Death of the American Empire?
Nouriel Roubini, in a post entitled Decline of the American Empire, outlines four developments, marking the beginning of the end of the American Empire. The unique position of the U.S. as the sole “unipolar” power, he asserts, has been lost; America may now be in irretrievable decline.
Before I review Nouriel’s observations, let me two of my own. First, though America may yet pull its bacon out of the fire, any post mortem of its decline will, in all likelihood, lay the causes at the feet of U.S. policy, economic and military.
Second, America has–through its multinationals and managerial talent, its economic power, its science and universities–seeded the world, made possible the success of its rivals. As one of the prime architects and movers of globalization, America has inadvertently laid the foundation for the torch to be passed. Nouriel makes a good case for American decline. Consider:
First, the US squandered its power by relying excessively on its hard military power in the wars of Iraq and Afghanistan and in its unilateralist foreign policy – including economic issues such as global warming – rather than relying more on its soft power of diplomacy and multilateralist approaches to global policy issues.
Second, regardless of mistaken US policies the rise of other economic and financial powers…that the relative economic, financial and geopolitical power of the US will be reduced over time
Third, and more important, the US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits.
Fourth, Nouriel notes that:
the economic powers financing the US twin deficits are the strategic rivals of the US – China and Russia – and unstable petro-states, i.e., Saudi Arabia, the Gulf States and other shaky petro-states. This system of vendor financing – with these US creditors providing both the goods being imported and the financing of such deficits – has led to a balance of financial terror: if these creditors were to pull the plug on the financing of the US twin deficits the dollar would collapse and US interest rates would go through the roof.
As the U.S. goes deeper and deeper in debt, it is transferring enormous wealth its rivals. I would include the “unstable petro-states” as rivals as well. There is certainly significant tension between Islamic states and America. Though some may seem to be friendly, even the friendly ones have harbored and ecouraged elements that are anything but friendly to the U.S. It is hard to forget, for example, the madrassas in Saudi Arabia that spawned many of the Taliban and the 911 bombers.
… foreign creditors of the US are getting tired of financing the US in the form of low-yielding US Treasuries. Thus the switch of such reserve holdings to SWFs that are planning to make large equity investments possibly with actual control of corporate firms and financial institutions that are desperate for capital to recapitalize themselves
As many have noted, there is a price the U.S. must pay for its growing debt: Its assets. Sovereign Wealth Funds in the Middle East, China, and elsewhere will invest heavily in or outright buy American corporations financial institutions. They have the cash. While America may get desperately needed tax dollars in such purchases or investments, those purchases will not significantly lower our debt. We will lose the assets and keep the debt–a real spiraling down. The twin deficits will remain. Furthermore, those companies–and all their assets and know-how–may now serve new masters, masters whose goals we may well not share.
Nouriel notes that although it is unlikely that any of our creditors will suddenly “pull” the financial rug from beneath our feet; nonetheless, America is
vulnerable to such rivals using the financial terror weapon – dumping US assets and or reducing their financing of the US twin deficits – in situations of geostrategic tension.
Suppose Russia flexes further its muscle in its backyard – under the pretense of defending abused Russian minorities in Ukraine, the Baltics and other former Soviet Union or Iron Curtain countries. Then Russia could use its financial power – the ability to dump hundreds of billions of dollar assets – to exert both financial and military influence. So could China over time if trouble in Taiwan or other disputed Asian territories become big geopolitical issues. Russia and China are already winning the new war for the control of commodities and ressources through their investments in Africa and Latin America – in the case of China – and its domestic and foreign control of energy and pipelines in Central Asia in the case of Russia. China and Russia are indeed winning the new Scramble for Resources.
Nouriel expects the dollar as the main reserve currency to be challenged.
Already Russia is flexing its muscle and pushing for an international role of the ruble; the euro is rising as a major reserve currency; central banks and SWFs will slowly but surely start to diversify away from dollar assets especially as the Bretton Woods 2 regime starts to unravel…
If Nouriel is correct, how did all of this come to pass?
Certainly, the Iraq War has been a disaster in terms of cost, goodwill, lives, and attention. By “attention” I mean America’s obsession with it. That American raw power cannot tame two third-world states in less time than it took the allies to defeat the axis powers in WWII says it all. Perhaps it did not have “will” to do so. Whatever the causes, it has failed miserably. Caesar would have been stunned.
As I said, Iraq has been America’s obsession; meanwhile it pursued policies concerning energy, regulation, consumerism and trade that have proven disastrous. Its lack of its decades long coherent energy policy is obvious. That it espoused a freewheeling marketplace with minimum oversight is also obvious.
The centerpieces of its failure lie, I think, in its relentless consumerism, encourage by incessant and ubiquitous advertising, easy credit, and its disastrous trade policy. Bush stuck the tone of the decade when he urged America to shop after 911. A good trip to the mall will cure anything, including, I guess, fear of Saddam sending over nukes or the twin towers falling.
As one of the most significant forces in the last decade, globalization must be playing a role in America’s decline. America was one of its prime movers–and America’s fate must be tied inexorably to is development.
Certainly, America would not knowingly create the engine of its own decline. Certainly, its economists would have warned it. Many economists were quite happy with America’s future in a global marketplace. Are they surprised at the latest turn of events? Staggering twin deficits, a burgeoning trade deficit, loss of manufacturing….
Was it mismanaged or was it happenstance that America’s decline coincided with its rise?
For a moment, let us grant that Nouriel is correct that America is in decline and continue with the post mortem, speaking as if we were future historians that saw a connection between globalization and America’s decline.
On the one hand, Americans were encouraged to be consumers, even as its trade deficit increased, even as its companies, one after another set up shop in countries with cheap and unprotected labor, low taxation, and weak environmental regulations. Walmart, which used to brag about “Made in America,” was the iconic symbol of what happened.
American manufacturing slowly wilted; its trade deficit increased. It outsourced goods and services in order to feed the consumerism encouraged at home. American corporations and financial institutions were all too happy to usher China into the WTO, along with other ripe export platforms. Bucks were to be made; goods were to be sold. The American consumer would keep the party going.
Globalization from the start was disjointed. One country, America, became the consumer of last resort. Emerging economies became producers of first resort. Emerging economies were not “emerging markets”; they were export platforms. America sent its production skills to these countries.
(Now, China may well become a future marketplace, but companies initially did not go there with that in mind.) How China played the game of globalization was intelligent and direct. Feeding off the American consumer and the foreign corporations it attracted, keeping its currency pegged for as long as possible, and keeping its labor force as unprotected and as cheap as possible for as long as possible, China gathered the cash to build its infrastructure and buy the resources for the long century ahead.
Foreign corporations in China liked the pegged yuan. Mismatched currencies added even more profits. Indeed, for a while the stock market soared, even as American wages stagnated. Similarly, foreign companies in China enjoyed unprotected and cheap labor. Similarly, those companies enjoyed the weak environmental regulations. Even if those companies claimed that they or their Chinese associates did not pollute, they did profit from the cheaper energy, a direct result of weak or non-existent environmental regulations.
Nouriel ends with one observation with which I do not agree:
the brief period of unipolar power of the American hyperpower is now over and a new age of balance of great powers is starting in the world. Also, the rise of non governmental actors – multinational corporations, NGOs, terrorist groups, non-nation state powers, failed and unstable states, non-traditional global players – will radically change the traditional balance of power as the power of nation states will shrink relative to that of other global players.
China will not shrink; neither will Russia; neither will, for example, Brazil. Terrorist groups may set up shop in places like Afghanistan, but unless they get nukes (Pakistan), they will not be much of a threat. No, countries are still the fruit de jour. It was always a mercantilist pipedream that it could be otherwise. Wealth and power has shifted back to command economies: Russia, China, Saudi Arabia.
These countries do and will continue to own the important corporations, corporations that control resources and important means of production: Aluminum Corporation of China and China Offshore Oil Corporation, for example. China may relax its grip on companies that deal in consumer goods, such as Lenovo (old IBM) or other companies such as Haier. They insist that corporations serve China’s purposes. Whether China will encourage rampant American-style consumerism remains to be seen.
In short, on every front, American craftily engineered its own downfall…from foolish wars to economic policy. All for what? (Certainly not any interest in America.) Greed is the word that comes to mind. Privatization was to be the dream, private ownership of resources and production. Yet, now we see the rise of powerful Soverign Wealth Funds ready to buy or invest in American corporations and financial institutions. What America has created will be on the auction block. For sale will be its managerial expertise, its production and investment facilities, its R&D…anything movable and much that is not movable.
If Nouriel is correct, those creations will move to new owners, owners that do not share America’s vision of the individual or its sense of democracy. In that sense, America has seeded the world. What flowers may bloom, we do not know.