Tuesday, February 02, 2010

The Fall of Pax Americana

The American "empire", yes I know America does not believe it ever was though it has always behaved like one since WWII, has to be the shortest on record. It has set a record in being the world's shortest superpower.

How did it get that way is the stuff of volumes. Throughout history, the demise of an empire was always preceded by the degradation of the nation's balance sheets.

In America's case the decay followed a familiar pattern of past empires: expensive overseas wars got too large relative to the productive capacity of the country.

Like fallen empires in the past, USA is now deeply in debt and has been for sometime.

Now, it is even in debt to its principal strategic competitor: China, a country ruled sternly by a communist party that proudly puts into its Constitution the guiding principles of Marx, Lenin and Mao.

You don't need an economics PhD from MIT to know that just as in a person, a nation cannot keep on borrowing to finance its many needs, especially capital-destroying wars, without having one day to pay for it one way or another. The de-leveraging process will be long and painful. When it happens to an empire, well, the empire will be no more.

The British Empire upon which the sun once upon a time never set collapsed after WWII because it had exhausted its moral and financial resources: morally because de-colonization became the dominant value of civilized nations under the United Nations charter heralding in a new world order.

Financially the "motherland" could no longer keep its far flung empire under its Sterling standards that was the glue of its global empire. It was borrowing mainly from the United States.

When the UK and France were trying to re establish their Middle East influence in their clumsy attempt to invade Egypt to recapture the Suez Canal, President Eisenhower, the largest creditor to the UK and France just picked up the phone and told these two former imperial powers to stop it. The two debtors promptly obliged.

The creditor in one stroke ended forever the British Empire. Ho Chi Minh finished off the French empire once and for all in Dien Bien Phu in Vietnam.

We are witnessing a similar, though not exactly identical process, unfolding right in front of us.

I recently posted a hart showing how US debt/GDP, one indicator of a country's leverage, has been going up like a rocket.

The geopolitical implications, too, are clear. You certainly don't need a PhD in politics from Harvard to understand them.

Here is a telling excerpt from today's NY Times:

..."as Mr. Obama’s chief economic adviser, Lawrence H. Summers, used to ask before he entered government a year ago, “How long can the world’s biggest borrower remain the world’s biggest power?”

The Chinese leadership, which is lending much of the money to finance the American government’s spending, and which asked pointed questions about Mr. Obama’s budget when members visited Washington last summer, says it thinks the long-term answer to Mr. Summers’s question is self-evident. The Europeans will also tell you that this is a big worry about the next decade"...

The British didn't want to tell itself its imperial days were over until the new empire, America, led by Dwight Eisenhower, told London to get out of the Middle East. How come his words counted so much? Elementary. UK was borrowing to maintain its military strengths abroad. America was its largest supplier of credit.

The Chinese communists, men from violent struggles who understand only too well that power comes from the gun barrel and it takes real not borrowed money to produce guns (not to mention butter) know America is well on its way to the exit door.

The Obama budget, as is clear from this report here, is a confirmation of the ending of Pax Americana.

The country, barring a miracle, has little wriggle room in its national budget for the next decade because the deficits are going to remain in the stratosphere.

There is a way to reduce debt. Higher taxes, higher savings, less private consumption, less government spending, domestic or overseas.

America can, like a phoenix, rise again, in theory. It's been pointed out by any number of thoughtful analysts that America has to do some serious "nation building" at home as a prerequisite to regain its superpower status, one that until recently had not been called into question.

Unless you can rebuild your own nation, you just don't have the resources to do much abroad. Build up your productive capacity, strengthen your national balance sheet, and then, we can discuss once again your global "responsibility" -- one day.


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