In 2005 the combined output of emerging economies came to account for more than half of total world GDP (measured at purchasing-power parity). Consequentially, today rich countries no longer dominate the global economy, while developing countries have far greater influence over rich economies. The advent of offshoring has lowered production costs, allowing consumers in the developed world to reap the benefits of cheaper goods and services; this has reduced consumer price levels and thus inflation. Lower labour costs have been a in large part, a consequence of the manufacturing production function, generally it uses very little human capital and takes a form similar to y=akα .The massive rise in the effective unskilled labour supply resulting from the ability of MNC’s to move these processes abroad has exerted tremendous downward pressure on unskilled labour’s share of income L/Y, relative to skilled labours share Lh/Y in developed nations. As the world develops however, a growing supply of human capital across the world has begun to exert downwards pressure even on skilled domestic labourers. With lower costs of labour, have come lower costs of output and thus higher levels of Profit and larger share of profit in national income. The abundant supply of effective labour abroad, increases productivity.
This same resistance to inflation contributes to the United States’ Dollar’s reliability; in that it aids the dollar in remaining a strong store of value; backed by the full faith and credit of the United States Government, it is a liquid medium of exchange and a reliable unit of account. Given these facts, amidst the greatest growth miracle and supply shock in history, developing countries choose to purchase dollars for their reserves, consequentially, their rapid purchase of dollars vastly increases deficits through capital inflow which may lowering U.S. Marginal Product of Capital = MPK =ΔY/ΔK = r which may represent its equilibrium interest rate. Despite the possibility of a falling interest rate yielding capital losses if adjusted for inflation, capital flows have continued to widen the deficit, leading many to think, or perhaps to have correctly thought, that at the very least, large deficits promote assets bubbles, and at worst that major economies might abandon it.
It has been argued that over dependence on foreign capital, and an excessive current account deficit, uncompensated by private savings might lead foreign central banks to determine the U.S. economy to have deteriorating fundamentals thus setting off a panic, this argument overlooks the U.S.’ fundamental strength. Many Economists today believe that U.S. dependence on foreign capital and growing foreign debt has brought about an economy based on an unsustainable accumulation of foreign debt only worsened by excessively low private savings rates, and an out of control current account deficit with total net foreign liabilities approaching a quarter of GDP. It has been posited that failure of foreign U.S. Asset holders to continue purchasing dollar assets could set of a panic causing heavy dollar depreciation, rising domestic interest rates as available capital dries up and widespread inflation. Though this remains a possibility, it is not a likely one. Though the U.S. economy sits atop a mountain of debt, it is not a subprime borrower, as it has the means abilities and intentions to make good on its debt. With respect to its means, the U.S. economy leads the world in innovation and technological advancement, admittedly the economy can certainly expect a painful correction towards further specializing in this sector, with rising global demand, this should only reflect rising wage rates in these sectors over time due to their scarce global nature, further boosting U.S. relative wealth through this period until other countries become equally skilled.
The U.S. is not unstable in relative historical terms, its currency will...