What will America look like after this recession?

This series of articles speculations about our future based on history and the almost inevitable re-balancing of global economy (i.e., end of unconstrained borrowing by US).  The elections are only three eight months away, perhaps our last chance to influence these developments.

I.  This is a government failure on two levels, despite many warnings from major institutions that the US could not forever borrow without inevitable and painful consequences.

1. The US government let it happen, failure of the massive government regulatory apparatus.
2. The US government, esp. the Fed staff, did not model this scenario, despite the warnings.  The Fed’s legendary “500 PhD economists” and their supercomputers could have provided valuable analysis of alternative steps to mitigate this financial and soon-to-be economic collapse.  “Surprise is an event that takes place in the mind of a commander” - and represents a personal failure.

As a result of these two failures, US government decision-making has lapsed into a failure-prone mode:  brain-storming by senior leaders.  Old men, whose operational experience was either long-ago or zero (e.g., academics and politicos), operating under time pressure, without research and advice from professional staff.

II.  The insane borrowing by US businesses and households took place in plain sight, to widespread applause. No child will be christened “Alan” in America for the next five generations - and rightly so — but the ultimate responsibility in a Republic for such folly is ours.

III.  The next few years will likely see the nationalization (partial or complete, de facto or de jure) of the US financial and health care sectors, the largest expansion of the US State since the 1930’s.

Despite the growing histeria, this will not mean the end of America.  Today our governing elites are trading away our economy’s vibrancy and adaptability — which requires allowing private entities (individuals and businesses) to fail — in exchange for security and stability.  This represents a failure of the free-market system, as the fall of the Soviet Union was failure of government-controlled economies.  The only remaining models are “third way” systems like those of Asia and the EU, with substantial government control of both culture and economics. 

So the US will soon look like France or Germany.  I doubt US elites consider that a bad thing.  Two generations from now American children will not understand why their grand-parents make such a big deal out of the events of “2008-10.”

IV.  This downturn will not destroy American’s physical wealth (natural resources, buildings).  It will concentrate wealth in fewer hands.  A “middle class” accumulates wealth during periods of stability.  Periods of instability — both inflation and deflation– shift wealth to elites (they own real property, not just the paper assets of the middle class).   To see this in action, watch the bank run scene in the movie It’s A Wonderful Life – when the fat, rich Mr. Potter buys up the town of Bedford Falls.

When the going gets tough, the rich get manicures.

V.  The poorest Americans will suffer the most. That is one aspect of what it means to be poor.

VI.  As a result of this downturn, America will lose wealth and income, as the US dollar declines so that American workers wages (in real terms) fall so that our goods and services again become competitive on world markets.  Wages will not fall to 2^nd or 3^rd world levels, as our productivity is far higher than theirs.

We will export more – earning the income needed to pay our foreign debts - and import less (foreign goods become more expensive).  Our trade deficit will shrink, perhaps even becoming a small surplus.

VII.  As we lose economic and military supremacy the US will no longer have the resources to act as global hegemon.  The fall of the US dollar reduces our relative economic strength.  By missing the shift to 4GW we have lost effective military supremacy.  We will become just another Empire which fell due to internal mismanagement.  Our time as a superpower will be considered unusual only as we failed to generate any substantial gains from it.

Admiral Fallon may be the last of our pro-counsels will to stride the world stage as giants (as Barnett describes here). 

VIII.  The US will need the cooperation of foreign governments to stabilize the US economy.  At the very least, our creditors must continue to roll over our bonds despite massive foreign exchange losses.  Some governments may do so in the spirit of past alliances and a shared future.  Others might set a price for their aid.  Some might set a high price.  This negotiating process could get interesting (questions of survival are always interesting).

IX.  The world will shift to a multi-polar system, probably with regional leaders.  Since so much of our work as global cop was consider unwanted or actively destabilizing, the multi-polar system will probably run more-or-less smoothly.  Nukes will become more common, which means only few and small wars (perhaps with an occasional city getting melted by State or non-state actors).  Non-state actors will continue to grow and thrive, with or without the US as hegemon.

Eventually a new hegemon will emerge, although this may take decades.

X.  The world’s weaker nations will likely suffer most from this transition to a multi-polar system.  As a valuable source said (quoted with permission):

Another Big Kahuma theme: the shift away from the US banking system as the global controller of liquidity and the US as the arbiter of global economic decisions. … No one controls liquidity; it is a free for all. Places that need it cannot get it. Not like the old days when the Fed could more or less force liquidity into certain areas. The larger ramification is the loss of political control and the end of certain borders. And this means that the weaker economic entities or countries get crushed and become seeding grounds for hostility/revolution/instability.

Summary 

These things appear inevitable so long as we stay on our present course.  But there are other possible futures for America, depending on our actions.  Nothing is written. 

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).

My articles about the US economy

The three key articles are in bold.

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).

Power shifts from West to East: the end of the post-WWII regime in the news  (20 December 2007) — We are seeing another western industry ceding dominance to eastern competitors, one more step in a larger process.

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.

A recommendation to read these bulletins from the front! (21 January 2008) – A brief note on today’s articles in the NY Times and Financial Times, with Brad Setser’s explanation of why they are important.

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.

Let us light a candle while we walk, lest we fear what lies ahead  (10 February 2008) – Putting the end of the post-WWII regime in a larger historical context.

A happy ending to the current economic recession (12 February 2008) – The political actions which might end this downturn, and their long-term implications.

Understatement can be a form of courage — a comment about the US economy  (28 February 2008) — Our leaders have begun to speak to us about unpleasant truths.  What might they be saying in a year or two?

Our metastable Empire, built on a foundation of clay  (3 March 2008) — More thoughts on the “dreamland” described by Wolfgang Schivelbusch in The Culture of Defeat, and what it tells us about the foundatino of the American empire.

The US economy at Defcon 2  (11 March 2008) — Pretty self-explanatory.  Where are we in the downcycle?  What might the world look like when it ends?