Nominal/Real—Monetary/Fiscal—America/China
While there are many ways of thinking about the world economy, I find it helpful to think in terms of two superpowers.
America is a nominal superpower, and American monetary policy has a disproportionate impact on the world’s nominal economy. China is a real superpower, and its fiscal policy has a disproportionate impact on the world’s real economy.
David Beckworth has written extensively on the US as a monetary superpower. But where does that come from? After all, the GDP of the EU is roughly comparable to that of the US.
The monetary dominance from the US comes from a variety of factors, but the most important is the fact that many countries have currencies that are at least loosely pegged to the dollar. Other factors include the high proportion of international loans that are denominated in dollars, the fact that much foreign trade is priced in dollars (even between two non-dollar economies), and the fact that most foreign reserves are in the form of dollar assets.
Because the US is a monetary superpower, we have a disproportionate effect on all sorts of nominal variables, all over the world. And that matters because many wages and prices are sticky. When the global dollar economy is unstable, it makes the global real economy unstable as well.
China is at a stage of development that is extremely commodity intensive, as it builds up its capital stock. As a result, it tends to consume 40% to 50% of many key commodities, such as cement, steel, copper, etc. Coal is also very important in China.
Chinese fiscal policy (broadly defined to include government credit policies that affect state and local governments and state-owned banks) has a big impact on countries such as Brazil and Australia, which export commodities, as well as Germany, which exports the sort of capital goods that China needs to develop. The Chinese fiscal stimulus of 2009 (as well as monetary stimulus) helped to push the global economy out of recession.
American monetary policy can be a problem for several reasons. First, we might have a policy that is inappropriate for the US economy, causing unstable NGDP (as in 2008-09). That shock impacts the entire world. Second, we might have a policy that is appropriate for the US, but is associated with a dramatic real appreciation or depreciation in the US dollar exchange rate.
For example, the tech shock of the late 1990s appreciated the real value of the US dollar in forex markets, and this overvalued the currencies of many dollar-oriented economies, from Southeast Asia to South America to Russia. Many countries would be better off having a looser link to the dollar, but that may be hard to do if they rely on dollar-denominated debt.
Chinese business cycles cause instability in commodity-oriented economies, and also places like Germany, which exports lots of capital goods to China. The US is less affected.
I’m not sure this post has anything new, except perhaps the nominal superpower/real superpower framing.
Tags:
8. November 2023 at 00:09
Scott,
interesting way to put these things.
Minor quibbles:
* China was Germany’s top trading partner after the GFC, now this is back to the US. for the Eurozone in total, the US way more important
* whereas it is undeniable that Chinese fiscal stimulus was the main driver of post-GFC recovery, I have the feeling that the current fiscal largesse in the US is keeping World demand afloat post-Covid.
8. November 2023 at 05:39
When the balance of payments is balanced by foreigners acquiring net holdings of our equities, bonds, and real estate, and capital outflows (interest, dividends, rentals, etc.) exceed inflows, we are either decreasing our net creditor position in the world or increasing our net debtor position.
Beginning 1985 it has been the latter. The trade deficits, plus the unilateral transfer of funds by the Federal Government to foreigners (our far-flung military bases, etc.), transformed this country from this world’s largest creditor to the world’s largest debtor – for the first time since 1917. Since 1985 we now have a net debtor position exceeding 17 trillion dollars, but the principal villain (since 1973) was our dependence on foreign oil.
And 17 + trillion dollars buys up a lot of real estate.
8. November 2023 at 07:46
Viennacapitalist, Aren’t Germany’s China exports a far larger share of GDP?
I see aggregate demand as a nominal concept—monetary policy.
9. November 2023 at 06:24
Scott,
Not according to this graph, in nominal terms ofc:
https://de.statista.com/statistik/daten/studie/2876/umfrage/rangfolge-der-wichtigsten-handelspartner-deutschlands-nach-wert-der-exporte/
Exports to US are 50% larger than to China. If I remember correctly, in 2017 this was not the case. US fiscal stimulus is a huge driver of global demand.
It would be interesting to compare the US fiscal stimulus post-covid to china’s post GFC.
9. November 2023 at 06:57
Viennacapitlaist, This link says only slightly larger:
https://oec.world/en/profile/country/deu
I suppose I was thinking about changes over time. Germany has always had high exports to the US, but exports to China have soared over time, and been an important part of German growth.
But I accept your point—I misstated the situation. It applies more to commodity exporters.
13. November 2023 at 08:53
re: “That shock impacts the entire world.”
Link: https://www.realclearmarkets.com/articles/2023/06/02/the_eurodollar_standard_isnt_going_anywhere_anytime_soon_903165.html#!
https://www.richmondfed.org/~/media/richmondfedorg/publications/research/special_reports/instruments_of_the_money_market/pdf/chapter_05.pdf
Sheila Bair (assessment fees on foreign deposits) and Jerome Powell (eliminating reserve requirements) made the E-$ market more expensive.
14. November 2023 at 15:56
Inflation dead in October.
As a monetary superpower, can the Federal Reserve simply hold on to its balance sheet?
15. November 2023 at 05:44
“After all, the GDP of the EU is roughly comparable to that of the US.”
Scott: the EU has a 35% larger population and 10% lower GDP;
“But where does that come from?”
The fact that the US is the world business and technological leader by a wide margin. The EU is a technical & business backwater – it has only two technology companies in the top 100 of world companies, one of which is the fading SAP. ASML is the only imporant EU tech company. The EU is so overburdened with business regulation that one of its largest economies left the union to be free of it’s nonsense.
Very roughly the average American produces about 40-50% more than the average European.
So that’s why the US is the world economic leader.
22. November 2023 at 14:27
Kangaroo, I consider a 10% lower GDP to be roughly comparable. What’s your point?
25. November 2023 at 20:43
Hello, I’m a high school student. I have read many of your posts and articles on the blog and on Econ lib. I post here since I see there aren’t many comments here and that there is a possibility you may reply. I have been thinking about a way to create an IR model and feel a little unconfident in my I guess idea. I don’t have many people to talk to about it, actually none at all. I would’ve emailed however I couldn’t find it.