The old adage, "When the United States sneezes, the rest of the world catches a cold" still applies. The United States is the largest economy in the world by a country mile. Ben Bernanke, the governor of the US Federal Reserve, recently mentioned the possibility of reducing its policy of quantitative easing. Financial markets around the world started having fits. New Zealand's sharemarket slumped and the value of our currency fell against the US dollar.
Novice investors in Mighty River have been left puzzled about why their share price has dropped because there has been no bad news about the stock since its float. Decisions made by officials in foreign countries can quickly impact on financial markets far afield at the click of millions of computer mice.
The US economy has been in the doldrums since the global financial crisis. China's model of a state directed market economy has been heralded as a preferred route to economic success for a nation. But this ignores lessons from recent history. In the 1950s, the Soviet Union was regarded as the paragon of economic success. Central planning seemed to ensure stellar economic growth.
Many newly independent countries, such as India, embraced central planning with dismal results. In the 1970s and 80s, Japan's version of corporate capitalism was touted as a major threat to American economic hegemony. The reality is these pretenders have lacked the essential feature of a successful market-driven economy. This concept was first expressed by the Austrian economist Joseph Schumpeter. It is the necessity for a market economy to accept "creative destruction".
Over the past five years the United States has experienced significant economic pain. House prices have plummeted, unemployment has hovered around 10 per cent and business confidence has been abysmal. The Americans have taken their medicine.