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Tuesday, June 17, 2003

(Not Quite) on the Eve of Destruction

Maynard has sent in a link to an article which as he describes as

a very nice piece laying out the depth of the hole the US has dug for itself vis-a-vis foreign-held debt, and noting various foreign rumblings I was unaware of as to how said foreigners can restructure things to protect themselves and, insofar as possible, abandon the US.

I must say I agree with the spirit of this, and found the Billmon blog enjoyable and highly readable. I am 100% with him in his crusade against this horrendous WMD hypocrisy. I just fail to see how politicans who treat their citizens in this way are going to be able to look then in the eye and explain the pensions situation, ever. I also just love the Bertolt Brecht quote at the top. Keep it up Billmon!

With the conquest of Iraq, the American Empire stands at its zenith. U.S. military supremacy is unchallenged. U.S. technological superiority is now taken as a given -- even by the Japanese. America’s most formidable enemy, the Soviet Union, is more than a decade in its grave. Our most likely future adversary, China, is several decades away from posing a threat to American global hegemony. Even the French have been cowed into a sullen silence. The U.N. Security Council (the last bastion of French hopes for a "multi-polar" world) has placed its good housekeeping seal of approval on a unilateral, open-ended U.S. occupation of Iraq -- a colonial "mandate" in all but name. As the neocons turn their attention to remaining members of the "Axis of Evil," the New American Century never looked so near at hand.

But a proverbial cloud – this one quite a bit bigger than a man’s hand – sits on the horizon. I’m not talking about the terrorists........The threat I’m talking about is economic. Like the British Empire in the years after World War I, the American Empire is marching toward global domination on increasingly shaky financial legs:

The American economy now depends on a rising tide of cheap imported goods to sustain acceptable levels of economic growth and domestic consumption. Because of this dependence, the trade deficit – the gap between what America exports and imports -- has reached truly gargantuan levels. This trend is unsustainable. To pay for its import habit, America has to attract approximately $1.5 billion a day from foreign lenders and investors. This means foreign capital – and capitalists – are becoming increasingly essential to the smooth functioning of the U.S. economy. But foreign investors are becoming increasingly reluctant to invest in U.S. assets. To cover the shortfall between what America needs to borrow and what private investors are willing to lend, foreign central banks (the counterparts to our Federal Reserve) have stepped in to fill the gap. As a result of these trends, foreign governments are accumulating a growing ownership stake in the U.S. national debt. In fact, they now own more Treasury debt than the Federal Reserve itself. But their willingness to continue subsidizing our import habit in this fashion is unclear. The strain of increased defense budgets, combined with the looming demographic burdens of retirement and health-care spending, make the longer-term picture even gloomier. A debt crisis looms. The Republican fiscal train wreck – product of the stubborn supply side fantasy that federal taxes can be cut without reducing federal spending – has only brought the day of reckoning closer. The result, as an economist with the Citigroup Private Bank recently put it, is an "unseen hammer" hanging over the U.S. economy and the U.S. financial markets.....................

Obviously, there is an economic contradiction lurking behind the neocons’ imperial project. Like Britain in the 1920s, America increasingly lacks the structural resources to feed its domestic appetite for both guns and butter. Unlike Britain in the ’20s, however, U.S. military and diplomatic supremacy is unchallenged.

So the question I asked earlier pops back up again: Could military power be used to obtain what normal "market" economic forces no longer provide? Will we soon hear demands from U.S. officials that our Asian allies shoulder their "fair share" of the security burden? And if nagging and diplomatic begging (on the Gulf War I model) aren’t enough to keep the foreign capital flowing in, what are the alternatives? We’re still some years away from learning the answers to those questions. But not too many years, I suspect. The U.S. current account deficit -- and growing foreign debt associated with it -- are both rapidly approaching criticality. It’s impossible to say what could finally trigger a full-blown debt crisis. Perhaps another round of corporate defaults and/or accounting scandals (did I hear someone say Freddie Mac?) Perhaps a major banking failure, or another big, splashy terrorist attack. Or maybe foreign demand for U.S. assets will just gradually continue to dry up, putting more and more pressure on foreign central banks to plug the gap, until they, too, are finally forced to begin liquidating their U.S. portfolios. Sound like a disaster movie? A Tom Clancy thriller? Maybe. But through history, financial crises have been an important part of the imperial experience. The Spanish Empire faced them in the 17th century; the Dutch in the 18th and the English in the early 20th. The Soviet Empire died of them in the late 20th. Now it’s the 21st century, and the United States is staking its own claim to world empire. But how it handles its growing financial problems could go a long way towards determining what kind of empire it will be -- and how long it will last.

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