Wednesday, October 17, 2007

Alternative Futures II : The United States

The United States remains the key economic and political player on the Planet. Nevertheless, we can see a series of changes that, if continued, could have very profound effects. In some senses the United States seems almost caught in a perfect storm: the economic, political and military preponderance that the end of the cold war seemed to have allowed to the US was challenged within a very short period.

The dramatic economic growth of China, coupled with a drive for ever greater military and technological strength has already eroded the American military advantage. However the relationship between the largest country and the largest economy has been linked by the relentless purchase of American securities by Chinese institutions. However, repeated bubbles have failed to increase the economic efficiency of the America, and the consequence has been that cheaper money merely fuelled a consumer credit boom. One of the most dramatic changes in the global economy over the past 30 years is the switch from the United States being the world's creditor to becoming the world's largest debtor.

The consumer bubble was masked by the erroneous idea that housing was a true asset - since the price of property detached from any potential economic yield, the busting of the US housing market, as a result of the sub-prime crisis has created extremely challenging conditions for the US consumer, with a sharp fall in the price of loan collateral- houses- leading to a massive growth in loan defaults. Now, the bursting of the housing bubble has created a series of large outflows from US securities, with over $52 billion being sold by Asian investors in August 2007 alone. The gradual drift in the price of the Dollar is leading to something more sinister: the repeated rise of the price of oil in US Dollar terms- now hitting a new record of $87 a bbl. This is sinister in that in non US$ terms, the price is stable. Commodities are decoupling from the US$ as a reserve currency.

So there is now a very real threat that the US could enter a deep recession, with the Fed either unable to stabilise the Dollar against global commodities prices or forced to raise rates to the point where domestic economic activity is shut down.

Partly this reflects a breakdown in confidence in the US political system. It is hard to argue that the USA has an open political system when the President is the son of a previous President, while the leading contender to replace him is the wife of a different previous President. Meanwhile the reputation of the Congress is extremely low. the combination of pork barrel politics and a gerrymandered electorate seems to have created a political system that neither engages nor attracts the citizen. Although Paul Kennedy, in the Rise and Fall of the Great Powers, speaks of "Imperial overstretch"- briefly overspending on military power, as a prime cause of political decline- the relative economic decline of the US is obvious. In a sense we can draw parallels between the US and the Roman Republic, from where much of the language of American politics is drawn from ("The Senate"). The dominance of a narrow power elite proves to be too inflexible to cope with the problems that face the Republic.

The challenge that the US faced from Al-Qaida has provoked a series of major miscalculations by the power elite. The flawed decision to invade Iraq, while still engaged in Afghanistan, has cost the United States massively: politically, militarily, financially and also, perhaps especially, morally. The disgrace of Guantanamo Bay and Abu Graib is an indictment even to those who regard the United States as a benign, non hegemonic power.

So my fear is that the state that was in the vanguard of liberal and democratic values in the twentieth century now faces severe challenges, and even- to a degree- an existential threat. The relative position of the US has weakened and the challengers- primarily China, but to a much lesser degree Russia, truly are hegemonic, anti-liberal, and indeed tyrannical states.

Yet as I shall point out in later blogs, the threat to global stability is not merely from a weaker United States. The US has much structural flexibility and were it to embrace genuine economic and especially political reform, there would still be much to hope for.

The imponderable, is whether Americans are aware of their predicament, and if they are able to address it.

3 comments:

Anonymous said...

Serious lack of humour there Cicero. Since you feel free to make hay at Boris's expense for instance perhaps you can take a bit of ribbing without foaming at the mouth. I have told you before I regard 45 seats as being your complete floor at the next Election because of the personal votes of many of your MPs regardless of how you do nationally unless you really are at 11% which I extremely doubt. It was harmless fun as you remark on another point. I appreciate the last 48 hours have not been greatly pleasant for your Party, but one hopes you rediscover your good humour soon. Remember those Tory voters in Aberdeen South.....

Lepidus

Cicero said...

Please put comments on the right thread Lepidus- Americans will find your comments too hatstand.

Anonymous said...

The US economy is in for a world of pain, and it will drag others in with it. The housing crisis has moved far out of sub-prime and into the hi-rent areas. With so many repos and auction firesales, compounded by builders selling them at rock-bottom prices and the ever-increasing property tax and interest rate, it is set for disaster.

So many people re-fi'd their properties during the low interest period, making a huge mistake. They took this "windfall" and spent it -- forgetting that re-fi rates are often laced with teasers. Now with re-adjustment (also with their "teaser"-laden credit cards), they have nothing left.

With consumer spending the core of the US economy, it is a disaster. There is now major inflation in non-core categories, most significantly food.

The markets are up unnaturally, boistered by the hopeless dollar and profits repatriation. GDP rise? Sure... But if the markets hit more downturn, the cutting of tax revenues (from capital gains) will cause so many problems it will be a disaster.

The dollar will continue to weaken and there will be no sense for Asian central banks to hold those debts -- and essentially end up losing money on each paper. As oil and other commodities leave the US dollar dimension (there has been enough efforts by foreign central banks to "Euroise" their reserves and to push for re-denominating commodities in EUR), the US becomes more marginalised.

And with more US companies fleeing overseas, the US will soon become a paper tiger with nothing to show for. And that's when US reaction will get scary, and unpredictable.

It is scary, tremendously scary.

m