FOR three-quarters of a century, US Government bonds have been as good as gold. Indeed, better, because gold does not pay interest.
The US Government would never default on the interest or principal of its loans, the argument ran.
But if things keep going the way they are you may not be able to say that with any certainty before too long.
The question to pose is: who is going to buy $1400 billion in US bonds to finance the 2009 government deficit? And who is going to stump up an almost equally high amount the following year?
Most of it is borrowed internally. Externally, the Chinese have provided the lion’s share. The Chinese are great savers. The US debt to China will soon top $1000 billion.
The US deficit is now at its highest proportion of GDP (11.2 per cent) since the recovery immediately after World War II. It is alarming stuff when put in an historical context.
I have just finished reading the updated version of Harvard history professor Niall Ferguson’s Ascent of Money. He also has an article in the latest issue of foreign affairs.
In both places he rejects the popular idea of the gradual decline of empires and the cyclical theory of history. Rather, he argues, empires collapse suddenly and unexpectedly. And one of the main reasons for their collapse is unsustainable debt combined with some quite minor trigger which has cascading effects.
Ferguson points to the Soviet empire: In less than five years from the time Mikhail Gorbachev took over a seemingly stable Soviet empire, it was all over. The British Empire: In the 12 years from when Winston Churchill was confidently carving the world up after World War II, it was nearly all gone and the Suez crisis ensured Britain was a second-class power. The Hapsburg, Ottoman, and Romanov empires all collapsed in a few years because of World War I. Similarly with the Bourbon monarchy in France at the end of the 18th century.
What of the American empire? Yes, like all empires it will end. But when and how quickly? The way US public finance is going it might be sooner and quicker than we generally think.
The total public debt was $5800 billion in 2008 and is projected to rise to $14,300 billion in 2019.
(Incidentally, I prefer not to use trillions because the figures become almost meaningless – like distances between stars.) The interest bill will go up from eight per cent of Federal revenue now to 17 per cent on 2019.
Something has got to give. We have already seen how mortgages to poor credit risks were repackaged as sold as solid bonds resulting in a near collapse of the world’s financial system.
But it is not over yet. Big complex empires are susceptible to sudden changes in confidence. As the US debt grows it might have to raise the interest rate on new bonds to attract the money. That will cause greater debt.
The trouble the US faces is not so much the total debt, but the ratio of spending to revenue in the US Budget. Revenues are just two-thirds of spending. That will take a lot of fixing.
The Obama (and Rudd for that matter) fiscal stimulus is all very well in the very short term. But in the medium term creditors will want to see some light at the end of the tunnel – not endless accumulation of debt, or they will not buy bonds without a higher interest rate.
There are several reasons for the public debt. Congress fears voter backlash against higher taxes or cuts in benefits and hand-outs. This fear – an election right now – by far outweighs any concern about passing on to the next generation a pile of debt. It blinds Congress to the possibility that the debt might bite this generation quite soon.
Another debt creator was George W. Bush’s moronic decision to invade Afghanistan and Iraq. Those wars have cost about $900 billion. Even if the wars stopped tomorrow, support for the wounded will cost at least that again. The wars were doubly moronic because Bush refused to raise taxes to pay for them. It has been war on the credit card.
But herein lies the reason we should not be too pessimistic about the collapse of the American empire. We are not talking about the collapse of the United States, but its empire. People at the heart of the former British Empire lead quite happy, prosperous lives. People in what was the Soviet empire are mostly better off.
The collapse of the US empire – its vast bases on foreign soil and its wars, as distinct from its local industry – seems more likely when you look at the Budget. You see there is really only one likely way that the US Government can deal with its debt, given Congressional reluctant to reduce entitlements or raise taxes, and that is to cut military spending.
It is hard to calculate total US military spending because bits get hidden or disguised, but $1000 billion a year is not far off. It is more than a quarter of US Government spending – only a little smaller than the total deficit. It is the only truly discretionary area of spending – you can cut it without offending too many voters.
A US financial crisis could trigger some drastic cuts in US military spending and withdrawal from the unwinnable wars in Afghanistan and Iraq, and that would be no bad thing. It might even end the war on terror if the US is forced to withdraw from its overseas bases and forced to slash its military under-writing of Israel. The war on terror, of course, cannot end in any other way.
The end of the American empire could be by and large a good thing. But only on one condition – that is the end of all empires on earth. Flawed as it is, the American empire is far less scary than the rise of a new Chinese empire. Don’t laugh, its meddling in Africa and other third world countries presages the tendency of all top nations to empire.
CRISPIN HULL
This article first appear in The Canberra Times on 27 March 2010