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Business Comment

Why America is winning the modern Great Game

The US borrows in its own currency, benefiting from a ready market for its securities, both at home and abroad

The term the Great Game referred to the strategic rivalry between the British and Russian empires in Central Asia. Today’s great game is the battle for economic survival in a world of low growth. As economic nationalism reasserts itself, reducing free trade in goods and service and free movement of capital, the major modern empires – US, Europe and China – must adapt.

The US can function successfully as a closed economy. It remains the world’s largest economy, a quarter of global gross domestic product (GDP) and almost twice the size of China, the second largest economy. Its economy has access to a large domestic market. It is less exposed to trade (15 per cent of GDP) than other large economies. Reliance on trade is lower if trading with Canada and Mexico under the North American Free Trade Agreement is excluded.

Despite inequality in the distribution of income, America remains relatively wealthy, with per capita GDP of around $50,000 (£33,000). This is among the highest in the world, especially when low-population (Luxembourg, San Marino or Singapore) or commodity-rich states (Middle East oil producers) are excluded. In comparison,  China’s GDP per capita is $5,000 to $6,000.

American households have net worth in excess of $70 trillion, although down from a peak of more than $80trn before the financial crisis.

The US remains a major food producer. It is a net exporter of food, with almost half of world grain exports. It is also rich in mineral resources. Historically dependent on oil imports, which make a substantial part of its $600bn trade deficit, the US is cutting imports by producing more shale gas and oil.

The dollar remains the world’s reserve currency, with a market share of 60 per cent of global investments. Most global trade continues to be denominated in US dollars.

The US borrows in its own currency, benefiting from a ready market for its securities, both domestically and internationally. Some $5 trillion of Treasury bonds are held by foreign investors, mainly in China, Japan, Asia and the Middle East.

The US has high population growth relative to other industrialised countries, which have below-replacement fertility rates. The US  is a magnet for immigration, attracting talent and additional labour.

But the US also faces challenges. Its economic model based on a debt-driven housing bubble and financial excesses is broken. With home values between 35 and 60 per cent below peak levels and significant loss of wealth, consumer spending, which makes up 60 to 70 per cent of GDP, is unlikely to recover to pre-crisis levels soon.

Economic growth, at around 2 per cent, while above most developed countries, is well below the economy’s potential. Current growth is narrowly based, continuing to rely on consumers taking out more car and student loans, business investments in equipment and software, and improving homes construction.

The US economy also has an overhang of high levels of government and consumer borrowings.

Retreat from global integration is integral to the US dealing with its economic issues. Key policies include maintaining low interest rates to reduce the cost of servicing debt allowing higher levels of borrowings to be sustained in the short run. Low rates and quantitative easing help to devalue the dollar, reducing government debt by decreasing its value in foreign currency terms.

A weaker US dollar boosts exports, reducing trade imbalances. Stronger exports are driven by cheaper prices combined with American dominance of key industries, such as technology and software, pharmaceuticals, complex manufactured products (aerospace, defence hardware, heavy machinery), entertainment and services. A weaker dollar also reduces the cost base of domestic production, encouraging a shift of production, manufacturing and assembly work back into the US.  Stronger growth and lower unemployment will assist in reducing the large US budget deficit.

A shift to a more closed economy is also consistent with America’s natural isolationism, focused on aggressively protecting the nation’s economic self-interest and expanding US power and influence.

As William G Hyland, a former adviser to President Gerald Ford and editor of Foreign Affairs magazine, noted: “protectionism is the ally of isolationism”.

Satyajit Das is a former banker and author of “Extreme Money” and “Traders Guns & Money”.