The post-WWII geopolitical regime is dying

After fifty years, the post-WWII geopolitical regime has become frail. Chapter One of this series considers the US economy, and what lies ahead for America — the hegemon of the current global order.

Our friend, Smokey the Bear

In the late 19th Century the goal of preventing forest fires gained wide support in the US. The Forest Service was established in 1905, becoming the lead agency in this program. After a century of successful fire prevention much of the western US consists of dense forest with layers of dead wood. Tinderboxes across the West, ready for the next drought to spark uncontrollable fires.

What can be done? Not much. Nature delayed must take its course. Logging permits are difficult to get and logging itself often uneconomic. Thinning and removal of ground cover is prohibitively expense over large areas. Controlled burns often work well. Unfortunately they occasionally become uncontrolled burns. Instead landowners clear the land around their buildings and wait for the inevitable.  Eventually, over years, this process will work itself to a new equilibrium.

We have managed our economy like our forests. The US Federal Reserve has successfully prevented a severe recession for a quarter-century. The early 1990’s saw a slight downturn in GDP; the early 2000’s an even slighter one. The government responded to each slowdown with aggressive monetary policy (easy credit, low rates), aggressive fiscal policy (government spending), and often exchange rate action (devaluing the US dollar to stimulate exports). The Fed has declared war on the business cycle. As Mao said, protracted struggle.

Consequences

“Sooner or later, everyone sits down to a banquet of consequences.”
— Robert Louis Stevenson, perhaps apocryphal

As a result of the Fed’s success the US economy has evolved in an unbalanced manner since 1982. Large, growing trade deficits. Accelerating growth in household debt. Decreased savings. National consumption in excess of national income, financed by foreign borrowing (current account deficits) — resulting in large foreign debts.

We have been warned. Comptroller General Walker. The IMF. High government officials, like former Treasury Secretary Robert Rubin. The major credit ratings agencies. Wall Street. Academia. It is not all boring jargon; here is a paper with an usually catchy title for a Fed publication: Is the United States Bankrupt?

A long list of alarms, ringing for many years. We ignored them as obviously false, since they warned of threats not yet here.

“On September 28 the {Norman invasion} fleet came safely to anchor in Pevensey Bay. There was no opposition to the landing. The local “fyrd” has been called out this year four times already to watch the coast. Having , in true English style, come to the conclusion that the danger was past because it had not year arrived, they had gone back to their homes.”
— Churchill, The History of the English Speaking Peoples

Now we have (perhaps) passed the point at which corrective action is possible, such as the 1980-82 recession Fed Chairman Volker induced to break the inflationary fever that gripped the US. Today the danger of a recession burning out of control is too great.

Exhausted defenses of the US economy

Much research, like that of the Levy Institute, suggests that with the current record-high levels of household debt a recession like 1980-82 would create foreclosures and bankruptcies at levels not seen since the 1930’s. The lower middle class (aka “blue collar” households) are especially vulnerable. Worse, our counter-cyclical economic stabilizers are largely burnt out from overuse.

  • Even at the peak of the expansion in 2006 the Federal government still ran a deficit of aprox $250 billion ($4.6 trillion using real accounting, as corporations must do — including the growth in liabilities). The deficit always increases during recessions, as expenses rise and income fades. This might make massive spending difficult during the next one — without collapsing the US dollar or risking hyperinflation.
  • Monetary policy has become less effective with each cycle, as US debt (government, business, households) approaches our maximum carrying capacity. As debt grows, each dollar of new debt provides less stimulus. That is, the elasticity of GDP with respect to debt approaches zero. Eventually we hit the limit on our national VISA card, and new debt does nothing. That marks the end of the Debt Supercycle, and the start of a new era.
  • Devaluing the US dollar to stimulate exports has become extremely hazardous, risking currency flight and hyperinflation.

The exhaustion of our stabilizers — which provide negative feedback — means that positive feedback might dominate the downcycle. For example, home prices decline => mortgage default increase => consumer spending declines (wealth effect) and housing-related jobs disappear => more home price declines. And so it goes.

Conclusions

How will this play out? The end of the post-WWII geopolitical regime is like a singularity in astrophysics. We cannot see beyond it, because we do not understand the choices that will determine our fate — or how we will choose. It also resembles a singularity in that what lies on the other side is unimportant until one survives the passage through it.

Economic regimes come, and they leave. As do Empires. The post-WWII regime has brought incredible prosperity to most of the world, but that does not make it eternal. As Queen Gertrude says to Hamlet (Act I, scene 2):

Good Hamlet, cast thy nighted colour off,
And let thine eye look like a friend on Denmark.
Do not for ever with thy vailed lids
Seek for thy noble father in the dust:
Thou know’st ’tis common;
all that lives must die,
Passing through nature to eternity.

** The movie “The Matrix” prominently featured a version of this, “All that lives must die.”

A closing note

The next recession will stress our economic and social fabric like nothing we have seen since WWII. Will we rise to these challenges as have our forefathers before us?

I believe that we need not fear the future. America’s strength lies not in our wealth or power. We are strong because of our ability to act together, to produce and follow good leaders. We are strong due to our openness to other cultures and ability to assimilate their best aspects. We are strong due to our ability to adapt to new circumstances, to roll with defeat and carry on.

We will be whatever we want to be. The choices we make in the next few years may reveal what that is.

Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

Key posts about the crisis:

  1. Diagnosing the eagle, chapter I — the housing bust, 6 December 2007
  2. Death of the post-WWII geopolitical regime – death by debt, 8 January 2008 – Origins of the 1982 – 2006 economic expansion; why the down cycle will be so severe.
  3. A picture of the post-WWII debt supercycle, 26 September 2008
  4. Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
  5. Causes of the financial crisis (no, its not the usual list), 29 October 2008
  6. Government policy errors and the Great Depession, 1 November 2008

About solutions:

  1. A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
  2. Slow steps to nationalizing the US financial sector, 7 April 2008 — How this will change our society.
  3. A solution to our financial crisis, 25 September 2008
  4. The last opportunity for effective action before disaster strikes, 3 October 2008 — How to stabilize the financial system.
  5. Effective treatment for this crisis will come with “The Master Settlement of 2009″, 5 October 2008
  6. Dr. Bush, stabilize the economy – stat!, 7 October 2008
  7. The new President will need new solutions for the economic crisis, 9 October 2008
  8. Everything you need to know about government stimulus programs (read this – it’s about your money), 30 January 2009

47 thoughts on “The post-WWII geopolitical regime is dying”

  1. The only specific I recall from reading many of your links and notes is your claim that US imports will balance with exports.

    So let me use that: if the USA continues to have an imbalance of imports being 10% or more greater than exports, for the next 5 years, I’ll feel comfy that my prediction of the non-death of the post-WW II regime is true, and your prediction did not yet materialize.
    Is 10% too high, too low? 5 years too short, long?
    Do you agree that such a continued import-export imbalance does falsify your (religous?) belief in the (short term) end of the post-WW II regime?

    If not, what metric or parameters would provide such falsification?
    .
    .
    Fabius Maximus replies: So you have a very poor memory. I have provided some links in your previous comment. I don’t have time to write essays in reply to questions.

  2. YES — I’ve been wrong! June-Sept 2008, BEFORE the CDS derivative collapse, I did NOT think the data showed the US was in a recession. (NBER only recently said the recession started in Q1, despite positive GDP growth Q1 & Q2.)
    At that time, without studying the financial bubble much, I thought the Credit Default Swap market was a sophisticated insurance / buffer against a big bubble pop — not the bubble itself.
    (And this site was an excellent education).
    I also favored the Big Bank bailout — before I was against it, after learning more.

    Let’s look at FM’s 9 Nov. look at our future: “The magnitude and length of this downturn will be greater than economists expect (this is of course an over-simplification).”
    The difficulty in anybody’s predicting what will happen is the influence of the choices made by gov’t — with Obama’s big porkulus, I believe FM will be correct, and all of 2009 will be contractionary.

    Were the Reps to unify around Tax Cuts, and get the Dems scared at the continued Obama Depression, the Depression could be ended in 3-6 months (maybe I’m still too optimistic?), with the taxpayer then facing lower asset prices and much less personal debt, and the US gov’t being the first major economy to stabilize and thus continue to attract safe haven cash and keep interest rates low, despite the increase in borrowing.

    But the Porkulus bill of Obama will cause a Depression, and prove that FM prediction (guess) correct. Yet even if so, does that mean the end of US dollar dominance or US trade imbalance — the end of post-WW II regime? Not necessarily.

  3. Instead of an essay, or a link, why not a clear and pithy rephrasing of your own favorite metric?
    Trade balance? US total debt? US gov’t debt?

    I’m really serious, I don’t know a metric that would falsify your regime-death thesis. Most of your links do not give one.

  4. Tom, from an (excellent) recommendation by Seneca in another thread, in terms of metrics I highly recommend (if it can be found anywhere in updated, ongoing form which is unlikely), the ‘differential accumulation’ as devised by Jonathan Nitzan and Shimshon Bichler in their paradigm-busting “The Global Political Economy of Israel” which is really about how the world economy works using Israel as a contemporary example rather than being only about Israel per se. [book available on their website for download]

    Briefly put, rather than define ‘capital’ in typical quanta alone, it is incorporated into a series of metrics that track it’s ‘power’ quotient, their thesis being that capital is actually power, that you cannot separate it from political and societal elements in society as has usually been done by economists and others, and that there are two main ‘regimes’ for such accumulation which they call ‘breadth’ and ‘depth’, the former being in generally favorable and expansive (peaceful) periods, the latter being in stagflationary and contracting (usually conflict-engendering) periods, however in both cases the ‘winners’ are those who, relative to others in their sector and nation, ‘accumulate’ more market share and/or dominance relative to others. Even in downturns, therefore, and even with substantial losses in overt terms, they can be gaining (relative) ground in terms of power and future potential.

    If we see the main corporate sectors/players in the US losing ground in the ongoing differential accumulation metrics – which has not happened since WW II even during steep recessions according to their presentations – then that might be a sign that the regime is ending.

  5. Thanks, E; that’s a new and interesting idea (but not quite so easily quantified).
    It fits in with my own bias in thinking the current rich-power elites are using the Bailout to help themselves, and avoid the discipline / power re-distribution of the Free Market.
    (When I can interpret it to agree with my prior beliefs, its credibility instantly increases!)

    But if the world is successfully reducing poverty (globalization / freer trade), it’s inevitable that the US elite will “lose ground” relatively — that’s a positive feature of post WW II US leadership.

  6. “But if the world is successfully reducing poverty (globalization / freer trade), it’s inevitable that the US elite will “lose ground” relatively — that’s a positive feature of post WW II US leadership.”

    The US elite “lose ground”? that only assumes you can destroy the Washington consensous.

    http://www.taxresearch.org.uk/Blog/2009/05/04/more-criticism-of-pwcs-work-for-the-world-bank/

    “It’s definitely one piece of work now headed for the scrap-heap as an indicator of the failure of the Washington Consensus thinking that it so clearly represents”.

    via Tax Research UK » More criticism of PWC’s work for the World Bank.

    Despite the author Parag Khanna, (The Second World, 2009, Random House), assertion that the US works as a coalition in its diplomacy, there defiantly is a consensus system, much like the EU, in place when it deals with domestic matters.

    Like this author at Tax Research UK (the above hyper-link) says, “The policy recommendations rigidly biased against the poor.” The consensus is for the people who put them in power, the wealthy.

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