In the coming months, the global economic growth and employment creation will be driven by an exceptionally strong monetary and fiscal stimulation in the trans-Atlantic community.
China will continue to be the main trade beneficiary of the turbo-charged Western economies. With an inflation rate of only 2.5%, Beijing will also have plenty of room to underpin its internal demand with an accommodative credit stance. On the fiscal side, it remains to be seen how much added demand China will be able to generate from recently announced tax cuts and a more favorable regulatory treatment of small- and medium-sized firms.
Growth dynamics are also revving up in the rest of East Asia. Its new – and the world’s largest -- Regional Comprehensive Economic Partnership (RCEP) free trade area has been joined, for the first time, by such economic powerhouses as China, Japan and South Korea.
The RCEP agreement became effective on January 1, 2022. Nearly all merchandise trade will now be done tax free in an area where population, economic output and trade volume account for 30% of world’s total.
In the short run, however, the U.S. economy will remain the principal engine of world growth. For most of this year, America’s aggregate demand will be driven by the enormous monetary and fiscal stimulus that was put in place during 2021.
The talk about the moderation, and eventual withdrawal, of America’s excessively stimulative demand management policies should therefore be taken with a great deal of caution.
This year, for example, the U.S. government spending will remain more than 40% of GDP, compared with a stable annual average of 38% of GDP between 2014 and 2019.
The current evidence also shows no signs of an imminent retreat from a hugely expansionary credit creation. The money market rates are virtually zero, the Federal Reserve’s (Fed) monetary base is showing no meaningful contraction, and banks’ excess reserves (i.e., loanable funds) are an astounding $4.1 trillion.
The most telling perhaps is the fact that the U.S. Treasury’s benchmark ten-year note ended up the year with a yield of 1.51%, showing that the Fed’s anticipated withdrawal from large bond purchases (aka “quantitative easing”) has yet to happen.
So, please note: We now have a huge monetary and fiscal stimulus working its way through the U.S. economy. And that means that the U.S. economic system continues to be pushed way beyond its physical limits to noninflationary growth.
Here is how that process is unfolding.
This year’s consensus forecast of the U.S. economic growth is around 4%. That is more than double the economy’s noninflationary growth potential set by the stock and quality of America’s human and (physical) capital.
Balance trade accounts with China
The result, of course, is an accelerating inflation, and a large part of domestic demand leaking out in the form of soaring import demand. Rising imports are killing American import-competing industries, boosting trade deficits and raising the country’s net foreign debt.
The U.S. price inflation, measured by the consumer price index, has accelerated during last year from 1.4% to its latest reading of 6.8% in November 2021. And, as things now stand, the CPI is well on its way to 8% in the months ahead.
The other price paid for running the U.S. economy at a rate that’s more than double its noninflationary growth potential are systematic and excessive trade deficits. In the first ten months of last year, the U.S. merchandise trade deficit rose at an annual rate of 18% to $887 billions – and is expected to exceed a trillion-dollar mark for 2021.
Those deficits have been a long-neglected structural feature of the U.S. economy, despite the fact that over the last ten years they drove the country’s net foreign debt from $4.5 trillions to $16.1 trillions at the end of the third quarter in 2021.
China remains by far the largest beneficiary of Washington’s trade policy. During the January-October period of last year, China pocketed a net income of $287 billions on its U.S. trade business – a 14% annual increase based on $410 billions of export sales to American customers.
This is clearly at odds with the U.S. policy of strategic and systemic competition with China, where trillions of dollars are spent on attempts to contain China’s development and its global projection of economic and political influence.
That being the U.S. policy, would it not be a good idea to begin the competition by squaring the bilateral trade accounts? Based on last year’s numbers, that would bring an increase of $300 billions in U.S. exports to China.
Beijing, apparently, is open and ready for that, in line with its repeated calls for a “win-win cooperation” with the U.S.
Whatever else the U.S. wants to do with China, a balanced bilateral trade would be a good point of departure. That, in turn, could lead to a more constructive relationship to uphold an open, free and rules-based multilateral trading system as a sound foundation for a peaceful and more prosperous world community.