US economic power

[Shek]

Statistics...
You're right for official exchange rates (but everybody knows that the Renminbi is too cheap). But you're wrong at purchasing power parity exchange rates.

USA:
GDP = USD 13.84 trillion
industry: 20.5% share of GDP
2.837 trillion industrial value added, USD

PR China:
GDPppp = USD 6.991 trillion
GDP = USD 3.251 trillion
industry: 48.6% share of GDP
3.398 trillion industrial value added, USDppp
1.580 trillion industrial value added, USD

As I said before, money is just an illusion. The offiial exchange rates are a wrong illusion.
PPP exchange rates are a less incorrect illusion.

(source: CIA World Factbook, everything 2007 estimates)

Fuchs,
Good point about PPP - I hadn't realized that the stats didn't incorporate PPP. Once you adjust the UNIDO statistics quoted in the piece based on the recent PPP revision from the World Bank, I still come up with the US being #1. We could spin around whether CIA estimates are better than UN/World Bank statistics, but we'll just obfuscate the larger point I was making that the US is by no means a faltering manufacturing state (and instead, remains either #1 or at worse, a very close #2). We could also look at the composition of the US manufacturing sector and decide that it tends to be at the higher end, making it well suited for the type of technology required to equip the national security apparatus of the United States.

You overestimate the relevance of the USA.
It's correct that the somewhat close economic ties can export U.S. economic troubles to most of the world. But that's only a short-term effect. Few per cent of the German GDP are related to trade with the U.S., for example - and the trade is a drain on its resources, not a push to its economy.
All countries that have a positive trade balance with the U.S. are actually feeding it - they could consume their own goods or export to other nations instead. The economic should would just cause short-term adaption costs.
Nobody really depends on working for Americans for promises to pay sometime in return.

Africa and the UN actually get a lot of money from other countries than the US.

European trade with the USA is actually not so overwhelmingly large as many people suppose. Its exports are diverse, so it would be possible to consume much of it in Europe or elsewhere.
And the reference to welfare state - well, that reminds me of a stereotypic misunderstanding by Americans. We pay to steer the society a bit and to keep the poor less poor. That's actually not more expensive than to have a higher crime rate and 0.75% of the countries' population in jail.

I understand that this was directed at Schmedlap, but once again, if you dive down into the weeds of bilateral trade stats, you miss the overarching point that Steve Blair simply put - the global economy is interdependent and so no matter what you quote from bilateral trade stats, a decline in an economic powerhouse (US, EU, etc.) is going to have a ripple effect that hits all. Whether the impact is direct to the EU or indirect through impacts on China, etc., is irrelevant. The fact that the ECB coordinated with the Fed this past spring to inject huge amounts of liquidity into the financial markets demonstrates this interdependence.

[Fuchs]

I use CIA World Factbook for convenience (it's really a nice collection of data) and because it's generally less prone to be challenged as source in an English-speaking environment.

The ECB is responsible for inflation, not for growth. And central banks have a well-deserved reputation for being in love with stability.

About demand - I'm tired to discuss first week economic studies content anymore:
http://en.wikipedia.org/wiki/Demand

About Non-Americans having less money at hand when they stop exporting to the USA: Would be true if the U.S. bought its surplus imports with anything else than loans.
If in the current situation the USA would cut its imports and keep exports stable, the rest of the world would have MORE money for consumption/investment at hand (simply because the USA would not lend it to pay for the imports).


B2topic; Sure, the U.S. economy is large, even its small industrial part. It's just like that it doesn't resemble the economy of the 40's to 70's that some people still think about when they think of U.S. economic power and how well the military is being backed up by that.
I disliked the original picture because it was suitable to reinforce the idea of an extreme superiority that's simply not true for some critical branches and quite the opposite for some as well.

[Shek]

The ECB is responsible for inflation, not for growth. And central banks have a well-deserved reputation for being in love with stability.

Not true. The primary objective is price stability with a much more rigid requirement than the Fed. However, the reason that price stability is a goal of both institutions is precisely because price stability provides the conditions for firms and individuals to make longer-term decisions that are more productive for the economy, i.e., greater price stability = greater rates of growth.

http://www.ecb.eu/press/key/date/199...0610_1.en.html

I should like to draw your attention first to the word "objectives" in plural. The ECB certainly has a primary objective: "price stability". However, Article 105.1 of the Maastricht Treaty adds that "without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2."

Among other objectives, Article 2 states that the Community shall promote a "sustainable and non-inflationary growth" and "a high level of employment and social protection".

About demand - I'm tired to discuss first week economic studies content anymore:
http://en.wikipedia.org/wiki/Demand

About Non-Americans having less money at hand when they stop exporting to the USA: Would be true if the U.S. bought its surplus imports with anything else than loans.
If in the current situation the USA would cut its imports and keep exports stable, the rest of the world would have MORE money for consumption/investment at hand (simply because the USA would not lend it to pay for the imports).

The reason that the money is available for Americans to borrow against is because people find that the US provides the greatest returns on their money all things considered (default risk, exchange rate risk, etc.). Thus, a decreased appetite for imports would mean less demand for loanable funds, pushing returns on loanable funds down, meaning that the funds that other countries put into the loan markets in the US would simply move elsewhere and face lower returns. Personal investment (I assume that you are referring to investments from a personal finance perspective) amounts don't change, they've just moved geograhpically and just become less productive all things considered. Thus, consumption/investments cannot increase since the loaned funds are already "investments". It is a zero-sum game as you've presented it.

B2topic; Sure, the U.S. economy is large, even its small industrial part. It's just like that it doesn't resemble the economy of the 40's to 70's that some people still think about when they think of U.S. economic power and how well the military is being backed up by that.
I disliked the original picture because it was suitable to reinforce the idea of an extreme superiority that's simply not true for some critical branches and quite the opposite for some as well.

I think that you're taking the graphic a little too seriously.

However, don't get too wed to the military instrument of national power. Since the majority of the global economy has a foundation that is information-based, the fact that the US economy (and the EU) has a strong information component to it means that we both have means that can be used to good effect when implementing grand strategy. The squeeze on Iranian assets through the information-based financial networks was effective in bringing Iran to the bargaining table and got North Korea to sign an agreement (actual outcomes is another issue, but it shows that the military stick isn't the only possible stick out there). As with any change, it brings new capabilities to yield and potential weaknesses to defend against.

[Fuchs]

There's no discussion about ECB priorities. Whenever there's a conflict between inflation and growth, it is obliged to opt for the inflation control target 2% p.a.. Period.

"Thus, consumption/investments cannot increase since the loaned funds are already "investments". It is a zero-sum game as you've presented it."

You confuse world and non-U.S. world here.
When the non-U.S. world reduces its lending of money to the USA, the non-U.S. world would have more money left for consumption/investment. Simple fact.
That's what you denied (instead, you claimed they'd have less money to spend). I did never write about increased world-wide demand here.

And the present situation of assumed good ROI in the U.S. is a present situation, one that would not persist in the scenario we were talking about; an economic crisis in the U.S. that shrinks its huge imports.

[Shek]

There's no discussion about ECB priorities. Whenever there's a conflict between inflation and growth, it is obliged to opt for the inflation control target 2% p.a.. Period.

Exactly what I quoted, and the point still remains that growth is an objective of the ECB, contrary to your earlier statement.

"Thus, consumption/investments cannot increase since the loaned funds are already "investments". It is a zero-sum game as you've presented it."

You confuse world and non-U.S. world here.
When the non-U.S. world reduces its lending of money to the USA, the non-U.S. world would have more money left for consumption/investment. Simple fact.
That's what you denied (instead, you claimed they'd have less money to spend). I did never write about increased world-wide demand here.

And the present situation of assumed good ROI in the U.S. is a present situation, one that would not persist in the scenario we were talking about; an economic crisis in the U.S. that shrinks its huge imports.

No, I didn't confuse anything here. The investment/consumption amount of non-US countries doesn't change in the net, it only changes geographical locations (with lower expected returns). Either way, it is the exact same amount money being allocated differently based on the consume vs. save (invest) decision now that the best option has been eliminated.

Like Schmedlap, I give up. We are down in the weeds and missing the big picture that I think Rex intended with this fun graphic.