sectors such as digital technology – has faltered. This applies particularly to its crumbling infrastructure of road, rail, and electricity and water supplies.

Weak infrastructure means a weak economy across the US and worsens inequality as it reinforces the tendency for growth to concentrate in a few areas. Trump promised a $1 trillion investment programme, which his sometime sidekick Steve Bannon wanted to make the centrepiece of an ‘economic nationalist’ programme he believed would secure permanent Republican rule. This didn’t happen. The Republican Party couldn’t tolerate the additional Government spending and Trump defaulted to cutting taxes for the rich instead.

Biden has promised $2 trillion of infrastructure spending, including a major green investment programme, but it remains to be seen how much damage a Republican Senate will do to this.

Already, this year has seen dramatic slides in the value of the dollar in currency markets – a foretaste of future problems. The underlying challenges facing the US have been worsened by the COVID-19 pandemic, but the set of issues remains the same: it is a grossly unequal society, with poor infrastructure and – related to these two – a growing dependence on a strikingly few, largely data-driven companies to drive economic growth.

These domestic problems can be hidden with borrowing and money-issuing, but eventually they will make themselves known. Stephen Roach, former HSBC chief economist, believes that the exorbitant privilege of the dollar may disintegrate as soon as next year, with its value falling up to 35%. Meanwhile, the economic dominance of Big Tech is attracting political attention, with 48 states having filed anti-trust petitions against Facebook in the past week.


The New Superpower

The crucial issue is that the US economy does not exist in a vacuum. Hanging over all of its domestic troubles is the appearance of what the US military planners call a “peer competitor”. This is a country able to plausibly compete with the US not only on the basis of sheer economic size but also, critically, able to mount a direct challenge for leadership at the technological frontier and across many different technologies.

This peer competitor is, of course, China. The fast-growing superpower has the capacity to mount sustained research, development and investment programmes in a series of critical industries at the frontier of technology – from space flight to Artificial Intelligence to genomics. It has become a source of endless worry in Washington.

It was China’s potential to gain and hold a lead in new technologies, as the Chinese Communist Party leadership clearly intended, that drove Trump’s trade wars with the country. They had little to do with securing jobs in the so-called rust belt in steel or traditional industries, but a great deal to do with targeting high-tech Chinese research and manufacturing. The verbal sniping against and, latterly, sanctions imposed on Huawei, whatever the claims about security concerns, were driven by the perceived need to knock this leading Chinese producer out of the critical communications technologies around 5G.

Huawei (the beneficiary over the decades of significant state subsidies) can supply essential parts of 5G infrastructure far more cheaply than any of the limited number of alternative suppliers can. Clamping down on China with draconian restrictions on the use of its technology, and leaning on allies to do the same, at least in theory created a space in which weaker US telecoms equipment firms might be able to catch up.

This is a novel situation for the US, a country that has been at the frontier of technological advance for at least the last 100 years, in virtually every sector of economic relevance. Mass production was a distinctively American invention, turning cars into the quintessential high-technology consumer product for much of the 20th Century. It was US companies who drove advances in consumer electronics, and today it is US companies that comprehensively dominate the data economy, with the spectacular rise of US-based Big Tech corporations in the past decade or so.

It has been comparatively easy for the US to deal with the emergence of potential peer competitors in the past. The US military retains a strong presence in Japan, for example. While this (much smaller) country found it hard to compete in multiple spheres at once, Japanese firms could challenge for technological leadership in cars or semiconductors, but not – as it turned out – both at once. China is both far more independent-minded, and simply a far bigger economy.

Trump took a course of direct, economic confrontation, launching a trade war that was very largely about undermining Chinese technology. It is not clear that he has been successful. Sanctions against Huawei and other technology firms are pushing them simply to becoming more self-sufficient, backed by the Chinese state’s deep pockets, whilst risking the US’ allies’ goodwill. In a straight economic confrontation with China, it is no longer apparent that the US would win – and even attempting to fight would be destabilising, as has been seen in recent years.

Biden’s new administration has a series of grave challenges ahead – tackling the COVID-19 crisis; delivering the infrastructure so many administrations have failed on; and reaching a settlement with China on trade and technology that both sides can live with. Climate change might, ironically, be the issue that could bring all this together, with domestic investment and job creation matching the will to strike fresh international agreements at the COP-26 summit next year.


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