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
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.
Comment by dckinder — 6 January 2008 @ 6:06 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.
Comment by Fabius Maximus — 6 January 2008 @ 7:04 pm
[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.
Comment by Cathryn Mataga — 7 January 2008 @ 7:18 am
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.
Comment by Fabius Maximus — 7 January 2008 @ 2:44 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?
Comment by Cathryn Mataga — 7 January 2008 @ 7:11 pm