What is the most critical factor separating the USA economically from the rest of the world?
The USA has healthy amount of natural resources (food, land, minerals, coal, etc), but so do other countries like Russia.
So what historically was the key difference in America becoming an economic powerhouse up until the 1980-2000 time frame when it transitioned?
There is no simple one answer, there are many factors. Some are historical positioning such as End of WW2 with America benefiting with it's manufacturing base. Some is military and political positioning. Some can be assigned to freedom.
But what makes freedom special about capital markets? People sometimes treat freedom as some sort of magic elixir that will make everything better.
For example, you can meet any homeless person on the street in the USA, and I could argue that they are the free-est of all Americans. As individuals they have no debts (that can be collected) and they can truly do what they want (limited to money). But most rational people would NOT classify homeless as an example of true success in life. This isn't about money, but about living standards and taking on responsibilities. Yes, money is a factor, but money is a consequence of acting responsibly and creating a good living environment for yourself and others.
In America, what has been bothering me the most since August 2006 isn't about the financial mess America created. It isn't about deficit spending MORE than the entire US budget in 1998. It's about the "bums in Washington". America provides Freedom (some curtails have snuck in), but freedom is a double edge sword. You can decide your own fate as individuals, companies, states, or as a country.
The people of America have lost a common bond that World War 2 provided the baby boomer generation. The Great Depression combined with World War 2 created a common experience that drove citizens to work for the individual AND common betterment of tomorrow.
Acting responsibly for the common good is no longer a cultural embedded idea. Acting for personal benefit is. I realize that acting for personal benefit has always been a major part of just being alive, but there has been a shift in the American culture.
It is this shift, that is reflected in the bums in Washington that bother me. We have turned into what is easiest for today, at expense of tomorrow. This is also the crux difference between having faith the US dollar will not collapse vs will. If you are of the opinion the US dollar will retain value for the next 30 years+, your are choosing that the system will work the situation out.
The other side is that the US dollar is doomed for failure due to a wide variety of reasons, including debt structure, US positioning, and leadership.
I am between the two. As stated in the post "Answering problems with what you know", people will continue to choose to do repeat behavior that has brought to where we are. Only after the real world takes away the choice to do the wrong thing, will the right thing be done. I agree with Winston Churchill who said "Americans can always be counted on to do the right thing...after they have exhausted all other possibilities."
And this is the source of my pessimism. The combination of Freedom to do the wrong thing, shift in citizen culture, and human nature to do "Answering problems with what you know" will bring America to it's knees.
I highly recommend reading Karl of the Market tickers post/rant titled "On Honesty In Schools, Governments And Enterprises". It highlights how morally corrupt America has become, and highlights that freedom is not a magic elixir. It is a challenge to act responsibly.
Capital markets can succeed when markets operate to make choices freely, with process execution fair to all involved, and the rule of law to enforce the outcome of choices made freely. Anything short of this, is a recipe for failure of markets either by currency or securities.