Prof Nouriel Roubini describes “The Decline of the American Empire”

The hot dots in economics today are, in my opinion, David Rosenberg and Nouriel Roubini.  Roubini is a professor of economics at NYU, noted expert in international finance, and founder of RGE Monitor(a aggregator of economics and finance articles, invaluable for anyone in those fields).

His forecasts are grim reading (by comparison with my longer-term views, he is a pollyanna).  For a brief on his forecasts, see this interview in the current New York Times Magazine (15 August 2008) — aptly titled “Dr. Doom“.  With free registration, you can read his reports in full at RGE Monitor (and also many posts from this site).

In Roubini’s latest report he comments on a subject familiar to readers of this site:  “The Decline of the American Empire“, posted at RGE Monitor, 13 August 2008.  Here are some excerpts; I recommend reading it in full.

Recent economic, financial and geopolitical events suggest that the decline of the American Empire has started. After the collapse of the Soviet Union there was a brief period where the world switched from a bipolar balance of two superpowers to a unipolar world with one economic, financial, geostrategic superpower, or better, hyperpower, i.e the United States. But by now three factors suggest that the US has squandered its unipolar moment and that the decline of the American Empire – as the US was in effect a global empire – has started.

Let us explain how and why.

First, the US squandered its power by relying excessively on its hard military power in the wars of Iraq and Afghanistan and in its unilateralist foreign policy – including economic issues such as global warming – rather than relying more on its soft power of diplomacy and multilateralist approaches to global policy issues.

Second, regardless of mistaken US policies the rise of other economic and financial powers – the rise of China, the recent resurgence of Russia, the process of economic and political integration in the European Union, the emergence of India, and the rise of other regional powers such as Brazil, South Africa and Iran – implies that the relative economic, financial and geopolitical power of the US will be reduced over time. We are indeed slowly moving towards a multipolar world where there will be a balance of Great Powers rather than the hegemony of a single hyperpower.

… Third, and more important, the US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits. … The trouble with these twin deficits is multi-fold.

First, superpowers and empires – like the British Empire at its peak – tend to be net lenders – i.e run current account surpluses – and be net creditors, not net debtors; The decline of the British Empire started in World War II when the British fiscal deficits in the war and the current account deficits turned that empire into a net borrower and a net debtor both in its public debt and external debt. That financial switch into an external debtor and borrower position was also the reason for the decline of the British pound as the leading reserve currency. And the British twin deficits were being financed by a rising economic and financial power that was a net lender and a net creditor, the US.

Second, the last time the US was running large twin deficits in the 1980s the main financers of these deficits were the friends and allies of the US, i.e Japan, Germany and Europe as the US external deficit was against these economies. Today instead the economic powers financing the US twin deficits are the strategic rivals of the US – China and Russia – and unstable petro-states, i.e Saudi Arabia, the Gulf States and other shaky petro-states. This system of vendor financing – with these US creditors providing both the goods being imported and the financing of such deficits – has led to a balance of financial terror: if these creditors were to pull the plug on the financing of the US twin deficits the dollar would collapse and US interest rates would go through the roof.

Third, while it is unlikely that China, Russia and other powers would suddenly pull the rug from under the US feet – as such action would lead to a sharp appreciation of their currency and negatively affect their export led growth model – relying excessively on the kindness of strangers – especially that of your strategic rivals – is extremely risky. Since almost 100 percent of all US fiscal deficits since 2001 have been financed by non-residents – as US residents net holdings of US Treasuries have been flat since 2001 – by now the total stock of US Treasuries held by non-residents is getting close to 60 percent. And the foreign financing of the US current account deficits has also become more risky: less FDI and equity, more debt, more short term debt, more debt held by official political actors – central banks and sovereign wealth funds – , less debt held by foreign private investors, and more debt held by politicals rivals rather than allies of the US. This change makes the US vulnerable to such rivals using the financial terror weapon – dumping US assets and or reduicing their financing of the US twin deficits – in situations of geostrategic tension.

Fourth, the foreign creditors of the US are getting tired of financing the US in the form of low-yielding US Treasuries. Thus the switch of such reserve holdings to SWFs that are planning to make large equity investments possibly with actual control of corporate firms and financial institutions that are desperate for capital to recapitalize themselves. … a country that needs to borrow from abroad 700 to 800 billion dollar a year to finance its external deficit cannot afford to be too choosy on the ways – equity rather than debt – that its lenders and creditors want to finance those deficits.

… The ensuing decline of the US dollar as the main reserve currency will take time and will not occur overnight; but it is inexorable given the relative fall in US economic, financial and geopolitical power.

… All these changes in the economic, financial, reserve currency and geopolitical role and relative power of the US will not occur overnight. But the trend is clear. The rise of the BRICs and other emerging market economies; the continuation of the process of economic and political integration in Europe; the US policy mistakes in economic, financial and foreign policies will steadily erode the power of the American Empire. This process will not be sudden and will take a couple of decades.

But the trend is clear: the brief period of unipolar power of the American hyperpower is now over and a new age of balance of great powers is starting in the world. Also, the rise of non governmental actors – multinational corporations, NGOs, terrorist groups, non-nation state powers, failed and unstable states, non-traditional global players – will radically change the traditional balance of power as the power of nation states will shrink relative to that of other global players.

Whether the decline of an hegemonic power providing global public goods – security, free trade, freer mobility of capital and people, inducements to free markets and democracy, better environment, peace – will lead to a more stable world with many powers multilaterally cooperating on these global economic, financial and geopolitical issues; or whether the absence of such stable hegemonic power will lead to a more unstable world characterized by conflicts – economic, political and even military – among traditional nation states, great powers and non-traditional actors is an open and difficult issue. But it is certain that the decline of the American Empire has started.

Please share your comments by posting below (brief and relevant, please), or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For more information about the end of the post-WWII economic regime

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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.
  6. A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.
  7. 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.
  8. 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.

6 thoughts on “Prof Nouriel Roubini describes “The Decline of the American Empire”

  1. “We are indeed slowly moving towards a multipolar world where there will be a balance of Great Powers rather than the hegemony of a single hyperpower.”

    I have an even more radical idea: Maybe there never was such a thing as a hyperpower an the USA was all the time unable to take on more than two mediocre opponents at once (which was, btw, the 90’s planning rationale; Middle East and North Korea wars at once) without mobilization. The so-called hegemony was probably more an illusion, fed to the world by the PR-gifted Americans, than reality.
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    Fabius Maximus replies: I strongly agree.

  2. So Roubini reads Zakaria. But how do YOU feel about the CFR party line and politics a la obama? With deference to Roubini, who I have called a true patriot on his blog, is the ‘rise of the rest’ best for the rest of us? And is the CFR’s weltanschaung (probably consistent with Zakaria’s) good for us as well?
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    Fabius Maximus replies: Roubini is an economist describing what is happening, inevitably. Like the sun rising, the rise of other powers is something to which we must adapt. Our feckless policies have accellerated this process, but 300 million can not long maintain hegemony over billions.

  3. (psssst, Sven)
    *spoiler warning*
    The “Cold War’ was the greatest myth of our time. Since ’62, the USA and USSR have been acting out a colossal version of good cop/bad cop, to keep the colonies in line.
    hehehe?

  4. The rise of the BRICs is great, and has long been the rhetorical goal of the post WW II order. But while it’s overall good, there are imbalances, and the production of US workers now making $22/hr often (not always) can’t compete with Chinese production and workers making $2/hr. The overpaid workers have less opportunity, the poor but qualified workers have more opportunity.

    Economic growth, and thus competition, has been one of the goals of the American “empire of Human Rights respecting democracies”. When comparing Bush’s action in Iraq, with the UN / EU inaction in Sudan, Burma, Zimbabwe, I think history will show the creation of an majority Arab, majority Muslim democracy in Iraq was the start of a long transformation of the Middle East. (While not perfect, it’s far better than more Saddam.)

    If regime change of dictator into democracy is not done by the ‘hyperpower’, what use is being a hyperpower? Except to become the whipping boy for every idealist who thinks America should do more or less of one thing or another to make the world better.
    Thus, I totally disagree with point 1:

    First, the US squandered its power by relying excessively on its hard military power in the wars of Iraq and Afghanistan and in its unilateralist foreign policy – including economic issues such as global warming

    Of course, the current media likes to lie about Kyoto and often says the US not signing was due to Bush, when it was really Clinton. On Somalia, and Iraq thru 16 different UN SC resolutions, I’d claim the ‘soft power’ so beloved by the supporters of impotentence was shown to be useless — tho not squandered.

    One could easily argue that Clinton’s failure (not never again, again) in Rwanda, shows the USA as no ‘hyperpower’, nor extremely interested in being a World Cop.

    But either there will be a World Cop, or there will be wars, little or big, between nations and non-national but tech-empowered groups.

    Similarly, the final point makes an untrue assumption:

    Whether the decline of an hegemonic power providing global public goods – security, free trade, freer mobility of capital and people, inducements to free markets and democracy, better environment, peace

    How nice — re-write history to create a rose-tinted prior ‘golden age’ of US hyperpower, lasting all of what, 10-14 years (’89 fall of Berlin Wall; ’91 end of USSR; 9/11/2001; 2003 Iraq invasion), during which the main China and India movements had already started and just continued, as well as Brazil, while Russia was being re-created and of course is unstable. Once this mythic golden age is established, compare the reality to it and claim we need to ‘go back’. No.

    The myth is wrong. We can’t go back. Part of the best thing about the ’90s is the very growth of the new powers, but like young cubs they were no threat to the old lion sire. Now they are becoming economically competitive — because they can produce and have buyers with cash in America.

    The BIC exporters of products are more dependent for continued growth on US buyers, than US buyers are dependent on them. Not so for Russian energy and Mid-East oil.

    Of course the US should have a relative decline from over 20% of the world’s GDP to an ever lesser amount more in line with its 5% of the world’s population. But if that comes thru faster-than-America growth in the other countries, it’s good, and a sign of the success of American ‘more market, more trade’ empire aims.

    In Iraq, the US should be loaning money to Iraqi cities on commercial terms (excluding risk), not writing grant checks. Otherwise, the promotion of democracy there is also good — but expensive.
    Much less expensive then big Federal entitlement programs which mostly go to the middle class and help make all folk more dependent, passive, and whining.
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    Fabius Maximus replies: This is a complex statement, but not correct in any meaningful sense.

    “The BIC exporters of products are more dependent for continued growth on US buyers, than US buyers are dependent on them.”

    Exports to the US are a small part of their economic growth. For example, China’s experts to the EU are growing faster than their exports to the US — and domestic-driven growth is larger than export-driven growth. Brad Setser, an economist at the CFR, has discussed this at length.

    We are not dependent on imports. We are dependent on the flow of foreign loans, which provide aprox 5% of our national income. Cutting these off would hurt our economy more than those exporting to us.

  5. Net capital transfer = trade balance. It’s not really separable.

    Tom; what purpose could a hyperpower have?
    First of all, it’s a state. A state is an illusion that serves its community.
    The welfare of the own people should not be neglected, nor should imbalances and unsustainable economy be accepted.
    Whatever the USA did in the past decade in foreign policy, it did so during a time when it didn’t solve domestic problems, accumulated huge debts (both as federal state and as a nation), destabilized its financial markets and tolerated oil addiction.

    First do the homework, then see how much energy is left for luxuries like supposedly altruistic foreign policy achievements.

    The USSR failed as a superpower and collapsed because its governments preferred foreign policy and military strength over domestic (especially economic) issues. The USA is repeating this mistake, and it does so with foreign policy actions that alienate old friends, create lots of new foes and rarely create any useful new friends.

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