The United States, powered by the mighty dollar, has always been insulated from global financial shocks. It has had a sufficiently large economy to enable it to retreat into its shell and hunker down while emerging markets have tumbled like dominos as the result of one or another form of contagion.
Withdrawing hot money at short notice and weathering the drop in global consumption of American goods by falling back on domestic consumers was the time-honoured method of dodging the bullet.
That was then.
New economic powers have risen to the east and, thanks to globalisation, the US has moved masses of jobs offshore to other economies.
And, most importantly, this time the contagion came from within.
The US political thinker, Francis Fukuyama, has written an intruiging history of how Reagan’s deregulatory agenda – the right medicine to drag the US out of the quagmire of the 70s – persisted too long. He argues that this was because US voters failed to bring the Reagan era to a timeous end because, unlike in Europe, US workers do not necessarily support left candidates. Cultural and religious issues can make working class voters support parties which are patently eroding their economic interests.
An extract from Fukuyama’s piece:

The Reagan era should have ended some time ago. It didn’t partly because the Democratic Party failed to come up with convincing candidates and arguments, but also because of a particular aspect of America that makes our country very different from Europe. There, less-educated, working-class citizens vote reliably for socialist, communist and other left-learning parties, based on their economic interests. In the United States, they can swing either left or right. They were part of Roosevelt’s grand Democratic coalition during the New Deal, a coalition that held through Lyndon Johnson’s Great Society in the 1960s. But they started voting Republican during the Nixon and Reagan years, swung to Clinton in the 1990s, and returned to the Republican fold under George W. Bush. When they vote Republican, it’s because cultural issues like religion, patriotism, family values and gun ownership trump economic ones.

The problem for America is that the way forward is going to be tough going. There will be no quick solutions to restoring confidence in the financial markets and in business in general. Whereas Americans were invested in bank deposits and other low-earning financial instruments prior to the onset of serious deregulation, they are now heavily invested in the stock markets, which are destroying their nett worth day-by-day.
The conservative British news magazine, The Spectator, wrote a leader blaming the current crisis on human nature:

It is human nature — that incorrigible force which makes us want too much of a good thing when it is within easy reach, and makes us dangerously complacent about risk when the going is good. It was human nature that made bankers behave irresponsibly when their judgment was warped by the temptation of giant bonuses; it made homebuyers and credit-card holders overreach themselves when they were offered too much cheap credit; it made politicians overborrow and encourage market folly when they thought it would buy them electoral popularity.

Yes, we had greed. And now we will have its opposite according to the well-worn cliche: Fear.
Fear of consuming, fear of investing, fear of Wall Street. In the recent consumer boom, much as written of the wealth-effect – how the middle classes were spending freely because they could see their financial worth rising along with property prices and stocks. Now we have the “poverty effect”, the tendency to postpone or to scrap spending as personal worth diminishes.
The poverty effect is going to take hold of the American psyche and hold it in a firm grip for a long time indeed. Without the American consumer, the global economy is going to contract and manufacturing economies will suffer.
This will be accompanied by a diminishing appetite for resources and commodities, which is where South Africa’s economy has made hay over the last eight years.
So the world will wilt. And it won’t be a little equity market wilt like the one we had when the dot-come era came crashing down. It will affect more than speculative investment portfolios, it will affect lifestyles and society as unemployment rises and state resources diminish along with tax receipts.

Related posts:

1. Welcome to America: Home of state socialism
2. What an Obama presidency will mean for Africa
3. How the world financial crisis impacts on South Africa
4. Trevor Manuel on the global crisis and South Africa
5. South Africa safe from global financial storm