Economic Decoupling

Nouriel Roubini, an eminent global economist, has made the point that if the US experiences an economic slowdown, other countries, such as China, would also experience a slowdown because our economies are dependent upon one another.[1] This is known as being coupled together. There has been ongoing discussion which suggests the alternative hypothesis, that economic decoupling has occurred, and the rest of the world is not economically dependent upon the US anymore.

While there are many well made points in Roubini's, as usual fine analysis, I believe there is something lacking in several respects. The idea of decoupling is contextualized as a black and white issue; either other countries have decoupled, or they have not. The preponderance of evidence, a posteriori, is that those other countries now have more developed economies, and by extension greater internal, as well as intra-regional, demand. The statement “"For now it is clear that it is still the case that when the US sneezes the rest of the world gets the cold.” may be an overstatement. I see little evidence to support this conjecture. It appears more likely that a more accurate representation would be "the rest of the world gets something between a sniffle and a cold". Whether the rest of the world gets more of a cold than a sniffle remains to be seen.

I see several possible mitigating factors which were not mentioned in this analysis. One factor would be how rapidly US demand deteriorates relative to geo-specific, intra-regional, and country specific internal demand increasing. Another factor are those elephants in the living room known as sovereign wealth funds, and country specific economic stabilization funds. It is no secret that a number of countries who have been beneficiaries of petro-dollar and trade surplus dollars have strategically identified the risk of a US slowdown. It may be a gross under-estimation of the intelligence of these entities to assume that they have not factored in contingency planning. Considering the infra-structure build-out needs of these emerging economies, a hypothetical alternative to being dragged down by a declining US economy would be to redeploy surplus reserves, and/or borrowing capacity, to developing, for example, their economic and physical infrastructure such as roads, telecommunications, environmental cleanup, etc. The US, in fact, presents a model of such an endeavor during the early 20th Century with the Civilian Conservation Corp. A major difference, nowadays, is that the US is financially broke, while these other emerging economies are relatively financially flush.

Ryan Darwish
Author of The Emperor’s Clothes: A Mosaic Look at the MegaTrends Affecting Your Financial and Investment Decisions
http://www.investmentmegatrends.com/

[1] http://www.rgemonitor.com/content/view/228535/85/