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Giant in
decline
By Marshall Auerback
In his 1849 novel Les Guepes,
Alphonse Karr penned the classic line: "The more
things change, the more they stay the same." In
the case of the United States in 2005, however,
the opposite might be true: The more things stay
the same, the more they are likely to change ...
for the worse. In that regard, compiling a list of
potential threats to the US this year has a
strangely deja-vu-all-over-again feeling. After
all, such a list would represent nothing more than
a longstanding catalogue of economic policymaking
run amok. Virtually the same list could have been
drawn up in 2004, or 2003, or previous years.
Such threats would include: a persistent
and increasing resort to debt-financed growth and
a concomitant, growing imbalance in the trade
deficit, leading the US ever further into
financial dependency and so leaving it dangerously
indebted to rival nations, which could (at least
theoretically) pull the plug at any time. This, in
turn, is occurring against the backdrop of an
increasingly problematic, Vietnam-style quagmire
in Iraq, against imperial overstretch, and against
a related ongoing crisis in energy prices, itself
spurring an ever more frantic competition for
energy security, which will surely intensify
existing global and regional rivalries.
Just as a haystack soaked in kerosene will
appear relatively benign until somebody strikes a
match, so too, although America's long-standing
economic problems have not yet led to financial
Armageddon, this in no way invalidates the threat
ultimately posed. For economy watchers in 2005,
the key, of course, is to imagine which event (or
combination of them) might represent the match
that could set this "haystack" alight - if there
is indeed one "event" which has the capability of
precipitating the bursting of a historically
unprecedented credit bubble.
The odd thing
about credit bubbles is that they have no
determined resolution, nor is there anything about
such a dynamic that specifies the path by which it
will be reversed; nor is there some specific level
of financial excess guaranteed to eventually put
an end to it. The beginning of that end could
potentially be set off at any level at any time.
Nevertheless, it is possible to sketch out several
scenarios that could conceivably, in the 11 months
left to 2005, trigger such a reversal or even
something approaching economic collapse.
Debt: A policy on steroids
The
Achilles' heel of the US economy is certainly
debt. It is generally assumed that increases in
credit stimulate consumer demand. In the short run
that is true, but the long run is another matter
altogether. When debt levels are as high as those
the United States is carrying today, further
increases in debt created by credit expansion can
come to act as a burden on demand. Signs of this
are already in the air - or rather in what has
been, by historic standards, only feeble economic
growth in the US economy over President George W
Bush's first term in office.
Think of the
present mountain of national debt as the policy
equivalent of steroids. It has so far managed to
create a reasonably flattering picture of economic
prosperity, much as steroid use in baseball has
flattered the batting averages of some of the
game's stars over the past decade. But unlike
major-league baseball, forced to act by scandal
and Senate threats, America's monetary and
financial officials still refuse to implement
policies designed to curb the growth of a
steroidal debt burden. If anything, addiction has
set in and policy has increasingly appeared
designed to encourage ever larger doses of
indebtedness. Each bailout or promise of a
government safety net has only led to more of the
same: the Penn Central crisis; the Chrysler and
Lockheed bailouts; the rescue of much of the
savings-and-loan as well as commercial-banking
system in the early 1990s; the 1998 bailout of the
hedge fund Long Term Capital Management; and the
persistent reluctance of US officials to regulate
the country's increasingly speculative financial
system, which not only has led to fiascoes like
Enron - the 21st-century poster child for what
ails the US economy - but speaks to the dangers of
excessive debt, corrupt financial practices,
highly dubious accounting, and endless conflicts
of interest.
The result of this reluctance
to confront the consequences of America's credit
excesses - a federal-government debt level that is
now at US$7.5 trillion. Of this, $1 trillion is
ancient history; the other $6.5 trillion has built
up over the past three decades; the last $2
trillion in the past eight years; and the last $1
trillion in the past two years alone. According to
economist Andre Gunder Frank, "All Uncle Sam's
debt, including private household consumer
credit-card, mortgage etc debt of about $10
trillion, plus corporate and financial, with
options, derivatives and the like, and state and
local government debt comes to an unvisualizable,
indeed unimaginable, $37 trillion, which is nearly
four times Uncle Sam's GDP [gross domestic
product]" (see Why the
emperor has no clothes, Asia Times
Online, January 6). This rising level of
indebtedness will become a huge deflationary
weight on economic activity if debt growth should
seriously slow - which is the economic equivalent
of a Catch-22.
The 'Blanche Dubois'
economy
The situation of the US economy
becomes yet more precarious when you consider that
the country's major creditors are foreigners.
Today, the US economy is being kept afloat by
enormous levels of foreign lending, which allow
American consumers to continue to buy more
imports, which only increase the already bloated
trade deficits. In essence, this could be
characterized in Streetcar Named Desire
terms as a "Blanche Dubois economy", heavily
dependent as it is on "the kindness of strangers"
in order to sustain its prosperity. This is also a
distinctly lopsided arrangement that would end,
probably with a bang, if those foreign creditors -
major trading partners such as Japan, China and
Europe - simply decided, for whatever reasons, to
reduce the lending substantially.
China,
Japan and other major foreign creditors are
believed willing to sustain the status quo because
their own industrial output and employment levels
are thought to be worth more to them than risking
the implosion of their most important consumer
market, but that, of course, assumes levels of
rationality not necessarily found in any global
system in a moment of crisis. All you have to do
is imagine the first hints of things economic
spinning out of control and it's easy enough to
imagine as well that China or Japan, facing their
own internal economic challenges, might indeed
give them primacy over sustaining the American
consumer. If, for example, a banking crisis
developed in China (which has its own "bubble"
worries), Beijing might well feel it had no choice
but to begin selling off parts of its US bond
holdings in order to use the capital at home to
stabilize its financial system or assuage
political unrest among its unemployed masses. Then
think for a moment: global house of cards.
Already China has given indications of its
long-term intentions on this matter: roughly 50%
of China's growth in foreign exchange since 2001
has been placed into US dollars. Last year,
however, while China saw its reserves grow by $112
billion, the dollar portion of that was only 25%
or $25 billion, according to the always
well-informed Montreal-based financial-consultancy
firm Bank Credit Analyst.
Beijing has
already made it clear that it will spread its
reserves and put less emphasis on the dollar. As
one of America's largest foreign creditors, China
naturally has the upper hand today, like any
banker who can call in a loan when he sees the
borrower hopelessly mired in IOUs. If such foreign
capital increasingly moves elsewhere and easy
credit disappears for consumers, US interest rates
could rise sharply. As a result, many Americans
would likely experience a major decline in their
living standards - a gradual grinding-down process
that could continue for years, as has occurred in
Japan since the collapse of its credit bubble in
the early 1990s.
Even if China, Japan and
other East Asian nations continue to accommodate
US financial profligacy, a major economic
"adjustment" in the United States could still be
triggered simply by the sheer financial exhaustion
of its overextended consumers. After all, the
country already has a recession-sized fiscal
deficit and zero household savings. That's a
combination that's never been seen before. In the
early 1980s, when the federal deficit was this
size, the household savings rate was 9%. This base
of savings enabled the government to finance its
vast deficits for a time through a huge one-time
fall in net savings, the scale of which was
historically unprecedented and not repeatable
today in a savings-less United States.
At the edge: Imperial
overstretch
A restoration of national
savings is fundamentally incompatible with
continued economic growth, all other things being
equal. And the United States can ill-afford even
lagging economic growth, given the magnitude of
its burgeoning - and expensive - overseas military
commitments, especially in an Iraq that is
beginning to look like Vietnam redux.
President Bush likes to compare his
combination of economic, military and diplomatic
strategies with president Ronald Reagan's blend of
tax cuts, military assertiveness and massive
borrowing in the 1980s. Bush's economic advisers,
especially Vice President Dick ("deficits don't
matter") Cheney, appear to believe that the
present huge trade and fiscal deficits will prove
no more disruptive in the next decade than they
were in the Reagan years.
But if we turn
to the Vietnam parallel, we find a less comforting
historical precedent: the decision, first by
president Lyndon Johnson and then by president
Richard Nixon, to finance that unpopular conflict
through borrowing and inflation, rather than
higher taxes. The ultimate result of their
cumulative Vietnam decisions was not just a
military humiliation but also a series of economic
crises that first caught up with the US in the
late 1960s and continued periodically until 1982.
In a sense, the dollar's continuing fall
last year (especially against the euro), in spite
of significant interventions by central banks in
the global foreign-exchange markets, reflects a
similar loss of respect for US policymaking - and
especially for the linking of the dollar and the
Pentagon through an endless series of foreign
adventures. In addition, a national economy that
cannot itself produce the things it needs and
invests instead in military "security" will
eventually find itself in a position in which it
has to use its military constantly to take, or
threaten to take, from others what it cannot
provide for itself, which in turn leads to what
Yale historian Paul Kennedy has described as
"imperial overstretch":
That is to say, decision-makers in
Washington must face the awkward and enduring
fact that the sum total of the United States'
global interests and obligations is nowadays far
larger than the country's power to defend them
all simultaneously. That descent into
imperial overstretch explains how in the early
1940s a United States much weaker in absolute
terms, fighting more evenly matched opponents,
could nonetheless prevail against its enemies more
quickly than a state with an $11 trillion GDP and
a defense budget approaching $500 billion (without
even adding in the $80 billion budgetary
supplement for Iraq and Afghanistan that the Bush
administration is reputedly preparing for the
current fiscal year) fighting perhaps
10,000-20,000 ill-armed insurgents in a state with
a prewar GDP that represents less than the
turnover of a large corporation. The US today is a
nation with a hollowed-out industrial base and an
increasing incapacity to finance a military
adventurism propelled by the very forces
responsible for that hollowing out.
Oil: The dividing line of the new Cold
War
And then there is the problem of crude
oil, which, despite predictions from
ever-optimistic financial analysts, has once again
begun to approach $50 a barrel. The one thing Mr
Bush has never mentioned in relation to his Iraq
war policy is oil, but back in 2001 former
secretary of state James Baker presciently wrote
an essay in a Council on Foreign Relations study
of world energy problems that oil could never lurk
far from the forefront of US policy
considerations:
Strong economic growth across the
globe and new global demands for more energy
have meant the end of sustained surplus capacity
in hydrocarbon fuels and the beginning of
capacity limitations. In fact, the world is
currently precariously close to utilizing all of
its available global oil-production capacity,
raising the chances of an oil-supply crisis with
more substantial consequences than seen in three
decades. These choices will affect other US
policy objectives: US policy toward the Middle
East; US policy toward the former Soviet Union
and China; the fight against international
terrorism. The CFR report made another
salient point clear: "Oil-price spikes since the
1940s have always been followed by recession." In
its current debt-riddled condition, further such
price spikes could bring on something more than a
garden-variety economic downturn for the US,
especially if some of the major oil-producing
nations, such as Russia, follow through on recent
threats to denominate their petroleum exports in
euros, rather than dollars, which would
substantially raise America's energy bill, given
the current weakness of the dollar.
The
most recent spike in the price of oil was not
simply a reflection of rising political
uncertainty and conflict in the Middle East. There
are other reasons to expect higher energy-price
levels over the next two to three decades - the
most notable among them being strong demand from
emerging economies, especially those of China and
India.
The parallel drives for energy
security on the part of the United States and
China hold the seeds of future conflict as well.
Yukon Huang, a senior adviser at the World Bank,
recently noted that China's heavy reliance on oil
imports (as well as problems with environmental
degradation, including serious water shortages)
poses a significant threat to the country's
economic development even over the near term, the
next three to five years.
China's already
vigorous response to this challenge is likely to
bring it increasingly up against the United
States. Venezuelan President Hugo Chavez, for
instance, returned from a Christmas trip to China,
where he apparently sold America's historic
Venezuelan oil supplies to the Chinese together
with future prospecting rights. Even Canada (in
the words of President Bush, "our most important
neighbors to the north") is negotiating to sell up
to one-third of its oil reserves to China. CNOOC,
China's third-largest oil-and-gas group, is
actually considering a bid of more that $13
billion for its US rival, Unocal. The real
significance of the deal (which, given the size,
could not have been contemplated in the absence of
Chinese state support) is that it illustrates the
emerging competition between China and the US for
global influence - and resources.
The
drive for resources is occurring in a world where
alliances are shifting among major oil-producing
and consuming nations. A kind of post-Cold War
global lineup against perceived US hegemony seems
to be in the earliest stages of formation,
possibly including Brazil, China, India, Iran,
Russia and Venezuela. Russian President Vladimir
Putin's riposte to a US strategy of building up
its military presence in some of the former SSRs
of the old Union of Soviet Socialist Republics has
been to ally the Russian and Iranian oil
industries, organize large-scale joint war games
with the Chinese military, and work toward the
goal of opening up the shortest, cheapest, and
potentially most lucrative new oil route of all,
southward out of the Caspian Sea area to Iran. In
the meantime, the European Union is now
negotiating to drop its ban on arms shipments to
China (much to the publicly expressed chagrin of
the Pentagon). Russia has also offered a stake in
its recently nationalized Yukos (a leading,
pro-Western Russian oil company forced into
bankruptcy by the Putin government) to China.
In a one-superpower world, this is pretty
brazen behavior by all concerned, but it is
symptomatic of a growing perception of the United
States as a declining, overstretched giant, albeit
one with the capacity to strike out lethally if
wounded. US military and economic dominance may
still be the central fact of world affairs, but
the limits of this primacy are becoming ever more
evident - something reflected in the dollar's
precipitous descent on foreign-exchange markets.
It all makes for a very challenging backdrop to
the rest of 2005. Keep an eye out. Perhaps this
will indeed be the year when long-standing
problems for the United States finally do boil
over, but don't expect Washington to accept the
dispersal of its economic and military power
lightly.
Marshall Auerback is an
international strategist with David W Tice &
Associates, LLC, a US Virgin Islands-based
money-management firm. He is also a contributor to
the Japan Policy Research Institute. His weekly
work can be viewed at prudentbear.com. This
article appeared on Tomdispatch.com and is
used here by permission.
(Copyright
2005 Marshall Auerback.) |
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