Sun Could Set Suddenly on America as Superpower as Debt Bites

We have been raised to think of the historical process as an essentially cyclical one.

We naturally tend to assume that in our own time, too, history will move cyclically, and slowly.

Yet what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder, on "the edge of chaos", in the phrase of the computer scientist Christopher Langton.

Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting.

But there comes a moment when complex systems "go critical". A very small trigger can set off a phase transition from a benign equilibrium to a crisis.

Complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes, what scientists call the amplifier effect.

Empires exhibit many of the characteristics of other complex adaptive systems, including the tendency to move from stability to instability quite suddenly. But this fact is rarely recognised because of our addiction to cyclical theories of history. The Bourbon monarchy in France passed from triumph to terror with astonishing rapidity. The sun set on the British Empire almost as suddenly. The Suez crisis in 1956 proved that Britain could not act in defiance of the US in the Middle East, setting the seal on the end of empire.

What are the implications for the US today? The most obvious point is that imperial falls are associated with fiscal crises: sharp imbalances between revenues and expenditures, and the mounting cost of servicing a mountain of public debt.

Think of Spain in the 17th century: already by 1543 nearly two-thirds of ordinary revenue was going on interest on the juros, the loans by which the Habsburg monarchy financed itself.

Or think of France in the 18th century: between 1751 and 1788, the eve of Revolution, interest and amortisation payments rose from just over a quarter of tax revenue to 62 per cent.

Finally, consider Britain in the 20th century. Its real problems came after 1945, when a substantial proportion of its now immense debt burden was in foreign hands. Of the pound stg. 21 billion national debt at the end of the war, about pound stg. 3.4bn was owed to foreign creditors, equivalent to about a third of gross domestic product.

Alarm bells should therefore be ringing very loudly indeed in Washington, as the US contemplates a deficit for 2010 of more than $US1.47 trillion ($1.64 trillion), about 10 per cent of GDP, for the second year running. Since 2001, in the space of just 10 years, the federal debt in public hands has doubled as a share of GDP from 32 per cent to a projected 66 per cent next year. According to the Congressional Budget Office's latest projections, the debt could rise above 90 per cent of GDP by 2020 and reach 146 per cent by 2030 and 344 per cent by 2050.

These sums may sound fantastic. But what is even more terrifying is to consider what ongoing deficit finance could mean for the burden of interest payments as a share of federal revenues.

The CBO projects net interest payments rising from 9 per cent of revenue to 20 per cent in 2020, 36 per cent in 2030, 58 per cent in 2040 and 85 per cent in 2050. As Larry Kotlikoff recently pointed out in the Financial Times, by any meaningful measure, the fiscal position of the US is at present worse than that of Greece.

For now, the world still expects the US to muddle through, eventually confronting its problems when, as Churchill famously said, all the alternatives have been exhausted. With the sovereign debt crisis in Europe combining with growing fears of a deflationary double-dip recession, bond yields are at historic lows.

There is a zero-sum game at the heart of the budgetary process: even if rates stay low, recurrent deficits and debt accumulation mean that interest payments consume a rising proportion of tax revenue. And military expenditure is the item most likely to be squeezed to compensate because, unlike mandatory entitlements (social security, Medicaid and Medicare), defence spending is discretionary.

It is, in other words, a pre-programmed reality of US fiscal policy today that the resources available to the Department of Defense will be reduced in the years to come. Indeed, by my reckoning, it is quite likely that the US could be spending more on interest payments than on defence within the next decade.

And remember: half the federal debt in public hands is in the hands of foreign creditors. Of that, a fifth (22 per cent) is held by the monetary authorities of the People's Republic of China, down from 27 per cent in July last year. It may not have escaped your notice that China now has the second-largest economy in the world and is almost certain to be the US's principal strategic rival in the 21st century, particularly in the Asia-Pacific. Quietly, discreetly, the Chinese are reducing their exposure to US Treasuries. Perhaps they have noticed what the rest of the world's investors pretend not to see: that the US is on a completely unsustainable fiscal course, with no apparent political means of self-correcting. That has profound implications not only for the US but also for all countries that have come to rely on it, directly or indirectly, for their security.

Australia's post-war foreign policy has been, in essence, to be a committed ally of the US.

But what if the sudden waning of American power that I fear brings to an abrupt end the era of US hegemony in the Asia-Pacific region? Are we ready for such a dramatic change in the global balance of power?

Judging by what I have heard here since I arrived last Friday, the answer is no. Australians are simply not thinking about such things.

A favourite phrase of this great country is "No dramas". But dramas lie ahead as the nasty fiscal arithmetic of imperial decline drives yet another great power over the edge of chaos.

Leviticus 26 (New International Version)

Reward for Obedience

1 “ ‘Do not make idols or set up an image or a sacred stone for yourselves, and do not place a carved stone in your land to bow down before it. I am the LORD your God.

2 “ ‘Observe my Sabbaths and have reverence for my sanctuary. I am the LORD.

3 “ ‘If you follow my decrees and are careful to obey my commands, 4 I will send you rain in its season, and the ground will yield its crops and the trees of the field their fruit. 5 Your threshing will continue until grape harvest and the grape harvest will continue until planting, and you will eat all the food you want and live in safety in your land.

6 “ ‘I will grant peace in the land, and you will lie down and no one will make you afraid. I will remove savage beasts from the land, and the sword will not pass through your country. 7 You will pursue your enemies, and they will fall by the sword before you. 8 Five of you will chase a hundred, and a hundred of you will chase ten thousand, and your enemies will fall by the sword before you.

9 “ ‘I will look on you with favor and make you fruitful and increase your numbers, and I will keep my covenant with you. 10 You will still be eating last year’s harvest when you will have to move it out to make room for the new. 11 I will put my dwelling place [a] among you, and I will not abhor you. 12 I will walk among you and be your God, and you will be my people. 13 I am the LORD your God, who brought you out of Egypt so that you would no longer be slaves to the Egyptians; I broke the bars of your yoke and enabled you to walk with heads held high.

Punishment for Disobedience

14 “ ‘But if you will not listen to me and carry out all these commands, 15 and if you reject my decrees and abhor my laws and fail to carry out all my commands and so violate my covenant, 16 then I will do this to you: I will bring upon you sudden terror, wasting diseases and fever that will destroy your sight and drain away your life. You will plant seed in vain, because your enemies will eat it. 17 I will set my face against you so that you will be defeated by your enemies; those who hate you will rule over you, and you will flee even when no one is pursuing you.

18 “ ‘If after all this you will not listen to me, I will punish you for your sins seven times over. 19 I will break down your stubborn pride and make the sky above you like iron and the ground beneath you like bronze. 20 Your strength will be spent in vain, because your soil will not yield its crops, nor will the trees of the land yield their fruit.

21 “ ‘If you remain hostile toward me and refuse to listen to me, I will multiply your afflictions seven times over, as your sins deserve. 22 I will send wild animals against you, and they will rob you of your children, destroy your cattle and make you so few in number that your roads will be deserted.

23 “ ‘If in spite of these things you do not accept my correction but continue to be hostile toward me, 24 I myself will be hostile toward you and will afflict you for your sins seven times over. 25 And I will bring the sword upon you to avenge the breaking of the covenant. When you withdraw into your cities, I will send a plague among you, and you will be given into enemy hands. 26 When I cut off your supply of bread, ten women will be able to bake your bread in one oven, and they will dole out the bread by weight. You will eat, but you will not be satisfied.

27 “ ‘If in spite of this you still do not listen to me but continue to be hostile toward me, 28 then in my anger I will be hostile toward you, and I myself will punish you for your sins seven times over. 29 You will eat the flesh of your sons and the flesh of your daughters. 30 I will destroy your high places, cut down your incense altars and pile your dead bodies on the lifeless forms of your idols, and I will abhor you. 31 I will turn your cities into ruins and lay waste your sanctuaries, and I will take no delight in the pleasing aroma of your offerings. 32 I will lay waste the land, so that your enemies who live there will be appalled. 33 I will scatter you among the nations and will draw out my sword and pursue you. Your land will be laid waste, and your cities will lie in ruins. 34 Then the land will enjoy its sabbath years all the time that it lies desolate and you are in the country of your enemies; then the land will rest and enjoy its sabbaths. 35 All the time that it lies desolate, the land will have the rest it did not have during the sabbaths you lived in it.

36 “ ‘As for those of you who are left, I will make their hearts so fearful in the lands of their enemies that the sound of a windblown leaf will put them to flight. They will run as though fleeing from the sword, and they will fall, even though no one is pursuing them. 37 They will stumble over one another as though fleeing from the sword, even though no one is pursuing them. So you will not be able to stand before your enemies. 38 You will perish among the nations; the land of your enemies will devour you. 39 Those of you who are left will waste away in the lands of their enemies because of their sins; also because of their fathers’ sins they will waste away.

40 “ ‘But if they will confess their sins and the sins of their fathers—their treachery against me and their hostility toward me, 41 which made me hostile toward them so that I sent them into the land of their enemies—then when their uncircumcised hearts are humbled and they pay for their sin, 42 I will remember my covenant with Jacob and my covenant with Isaac and my covenant with Abraham, and I will remember the land. 43 For the land will be deserted by them and will enjoy its sabbaths while it lies desolate without them. They will pay for their sins because they rejected my laws and abhorred my decrees. 44 Yet in spite of this, when they are in the land of their enemies, I will not reject them or abhor them so as to destroy them completely, breaking my covenant with them. I am the LORD their God. 45 But for their sake I will remember the covenant with their ancestors whom I brought out of Egypt in the sight of the nations to be their God. I am the LORD.’ “

46 These are the decrees, the laws and the regulations that the LORD established on Mount Sinai between himself and the Israelites through Moses.

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