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A warning from Professor Niall Ferguson

5 January 2008

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

  1. Power shifts from West to East: the end of the post-WWII regime in the news
  2. The people of Michigan explain why America faces so many serious problems
  3. Diagnosing the eagle, chapter I — the housing bust
  4. We have been warned. Death of the post-WWII geopolitical regime, Chapter II
  5. The post-WWII geopolitical regime is dying. Chapter One
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12 Comments leave one →
  1. dckinder permalink
    6 January 2008 6:06 pm

    Another analogy might be the consequences of the South Sea Bubble, an 18th century financial collapse that caused France but not England to default. Although before the Industrial Revolution France actually had a wealthier economy and a larger population than did England, nevertheless – because of the default – it had worse credit. Therefore, during the many 18th century wars between them, England – despite its smaller economy – actually could raise more money to conduct the wars.

  2. 6 January 2008 7:04 pm

    The classic descriptions of the South Sea Company bubble (England, 1711–1720) and the Mississippi Company bubble (France, 1719–1720) are in that great work — one of the must-read history books — Charles Mackay’s “Extraordinary Popular Delusions and the Madness of Crowds” (1841).

    The closest comparison of what might be ahead of us is the decline of the British Empire from after WWI until Margaret Thatcher in 1979. It is the closest example as its the only other case of the fall of a modern hegemon. Years of economic and military decline, marked by repeated bouts of inflation and currency crisises.

  3. Cathryn Mataga permalink
    7 January 2008 7:18 am

    [quote]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?[/quote]

    We live by the rule of law, that’s the religion, and part of the ‘rule of law’ religion is that it’s fair game to work the system for every dollar possible, to ignore moral and national issues just as long as you stay within the bounds. So these executives, they play their games and carefully check the rules and walk away with a few billion while the assets of the country collapse once more. We can’t blame his last one on the Arabs, this is completely an American failure.

    Writing more laws doesn’t work, because however many laws are written, someone will always come up with one more scam. There’s always new technology that no one thought of, or one more complicated deal that wasn’t anticipated. Businesses have consolidated to the point where these legal but moral lapses aren’t localized, but rather form a singularity that can suck down the whole game.

    What we need is a sense of ethics where it is not okay to make billions for yourself while imploding a major bank even if there is no law on the books against this. It’s not enough just to be within the letter, people need a spirit of community and a spirit of trying to do good.

    The ‘work up to the edge of the law’ mentality is deeply ingrained in US business. Americans believe the rule of law was the basis of their past success, and there is some truth to this, but that makes change even more impossible. The thing we need to fix is the one strength and is the thing that cannot be fixed.

    Figure on another major implosion 20 years from now all over again.

  4. Fabius Maximus permalink*
    7 January 2008 2:44 pm

    I agree with you as to what is needed, but how do we get there?

    My discussion with Chet Richards about restoring our political regime grappled with the question of “how” in this post: “Diagnosing the Eagle, Chapter III — reclaiming the Constitution.” No easy answers. No simple answers.

  5. Cathryn Mataga permalink
    7 January 2008 7:11 pm

    What is needed is simple. People need to ‘love’ the nation more than they love money or themselves. Like how the Ottomans became Turkey and today, right now, the Turks love Ataturk. And it’s not just they like Ataturk, or they would vote for him if he was still alive, or they think he had good ideas. They have an intense bond and affection for this guy. Ataturk embodies that nation and to hurt the nation is to hurt that guy. To me as an outsider, the Ataturk-love is goofy and a little bit strange, but there you go. That’s what it looks like when you get there.

    How do you get there? That also is simple, but unpleasant. The Turkish nation was born in a very nasty war. Unfortunately, this seems how these things usually go. That love for the nation comes after some kind of heroic struggle for existence.

    What we’re all really asking here, is there some way to leap from being cynical of the nation to love of the nation without all the nasty bits in the middle? The Ottomans were aware of their own decline, and they were trying to reform. With the right ideas, could they have hopped from Ottoman to Turkey in some nice easy transformation and avoided all the killing? I don’t know.

    Also I want to put in a word for muddling along. There is a danger in messing with this stuff. Gorbachev thought he could neatly hop from USSR to Russia, but that brought about chaos. Changing the underlying myth of a nation steps on a lot of toes. Come to think of it, I don’t really believe we’re 1870 Ottoman, we’re more like 1600 Ottoman. We’re still near the peak, we’ve seen a few cracks in the system, but we still have a long way to go. How bad are things really?

  6. 15 July 2008 3:20 am

    How it is possible that somebody like this guy Ferguson get’s almost everything wrong? He managed to do so and still cal himself historian.
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    Fabius Maximus replies: Thank you for sharing. However, please explain what you believe is wrong.

  7. 15 July 2008 3:28 am

    He is not historian. He is quasihistorian. Unfortunately he college profesor and is teching people “history.” Not really history but things how he see them, what is not history. “We have two” All right one thinks he is right. “And we have two” He is again right you will think. “What gives us five” Oh no five. Two and two is not five. But for Ferguson it is. Then you see that guy is crazy, but too late.
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    Fabius Maximus replies: As above, please be specific about what you find inaccurate. Your comment tells us nothing other than that you disagree with him.

  8. Peter permalink
    15 July 2008 3:43 am

    I think he is paid. He tries to do what they tell him to do. But sloppy work his. He want us belive that he like muslims, than he is for Mccain who wants to kill all of them. He is against globalizacion and that he wanr us agains China. All crap. Wolf Blitzer and CNN would do better.
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    Fabius Maximus replies: Please note the comment policy of this site, that comments be civil. This is just slander, without even the pretense of explaining the basis for your beliefs.

  9. Yours Truly permalink
    15 July 2008 5:35 am

    Cathryn has some very insightful views, but it’s gonna be really hard to implement this in an age where everyone, & I do mean EVERYONE (not just Americans) LOVES MONEY MORE THAN LIFE ITSELF.

    I guess the Turks are quite the anomaly.

    The United States will need a POTUS with a lot of character & charisma to get things movin’ in a real positive direction.
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    Fabius Maximus replies: Thanks for this interesting comment. I am lifting it to its own post.

  10. Herman Player permalink
    21 September 2008 11:49 pm

    I believe if we just did a ctrl+alt+delete and rebooted we could go on with our business. Take those 3 big buttons and slam them down !

  11. garrettp permalink
    15 May 2009 9:06 pm

    The author of this website has been writing for some time now that the Pax Americana is ebbing. Wow wars are fought and won has always been a bit of a guess but clearly the massive budgets for the arsenal of this democracy are ridiculous when our enemies can manage to sway public opinion with improvised weapons working without “official” government sanction. Is the owner of this website the one eyed man in a blind America? Does anyone else have problems living in a net debtor nation? Is anyone else concerned that there has been a noticable shift towards the east with regards to what we would call “centers of wealth” ?

    It went from Europe, to America, to Japan, Korea, and other Asian “tigers”, to..anyone? Hard to swallow, but China seems to be the country that is willing (if not quite able), to work with us as if we, as a nation, were in over our heads in credit card debt. One modest comment from a Chinese finance minister suggesting our current course of deficit spending may need to change, cause massive bloodletting on Wall Street out of fear that the Chinese may be on to us.

    At some point we will have to face up to the fact that WE ARE BROKE. We have foolishly tried to run this country as an empire, without the historical baggage that comes from running an empire. We spend and spend and we refused, or rather did not demand, tribute from those whom we wish to rule. Our national debt is a problem that demands a solution, the solution is to pay it back, but that will take generations. We seem to be just like Fabius suggested, unable or unwilling to at least look at the problems that are staring us in the face.

    This is not the America that I was born into, and it certainly is not the America I want to pass on to my children and grandchildren. There was a process that brought us to this point, and there must be a way back to greatness. Maybe the age of the superpower has passed, and I do not think it was our manifest destiny that the United States become a superpower. But for goodness sakes, is anyone who reads this web site comfortable that America cannot make automobiles any longer? Are any readers satisfied that General Motors is for all practical purposes bankrupt? Chrysler is now a subsidiary of Fiat. Our Medicare, Medicaid, and Social Security funds are being rapidly depleted, and there needs to be a massive rethink done on the role of the federal government in our daily lives.

    Are we capable of doing this? I believe we are. I believe America has a bright future, but it will take a lot of work for us to get there.
    The question I guess that we need to address first is: Are we up to it?
    Am I?
    Are you?

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