How much longer will a disunited world debt-fund America’s expansion?

The US has returned to growth, with a strong stock market and lead in AI technology but the global leadership contest is far from over and counting on the US as the key engine of recovery is simply not realistic

Andrew Sheng

Published: 4:30pm, 22 Mar 2024

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On March 7, US President Joseph Biden delivered his State of the Union address. This was his energetic bid for re-election over Donald Trump, to allay concerns about his age and stamina, show America’s strength and call for continued support for Ukraine. More than six in 10 Americans responded positively to the message, according to a CNN flash poll.

Ten days later, Vladimir Putin, mentioned seven times in Biden’s speech and seemingly likened to Hitler, was re-elected as Russian president with 88 per cent of the vote. Clearly, the state of global order is less of a union and more of a disunion or polarisation. Prices of gold, a safe haven, has hit record highs of over US$2,222 per ounce.

In the United States, major stock indices, including the Dow Jones Industrial Average, S&P500 and Nasdaq Composite, rose to record highs this week after Federal Reserve chairman Jerome Powell confirmed that plans for interest rates cuts this year.

In a way, it feels like the US has never had it so good. Last year, its stock market grew by more than US$10 trillion. With the boom in artificial intelligence (AI), Nvidia alone added US$1 trillion to investors’ wealth this year.

In a grand overturn of recession fears, the US economy closed out the year with 3.2 per cent growth in the last quarter, managing an annual expansion of 2.5 per cent – on a par with the World Bank’s global growth forecast of 2.6 per cent. With global economic expansion set to slow this year to 2.4 per cent, the US could still tread water at around 2 per cent.

But while the US is able to sustain growth through its growing fiscal and trade deficits, albeit a worrying debt habit, much of the rest of the world is languishing.

Given that the next US president, whether Trump or Biden, is likely to continue America’s spending and debt spree, will the rest of the world continue to fund it?

In the short term, there seems to be no alternative to putting one’s money in the dollar.

The euro is hobbled as European economies deal with the costs of the war in Ukraine, where Russian forces seem to have gained the upper hand. As Nato, including the US, cannot afford to let Ukraine lose, the entrenched conflict is likely to limp on until one exhausted side calls for truce.

Even if Trump becomes president and seeks a ceasefire with Russia, the damage done to Ukraine is so deep that it will remain a drag on the European economy for decades.

As for the yuan, US-China tensions are unlikely to ease any time soon and China will take at least two to three years to deal with the structural economic implications of its real estate debacle. The yen will also remain under pressure as Japan tries to normalise its ultra-low interest rates to help real incomes recover from years of stagnation.

For the Middle East, oil prices may well remain flat, depriving it of any additional ballast as oil producers try to build a new foundation in renewable energy.

Yet in the medium term, counting on the US to be the key engine of global recovery is simply not realistic.

China’s plan for ‘new productive forces’ should make the West sit up

Increasingly, the global rivalry for leadership is not just about military or financial power, but also about technological edge and its ability to generate wealth.

Last year, a study by the Australian Strategic Policy Institute declared that “China’s global lead extends to 37 out of 44 technologies that ASPI is now tracking, covering a range of crucial technology fields spanning defence, space, robotics, energy, the environment, biotechnology, AI, advanced materials and key quantum technology areas”.

But while China’s spending on research and development is fast catching up with the US budget, “US tech giants still dominate research and innovation in critical technologies such as AI,”, noted Marina Yue Zhang, a professor at the University of Technology Sydney. China’s tech champions have not yet achieved the levels of monetisation through stock market wealth that their US peers have.

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Chinese AI-generated cartoon series broadcast on state television

Many Chinese businessmen concede that America leads in hi-tech, whereas they are much better in “mid-tech”: the ability to convert technology into production prowess. For all of America’s superior military technology, as the Ukraine war has shown, the ability to mass-produce basic artillery shells still matters.

The global contest therefore hinges on who can convert AI technology into productivity across the broad economic front.

China’s rise as world’s green factory has put West on the back foot

For now, it is widely accepted that the US is in the lead, followed by China, while the rest of the world struggles with the application of AI in day-to-day consumption, production and distribution functions. Poor developing countries that fail to upgrade their productivity through AI and knowledge-based innovation will be stuck in low-tech.

In other words, the world is in disunion not just from the wealth and income disparities, but also with the widening digital and knowledge application gaps, including in climate action.

The US-China technological race is shaping up into a long march of hegemonic proportions. But history is shaped by multiple structural forces and random events, and the ultimate 21st century winner may be neither of the two front runners nor anyone else on the radar.

In a “pluriverse” of possibilities, those that work hardest to innovate with new technology may be the survivors in the end. As St Matthew said: “Blessed are the meek, for they shall inherit the earth.”

Andrew Sheng is a former central banker who writes on global issues from an Asian perspective