A warning from Professor Niall Ferguson
The Harvard historian Niall Ferguson recently wrote about one of history’s great events, occurring now. Power — economic and political — shifts from West to East while we contentedly watch TV, play with our electronic toys, and exult in our large homes and granite countertops. The foundation of America’s role in the world slowly crumbles during an American Presidential election in which nobody disturbs the crowd by mentioning so unpleasant a subject.
Opening of An Ottoman warning for indebted America, (Financial Times, 1 January 2008):
Future historians will look back on the current decade as a turning point comparable with that of the Seventies. No, not the 1970s. This is not going to be another piece pointing out the coincidence of an unpopular Republican president, soaring oil prices, a sagging dollar and an unwinnable faraway war. I am talking about the 1870s.
At first sight, the resemblances across 130 years may not seem obvious. The 1870s were a time when conservative leaders such as Benjamin Disraeli, British prime minister, were powerful and popular. It was a time of falling commodity prices, after the financial crash of 1873 and the opening up of the American plains to agriculture. And it was an era of currency stability, as one country after another followed the British lead by pegging to gold.
Yet, on closer inspection, we are indeed living through a global shift in the balance of power very similar to that which occurred in the 1870s. This is the story of how an over-extended empire sought to cope with an external debt crisis by selling off revenue streams to foreign investors. The empire that suffered these setbacks in the 1870s was the Ottoman empire. Today it is the US. …
His closing paragraph:
It remains to be seen how quickly today’s financial shift will be followed by a comparable geopolitical shift in favour of the new export and energy empires of the east. Suffice to say that the historical analogy does not bode well for America’s quasi-imperial network of bases and allies across the Middle East and Asia. Debtor empires sooner or later have to do more than just sell shares to satisfy their creditors.
There are two dimensions to this problem. First, we borrow from foreigners to fund a substantial fraction of our annual consumption. Stopping our borrowing today would mean a 5% drop, a massive recession, obviously impractical. Like any addict, we prefer to slowly taper off our daily fix.
Second, the hangover of past consumption — our debts. We must pay interest and — since the sum is beyond repaying without turning over the keys to America’s industries — constantly roll the debt into the future. This suggests we consider the unmentionable, crafting a long-term strategy to pay off our foreign debts. Instead Congress postures, telling our creditors what we will allow them to buy — in effect adding a new clause to the dollar bill: “This note is legal tender … for whatever we feel convenient to allow you to buy.”
The standard response to this is to discuss how we can stiff our creditors, and ask if defaulting will hurt them more than us. America’s greatness was evidenced, even as a small, struggling nation, by our payment of the Revolutionary War debt. America’s weakness is evident by our willingness to break our contracts. All twelve Carrier battlegroups cannot overcome such moral smallness.
The current global financial regime, the Bretton Woods II system, consists of Asian and oil-exporting nations’ central banks funding America’s excess consumption (i.e., beyond our income). So far their funding has consisted of low-interest loans. Now they slowly come to feel their strength and realize that they can do better. They want ownership. That is the impetus for the formation of their Sovereign Wealth Funds (SWF), vehicles for their governments to buy western assets. Merrill Lynch estimates that SWF’s will grow to almost $8 trillion by 2011.
That our creditors come to demand assets instead of more loans is neither inimical or evil. It is just business. Like water flowing downstream, power flows from debtors to creditors — a basic expression of national decline. The oddity is that the American people either do not recognize what is happening, or do not care. In this respect we are like Weimer Germany (think of the movie/play Cabaret). We party on, lacking the willpower to deal with these slow, unpleasant, remorseless trends.
Why is this? When will it change?
For more information on this
- Power shifts from West to East: the end of the post-WWII regime in the news
- The people of Michigan explain why America faces so many serious problems
- Diagnosing the eagle, chapter I — the housing bust
- We have been warned. Death of the post-WWII geopolitical regime, Chapter II
- The post-WWII geopolitical regime is dying. Chapter One