Depression and Decline: American Irresponsibility is Ending the American Era with a Bang

Despite the assurances of US Treasury Secretary Timothy Geithner it is increasingly likely there will be no debt deal. The United States is going to default on its debt. I know it sounds crazy, but I believe it is going to happen. If it does, this is the black swan event no one imagined or was prepared to contemplate. Its impacts are going to be significant. Possibly immeasurable.

For history, August 2nd, 2011 could end up marking the end of the American Era. Sadly, it will not have been inevitable, it will have been entirely self-inflicted and it may now be irreversible. Even if an agreement is reached tomorrow I suspect the world will increasingly be unwilling to entrust the role of global financial system caretaker to the United States. The world has lost faith in America. And why not. Its Congress has demonstrated that it can no longer be trusted with the responsibility of global financial management. Indeed, even its closest allies have had their confidence shaken.

The economic and geopolitical ramifications of this outcome cannot be underestimated.

Economically, we may now be closer to a global depression than at anytime since 1930s. For all the talk of the financial crises being a near miss, this could potentially be much, much worse, simply because the consequences fall outside our predictive models.

What is clear is that America is trapped. In the short term spending less will devastate its population. Today more Americans (18.1%) than ever use food stamps. It takes American workers 40 weeks (and rising) to find a job, twice as long than in any previous recession. 1 in every 6 Americans use Medicaid. Any cuts to these services will have an immediate and harsh affect on the quality of life of a huge number of Americans.

Longer term, America cannot restart its economy. Already the top 5% of Americans by income account for 37% of all consumer outlays. This is unsurprising given the top 5% of Americans account for 34.7% of all income. This is similar to 1929 when the top 5% accounted for the top third of all personal income. This is precisely the type of economic structure that Kenneth Galbraith argues in The Great Crash, 1929, transformed the great crash into the great depression. Rather than being able to rely on a broad consumer base to power economic growth, the United States then (as now) was dependent on a high level of investment and luxury consumer spending driven by a small elite. The crash caused that elite to seize up, leaving the American economy paralyzed.

In other words, the Bush Tax cuts may have killed the US economically, and possibly geopolitical. By killing the surpluses they have broken the US treasury. By radically curtailing wealth redistribution they have fatally eroded the capacity of the US domestic economy to power new growth. Combine this with two wars that have sapped trillions of taxpayer dollars, and it is hard not to see a United States more ill prepared than at any time in its history to deal with an economic crisis. The only question that may remain is how much of the rest of the world it drags down with it.

Of course economic decline could become a leading indicator for political decline.

When I arrived to grad school in 1998 to study international relations the field had spent much of the previous decade grappling with the issue of American decline. Books like The Rise and Fall of Great Powers and Lester Thurow’s Head to Head seemed to suggest that economically and militarily, the United States was in, at the very least, relative decline as a the world’s leading power.

But then the successes of the US economy – coupled with the turn around in the size of the US government’s debt –  meant that as a peer, China felt a long way off while Brazil and India seemed more distant still. Europe was too old, disorganized and unambitious to matter. Russia, was fading quickly from the scene. Suddenly decline theory was, itself in decline.

But today the writings of Kennedy feel even more urgent. America, with or without a raised debt ceiling, cannot afford its empire, or the means to protect it. It may be able to find allies to help shoulder the burden – today the central challenge of 21st century geopolitics is the integration of India into the Western Alliance, something that proceeds apace. But if it defaults (and maybe even if it does not) it’s capacity to raise money at a reasonable rate should a major conflict arise, may be compromised. War, for America, is going to get more expensive because investors may be more nervous.

I want to clearly state that I don’t write any of this with any glee. Leftish non-americans who relish a world without the US hegemony should look at the what the period after Britain’s decline, or any period of hegemonic decline. They generally aren’t pretty. Indeed, they are often unstable, violent and nasty. Not something any country should wish for, especially smaller countries (such as my own – Canada). Moreover, while there is no immediate peer that could take America’s place, it isn’t clear that the most likely candidate – China – is one that most people would feel more comfortable with. Be careful what you wish for.

I hope that I’m wrong. I hope a deal will be reached. And that if it is, or if it isn’t, the impact on the markets will be minimal or non-existent. Or maybe, I just need to have more confidence in what I have often tell others: do not to underestimate America. As Sir Winston Churchill famously noted: “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” And maybe they’ll have enough time to boot.

But I genuinely fear that in the haze of summer this crisis, as much as it has spurred some scary headlines, remains a sleeper. That we are confronting the mother of all black swans, and that a period of financial turmoil that will make the last two years look like a merry ride, could be upon us. Worse, that that financial turmoil will lead to other, great military and/or political turmoil.

These are scary times.

I can honestly say I never written a blog post that I hope I’m more wrong about.

Update: The Atlantic has a great article worth reading about the origins of the deficit published later this morning that includes a reference this fantastic graph from a few months ago.

9 thoughts on “Depression and Decline: American Irresponsibility is Ending the American Era with a Bang

  1. AutismRealityNB

    Very ominous David. I too hope you are wrong. But it is looking pretty grim as your analysis portrays so concisely.

  2. Anonymous

    It’s not clear to me that even if the US defaults, that it couldn’t recover.  @felixsalmon:twitter did an interesting video about the credibility of AAA rated bonds (including sovereign debt) as reliable financial instruments you can watch here on the subject:

    The US played a substantial role in the ’29 crash, and came out of it a world power, not to say that that is guaranteed to happen, but i’m not quite so pessimistic that default means the end of American hegemony, especially since China’s economy itself is not any more credible than the US’s.

    Last, the real problem that the US has is one of political credibility.  The GOP are the ones who’ve tied the political credibility to US fiscal credibility.  They have moved from Voodoo Economics to Cthulonic Economics.  If Republican legislators can cause a debt crisis any time they feel like it, that is what is going to cripple the US, not the default directly.

    The default is just (heh, “just”) going to plunge the world into another recession/depression.

    I feel like i’m living in Dickensian England.

  3. Guest

    Just because it’s gone this far, even when (and we all better hope it’s ‘when’) the debt ceiling is raised next week, all the big 3 credit rating agencies have stated that the USA’s 3-star rating is being reviewed this fall. And the likelihood is they will lose their top rating, in fact Standard & Poor has given an 80% chance they are dropping their rating, and that was 2 weeks ago.  I don’t think they are any more impressed today.

    So the stupid Republicans have already f#cked over Americans by increasing the US national debt, all thanks to the higher interest rates that will come with the credit rating drop. I say the US government should compensate by imposing a 25% tax on every registered Republican to help pay for them causing the national debt to increase. Maybe then they’ll learn a valuable lesson about when it’s appropriate to play partisan games with the White House, and when it’s not.

    Regardless of the debt ceiling being raised, the US will be in the same shape now as the British Empire was after WWI. On paper still a creditor nation, but in reality there is a lot of red ink with bleak prospects for ever recovering their old status. And if there is no deal by August 2nd, then the US is like the British Empire after WWII… finished.

  4. Alex Sirota

    There. Will. Be. No. Debt. Default. None. President Obama and the Democrats will ensure that some sort of deal is made, of that you can be sure. This is political suicide for the Democrats and noone will allow a default to happen on their watch. Americans can be harsh when they run out of money.

  5. Pingback: #FuckYouWashington and Black Swans « Kempton – ideas Revolutionary

  6. Krai

    The damage has been done. Other countires will turn away from the irresponsible, short-sighted, greedy, childish Americans. They have to.

    The U.S. has imploded many times in the past 10 years beginning with the lies re: the war in Iraq. Then came 2008 and now a possible or likely downgrade of their credit rating even if a default is avoided.

    The dust will need to settle before the U.S. will understand what they have done. 

    But what is this compared to richie rich helping out the system from which they have taken so much. 

    To hell with them. 

  7. Ge40miller

    all we need is more personal responsibility, we as a society should take care of the folks who cant take care of themselves, but who makes that determination?  we have become a society of half the country taking care of the other half, and how many of us really are doing the best we can? to dance around the issue of medicare spending, medicaid, and social security whereby by most folks get back two and three fold the amount that they paid in is most of the problem.  but who draws the line, the democrats want us to need them, their philosophy is most of you are too dumb or lazy to take care of yourself, so let us divy out your allowance.  we are doomed if as a society we do not stop this theory of i am entitled. we all need to look in the mirror.  george miller, omaha, ne.


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