Global financial markets and the world economy approach the fifth anniversary of the September 11th, 2001 attacks against the U.S. in a healthy state. Meanwhile, the Global War on Terror, or GWOT as it is called in the Pentagon, has now gone on longer than the entire U.S. involvement in World War II (December 1941 to August 1945), showing no signs of winding down.
The terrorist attacks, coupled with the pricking of the Internet bubble in 2000, triggered a global economic downturn. Wall Street panicked after the destruction of the World Trade Center, but by early 2002 the Dow Jones Industrial Average was back at its early September levels around 10,700. Afterwards, as economic activity slowed, the Dow plunged again, dropping toward 7,000 in the second half of 2002 and again in 2003. However, over the past three years the blue chip index has gained over 50 percent of its value and in the second quarter of this year toyed with all-time highs set in late 2000.
Foreign financial markets performed at least as well, and in many cases much better. GWOT has been a low-intensity conflict, not interfering with a broadly based global economic recovery which commenced in 2004. On the contrary, much like other low-intensity conflicts of the past half-century, notably the Korean War and, at least at its initial stages, the Vietnam War, it probably contributed to global economic growth.
But in the long run war is rarely good for society — or for the economy. GWOT has been no exception. Over the past five years, major imbalances have been created both in the U.S. and in the world economy, which may yet trigger a nasty correction.
In the immediate aftermath of September 11, when the U.S. economy started to totter, President George W. Bush and other U.S. officials declared that the patriotic duty of every American was to “buy, buy, buy.” And buy we did, aided by loose monetary policy, when the Federal Reserve slashed its interest rates to 1 percent.
Personal consumption, which now accounts for 70 percent of GDP, has been the single consistent driving force of the economy. From 2000 to 2005, real GDP increased by 13.4 percent, while personal consumption expanded by 16.6 percent.
There is some question about the morality of going on buying with gay abandon when the nation is fighting a war that, in Iraq and Afghanistan, has already cost some 3,000 American lives. The same goes for driving gas-guzzling SUVs and burning a quarter of the global output of crude. However, there are also negative economic consequences of runaway consumption.
The U.S. trade deficit has ballooned toward $800 trillion, measuring 6 percent of GDP. Over the past decade, imports more than doubled, while exports increased by only 50 percent. America now accounts for around 20 percent of global imports, up from 15 percent a decade ago. In large measure, the import bill has been settled with borrowed money. The U.S. became a net international debtor two decades ago, and its debt to the rest of the world has continued to mount. It jumped 14 percent in 2005 alone and stands at $2.7 trillion.
The Rise of China
One major consequence of the American consumption spree has been an increase in China’s weight in the global economy. True, China’s economic development predated the War on Terror. China’s GDP growth averaged 12.5 percent in 1992-1996. However, that growth rate came from a still-low base and, moreover, in the second half of the 1990s growth began to slow into the 7 percent range. Since 2002, however, the Chinese economy has been spurred once more, accelerating to an average annual rate of 9.5 percent.
While Chinese goods have been gaining market share everywhere, its export growth to the U.S. has been especially spectacular. In 2000, imports from China were 13.6 percent of total U.S. goods imports. By 2004, they exceeded 25 percent. The total value of Chinese exports jumped from $100 billion to nearly $250 billion last year. This year, that figure is on track to reach $285 billion. The U.S. trade gap with China has rocketed from $83 billion in 2000 to $202 billion last year.