The silliest thing that clever people are saying about the world economic
crisis is that the United States will lose its position as the dominant world
superpower in consequence. On the contrary: the crisis strengthens the relative
position of the United States and exposes the far graver weaknesses of all
prospective competitors. It makes the debt of the American government the
world's most desirable asset. America may deserve to decline, but as Clint
Eastwood said in another context, "deserve's got nothing to do with it".
President Barack Obama may turn out to be the most egregious unilateralist in
American history.
America's supposed decline dominates the glossy magazines. Last September,
Germany's Finance Minister Peer Steinbruck intoned, "One thing seems probable
to me. As a result of the
crisis, the United States will lose its status as the superpower of the global
financial system." The German official is quoted by Professor Richard Florida
in the March 2009 Atlantic Monthly, who adds, "You don't have to strain too
hard to see the financial crisis as the death knell for a debt-ridden,
overconsuming and underproducing American empire - the fall long prophesied by
[British historian] Paul Kennedy and others." (Florida's views are more
nuanced).
And the ubiquitous Professor Niall Ferguson told a Vanity Fair interviewer on
January 20 that America would crumble like Great Britain in the 1970s. "It
certainly will be extremely painful ... Half the federal debt is held by
foreigners. And if the US either defaults on debt or allows the dollar to
depreciate, the rest of the world is going to say, 'Wait a second, you just
screwed us.' And that's, I think, the moment at which the United States
experiences the British experience - when, in the dark days of the 60s and 70s,
Britain fundamentally lost its credibility and ceased to be a financial great
power."
But is this true? In fact, the rest of the world has queued up to lend America
as much money as it might wish to borrow in order to get its consumers to spend
again, and buy the manufactures and raw materials of the rest of the world. It
won't work, but that is another matter. As I wrote last October, the world
isn't flat, contrary to New York Times pundit Thomas Friedman's vision of a
level global playing field. It's flattened. (see
The world isn't flat, it's flattened, Asia Times Online, October 28,
2008).
Here's a thought-experiment to gauge the merits of different national markets
as a safe haven. Close your eyes and try to imagine what Germany, Japan and
China will look like 30 years from now, that is, when a newly-issued long-term
bond will mature. Citing Pope Benedict XVI's critique of economics, I argued
recently that the market cannot form accurate long-term expectations; it only
can imagine future states of the world. (See
Benedict XVI is magnificently right, Asia Times Online, December 9,
2008). Let us see what imagination tells us about the world's largest capital
markets. The conclusions of this exercise, I will show later, reinforce the
founding premises of "supply-side economics", the theory that guided America
out of the 1979-1983 mini-depression.
Imagination fails in the case of Europe and Japan. One out of every four
Germans today is older than 60, and in 30 years the proportion will rise to
two-fifths. Japan is even worse: 30% of Japanese today are above 60, and in 30
years the number will be almost half. What does a national economy look like
when the demographics are so skewed to pensioners?
We never have seen anything like this before in all of history. Pension and
health costs projected forward will crush these economies a generation from
now. Taxes will suffocate the dwindling population of young workers. A
straight-line projection of present trends takes us to the cusp of national
failure. We do not know whether present trends will continue in a straight
line, to be sure. The race is not to the swift, nor the battle to the strong,
as Damon Runyon said, but that's the way to bet.
Children are the wealth of nations, provided that their nations can put tools
in their hands and the rule of law at their back. Countries that lack children
are poor. Aging Germans do not have young people to whom to lend. That is why
they lent their savings to Americans, through the subprime market, and why
European banks are if anything worse off than American banks.
Imagination also fails in the case of China, not because extrapolation of
present trends is so frightening, but rather because economic growth cannot
possibly continue at the pace of the past 10 years. China is a different
country than it was 30 years ago, and it will be a different country in another
30 years. It is in the midst of the largest migration of peoples in the history
of the world, the fastest rate of urbanization and the greatest economic
expansion of which we know. Its political system and social structure will
change so radically that it is impossible to form a clear picture of the
country in 2040.
Great opportunities are attended by enormous dangers. China has more young
people than any other country in the world, more than all of Europe put
together, but too many of them are trapped in rural poverty, uneducated and
untrained.
That is why Chinese save half their income, more than anyone else in the world.
Part of China's steroidal savings rate can be explained by the one-child
policy. People whose children will not care for them in old age require
financial assets. What economists call precautionary savings, saving for a
rainy day, explains a great deal of the Chinese demand for savings. The sun has
shone on the Chinese economy for a generation, but when it rains, who is to say
how hard it will rain? Extreme uncertainty about the future explains China's
savings rate.
But America's future is not hard to visualize in 2040. In fact, America in 1979
was not much different from America in 2009. Minor adjustments await Americans
over the next generation compared with the great changes affecting its
prospective competitors.
China may offer greater prospective returns than America - a billion Chinese
will make the transition from a low-productivity rural environment into a
high-productivity urban environment during the next generation - but it also
requires a greater appetite for risk. Nothing can compete with the United
States as a safe-haven investment for the long term. German petulance about
America's domination of world markets rises in inverse proportion to the German
birth rate. The German finance minister should know better.
The Chinese have no such illusions. Luo Ping, a director general at the China
Bank Regulatory Commission, told an American audience, "We hate you guys. Once
you start issuing $1 trillion-$2 trillion ... we know the dollar is going to
depreciate, so we hate you guys but there is nothing much we can do."
(Financial Times, December 12, 2008.)
A fearful world is buying trillions of dollars of securities from the US
Treasury. Of all the cash flows in the world, nothing is more reliable than the
tax revenues of the American state, the longest-lasting government on Earth
presiding over the world's largest economy.
During the 1960s, a young Canadian economist, Robert Mundell, argued that an
increase in US government debt might represent a true increase in wealth under
certain circumstances. It is relatively easy to capitalize corporate income
streams through bonds, Mundell observed, but much harder to capitalize
household income streams. If the government cuts taxes and issues bonds to
replace the lost revenue, the increase in the float of the government bonds
outstanding will represent an increase in wealth, provided that the tax
increase stimulates growth, and the resulting growth brings in enough taxes to
pay the interest on the bonds.
From this insight emerged the economic program of president Ronald Reagan.
Drastic tax cuts, reducing the marginal tax rate from 70% to 40%, vastly
increased the US budget deficit during the early 1980s. But the increase in
revenues from a recovering economy more than paid the interest on the
additional bonds, and the increase in government debt represented an increase
in wealth. Mundell went on to win the Nobel Prize for Economics in 1999, for
work in a different area.
America's economic crisis in 2009 bears little resemblance to the
mini-depression of 1979. Then, the baby boomers were in their 20s and 30s; now
they are in their 50s and 60s. As I wrote in my year-end essay, the Reagan
administration made it easier for homeowners and businesses to obtain leverage
(see Waking
from Lever-Lever Land, Asia Times Online, December 25, 2008). Young
people need leverage to start families; old people need savings. The medicine
that cured the economy in the early 1980s turned into an addiction during the
2000s.
But there is a perverse parallel between the Treasury market of 1979 and 2009.
In both cases, the market is willing to absorb an enormous increase in the
float of US government securities. Looking into the future, no cash flows in
the world are more secure than the tax revenues of the American Treasury.
The greater the uncertainty attached to all other cash flows, the greater the
demand for US Treasury securities. America does not have to throw its political
weight around to persuade the world to fund between $1.5 trillion and $2
trillion of new debt issuance; its political weight stems from the fact that
the world needs the United States as a safe haven for its money.
The difference, of course, is that the increased issuance of Treasury
securities during the Reagan years represented an absolute increase in wealth,
capitalizing the recovery prospects of the US economy. All the other economies
of the free world benefited. The Obama administration's multi-trillion dollar
borrowing requirement constitutes a shift in relative wealth. Less capital will
be available for other economies. The relative position of the United States
will strengthen radically, which is to say that the position of many other
parts of the world will weaken radically.
Obama isn't entirely to blame for this sorry state of affairs, to be sure,
given that these trends were in place before he took office. Still, it is
incongruous that the liberal consensus welcomed the multilateralist Obama and
bade good riddance to the unilateralist Republicans. A radical shift in
economic power in favor of the United States makes Obama the moral equivalent
of a unilateralist, to a degree that Reagan never could have imagined.
To overpay unionized construction workers to build bridges, and bail out the
bloated budgets of American states, the Obama administration will flood the
world with so much Treasury debt that capital will flow out of the poorest
countries to buy it. Rather than protest this outrageously unilateralist
action, the rest of the world encourages him to do so, hoping that somehow the
Obama stimulus package will get American consumers to buy their goods once
again.
During the Reagan years, the rest of the world had the right to grumble about
the dominance of the American economy. Now that American policy has become a
millstone around the necks of most of the world's economies, the rest of the
world's leaders flatter Obama while he beats them. No Republican president ever
had it so good.
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