How the Boston Bombing Impacts the US

The Boston bombings were heartbreaking. Since the U.S. is the world’s only remaining superpower, the event shocked the whole world. The incident aroused market participants’ concern and may bring potential uncertainty to the international market and economic trends.

In the short term, the attack in Boston will have basically no effect on the real sector of the economy because there was minimal material damage to the production ability and physical wealth of the U.S. The major potential impact lies in the psychological expectations of capital market participants and may spread to market prices in the assets market.

Assuming that market participants’ expectations deteriorate significantly, it would be bad news for the U.S.’ real estate market and the upward tendency in stock prices. Fortunately, over the last year, the U.S. economy has stabilized on the path to recovery. Stock prices are no longer in continuous decline, and market participants are relatively optimistic. It is expected that the investors’ reactions to the bad news would not be horrible in the short term. The long-term effects of a negative, short-term reaction from investors would not be too awful.

The ultimate impact of this incident on the international market and economic trends depends on the identity of the perpetrators and the reaction of the U.S. government.

There has been a lot of speculation about the identity of the perpetrators of the Boston bombing. Suspicion is concentrated on three main groups: international Islamic terrorists, extreme right-wing forces in the U.S. and other U.S. extremist forces. Additionally, some people consider North Korea and Syria as suspects. However, objective observers with international knowledge refuse to believe that the North Korean or Syrian governments would resort to this approach.

If the perpetrator is a domestic radical, this case’s impact on the international commodities market and the U.S. domestic capital market will soon disappear. However, it is possible that it could have a less conspicuous but longer lasting influence on the progression of the U.S.’ internal “re-industrialization.” The U.S.’ re-industrialization and investment attraction are faced with a series of crucial economic barriers, the first of which is U.S. monetary hegemony itself. Just look at the principle of the so-called “Dutch disease” to understand this.

Historically, any large-scale development of newly discovered natural resources almost certainly encounters a manufacturing slump. Since the 1970s, every developed country has experienced this issue: Even England, Norway and Holland — which received huge amounts of revenue from North Sea oil and gas fields — were not immune. Although Russia has increased income from oil exports, it has also suffered from a recession in light industry and traditional heavy industry. Due to objective economic laws against non-oil industries, through exchange rate mechanisms, non-oil industries would be at a disadvantage in the competition for production factors such as labor, capital and land.

The same mechanism also functions between the U.S. financial service industry’s virtual economic sector and the U.S. manufacturing industry’s real economic sector. As long as the U.S. maintains its parasitic financial hegemony, its financial sector will forever provide higher compensation and return on investments than the real economic sector. Thus, in an environment with a representative democratic regime and a market economy structure, it will forever maintain a comparative advantage in talent competition and capital contribution, continuing to gain government support on policies and regulations. With this mechanism, how can Americans count on their country’s re-industrialization to make significant achievements sustainable?

Some Chinese manufacturing returns to the U.S. Important driving forces of the U.S. manufacturing sector, such as emerging market economies and capital inflows, are temporary phenomena. This bombing warns investors of the security risk inherent in investing in the U.S. Unfavorable sections will also be prominently reflected when market participants re-examine the investment environment in the U.S. This is not a good thing for U.S.’ re-industrialization.

Assuming that the perpetrator is an international Islamic terrorist, U.S. retaliation will be expected, which will affect energy prices. If the U.S. decides to adopt escalating retaliatory measures, it needs to adjust military expenditure, military layout and fiscal expenditure decisions on a large scale. Accordingly, its real economic section must enforce a series of adjustments.

The author is a research fellow at the Chinese Academy of International Trade and Economic Cooperation.