The World Bails Us Out

As global stock markets went wild last week, financial commentators resurrected an old metaphor about infectious diseases of the upper respiratory system. "When the United States sneezes, does the world catch a cold?" they asked. It's an intelligent question, the answer to which will largely determine whether the current slowdown turns into a worldwide slump. However it plays out, one thing is sure: the rest of the world will cushion America's slide. And that says a lot about the new global order.

As the American economy slows down, there are no indications that other countries are tumbling. In particular, the fastest-growing big economies in the world—China, India, Brazil—appear set to continue with their robust growth. While a sharp American downturn will surely slow them down somewhat, those emerging markets will all continue to expand—to buy, sell and trade—and this will help the United States.

The quarterly results of many large American multinationals (other than banks) show how. Their profits are growing extremely slowly in the United States—at best a few percent—but are surging by 15 or 20 percent abroad. Adding all these companies together, we can see why America's trade deficit—which ballooned for decades—has begun shrinking dramatically, by $100 billion over the past year. This trend will accelerate as the U.S. dollar's decline continues to make American exports more affordable across the world. A cheap dollar also encourages tourism and investment in America from foreign companies and individuals.

Another group of countries is bailing out the United States in a different way. The past few years have been very good to the world's energy-rich lands—Kuwait, the United Arab Emirates, Saudi Arabia, Norway. Add to the list China and Singapore; they may not be big oil exporters, but they still have huge surpluses. These vast savings have to go somewhere, and sovereign wealth funds—the investment arms of these nations—have provided infusions of cash to otherwise desperate American financial firms. Imagine what the U.S. economy would look like without these investments. Many of its most illustrious banks and financial companies would have gone bankrupt, triggering cascades of gloom and doom across America. The fact that there are large pools of capital available to shore up faltering giants might actually add substantially to the stability of the system as a whole.

These trends represent a large, ongoing shift in the global economic order. Power is moving away from the traditional centers of the global economy—the Western nations—to the emerging markets. To put it more bluntly: the United States is in the beginning of a period of relative decline. It may not be steep or dramatic, but the fact that it's happening is clear. Even if one assumes a slowdown, the other big economies will still grow at two and three times the pace of the West. Over time they will take up a larger share of the global economy—and the United States and Western Europe will have thinner slices. This is not defeatism, it's math.

The math has political consequences. Consider how different the current crisis is from the panics of the 1990s. The U.S. economy may have been in a stronger position back then, but the real difference is the condition of the rest of the world. In the mid-1990s, Russia was on its knees, begging the West for aid. Today it's growing at 7 percent a year and setting up its own sovereign wealth fund. In the past, East Asian countries were at the mercy of the IMF and other Western institutions. Now they post huge surpluses. In fact, more than three quarters of the world's foreign-exchange reserves are now held by emerging-market countries. Wealth and success breed pride and confidence.