Rise and fall of Great Powers

Rise and fall of Great Powers

CHING CHEONG
SINGAPORE

Tuesday, November 4, 2008

THE current financial meltdown may well signify the beginning of the end of US global leadership which began during World War II.

Historian Paul Kennedy examined what caused great powers to rise or fall in his 1987 book, The Rise And Fall Of The Great Powers: Economic Change And Military Conflict From 1500 To 2000.

His conclusion was simple: "The decline of great powers is caused by simple economic over-extension."

That seems to hold true, regardless of the power's political and economic system. Both the 1991 collapse of the Soviet Union, a totalitarian regime, and the likely decline of the United States, a free- wheeling capitalist regime, testify to the correctness of Professor Kennedy's hypothesis.

Many analysts of the current financial crisis have put the blame squarely on economic over-extension. "The word that could define the financial times Americans are now living through — and the economic pain that has begun — is leverage," noted Time magazine.

"Leveraging" allows the consumer, the corporation and the country to spend beyond their means by borrowing.

Many have concluded that the American way of life is unsustainable and cannot be a model for other nations for the simple reason that no country can forever borrow its way to prosperity. Economist Michael Hodges has calculated that the total debt chalked up by the American government, corporations and consumers was a staggering US$53 trillion ($80 trillion) as of January 1, 2008. The per capita debt worked out to US$175,154.

America's foreign debt is just as high.

Hodges calculated that its total external debt as of January 1, 2008 was US$12.5 trillion. Both domestic and foreign debts grew by leaps and bounds only after 1990.

Official figures show that between 1957 and the 1980s, the growth rates of US debt and national income were about the same.

From the 1990s, debt grew twice as fast as national income, with financial sector debt growing four times as fast. As for America's external debt, it soared from US$6.4 trillion in 2003 to US$12.5 trillion within four years. That's a 100 per cent jump!

What prompted this post-Cold War borrowing spree? It had to do largely with the perception that American capitalism was invincible, especially after the Soviet Union collapsed in 1991. This perceived invincibility affected American behaviour in a number of ways. Firstly, the US government began to act more unilaterally.

While the US conducted its foreign policy during the Cold War period within a multilateral framework, President George W Bush disregarded consensus-building. There was little that other nations could do to change the mind of the world's sole superpower when it decided to invade Iraq. According to Nobel economics laureate Joseph Stiglitz, the war in Iraq has so far cost America US$3.3 trillion.

The Bush administration's own estimate is US$500 billion, far in excess of its initial estimate of US$60 billion.

Professor Stiglitz believes that the Iraq war contributed to the sub-prime mortgage crisis, because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit. Also, the collapse of Soviet-style economic planning led to the rise of market determinism.

As political philosopher John Gray wrote in The Observer newspaper recently: "The irony of the post-Cold War period is that the fall of communism was followed by the rise of another utopian ideology...A type of market fundamentalism became the guiding philosophy."

Regulatory supervision and monitoring by the authorities were eased in favour of a free-wheeling market. With cheap money readily available, consumers and corporations over-borrowed and overstretched themselves, thus precipitating the current crisis.

Appearing before a congressional committee two weeks ago, former Federal Reserve chairman Alan Greenspan admitted that he had discovered a flaw in the "critical functioning structure that defines how the world works". He said: "I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms."

Asked by committee chairman Henry Waxman if he was saying his world view was "not working", Greenspan replied: "Absolutely, precisely."

Two hundred years ago, America's founding fathers had warned of the dangers of piling up debt. "No generation has a right to contract debts greater than can be paid off during the course of its own existence," George Washington wrote in 1789. And Thomas Jefferson said: "I place economy among the first and most important virtues, and debt as the greatest of dangers to be feared."

Alas, these words of wisdom are long forgotten in America.

The Straits Times/ANN