Monday, February 25, 2008

Decoupled or Decoupling?

The global impact of the U.S. slowdown indicates that the U.S. economy still exerts influence over the rest of the world, despite predictions that other countries are "decoupling," Johnson said. [Simon Johnson, economic counselor and director of the research department at the IMF.]

All the talk in the recent weeks about decoupling along the lines of "now that decoupling has been proven dead..." is making me think I've missed something. The argument seems to be: markets in the rest of the world are reacting to negative news in the US, so the rest of the world is not immune to US jitters, so there's no decoupling.

Wait: if decoupling meant literally complete detachment, well, then, yes, it's a concept in line with other embarrassments of recent history like "real estate prices can never go down" and "the dot come revolution has changed the laws of (asset pricing) nature." Only true autarky from the US economy would achieve this.

So I was under the impression (misunderstanding?) that this was not a binary issue, rather a question of degree: "decoupling" is a process, "decoupled" is a destination, and we're "decoupling," not "decoupled." On a politically-loaded parallel, it's the difference between "drowning" and "drowned," but let's not go there. It means lower, not zero (nor negative!) correlation.

That's why decoupling can coherently co-exist with globalization (and in fact be spawned by it). Decoupling makes a duh-type of sense (as in "is at least plausible") if taken to mean that the relative importance of the US as a source of net demand for other economies' outputs (or as a financial market accessible to them) has fallen, on average, for countries around the world, both because of the emergence of new regional powerhouses AND because of the expansion of their own domestic markets. (And that's an "if": this statement might, of course, be proven wrong by the data by looking at trade and capital flows at different levels of geographic aggregation.)

In fact, the US could be the most important partner for every other country and decoupling still hold: the US just needs to be less important (on average) than before.

I see it as "Globalization, part II": the US' insatiable appetite for consumption (and debt) allowed other economies to grow; as access to the larger US market allowed them to expand and thus exploit competitive advantages and economies of scale, these economies began to link with each other, to produce for their own and their neighbors' rapidly expanding markets; and now that the US is ailing, they will most certainly slow down their expansion since one (still very important) source of demand for their output is weakened, but not so much as they would have slowed if the domestic and non-US foreign drivers of expenditure hadn't increased in importance.

Instead of thinking in terms of the old saying "if the US catches a cold, the rest of the world catches pneumonia," we should switch to "if the US catches a cold, the rest of the world sneezes and feels rather chilly, but still manages to go to work."

UPDATE (Feb 27th): Here's John Authers, Investment Editor at the FT, pointing out, towards the end of this vlog, that decoupling is alive and well.

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