Sunday, 13 January 2008

A Cushioned Fall?

A group of futurists has been discussing the collapse of the American Empire on the Shaping Tomorrow Network site (see discussion). Let us suppose, just for the sake of argument, that America has an Empire. There are many who deny this, but let us just leave that objection aside for the moment. Let us also suppose that the American Empire (which we have just assumed to be) is in long term decline. Once again, there are those who argue that the current malaise experienced by the US is temporary, and that we should expect a resurgence of America over the next decade or so. By assumption, we have an American Empire in decline. If so, then the interesting question is whether or not that Empire is due to collapse.

It is not necessarily the case that imperial decline and regime collapse are inevitable. History can inform us on this. During the First World War, the locus of the world economy shifted westwards, from Europe to the United States. By 1918, three of the four European Empires had collapsed (the Russian, German, and Austro-Hungarian), along with the Ottoman Empire, which was more Asian than European in its nature. Only one Empire remained in Europe – the British Empire. And yet, the First World War had dealt a fatal blow to the British Empire, as witnessed by the flawed return to the Gold Standard in 1925. It took a further forty years for the British Empire to unwind fully.

In this, we have two models of imperial decline – the hard landing of the Russian, German, and Austro-Hungarian Empires, which involved the collapse of the respective regimes; and the soft landing of the British Empire, which involved a prolonged withdrawal from imperial status. The dangers of a hard landing would include the establishment of extreme governments (Stalin in Russia, Hitler in Germany) and the possibility of the anarchy of Central Europe, which directly paved the way for the atrocities recently seen in the former Yugoslavia. History tells us that a hard landing would be best avoided.

If so, then we might ask how a soft landing could be achieved. In the British experience, during the First World War, the British Government financed the war effort by selling bonds to finance houses located mainly in the US. This weakened Sterling to such a point that the “Return to Gold” at pre-war exchange rates in 1925 was unsustainable. It also created a Sterling pool in the US from which other British assets, publicly quoted on the Stock Exchange, could be bought. In this way, the wealth of the British Empire flowed westwards to create ‘The American Century’.

If we move the clock forward about 100 years to today, what do we find? We find that the US is over-borrowed in both the Public and Household sectors and we find that the creditor nations have moved westwards again, to East Asia. As a consequence of long term decline, the US Dollar is weak and set to weaken further. We are now at a point where small actions will leverage into large impacts as time starts to run against the US. The next US Presidency is likely to be instrumental in setting the scene for the US well into the rest of this century. For a soft landing to occur, there needs to be a greater degree of financial integration of the US and East Asian economies. The recent news that the China Development Bank has bought a $9bn equity stake in Citigroup and that the China Investment Corporation has bought a $5bn stake in Morgan Stanley all point towards a soft landing for the US in the long term.

This, however, is not unequivocal. The blocking of the CNOOC bid to purchase Unocal in 2005 on strategic grounds points in the opposite direction. If other nations, particularly China and the East Asian creditor nations, are not allowed to cushion the decline of the US in financial terms, then we can expect the eventual landing to be harder than it otherwise would have been. In this respect, the current US Presidential Election is rather distressing. Applause can be bought cheaply by the candidates by berating Chinese trade and financial policies, but this would make a hard landing much more likely than a soft landing. The consequences of a hard landing should be enough to sober most people.

To put it bluntly, if the US does have a hard landing in the next five to ten years, which of the current candidates would you cast as Stalin or Hitler?

No comments: