On Finance and U.S. Political Future

We have recently seen an influx of articles and books address the future of the West, and more specially the United States. "That Used to Be Us" and "The Post-American World" are some of the most popular titles. Apparently, it is hard to resist the temptation of trying to predict the prospects of a struggling giant like the U.S. in the years to come. The current U.S. elections campaign has also amplified the trend, thus presenting various voices on the topic, both on the economics and foreign-policy fronts.

While the conclusions are mixed there is a growing consensus that by the end of the decade the U.S. will not be the world's super economic power anymore but continue to serve as the center of the world's financial systems, and as a moral and cultural cornerstone of mankind.

Martin Wolf, a leading British economic and political commentator, tends to agree and in a recent speech on the future of the U.S. from European perspective he justifiably pointed out that the U.S. grows enough to support its moral and military spending but too slow to keep its economic dominance. Yet, any failure to fight its inequality, he advocates, will lead to the collapse of its moral standing in the world.

In light of this emerging consensus, it is clear that the centrality of U.S. financial systems is crucial for its ongoing geostrategic status. Yet, unless the U.S. government continues to protect and promote this centrality, things can change dramatically. Is it happening?

First, a very important component of the U.S. ability to maintain its status as the world's center of financial systems is its ability to sustain financial markets. Many factors have made it challenging for international companies to enter U.S. capital markets. Costly regulation and large, highly centralized investment banks, among other factors, have contributed to this shrinking market. Moreover, a very important part of the Jobs Act, a recent U.S. legislation designed to deal with jobs creation in the small-to-mid markets and access to liquidity, is crowdfunding that should help these companies to access capital markets despite their low valuations. This legislation is still in its initial stage of implementation and some preliminary feedbacks from the markets are not positive.

Then, with respect to banks and financial systems, as we all know in recent years U.S.-based banks lost significant part of their equity. Only 3 out of the top 10 global banks are American, determined by their assets. Several Chinese banks will join this list in the coming years. While many U.S. banks have tried penetrating growth markets, most of them have had a bad experience and decided to focus on local markets instead.

Finally, there is a strong correlation between the use of local currency and development of financial centers. Thus, the continuing primary use of the U.S. Dollar as a global currency is important for the future of the U.S. financial center. As I discussed here several times, strong policies are needed to maintain this status.

While most commentators these days focus on America's future industries, fight against fiscal deficits, and its market vis-à-vis the rest of the world, little attention has been paid to the efforts needed to keep U.S. financial systems central to the rest of the world. Orchestrated and integrated solutions can change it. A centralized program to keep U.S. financial centers relevant, open and successful, similar to 'SelecteUSA' in the foreign direct investment context, is crucial. While transparency, enforcement, and consumer protection are necessary to keep the vitality of financial institutions for the long-term, an effective implementation of various reforms is necessary.

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