Economist Michael Pettis argues that the costs of the U.S. being the “global economic backstop” are already outweighing the benefits, and that a future abdication of that role and a return to protective “isolationism” is almost inevitable, largely as a matter of survival.
The crux of Pettis’ argument is that as long as the U.S. was clearly the global economic top dog, we could afford to be the arbiter of economic stability, and relatively easily “afford” to absorb systemic shocks created by other countries to maintain the large benefits we derived from the smooth functioning of global economic markets. However, as the U.S. share of the global economy becomes smaller over time, it becomes less and less “worth it” to the U.S. to take the risk/pay the price of other countries selfishly creating systemic shocks that benefit their national economies.
Pettis argues that the U.S. is approaching or already crossing this benefit threshold, and U.S. leaders will also soon recognize this obvious fact and start to change policy. He says the U.S. will almost be forced into a more isolationist foreign policy to protect its economic assets from the selfish currency devaluations and other protectionist shenanigans from now much larger and faster-growing emerging economies.
Pettis says it boils down to the current account deficit
The risk involved in maintaining a large current account deficit is the real issue at hand, according to Pettis. He says: “The main measure of that cost is the US current account deficit. Growth in the global economy should naturally require that the rest of the world accumulate dollar reserves, and so it is natural that the US run current account deficits as the world accumulates dollars. This permanent exchange of a small amount of dollars for real goods is the total extent of the exorbitant privilege.
But this privilege comes at an enormous risk, one which no other country wants to take. As the rest of the global trading system grows relative to the US, the need for a rising US current account deficit poses the problem identified by Robert Triffin.”
The Triffin Dilemma
The Triffin Dilemma highlights that if non-U.S. global economic growth is high enough relative to U.S. growth that the need for U.S. dollar reserves grows more rapidly than the U.S. economy, the resulting domestic current account deficit will require that the U.S. sell assets fast enough, or that U.S. obligations to foreigners grow fast enough, to create a real systemic risk. Moreover, this risk is directly related to the differential in the size of the U.S. and global economies, which means the risk grows the longer U.S. policymakers deny that the economic calculus that has worked since the end of the Second World War has changed.
