The United States is laying the foundation for an Asia-Pacific century that looks quite different from what most Australians imagined in the carnage of the GFC, writes Geoffrey Garrett.
OPINION: Wall Street has had quite a week. At the close of Monday’s trading, the Dow Jones Industrial Average posted its seventh straight day of gains. The run was boosted by the best unemployment figures in four years, yet it began as we were told the economic recovery was imperilled by Washington’s own goal of $85 billion a year in “sequester” spending cuts.
These events tell us three things about where the United States is headed. First, Washington has no appetite for a concerted austerity plan to wipe out US debt and deficits. Kicking the can down the road is still the order of the day – tax increases on the wealthy in January, letting the sequester kick in last week, with smoke and mirrors budgeting in the coming months. Second, what so many decry as fiscal paralysis isn’t hurting the US economy much. Companies aren’t employing as many Americans as before but they are making more money. Third, there is an implicit elite consensus that the country can grow and doesn’t need to cut its way out of its fiscal woes.
Conventional post-GFC wisdom has been that political paralysis and fiscal crisis are hastening the US’s fall from the pinnacle of global power. Not so fast. With the US looking a good bet to get back soon to its post-war average growth rates of just over 3 per cent and China’s growth inexorably slowing, predictions of China flying past the US seem increasingly naive.
Of course, financial markets are already speculating about how soon the ultra cheap money spigot underpinning the US recovery will be shut. The Federal Reserve is bound to start tightening monetary policy over the next year or two, with the spectre of rising housing prices looming large. Monetary tightening will no doubt cool off Wall Street but the flood of foreign capital, led by north-east Asia, into the US may only increase with stronger growth and a return to more normal interest rates.
The US economy looks an increasingly good bet over the medium term even with a return to monetary normalcy because of the emergence of cheap and plentiful domestic sources of energy. First shale gas and now shale oil, coupled with legal and logistical obstacles to exporting gas, mean energy independence and a manufacturing renaissance in America look increasingly real.
These developments will have three consequences for Australia. First, higher US interest rates will let some air out of the Australian dollar balloon. How far and how quickly our dollar falls will depend upon the strength of our raw materials exports, again heavily influenced by the US. Second, the surge in US gas production, some of which will inevitably be exported, will depress the price Australian gas commands on global markets – bad news for our resources sector and its global backers, but more downward pressure on the dollar and better news for the rest of the domestic economy.
Finally, the US economy won’t be a major brake on its foreign and security policy pivot to Asia. This means Australia will have to continue walking the grand strategy tightrope it has successfully negotiated in recent decades, making sure closer economic ties with China don’t get in the way of our bedrock geopolitical alliance with the US. Australian grand strategy may seem a mile from last week’s bickering in Washington and euphoria on Wall Street but the US is laying the foundation for an Asia-Pacific century that looks quite different from what most Australians imagined in the carnage of the GFC.
This opinion piece first appeared in the Australian Financial Review.
Professor Geoffrey Garrett is Dean of the Australian School of Business at UNSW.