There is no one who is not aware of the widespread global influence controlled by America since times unknown. America has a manipulative power to affect the economy, polity, and all other aspects of most of the countries around the world. And it does that too. It uses all its powers to strangle the affairs of global and national matters, for good or for bad. Another way to put it could be by using the following analogy- “If America catches the coronavirus, the cases in the rest of the world rise too.”
If one is aware of the vast magnitude of potency America holds, he might have thought several times- “But, what would happen to the world if someday America collapses? Or if it unprecedently, without any warning, it takes a wrong economic or political turn? How will the rest of the world bear with it?” A lot of you might have not even thought about this, because, well, the thought in itself sounds absurd and unimaginable. But, for the people who have just witnessed a year that was never thought of before with the unprecedented pandemic and subsequent global lockdowns, no thought is too ambiguous and absurd now.
For once, let us let our imagination ponder to ascertain what might happen if a global superpower named America, which was a world saviour, itself becomes a state of destruction.
America’s Gross Domestic Product (GDP) fell by 3.5% in the pandemic-struck year 2020. However, it is also expected to witness a rejoicing growth in 2021 as the world returns to the pre-pandemic normal (not really) with the onset of vaccination procedures. But the story could be simply more than that with an expectation of the total US stimulus exceedingly as much as $2.5trn if the newly elected president Biden is successful in implementing his expectations.
This enormous stimulus, if introduced, is likely to have a tight hand on the Congressional Budget Office estimates. The increased supply of money will not be able to keep away the accelerating growth in prices and wages, in other words- Inflation. And, as we all know, America is not a country operating in a vacuum. In other words, the inflationary pressure in America, if any, will not be confined within its borders and shall ignite ravaging fires across the globe. Still very uncertain, a lot of economists are of the view that an inflationary situation in the American economy could be a boon for the rest.
If an economy is introvert, that is, it does not hold any international trades with the other countries it has what we call a “closed economy.” Whatever happens in a closed economy, stays in a closed economy. On the contrary, countries like America and India, are open economies. This means that any effects within their boundaries can affect employment, trade, prices etc in other countries as well.
For instance, the 2007-09 financial crisis which began in the United States took no time to cover the rest of the world. It birthed troubles in financial markets of mostly all the countries around the world and wreaked havoc on the entire global financial and economic system.
An analysis published in 2017 by the International Monetary Forum (IMF) claimed that an American stimulus worth 1% of the American GDP has the potential to impact the other countries. With this stimulus of 1% of GDP, America can raise the output of an average country by almost 0.33% in just the first year itself, and countries with stronger trade ties with America are likely to have a greater impact. For example, Canada’s economy can witness a surge that is almost three times the average.
It is quite a 100 per cent likely phenomenon that a spillage in America will burn the hands of all the countries, the intensity might differ with their policy response, both within the domestic frontiers and outside. The effect shall be stronger for the countries which are operating below potential and vice-versa. Keeping that in mind, American senators have also urged other countries to work heavily on their stimulus numbers rather than just waiting to rely heavily and free ride on the American stimulus. On February 12th America’s treasury secretary, Janet Yellen had said the same to her counterparts in the G7 group.
Right now, the biggest and the sharpest sword of uncertainty that hangs over the heads of multiple economies is the reaction of the Federal Reserve. It has been observed every now and then that domestic inflation is becoming more and more responsive to alterations in the global business and economic climate and factors thus influencing it. The countries around the world now react to the number of economic changes as a whole as well as to economic changes in one particular friend nation or enemy nation.
There is a possibility that the Fed might try its best to reduce the price rise or inflation in the second half of this year, right now, laying the entire focussed spotlight on the growth and recovery factors. It has assumed that any short-run price pressure will not convert into massive inflationary pressures until the job market in the United States as well as across the globe has fully recovered. In that case, an America working towards global development and growth should bet for a weaker dollar along with increased ease in the global financial conditions and processes. This shall help other trembling and struggling economies by encouraging Americans to buy more and more goods from abroad. However, this might not last long as a surging current account deficit might push the Fed to react to the build-up of the country’s financial risk. If the United States eyes at increasing the interest-rates, the global markets might not take it well. This adverse reaction shall force the emerging economies and developing nations, such as India, to introduce a less than the required fiscal stimulus package. The developing countries might also strictly control their monetary policies in that case.
It isn’t quite expected of the Fed to suddenly turn inwards and harsh towards the other nations, especially when the new president Joe Biden has promised the world of a new and collaborative America (Something which did not happen under the previous president- Donald Trump).