I strongly recommend attention to the US dollar, as it breaks down to multi decade lows — or record lows — vs. almost every other currency (except the Zimbabwe dollar).
It is almost impossible to exaggerate the seriousness of this situation. For Americans “currency crisis” and “currency flight” are things that happen to other, lesser nations. But our history as a well-managed nation, a tradition established by Alexander Hamilton in the difficult days following the US revolution, ended long ago. We have become the world’s greatest debtor — both in terms of annual borrowing (approx. 6% of our national income) and accumulated debts.
We have with no plans, perhaps no intention, of paying back the debt. That shows a moral weakness. For good reason Adam Smith wrote “A Theory of Moral Sentiments” before “Wealth of Nations.” Our behavior has been and is irresponsible, and now the bills are coming due.
We’ve been warned repeatedly over the past two decades. By both US and international agencies. By the major ratings agencies. By many of the global investment banks. By sages like Warren Buffett. By former high officials like Richard Rubin. By academics at our major universities. Perhaps the clearest analysis was by Paul Kennedy in his 1987 book The Rise and Fall of Great Powers.
It’s not knowable how this will play out. The factors are not just economic — what will private foreign holders of US debt do — but political. What will our creditors — Asian central banks and the oil exporting nations — do as irresistible forces push the dollar down?
An analysis of this is beyond the scope of a blog. There are many fine reports on the web. Here is one thought. In an age of nukes and 4GW, conventional war between major powers is unlikely — perhaps obsolete. But political stresses remain a fact of life and must be expressed. Perhaps money has replaced bullets as the new form of combat. WWII was as much a war between competing economies as between armies. Modern financial systems allow us to eliminate bombs as the intermediate step, for pure economic warfare.
If so, then the current situation looks much like Summer 1914. The situation is unstable on many levels. Massive accumulated tensions, waiting for the weak link to snap. It could be anything, something trivial.
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For more information about this subject
A brief note on the US Dollar. Is this like August 1914? (8 November 2007) — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One (21 November 2007) — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, Chapter II (28 November 2007) — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Death of the post-WWII geopolitical regime, III – death by debt (8 January 2008) – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
Geopolitical implications of the current economic downturn (24 January 2008) – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession? (18 March 208) — More forecasts. The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
The most important story in this week’s newspapers (22 May 2008) — How solvent is the US government? They report the facts to us every year.
To see the all posts on this subject, go to the archive for The End of the Post-WWII Geopolitical Regime.