A shattering moment in America's fall from power

The global financial crisis will see the US falter in the same way the
Soviet Union did when the Berlin Wall came down. The era of American
dominance is over

John Gray 
The Observer, Sunday September 28 2008 

http://www.guardian.co.uk/commentisfree/2008/sep/28/usforeignpolicy.useconomicgrowth
http://tinyurl.com/4xpege

Our gaze might be on the markets melting down, but the upheaval we are
experiencing is more than a financial crisis, however large. Here is a
historic geopolitical shift, in which the balance of power in the world is
being altered irrevocably. The era of American global leadership, reaching
back to the Second World War, is over.

You can see it in the way America's dominion has slipped away in its own
backyard, with Venezuelan President Hugo Chávez taunting and ridiculing the
superpower with impunity. Yet the setback of America's standing at the
global level is even more striking. With the nationalisation of crucial
parts of the financial system, the American free-market creed has
self-destructed while countries that retained overall control of markets
have been vindicated. In a change as far-reaching in its implications as
the fall of the Soviet Union, an entire model of government and the economy
has collapsed.

Ever since the end of the Cold War, successive American administrations have
lectured other countries on the necessity of sound finance. Indonesia,
Thailand, Argentina and several African states endured severe cuts in
spending and deep recessions as the price of aid from the International
Monetary Fund, which enforced the American orthodoxy. China in particular
was hectored relentlessly on the weakness of its banking system. But
China's success has been based on its consistent contempt for Western
advice and it is not Chinese banks that are currently going bust. How
symbolic yesterday that Chinese astronauts take a spacewalk while the US
Treasury Secretary is on his knees.

Despite incessantly urging other countries to adopt its way of doing
business, America has always had one economic policy for itself and another
for the rest of the world. Throughout the years in which the US was
punishing countries that departed from fiscal prudence, it was borrowing on
a colossal scale to finance tax cuts and fund its over-stretched military
commitments. Now, with federal finances critically dependent on continuing
large inflows of foreign capital, it will be the countries that spurned the
American model of capitalism that will shape America's economic future.

Which version of the bail out of American financial institutions cobbled up
by Treasury Secretary Hank Paulson and Federal Reserve chairman Ben
Bernanke is finally adopted is less important than what the bail out means
for America's position in the world. The populist rant about greedy banks
that is being loudly ventilated in Congress is a distraction from the true
causes of the crisis. The dire condition of America's financial markets is
the result of American banks operating in a free-for-all environment that
these same American legislators created. It is America's political class
that, by embracing the dangerously simplistic ideology of deregulation, has
responsibility for the present mess.

In present circumstances, an unprecedented expansion of government is the
only means of averting a market catastrophe. The consequence, however, will
be that America will be even more starkly dependent on the world's new
rising powers. The federal government is racking up even larger borrowings,
which its creditors may rightly fear will never be repaid. It may well be
tempted to inflate these debts away in a surge of inflation that would
leave foreign investors with hefty losses. In these circumstances, will the
governments of countries that buy large quantities of American bonds,
China, the Gulf States and Russia, for example, be ready to continue
supporting the dollar's role as the world's reserve currency? Or will these
countries see this as an opportunity to tilt the balance of economic power
further in their favour? Either way, the control of events is no longer in
American hands.

The fate of empires is very often sealed by the interaction of war and debt.
That was true of the British Empire, whose finances deteriorated from the
First World War onwards, and of the Soviet Union. Defeat in Afghanistan and
the economic burden of trying to respond to Reagan's technically flawed but
politically extremely effective Star Wars programme were vital factors in
triggering the Soviet collapse. Despite its insistent exceptionalism,
America is no different. The Iraq War and the credit bubble have fatally
undermined America's economic primacy. The US will continue to be the
world's largest economy for a while longer, but it will be the new rising
powers that, once the crisis is over, buy up what remains intact in the
wreckage of America's financial system. 

There has been a good deal of talk in recent weeks about imminent economic
armageddon. In fact, this is far from being the end of capitalism. The
frantic scrambling that is going on in Washington marks the passing of only
one type of capitalism - the peculiar and highly unstable variety that has
existed in America over the last 20 years. This experiment in financial
laissez-faire has imploded.While the impact of the collapse will be felt
everywhere, the market economies that resisted American-style deregulation
will best weather the storm. Britain, which has turned itself into a
gigantic hedge fund, but of a kind that lacks the ability to profit from a
downturn, is likely to be especially badly hit.

The irony of the post-Cold War period is that the fall of communism was
followed by the rise of another utopian ideology. In American and Britain,
and to a lesser extent other Western countries, a type of market
fundamentalism became the guiding philosophy. The collapse of American
power that is underway is the predictable upshot. Like the Soviet collapse,
it will have large geopolitical repercussions. An enfeebled economy cannot
support America's over-extended military commitments for much longer.
Retrenchment is inevitable and it is unlikely to be gradual or well
planned.

Meltdowns on the scale we are seeing are not slow-motion events. They are
swift and chaotic, with rapidly spreading side-effects. Consider Iraq. The
success of the surge, which has been achieved by bribing the Sunnis, while
acquiescing in ongoing ethnic cleansing, has produced a condition of
relative peace in parts of the country. How long will this last, given that
America's current level of expenditure on the war can no longer be
sustained?

An American retreat from Iraq will leave Iran the regional victor. How will
Saudi Arabia respond? Will military action to forestall Iran acquiring
nuclear weapons be less or more likely? China's rulers have so far been
silent during the unfolding crisis. Will America's weakness embolden them
to assert China's power or will China continue its cautious policy
of 'peaceful rise'? At present, none of these questions can be answered
with any confidence. What is evident is that power is leaking from the US
at an accelerating rate. Georgia showed Russia redrawing the geopolitical
map, with America an impotent spectator.

Outside the US, most people have long accepted that the development of new
economies that goes with globalisation will undermine America's central
position in the world. They imagined that this would be a change in
America's comparative standing, taking place incrementally over several
decades or generations. Today, that looks an increasingly unrealistic
assumption.

Having created the conditions that produced history's biggest bubble,
America's political leaders appear unable to grasp the magnitude of the
dangers the country now faces. Mired in their rancorous culture wars and
squabbling among themselves, they seem oblivious to the fact that American
global leadership is fast ebbing away. A new world is coming into being
almost unnoticed, where America is only one of several great powers, facing
an uncertain future it can no longer shape.

• John Gray is the author of Black Mass: Apocalyptic Religion and the Death
of Utopia (Allen Lane)
-- 
Facts are sacred ... but comment is free

Robin T Cox  wrote in
news:EyHDk.63743$E41.58614@text.news.virginmedia.com: 

[Snips]
> The global financial crisis will see the US falter in the same way the
> Soviet Union did when the Berlin Wall came down. The era of American
> dominance is over

Not until the world's energy trading is done in Euros instead of dollars, 
I suspect.

[Snips]
> You can see it in the way America's dominion has slipped away in its
> own backyard, with Venezuelan President Hugo Chávez taunting and
> ridiculing the superpower with impunity. 

I seem to recall Castro taunting and ridiculing with impunity for a 
number of decades.  The fact that a superpower chooses to ignore 
witterings from the peanut gallery does not, to my mind, amount to 
evidence of the superpower's decline.

[Snips]
> Despite incessantly urging other countries to adopt its way of doing
> business, America has always had one economic policy for itself and
> another for the rest of the world. Throughout the years in which the
> US was punishing countries that departed from fiscal prudence,

See, this is why I never understood high finance.  Gordy was always 
saying that "Prudence dictates" something-or-other, and I never 
understood why the economy was being run by a kitten.

[Snips]
> The fate of empires is very often sealed by the interaction of war and
> debt. That was true of the British Empire, whose finances deteriorated
> from the First World War onwards, and of the Soviet Union. 

At least we got some decent-sized wars for our money, rather than a 
couple of half-baked and under-staffed colonial police actions.

[Snips]
> capitalism. The frantic scrambling that is going on in Washington
> marks the passing of only one type of capitalism - the peculiar and
> highly unstable variety that has existed in America over the last 20
> years. 

I suspect most people these days regard something that lasts 20 years as 
well-established.  How long do the careers fo finance whizz-kids last, 
anyway?  Does anyone in the biz now recall how banking was done before 
the 1980s? 

[Snips]
> Soviet collapse, it will have large geopolitical repercussions. An
> enfeebled economy cannot support America's over-extended military
> commitments for much longer. Retrenchment is inevitable and it is
> unlikely to be gradual or well planned.

I bet you could get an awful lot of  military capability for a quarter of 
the US defence budget, especially if you could restrain the natural 
impulse to splurge gold-plated pork on Buck Rogers wonder-junk.


All the best,

John.