How sustainable is America's economic dominance?

Whatever happens in Iraq, it appears that the events of the past two years have created fissures in the relationship between the United States and much of the world that will take time to heal. The Pax Americana negotiated from the end of World War II and lasting almost 60 years is facing a new set of challenges from issues that were submerged during the Cold War.

Historians have often observed that no nation since the Roman Empire enjoyed as much power as America did in 1945, at the end of World War II. The rest of the developed world's industrial infrastructure had been totally destroyed, and America's military might was challenged only marginally by the Soviet Union. Today, many nations have resurrected their economies, but the collapse of the Soviet Union has left the United States as the world's sole superpower, a development that is producing great angst in some quarters of the world. As the pro-American British observer Timothy Garton Ash has observed, the United States "is too powerful for everyone's own good, including their own."

This growing imbalance of power is spilling from the geopolitical sphere into the global economy, and its ramifications are only starting to surface. In early February, Pimco Funds fixed-income chief Bill Gross authored a piece arguing that America's redefinition of the role of global policeman, originally dumped in its lap in 1945, would erode its "economic hegemony" in the post-9/11 environment. Few Americans would disagree that the safety of ordinary citizens is more important than a balanced federal budget, but the shift in three short years from a $300 billion surplus to a $300 billion deficit is tectonic. Gross bemoaned the loss of the peace dividend associated with the end of the Cold War, although it's worth recalling other bond fund managers were whistling the same tune when the federal budget was bleeding red ink by the bucket in the early 1990s.

Why Current Account Deficits Are Irrelevant

hen asked about the current account deficit, Jean-Marie Eveillard likes to quote legendary hedge fund manager George Soros's remark that "the current account deficit doesn't matter until it matters."

If you ask OppenheimerFunds' Bill Wilby about it, he might say that even when you think current account deficits matter, they don't. Well, almost.

"One of the most important things in the psychology and the perceptions of the U.S. is this current account deficit," Wilby says. "It's not important in a reality sense, but it's highly important in a psychological sense."

The current account deficit has expanded significantly in the last several years, approaching 5% of GNP, about as high as it's ever been. "That's what's causing a lot of people to wail and moan and talk about how the U.S. is overspending, and you know, it's spending beyond its means and all this kind of thing," he says.

A trained international economist, Wilby views that current account deficit in a very different fashion. "We don't care what the current account deficit is between, you know, West Virginia and California, nobody measures it, nobody looks at it, nobody even cares what that is. It's basically a balance of revenue, " he argues. "It's not a balance of profitability, it doesn't say anything about the returns on capital in any of the two countries. It just says what the balance of revenue is."

The composition of international exerts tremendous influence on trade balances. "Japan has become one of the leading automobile manufacturers and so has Germany. So they've got a lot of big-ticket items that are big revenue producers," Wilby continues. " I don't think it's that important for the U.S. to be the leading auto producer in the world. It's much more important that we're the source of leading biotechnology, of genetically engineered drugs, or strongest information technology, or the strongest chip design capabilities."