American exceptionalism often turns out to be the heuristic rule of thumb for better economic growth, low and stable inflation, full employment, and macro-financial stability.

In recent years, higher American economic growth has been impressive both by historical standards and in comparison to the rest of the world. American exceptionalism often turns out to be the heuristic rule of thumb for economic growth, full employment, productivity advancement, low and stable inflation, and macro-financial stability.

We delve into the mainstream root causes of higher productivity growth in America despite several recent extraordinary events. These rare events include the dotcom stock market crash of 2001-2002, Global Financial Crisis of 2008-2009, Covid-19 pandemic crisis of 2020-2022, and the subsequent surge in inflation and domestic unemployment. In this wider macro context, we explain and discuss why American productivity growth has been so impressive in comparison to the rest of the world. We can draw some vital lessons from American productivity growth in global trade, finance, and technology.

 

With impressively higher productivity growth, America continues to lead the rest of the world. America’s recent rise as the world’s biggest shale oil producer continues to fuel its own economic growth in the next couple of decades. America’s deep and liquid capital markets for stocks, bonds, ETFs, and so on continue to deliver higher returns, cash dividends, and share repurchases for global investors. The American dollar continues to serve as the dominant global reserve currency for trade, finance, and technology. Only toxic politics can derail American economic growth, low and stable inflation, maximum sustainable employment, and macro-financial stability.

 

Since the early-1990s, America has grown substantially faster than most other rich countries. Also, the American economy has rebounded more significantly from its recent recessions along the way. In practice, U.S. economic growth has been best-in-class, and American strengths give grounds for greater optimism about the next likely economic power, productivity growth, macro-financial stability, and maximum sustainable employment. However, the U.S. fraction of global GDP has decreased incrementally from 21% in 1990 to 16% today in real purchasing-power parity (PPP) terms. Even the economic growth spurts of the world’s 2 most populous countries, China and India, lag behind American exceptionalism. China’s real GDP per capita remains less than one third of U.S. real GDP per capita. India’s real GDP per capita is still smaller today. In recent years, higher American productivity growth has been impressive by both historical standards and in comparison to the rest of the world. American exceptionalism often turns out to be the heuristic rule of thumb for wider economic growth, full employment, low and stable inflation, real productivity growth, technological advancement, and macro-financial stability.

 

On a per-person basis, American economic output is now more than 40% higher than economic output in Western Europe and Canada, and about 60% higher than economic output in Japan. Today, these economic output gaps are approximately twice as large as they were back in 1990. Average wages in the poorest American state, Mississippi, remain higher than average wages in Australia, Britain, Canada, France, and Germany. A recent IMF survey shows that America is the only country whose economic output and employment are above pre-pandemic expectations in the G20 club. This impressive productivity growth combines with the global reserve currency status of the U.S. dollar to entrench global economic heft for America and wealth creation for Americans.

 

We explain and discuss why American productivity growth has been so impressive for so long. Also, we explain and discuss why this growth is likely to continue in the next couple of decades. Some of the fundamental forces relate to the good fortune due to geography. As a quasi-continental economy with a big and broad consumer market, American companies benefit substantially from this sheer economic scale. A good product idea that some Silicon Valley tech startup hatches in California can often spread to the other 49 states in short order. Also, America integrates its labor market into the global economic ecosystem. This integration allows Americans to move to better jobs with higher wages. At the same time, this integration empowers Americans to gravitate toward more productive strategic sectors of high technology. These strategic sectors include semiconductor microchip production, higher-speed broadband cloud services, telecoms, electric vehicles (EV), autonomous robotaxis (AR), generative artificial intelligence (Gen AI) large language models (LLM), and biopharmaceutical medications, treatments, and therapies. In light of green energy transformation, the American-led improvements in techniques for extracting hydro-carbons from shale rocks have turned America into the world’s largest producer of oil and natural gas over the past couple of decades.

 

With its deep, broad, and liquid financial markets, America has made it both easier and faster for startups to raise new equity. In stark contrast to the alternative debt capital instruments such as bank loans and corporate bonds, this key equity capital availability serves as a better way for numerous American companies to get off the ground. In practice, this novel and non-obvious profusion of young companies has helped build out the broader vital, vibrant, and dynamic startup ecosystem for high technology in America. In addition, the dominant global reserve currency status of the American dollar helps further make global trade, finance, and technology more frictionless for American business. From Harvard, Yale, MIT, NYU, Columbia, and Chicago to Stanford and UC Berkeley, America has many of the world’s best think tanks, universities, and research institutes. These academic institutions attract the world’s best students, doctors, scientists, engineers, statisticians, economists, and other fresh talents worldwide.

 

In America, business rules and regulations are relatively lax, lenient, tolerant, and inclusive. This broader deregulatory business context has given high-tech startups ample room to grow their core business operations in the midst of significantly less economic policy uncertainty. In the recent couple of decades, the U.S. government has made bold, robust, and resolute interventions in response to some rare crises, disasters, and other extraordinary events. These rare crises span the dotcom stock market crash, Global Financial Crisis, Eurozone sovereign debt debacle, Covid-19 pandemic crisis, and subsequent inflationary outbreak worldwide. At any rate, it is impossible for us to explain America’s smarter, faster, and better economic growth engine without acknowledging the U.S. government’s open and inclusive attitude toward stepping on the financial accelerator pedal when the real economy sputters. The resultant positive government interventions often arise in the common form of better fiscal-monetary policy coordination. In modern economic history, there is an element of relentless dynamism in American business. This unique characteristic of the American economy continues to be the ultimate fundamental force in support of higher-quality economic growth over the next couple of decades.

 

With impressively higher productivity growth, America continues to lead the rest of the world.

Since 2000, real productivity growth has empowered much of America’s economic growth outperformance. Today the average American worker generates more than $170,000 in economic output on purchasing-power parity (PPP) terms, by contrast to only $120,000 in Europe, $118,000 in Britain, and $96,000 in Japan. This higher and impressive outperformance represents a 70% increase in labor productivity in America since 1990, well ahead of the respective productivity increases in several other parts and regions of the world, only 45% in Britain, 29% in Europe, and 25% in Japan.

 

A common riposte is that these numbers tend to exaggerate American productivity because American workers get much less holiday time than their peers abroad. In practice, American productivity outperformance remains remarkable when we turn to per-hour productivity growth figures. Specifically, American workers experience 73% per-hour productivity growth since 1990 versus 55% in Britain, 39% in Europe, and 35% in Japan. Another common criticism is that American productivity growth has steadily declined over the past couple of decades. This mega trend arises from both demographic longer longevity and technological advancement. After all, U.S. productivity growth remains impressively stronger than productivity growth in most other parts and regions of the world.

 

To better explain superior American productivity growth outperformance, we break this outperformance into several broad categories. These broad categories include capital investment accumulation, business dynamism, technological advancement, and increasingly higher stock market concentration in America. First, U.S. workers often apply more technological tools, levers, and instruments at their own disposal due to significantly greater and better capital investment accumulation in America in recent decades. These American capital investments include highways, bridges, warehouses, power plants, factories, as well as intangible cloud services, telecoms, high-speed broadband networks, software solutions, and so on. Since 2000, non-residential capital investments represent almost 20% of total GDP in America. Also, many U.S. capital investments focus on technological research and development (R&D). With only the rare exceptions of Israel, South Korea, and Taiwan, America invests more in R&D than any other country, approximately more than 3.5% of total GDP. Today, China is the only major country that seems to have closed the output gap on R&D capital investments relative to America. However, China still trails the U.S. by a significant absolute margin in terms of total dollar amounts of R&D capital investments.

 

Second, better business dynamism serves as another fundamental factor for high American productivity growth in recent decades. It is relatively easier for old firms to fold in America. At the same time, it is also relatively easier for high-tech startups to acquire new equity capital in America. The resultant churn helps empower these startups to substantially scale up their core business operations at the light speed of thought. Good recent examples of tech startups include OpenAI and DeepMind. OpenAI serves as the non-profit AI-driven powerhouse of ChatGPT with more than 400 million active users worldwide (now part of Microsoft). DeepMind serves as a Google high-tech startup with substantial R&D capital investments in the AI-driven Go chess global grandmaster AlphaGo, and the Nobel Prize in biochemistry winner and AI inventor of AlphaFold with well more than 600 million predictions of different shapes and forms of proteins, amino acid chains, cells, and molecules for smarter, faster, and better biomedical treatments. Outside America, few tech startups share these recent astronomical successes of Microsoft OpenAI’s ChatGPT and Google DeepMind’s AlphaGo and AlphaFold.

 

With such impressive business dynamism, smarter, faster, and better churn allows, empowers, and turbocharges Corporate America to evolve in the direction of more profitable ventures. Today the top-notch American patent holders include Microsoft, Apple, Google, IBM, Qualcomm, P&G, 3M, GE, and DuPont. In Europe, the major patent holders span Bayer, Siemens, Bosch, Ericsson, Philips, and BASF. Across the Atlantic Ocean, these global technological patent bellwethers now continue to dominate in their respective strategic sectors, industries, parts, and regions of the world. Overall, this fresh business dynamism applies to the unique American labor market with many more high-skill knowledge workers, machine-learning computer scientists, and other disruptive innovators in the modern golden age of information technology. In any given 3-month period over the past couple of decades, no more than 5% of American workers change jobs. Over time, all of this churn helps push American workers, entrepreneurs, and capital investments toward more productive strategic sectors. Today, these strategic sectors span AI semiconductor microchip production, high-speed broadband cloud services, telecoms, electric vehicles (EV), autonomous robotaxis (AR), generative AI (Gen AI) large language models (LLM), and novel non-obvious biopharmaceutical medications, treatments, and therapies. In essence, the output gaps in real productivity between America and Europe, and many other parts and regions of the world, are almost naturally and completely the result of American outperformance in some digitally capital-intensive segments of the global economy. Specifically, the U.S. knowledge workers perform particularly well in law, trade, finance, medicine, and online services such as movies, podcasts, TV drama series and talk shows, software solutions, and cloud services for Internet search, e-commerce, and social media. Although not every facet of American life is more productive, America is strong in some strategic sectors. Over the past few decades, these strategic sectors substantially boost economic growth, wealth, and income for Americans.

 

Third, American technological advancement serves as one of the mainstream root causes of vital, vibrant, and superior innovations over the conventional lifecycle of high technology. American think tanks, universities, and research institutes attract the brightest minds from the rest of the world. In America, public support for higher education and academic research is robust. Also, there is an abundance of venture capital for high-tech startups in America. American companies face few regulatory hurdles to scale up their core business operations worldwide. In many cases, U.S. regulators are not necessarily lax and lenient, but indeed, they compare favorably to the vast majority of non-U.S. regulators elsewhere. Europe still fragments along national boundaries. Japan has a long way to go in shaking up its stodgy corporate governance. In China, the Chinese Communist Party (CCP) has set its own cause back by throttling its once-vibrant private sector with more propaganda.

 

Finally, the recent phenomenal success of tech titans has provoked some concern about increasingly higher stock market concentration in America. These tech titans may have become too powerful in setting hefty prices for their digital products and services. American tech titans continue to dominate in some strategic sectors with astronomical network effects, information cascades, and scale economies. In time, their dominance monopolizes several recent digital markets (such as online search, e-commerce, social media, and cloud software), stifles some further innovations in adjacent market segments, and may inadvertently harm consumers because these consumers now tend to face fewer online choices, products, and services. Several economic trends arise from the recent stock market concentration of tech titans in Corporate America. Since the mid-1980s, American tech titans have taken a larger fraction of total sales in Corporate America. Also, their bottom-line net profits have grown substantially as a fraction of total GDP in America as well. Since 2010, these tech titans have transformed their net profits and cash flows into new R&D capital investments, cash dividends, and share repurchases.

 

In recent years, S&P 500 stock market returns exhibit spectacular concentration in the top-tier tech titans Meta, Apple, Microsoft, Google, Amazon, Nvidia, and Tesla, also known as MAMGANT or Magnificent 7. In the past years from January 2022 to December 2024, the Magnificent 7 delivered a hefty stock market return of 41%, versus almost 17% for the other 493 stocks in the S&P 500 index. From early-2025 to mid-2026, S&P 500 shows substantial stock market concentration. Specifically, the top 10 stocks account for more than 35% of S&P 500 market capitalization. In comparison, the top 10 stocks represented 20% of S&P 500 market capitalization on average over the past few decades. In addition, the market capitalization of the largest stock relative to the top quartile stock now shows the highest level of stock market concentration since 1932. Even though there has been no, little, or minimal clear and strong relation between stock market concentration and near-term return performance, some financial economists and institutional investors voice their own concerns about increasingly higher stock market concentration in S&P 500, NYSE, and Nasdaq.

 

American economic history shows that high stock market concentration often leads to substantially lower average returns ceteris paribus over longer-term investment horizons. When we add market concentration as a distinct variable to the long-run stock market model, the model forecasts average S&P 500 annual returns of only 3% to 5% in each decade. Although the subpar stock return performance falls short of the historical average return of 11% for S&P 500, this drag on longer-run returns arises from the greater volatility of tech titan stock returns. In recent times, the high stock market valuations of the Magnificent 7 tech titans now embed greater growth expectations in relation to the wider AI-driven stock market rally. From Apple, Meta, Amazon, and Microsoft to Google, Nvidia, and Tesla, these tech titans now rely on the steady flows of high-end semiconductor microchips, graphics processing units (GPU), high-speed broad-band cloud services, telecoms, quantum computers, and several other technological advances. These tech titans continue to make iterative improvements for their Generative AI large language models (Gen AI LLM). Today, the top-tier mainstream Gen AI LLM bellwethers span: Microsoft-OpenAI ChatGPT, Google Gemini, Meta Llama, Alibaba Qwen, DeepSeek, Anthropic Claude, Twitter xAI Grok, Amazon Nova, Mistral, and Perplexity.

 

Economic theory suggests that such high-tech oligopolists may abuse their market power to raise prices with significantly lower production. To the contrary, however, a recent empirical study of American census data over more than 40 years shows that some strategic sectors with increasingly higher market concentration have led to substantially greater growth in real productivity with fewer significant price hikes. In this new light, these U.S. corporate champions outperform their respective peers in some strategic sectors. With iterative continuous improvements in core business operations, these U.S. corporate champions become more efficient, make the best uses of their profits and cash flows, and then delight consumers with higher-quality products and services.

 

The recent rise of market concentration across some strategic sectors seems more like fierce competition in action than fierce competition in decline. P&G serves as an American powerhouse in consumer goods. In recent decades, P&G may have become bigger in some of the niche market segments for consumer goods. More specifically, nonetheless, P&G has substantially reduced market concentration in the rubber-glove market with newer and better Mr Clean products. Home Depot’s heft may seem to reduce competition on a national scale. However, the American home improvement retailer represents a new competitive force in the local market when Home Depot enters another town. In addition, Google and Amazon now offer the best hopes for shaking up the high-cost healthcare sectors in America as these tech titans tap into biomedical diagnostic services, primary healthcare medications, treatments, and therapies, and many more. These special cases help explain why market concentration can combine with technological advancement to benefit U.S. consumers with both better and smarter prices, products, and services in America and many different parts and regions of the world.

 

America’s recent rise as the world’s biggest shale oil producer continues to fuel its own economic growth in the next couple of decades.

Since the 1990s, America has become the world’s largest shale oil and natural gas producer by hydraulically fracturing special liquids to some open cracks in rocks to extract shale oil and natural gas. As American private-sector research companies and government agencies continue to hone their hydraulic fracking techniques with horizontal drills in recent years, these smarter efforts have led to massive domestic production of shale oil and natural gas. Today, America produces some 13 million barrels of crude oil each day and another 3 billion cubic meters of natural gas each day. These major milestones make America the world’s biggest producer of both.

 

From the 1970s to 1990s, America had been a major importer of crude oil. Further, America’s macro demand for foreign crude oil started to decline substantially back in the Global Financial Crisis of 2008-2009. At that time, American shale oil fields took off. By the Covid-19 pandemic crisis of 2020-2022, America started to export far more energy resources, primarily shale oil and natural gas, than its own energy imports for the first time in more than 50 years. In recent years, America achieved a historically high net energy surplus of more than $65 billion per annum.

 

Over the past 15 years, shale oil and natural gas extraction has boosted American economic growth in several ways. The recent decline in American energy imports combines with the recent rise in American energy exports to improve substantially the overall balance of trade for the shale leader. In the vast majority of other sectors, America buys more goods from many other countries than America sells goods to the rest of the world. The American-led increase in global shale energy supply can help reduce domestic energy prices. The resultant shale capacity further helps free up cash for more consumption and more capital investment accumulation in some strategic sectors. Some recent Federal Reserve System studies show that this new energy boom adds at least 1 percentage point to American GDP from 2010 to 2025, or almost one tenth of American economic growth in the past 15 years. In the best likelihood of success, many economists expect this shale-driven economic growth to continue in the next couple of decades.

 

Over the past couple of decades, American employment in shale energy extraction increased by 60% to more than 200,000 shale workers from 2005 to 2025. Positive knock-on ripple effects of shale energy extraction tend to be more significant, from new employment in shale support services for hydraulic fracturing techniques to a small recovery in the manufacturing sector, both due to more cost-effective energy resources in America.

 

The biggest economic ripple effect of all is that shale energy extraction has helped to better safeguard the American economy from the fickle volatility of the global oil and natural gas markets. During the Yom Kippur War between Israel and the Arab coalition of Egypt and Syria and the subsequent Iranian Revolution in the 1970s, energy shocks were a major fundamental source of economic instability in America and many other different parts and regions of the world. In particular, price surges drove up inflation and then depressed economic growth worldwide. This rare brutal combination marked the Global Stagflation from 1973 to 1979.

 

In recent years, the oil-and-gas drags have been far milder. Higher prices have led to ramp-ups in American shale production of both oil and natural gas. These recent developments have helped support economic growth in the domestic shale sector, even though higher prices might hurt downstream consumers in America. In recent years, especially after the Covid pandemic crisis of 2020-2022, America continues to be free from the regional energy crises due to the Russia-Ukraine war in Eastern Europe and the relentless conflicts between Israel and Iran, Lebanon, Hamas, and the Palestinians in the Middle East.

 

Shale extraction further highlights some of the root causes of American economic growth. In practice, the sheer size of the American economy combines with its rare unique geology to bestow the country with extraordinary energy deposits. In time, these energy deposits have proven to be both more abundant and more amenable to hydraulic fracking drills than shale formations in most other countries. American free-market capitalism is further on full display in its shale oil and natural gas wells. Unlike many other countries, America allows private individuals and companies to own minerals, rare earths, and oil and natural gas deposits, under their land. The resultant incentives encourage hundreds of private companies to tap into the shale business. As these private companies drill more shale wells, the shale specialists develop a better picture of where the richest energy reserves remain on American soil. With vast and extensive American geological surveys available on the books, these hydraulic energy producers now better target the next shale wells across the country.

 

However, America’s shale deposits may turn into a future liability on environmental protection, clean energy transformation, and the greener transition toward net-zero goals by 2050. In the worst-case scenario, America may fall into the fossil-fuel trap by discouraging further hydraulic innovations and capital investments in renewable energy. In economic terms, the fossil-fuel trap would pose 2 fundamental risks for America. First, the extant capital investments for shale energy might become stale one day. Regardless of how much oil and natural gas American producers extract from shale wells, Persian Gulf producers can always get more crude oil and natural gas at lower costs. As the world weans itself off oil and natural gas in the long run, American shale fields are likely to generate substantially lower marginal returns to scale one day. Second, America might ultimately fail to make the right kinds of new capital investments in shale extraction. America remains a distant second behind China in producing electric vehicles (EV), autonomous robotaxis (AR), solar panels, wind turbines, and lithium batteries. These key elements remain the most essential parts of clean energy systems. Many of these alternative greener energy resources are already cheaper, better, and more efficient over their lifespans than fossil fuels are today. In the green transition toward net-zero goals by 2050 as part of the Paris climate agreement worldwide, these cost advantages would likely continue to grow more substantially in due course. For the foreseeable future, greener and cleaner renewable energy innovations revolve around nuclear and hydrogen power plants and lithium battery storage mechanisms. Now, these renewable energy resources remain in the shadow of shale extraction in America.

 

America’s deep and liquid capital markets for stocks, bonds, and ETFs continue to deliver higher returns, cash dividends, and share repurchases for global investors.

In the new century, Wall Street’s impressive outperformance has propelled the U.S. stock market to more than 60% of global market capitalization. In the prior century, American stocks delivered the hard and hefty average real dollar return of 7% per annum, versus only 4.5% per annum in all other non-U.S. stock markets worldwide. This hefty U.S. equity risk premium of 6% to 8% per year has been the major focus of macrofinance research in recent decades. Several recent macrofinance models span habit formation, longer-term risk, rare disaster risk, labor income idiosyncratic risk, financial intermediary capital, ambiguity aversion, and heterogeneous-agents demand due to domestic institutional arrangements in America. Again, American exceptionalism often turns out to be the heuristic rule of thumb in light of impressive stock market return performance, especially for S&P 500, NYSE, and Nasdaq. The exponential power of compound interest further shows that American stock market investors would have ended the conventional investment lifetime of 70 years more than 4 times richer than non-American stock market investors in different parts and regions of the world. What makes the American stock market unique is its massive size in combination with better, greater, more robust, and more steady longer-term return performance. In recent years, this rare unique American stock market return advantage over non-American stock markets continues to grow with the recent rise, use, and prevalence of stock market ETFs worldwide.

 

There are at least 2 major fundamental forces in support of superb American stock market return performance. First, many American public corporations continue to retain rare unique competitive advantages in their respective strategic sectors, and hence these companies make more net profits and cash flows in recent decades. Second, stock market investors often tend to assign higher stock market valuations to these American companies. Specifically, the American stock market often trades at 24 to 26 times total net profits, in stark contrast to P/E ratios of only 15 in Britain, 14 in Europe, and 13 in Japan. America’s deep and liquid capital markets for stocks, bonds, and ETFs now continue to deliver higher returns, cash dividends, and share repurchases for global investors.

 

There are logical reasons for the impressively higher P/E ratios of American stocks. The U.S. stock market remains home to the Magnificent 7 tech titans: Meta, Apple, Microsoft, Google, Amazon, Nvidia, and Tesla (MAMGANT). In both America and the rest of the world, stock market investors often tend to perceive greater growth expectations in favor of these disruptive innovators in high technology. Indeed, the Magnificent 7 tech titans now continue to enjoy significant competitive advantages in their respective technologically strategic sectors such as social media networks, consumer smartphones, tablets, computers, and other mobile devices, AI software solutions, online search services, semiconductor microchips, graphics processing units (GPU), electric vehicles (EV), and autonomous robotaxis (AR). As most stock market investors often expect these Magnificent 7 tech titans to be more profitable tomorrow than today, these tech titans tend to attract increasingly higher P/E ratios, P/B ratios, P/S ratios, or other relative stock market valuations.

 

By comparison, Europe has its own stock market group of mega corporations: GSK, Roche, Nestle, and Louis Vuitton (also known as GRANOLA). Nevertheless, these European companies tend to focus on consumer goods, luxury products, and bio-pharmaceutical medications. Their growth prospects are not as good as the broad, pervasive, and long prevalent growth expectations for the Magnificent 7 tech titans. The same logic applies to the dominant companies in China, Japan, South Korea, Taiwan, India, Indonesia, Malaysia, Vietnam, the Philippines, and many other East Asian countries.

 

Since the Global Financial Crisis, many stock market investors worldwide have bet heavily on growth stocks, while many old-economy sectors such as banks and real estate companies have faced headwinds. Many stock market investors keep their active interests in the Magnificent 7 tech titans because these high-tech companies tend to reinvest more of their profits and cash flows in new R&D projects in support of further growth expectations. More broadly, American stocks are more valuable to stock market investors worldwide because people know they can sell these U.S. stocks in large quantities without any adverse impact on American stock prices, as many stock market investors worldwide want to trade these stocks at any moment. In practice, we expect to witness increasingly greater concentration in global stock markets on 3 fundamental levels: geographically in America, sectorally in Nasdaq technology stocks, and more granularly the Magnificent 7 tech titans, in addition to the top-tier tech titans in Britain, Europe, Japan, South Korea, and Taiwan etc.

 

The Magnificent 7 dominance seems to be a major self-fulfilling prophecy. Indeed, the next AI bellwether is increasingly likely to list on U.S. stock exchanges, Nasdaq and NYSE specifically, because of the deeper, broader, and more liquid American stock market. The higher stock market valuations of tech titans make the American stock market an attractive place for tech startups to raise common equity capital in the relatively lax, lenient, and facilitative American regulatory context.

 

In recent years, America dominates global private equity markets as well as public stock markets. The American fraction of global venture capital investments is 55%. Thus, America is the best place for tech startups to raise early equity capital in the form of cash. At the same time, America is also the best place for tech startups to go public with IPOs. Across the Atlantic Ocean, Europeans often bemoan the loss of their most promising companies to the clutches of Wall Street.

 

Even if we attempt to justify the recent divergence in stock market valuations today, this divergence cannot maintain American outperformance indefinitely in the future. After all, high stock market valuations often predict lower longer-term stock returns ceteris paribus. Although American stock market investors seem to have enjoyed significantly higher returns in recent decades, global diversification across multiple asset classes remains worthwhile. Specifically, international stocks, bonds, ETFs, and real estate investment trusts (REIT) serve as effective inflation hedges as well as speculative bets, especially when the global economy moves into an inflationary outbreak, a rare disaster, or a severe macro-financial downturn. Despite American exceptionalism, we believe a global mixture of multiple assets helps diversify away most idiosyncratic risks in support of more robust asset returns. Across many asset classes, global diversification helps better secure wealth creation from shirtsleeves to shirtsleeves over more than 3 generations.

 

The American dollar now continues to serve as the single dominant global reserve currency for worldwide trade, finance, and technology.

Although the U.S. fraction of global output has declined incrementally from 21% in 1990 to 16% now in real purchasing-power parity (PPP) terms, the American dollar remains the single dominant global reserve currency for worldwide trade, finance, and technology. For trade payments, cross-border capital investments, and foreign exchange transactions, the American dollar continues to be the currency of choice by far. The American dollar’s modern appeal, strength, and resilience help manage stable and steady U.S. private credit supply growth. Also, the greenback gives the U.S. Treasury and Federal Reserve System the rare unique geo-economic power to cripple foreign financial institutions with American dollar sanctions. At the current market exchange rates, America counts for almost a quarter of the world economy. In recent decades, the American dollar has been the long prevalent global reserve currency for trade, finance, and technology since the global economy transformed itself from the Cold War to the information revolution in the 1990s and early-2000s. Since 1995, trade liberalization has become the new normal steady state for many East Asian countries, such as China, India, Indonesia, Malaysia, Singapore, Japan, South Korea, Taiwan, Vietnam, the Philippines, and so forth. In addition to America, Australia, New Zealand, Britain, Canada, and Europe, these countries continue to regard the American dollar as the default global reserve currency worldwide.

 

Many speculative currency attacks took place in the 1980s and 1990s. Specifically, the self-made billionaire George Soros leveraged his Quantum Fund to make more than $1.5 billion by short-selling massive amounts of the British Pound and several other European currencies against the German Deutsche Mark in September 1992. In response to these speculative currency attacks, many central banks have been hoarding foreign exchange reserves, especially the hard currencies, the American dollar and the Euro, to counterbalance any additional currency attacks since 2000. Today, the top 10 holders of American dollar foreign-exchange reserves are China (almost $3.6 trillion), Japan (more than $1 trillion), Switzerland ($927 billion), India ($662 billion), Russia ($616 billion), Hong Kong ($463 billion), Saudi Arabia ($432 billion), South Korea ($415 billion), Germany ($387 billion), and Singapore ($377 billion). It is often useful for central banks to hold the American dollar as part of the foreign-exchange reserves, especially when the greenback brings broader options for trade tomorrow. As a result, greater greenback foreign-exchange reserves and trade invoices should reinforce one another.

 

Global trade flows that involve at least one rich country outside China now account for almost 70% of total trade transactions worldwide. Today, it is hard for us to see why these trade flows would ever switch to the Chinese Renminbi (Yuan), because the vast majority of rich countries with massive global trade flows are the American allies such as France, Germany, Spain, Australia, New Zealand, Japan, Singapore, Malaysia, South Korea, Taiwan, Vietnam, and the Philippines. If we exclude these American allies altogether, only about a quarter of global trade flows would be left on the table. Switching these trade flows to the Chinese Renminbi, Yuan, remains a tall order because of the fundamental risks for trade partners and central banks to hold Yuan as part of their respective foreign-exchange reserves. In recent years, many macro-financial economists expect the Chinese Renminbi, Yuan, to further depreciate incrementally due to the Chinese Community Party’s (CCP) longer-run sovereign debt accumulation, fiscal deficit continuance, and the broader Belt-and-Road Initiative for public infrastructure in different parts and regions of the world.

 

A recent Federal Reserve System survey shows that American dollar dominance has remained relatively stable over the past 30 years. One fundamental reason for American dollar dominance relates to positive network effects. When more people, more companies, more central banks, and more governments use the greenback, there are greater incentives for others to use the American dollar in global finance, trade, and technology. In light of the vibrant and robust American financial markets for stocks, bonds, ETFs, and REITs etc, another fundamental reason for American dollar dominance pertains to the better liquidity status of U.S. Treasury bonds, bills, and notes. For some currency pairs, it is often cheaper, faster, and smarter to trade through the American dollar. The greenback serves as a better medium of foreign exchange in stark contrast to some alternative direct foreign exchange between 2 non-dollar currencies. Nowhere else provides the American combination of deeply liquid financial markets, an open and flexible capital account, and the rule of law.

 

In recent years, America has run up its public debt worth more than 95% of its total GDP. At the same time, America continues to run its enormous fiscal deficit worth 7% of its total GDP. Some recent empirical studies by Harvard macro-economists Ken Rogoff and Carmen Reinhart show a robust negative relation between public-debt-to-GDP ratios and economic growth rates when public debt for a given nation exceeds 90% of its total GDP. After all, the current American fiscal strains may or may not be sustainable in the long run. The Sargent-Wallace monetarist arithmetic analysis shows that higher inflation inevitably arises from incremental increases in money supply growth when the central bank continues to fund fiscal expenditures with Treasury bonds as part of the macro budget constraint. In the extreme, if high public-sector debt eventually cripples sovereign creditworthiness and subsequent credible fiscal policy actions, the resultant public debt burden would likely lead to substantially higher inflation through domestic exchange rate depreciation. In the worst-case scenario, the central bank cannot maintain price stability as part of the macro mandate. If the incumbent government has no or little fiscal discipline, blind, reckless, and incessant expansionary fiscal policy actions can often turn out to be unsustainable in the longer run. The resultant public debt burden inexorably derails the core trade-offs between economic growth, inflation, and macro-financial stress conditions.

 

Today, Americans continue to receive cost-effective public debt finance. In return, foreign central banks anchor their economic policy goals to the American dollar as a safe store of value. The resultant exorbitant privilege empowers many Americans to enjoy both better and richer economic lives through greater global trade, finance, and technology. Whether the American dollar-driven global financial system stays sustainable remains an open puzzle.

 

Only toxic politics can derail American economic growth, lower and stable inflation, maximum sustainable employment, and macro-financial stability.

Despite almost constant political rancor, chaos, and division in recent decades, the American economic growth trajectory remains impressive. Since the third wave of democratization movements worldwide in the 1990s and early-2000s, America has incrementally expanded its economic lead over the G20 club of rich countries. Also, the U.S. has kept the recent rise of China at bay. In recent decades, the world has seen how U.S. political brinkmanship can bring on economic headwinds, struggles, and even crises. In 2011 and again in 2023, America ran smack into its fiscal debt cap. American Congress had imposed this stringent limit on total national debt for the Treasury. Without last-minute bipartisan agreements to lift this fiscal debt limit, the American government might have defaulted on some of its national obligations. Indeed, this cataclysmic rare event would shatter investor confidence in the global financial markets and the American dollar as the dominant global reserve currency and pre-eminent safe haven for trade, finance, and technology worldwide. Today, that danger continues to lurk in American toxic politics. Only toxic politics can derail American economic growth, low and stable inflation, full employment, and macro-financial stability.

 

The simplest macro measure of American fiscal health is the current ratio of public-debt-to-GDP. Since the Global Financial Crisis of 2008-2009, the U.S. government has tripled this fiscal measure to more than 95%. The Congressional Budge Office (CBO), a non-partisan fiscal scorekeeper, forecasts that this current ratio of public-debt-to-GDP would likely surge to more than 150% over the next 30 years. Recent empirical studies suggest a robust negative relation between economic growth and the current ratio of public-debt-to-GDP when the ratio rises above 90%. Substantial economic policy uncertainty emerges from further political polarization. In America, the recent anti-immigrant sentiments may inadvertently reduce labor mobility, labor force participation, and high-skill job flexibility in the tighter American labor market. Tariffs, trade wars, shale fuels, and climate risks might further heighten American economic policy uncertainty. With an impressive 4% domestic unemployment rate, per-person economic output of $85,000, and AI-driven high stock market valuation, America is already a great country. In recent years, however, increasingly extreme and toxic politics might gradually derail American economic growth, low and stable inflation, maximum sustainable employment, and macro-financial stability (all such policy goals as part of the macro mandate). Wider socio-economic inequality sows the seeds of toxic political polarization, and the resultant policy stance tends to tilt toward bigotry and xenophobia. After all, tomorrow is another day. Political checks and balances, free-market competition, and the rule of law combine to provide the best hopes for American exceptionalism, economic growth, stock market valuation, and macro-financial stability.

 

Central banks learn to better weigh the monetary policy trade-offs between output and inflation expectations and macro-financial stress conditions.

https://ayafintech.network/blog/central-banks-weigh-the-monetary-policy-trade-offs-between-output-inflation-and-macro-financial-stress-conditions/

 

Geopolitical alignment often reshapes and reinforces asset market fragmentation in the broader context of financial deglobalization.

https://ayafintech.network/blog/geopolitical-alignment-often-reshapes-and-reinforces-asset-market-fragmentation-in-the-broader-context-of-financial-deglobalization/

 

In the modern monetary system, each central bank digital currency (CBDC) helps better anchor public trust in money in support of economic welfare, especially in a new cashless society.

https://ayafintech.network/blog/central-banks-should-shape-cbdc-design-features-and-functions-to-reduce-any-adverse-impact-on-bank-intermediation/

 

Economic policy incrementalism for better fiscal and monetary policy coordination

https://ayafintech.network/blog/economic-policy-incrementalism-for-better-fiscal-and-monetary-policy-coordination/

 

The bank-credit-card model and fintech platforms have adapted well to the recent digitization of cashless finance.

https://ayafintech.network/blog/the-bank-credit-card-model-and-fintech-platforms-have-adapted-well-to-the-recent-digitization-of-cashless-finance/

 

Paul Morland shows that demographic changes lead to modern economic growth in the current world.

https://ayafintech.network/blog/paul-morland-argues-that-demographic-changes-lead-to-modern-economic-growth-in-the-current-world/

 

New Keynesian monetary policy framework

https://ayafintech.network/blog/new-keynesian-monetary-policy-framework/

 

Michael Woodford provides the theoretical foundations of monetary policy rules in ever more efficient financial markets.

https://ayafintech.network/blog/michael-woodford-provides-the-theoretical-foundations-of-monetary-policy-rules-in-efficient-financial-markets/

 

Government intervention remains a major influence over global trade, finance, and technology.

https://ayafintech.network/blog/government-intervention-remains-a-core-influence-over-global-trade-finance-and-technology/

 

Peter Isard analyzes the proper economic policy reforms and root causes of global financial crises of the 1990s and 2008-2009.

https://ayafintech.network/blog/peter-isard-analyzes-the-proper-economic-policy-reforms-and-root-causes-of-global-financial-crises/

 

Ray Fair applies his macroeconometric model to study the central features of the real economy such as price stability and full employment in the dual mandate.

https://ayafintech.network/blog/ray-fair-applies-his-macro-model-to-study-the-central-features-of-the-economy-price-stability-full-employment-dual-mandate/

 

Carmen Reinhart and Kenneth Rogoff analyze long-run crisis data to find the root causes of recent financial crises for better bank capital regulation and asset market stabilization.

https://ayafintech.network/blog/carmen-reinhart-and-kenneth-rogoff-analyze-long-run-crisis-data-to-find-the-root-causes-of-financial-crises-for-better-bank-capital-regulation-and-asset-market-stabilization/

 

Anat Admati and Martin Hellwig raise critical issues about bank capital regulation and asset market stabilization.

https://ayafintech.network/blog/admati-and-hellwig-raise-issues-about-bank-capital-regulation-and-asset-market-stabilization/

 

American bank failure resolution and financial risk management for Silicon Valley Bank, Signature Bank, and First Republic Bank

https://ayafintech.network/blog/bank-failure-resolution-financial-risk-management-silicon-valley-bank-first-republic-bank/

 

Timothy Geithner shares his personal reflections on the post-crisis macro financial stress tests for U.S. banks.

https://ayafintech.network/blog/timothy-geithner-shares-his-reflections-on-the-macro-financial-stress-tests-for-american-banks/

 

The Federal Reserve System conducts modern monetary policy decisions, interest rate adjustments, and inter-bank payment operations.

https://ayafintech.network/blog/federal-reserve-conducts-monetary-policy-decisions-interest-rate-adjustments-and-inter-bank-payment-operations/

 

Barry Eichengreen compares the Great Depression of the 1930s versus the Great Recession of 2008-2009 as historical episodes of economic woes.

https://ayafintech.network/blog/barry-eichengreen-compares-the-great-depression-and-global-financial-crisis-as-episodes-of-economic-woes/

 

Former Bank of England Governor Mervyn King provides his substantive analysis of the Global Financial Crisis of 2008-2009.

https://ayafintech.network/blog/former-bank-of-england-governor-mervyn-king-provides-his-deep-substantive-analysis-of-the-global-financial-crisis/

 

Michel De Vroey discusses the global history of macro-economic theories from real business cycles to persistent non-neutral monetary policy effects.

https://ayafintech.network/blog/de-vroey-delves-into-the-global-history-of-macroeconomic-theories-from-real-business-cycles-to-persistent-monetary-effects/

 

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