The US as the preponderant state of our time has been a stabilizing force in the capitalist world economy, acting consistently with Kindleberger‘s hegemonic stability theory. Which is for the US to provide “market for ‘distress goods’ and a steady flow of capital. The hegemon must also manage the structure of foreign-exchange rates and provide a degree of coordination of domestic monetary policies.” (source). After the Second World War, the US has kept recessions relatively short and painless. Whenever the capitalist world economy falls into recession, trigger by whatever causes, the US will lossen monetary policy, inject liquidity and the US will consume and invest the capitalist world economy back into growth. For 50 years, America were willing and able. However time have changed.
US share of world economy is declining in both nominal and purchasing power parity (PPP). In the coming February when University of Pennsylvania update its Penn World Tables (a collection of comparative economic data) it will make some corrective adjustments which according to Arvind Subramanian from Peterson Institute for International Economics will result in China overtaking United States as having the worlds largest GDP measure by PPP. This is inevitable, as globalization intensifies, developed countries will no long able to maintain economic size that is significantly disproportionate for its population size.
Even though, this is mostly a good thing, as it means quality of life in some developing countries are catching up to the developed countries, shrinking relative economy size will also diminish America’s will and ability to carry on as the hegemon. America can no longer unilaterally pull the global economy out recession, it will have to coordinate with China and to a lesser extend other major economies of the world,
With this understanding, the G20s coordinated their response to the 2008 near-depression. And China perhaps aware of its new weight in the globalized economy announced a historic stimulus package that amounts to 16% of its GDP. The depression is avoid largely because of this.
Going forward, The US and China together accounting for almost half of world economy (PPP wise, and EU without fiscal consolidation dont count) have to work together as a paired oxymoronic duo-hegemons, or “Chimerica 2.0″ if you will, to moderate world economy. Sino-US is now the most importantly bilateral relationship in the world, lets hope they plays well together.
PS. as an English and Mandarin speaker, my market value just appreciated.