Harry Geels: US hegemony is mainly financial-monetary in nature

July 16, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Harry Geels

The US stock markets are approaching a market cap of $60 trillion dollars. There are six reasons for this mega achievement. One of these is becoming increasingly apparent: the financial and monetary power of the US.

About a year ago I wrote a column entitled Europe is lagging record behind the US, in which seven reasons were given why the US is doing so much better economically than Europe. For example, the financial markets are much more liquid, making shares more expensive (the higher the liquidity, the more investors are willing to pay). For example, the average number of shares traded per fund in the US is twice as high as elsewhere. The annual stock exchange turnover ('turnover ratio') is 120% versus 60% for the rest of the world.

Furthermore, economic growth in the US is structurally higher, there is less dependence on foreign countries (including no expensive energy imports), private equity plays a much more important role (which keeps companies on their toes to take good care of their shareholders), there is a well-functioning currency union (which cannot yet be said for the euro), and the growth of passive investing plays into the hands of large American companies (the more is passively invested, the more money flows to the megacaps).

Differences are significant

The total market capitalization or stock market value of the US stock markets is approaching the $60 trillion mark. Since last November alone, $15 trillion has been added. They thus claim approximately 50% of the total world market capitalization (see Figure 1). The stock market value of the Magnificent 7 alone is greater than any other stock exchange outside the US. Furthermore, the American stock market capitalization now amounts to approximately 170% of American GDP (for the rest of the world this percentage averages 60%).

Figure 1: The hegemony of the US stock markets

Note: As a percentage of global stock markets, as of January 1, 2024

Financial-monetary power

What was not sufficiently discussed in the previous column about the power differences is that there are also reinforcing effects between the seven causes. The financial and monetary power of the US in particular appears to be a strengthening factor. Having the most important reserve currency, the dollar in this case, has a (positive) impact on stock prices in a number of ways. Firstly, because institutions that hold dollars as reserves almost always do so in the form of investments in dollars.

When dollars are printed – and this has happened on a large scale through quantitative easing in recent years – they then partly find their way back into American shares and bonds. In addition, when companies and governments, even outside the US, take out loans in dollars, the interest rate on them is usually more favorable than in other currencies, especially if those currencies are riskier. Many companies and governments therefore also borrow money in dollars or are listed on the American stock exchanges, which makes the dollar investment market diverse.

According to research by the IMF, among others, having a stable reserve currency – through, among other things, the issuance of securities in dollars – leads to deeper liquidity, which, as described earlier, also contributes to higher prices, which in turn makes dollar investments more attractive, et cetera. Liquid markets and a lower risk premium on the currency also ensure that additional leverage (debt accumulation) is facilitated (in the US, a larger part of economic growth is based on leverage than elsewhere).

Side notes

The US economic lead cannot be explained solely by a list of causes. It is a complex of issues that partly reinforce each other. The rise of AI, where American tech giants dominate, further strengthens the upward spiral. The 'winner takes all' effect, which we already see in various business sectors, also seems to be valid at country level.

However, a number of comments must also be made. Firstly, that the importance of the US in the world is becoming very large (versus its own GDP and the rest of the world). Given the tense political situation in the US, this is itself a risk factor. The Fed must act increasingly cautiously. Although monetary policy has led to significantly higher rates, it has also led to an enormous build-up of debt in dollars. Too strict monetary policy can then cause problems. It may be a good idea to look at Japan, where, partly due to increasingly loose monetary policy, the largest stock exchange in the world was also able to emerge during the first four decades after the Second World War (see Figure 1). Until the stock market value also covered approximately 50% of the world in 1987.

This article contains a personal opinion from Harry Geels

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