America’s Achilles heel?
Before my September lecture on the relationship (if any) between external debt and external power, I read a lot of Niall Ferguson. I even used the financial troubles of Egypt’s khedive - troubles Dr. Ferguson highlights in today’s FT — to introduce my lecture.
It is a great story.
The Suez canal was originally a joint venture between Egypt’s ruling khedive (presumably for his own account) and a French consortium. When the khedive couldn’t pay his (personal) debts to private British bankers, he was forced to sell his stake in the canal to the British government to raise a bit of cash. And that was only the beginning: the1875 sale of the Khedive’s 44% stake in the canal was followed by difficulties paying the government’s debt, by 1878 Egypt couldn’t pay its government debt - leading Britain effectively take control of Egypt’s Treasury and by 1882, Britain ran Egypt.. Ferguson:
“what began with asset sales continued with the creation of a foreign commission to manage the public debt, the installation of an “international” government and finally, in 1882, to British military intervention and the country’s transformation into a de facto colony. “
In the Cash Nexus, Ferguson notes that the British management of Egypt’s Treasury “ensured an exceptionally high real rate of return on Egyptian bonds.” The US had better hope its creditors don’t get any ideas …
I wish I knew a bit more how the British government managed its stake in the canal. — as it sounds like Britain ran something of a sovereign wealth fund at the peak of its empire.
Broadly speaking, there are two views on the relationship between debt and power.
Egypt’s troubles in the 1870s - and for that matter, Latin America’s experience in the 1980s - suggests that external debt leaves a country dependent on its creditors, and ultimately increases the power of the creditor, not the debtor. And it currently isn’t hard to see signs of the growing power of at least one group of creditors.
But Ferguson’s work also suggests that the ability to borrow large sums at a low cost can be a key attribute of national power. Britain rose to global prominence in part because its government was able to borrow at a lower interest rate than other powers, and thus could more easily sustain a (large) debt stock. This helped Britain spread the cost of war over time — a huge advantage in the early part of the nineteenth century.
The United States’ capacity to place large sums of external debt with other governments in dollars and at low rates consequently can be considered a sign of the United States’ enduring strength.
Ferguson argues Britain’s ability to borrow at low cost — and the resulting edge it gained over other European powers — stemmed from the strength of its domestic institutions: the Bank of England, a well-established domestic bond market, a representative parliament that legitimized taxation and a skilled bureaucracy able to collect taxes efficiently.
There are - at least in my view - two differences between the US now and the Britain in the nineteenth century.
1. Britain’s debt was always mostly domestic. And at the peak of its power, it was a large external creditor.
2. The key institutions that allowed the Britain to raise funds at low cost were British. The key institutions that allowed the US to raise funds at low cost by contrast is the People’s Bank of China, which intermediates between Chinese demand for renminbi-denominated assets and the United States need for dollar financing. Increasingly, the PBoC is being joined by China’s ministry of finance - which is funding the CIC - and, with oil at $100 a barrel, the big oil funds.
That, it seems to me, leaves the US in position of vulnerability. The US relies on the continued willingness of other governments to add to their dollar assets for low cost financing. The UK relied on private investors’ faith in the Bank of England.
In the past, Dr. Ferguson has written favorably about Sino-American financial interdependence (Chimerica). But he now seems rather more worried about the consequences of the United States growing external debt.
“We are indeed living through a global shift in the balance of power very similar to that which occurred in the 1870s. This is the story of how an over-extended empire sought to cope with an external debt crisis by selling off revenue streams to foreign investors. The empire that suffered these setbacks in the 1870s was the Ottoman empire. Today it is the US. ….
The US debt crisis has taken a different form, to be sure. External liabilities have been run up by a combination of government and household dis-saving. It is not the public sector that is defaulting but subprime mortgage borrowers.
As in the 1870s, though, the upshot of this debt crisis is the sale of assets and revenue streams to foreign creditors. This time, however, creditors are buying bank shares not canal shares. And the resulting shift of power is from west to east.
… Most commentators have been inclined to welcome this global bail-out : better to bring in foreign capital than to shrink balance sheets by reducing lending. Yet we need to recognise that these “capital injections” represent a transfer of the revenues from the US financial services industry into the hands of foreign governments. This is happening at a time when the gap between eastern and western incomes is narrowing at an unprecedented pace.
In other words, as in the 1870s the balance of financial power is shifting. Then, the move was from the ancient oriental empires (not only the Ottoman but also the Persian and Chinese) to western Europe. Today the shift is from the US - and other western financial centres - to the autocracies of the Middle East and east Asia.
In Disraeli’s day, the debt crisis turned out to have political as well as financial implications, presaging a reduction not just in income but also in sovereignty. …. It remains to be seen how quickly today’s financial shift will be followed by a comparable geopolitical shift in favour of the new export and energy empires of the east. Suffice to say that the historical analogy does not bode well for America’s quasi-imperial network of bases and allies across the Middle East and Asia.
Debtor empires sooner or later have to do more than just sell shares to satisfy their creditors.
The Suez canal’s role in global financial history didn’t end when the Khedive sold to the British government. In 1956, Egyptian President Nasser nationalized the canal, prompting Britain, France and Israel to intervene. The UN General Assembly - pushed by the US - passed a resolution encouraging the British, French and Israel to withdraw.
The UK at the time was intervening heavily to keep the pound pegged at 2.80 dollars to the pound. Its reserves though were limited, and it needed an IMF loan. The US, though, was unwilling to support an IMF loan to a country ignoring the UN. Eisenhower’s Treasury secretary told the UK Treasury that:
United States would support the United Kingdom when the latter was "conforming to rather than defying the United Nations.
By the end of the year, Britain was faced with the prospect of disclosing that its reserves had fallen below $2 billion, something that it didn’t want to do — at least not without being able to announce that it had arranged access to additional financing. Britain signaled its willingness to pull back from the Suez. Then the IMF, prodded by the US, indicated its willingness to provide a larger than expected loan …
For more, see IMF historian James Boughton — including his paper on the IMF’s role in the Suez crisis.
Brad, Ferguson’s implicit comparisons between the US and the UK (and Ottoman Turkey, imperial China, etc.) seem to involve a lot of slapdash pop history. Yes it’s true that small, weak economies with excess external debt denominated in a foreign currency (or gold), with very weak local governments incapable of effective taxation, and who have just participated in a major globalization that bubble that has collapsed (the global crash of 1873) face the possibility of default and foreign control, but that is hardly a new or interesting point, and it does not say much about the US today to point out that Egypt then, like the US today, is selling assets to foreigners, if for no other reason than the US has sold assets to (and purchased from) foreigners throughout its history with no threat of default.
You are right that England was a creditor nation in its heyday while the US is a debtor nation, but that doesn’t say as much as it may seem to for at least two reasons: First, US external obligations are mostly denominated in dollars and equity, and so the country doesn’t run the risk of balance sheet collapses. Second and more importantly, the US has almost always been a debtor nation (the main exception, ironically enough, being in the 1920s just prior to the Great Depression), and there have been several periods in its history - e.g. the end of the 19th and beginning of the 20th centuries - when it was easily the world’s largest debtor. It is not at all clear to me that this is a bad thing because it means, among other things, that the US has been able to use foreign savings to power domestic investment, and it seems to me that this is one of the inevitable consequences of a well-functioning financial system. A lot hinges, as we have already discussed, on whether US external financing reflects domestic “over-consumption” or foreign “over-savings”.
This rising external indebtedness might be a dangerous thing if US external debts were extremely high and the US had difficulty making debt payments, but this is so far from the case that it is not worth worrying about just yet. As a share of the economy US external indebtedness is not particular high by historical standards and well within the US capacity to repay. And it is not external debt - it is internal debt held by foreigners, which is very different. At any rate, given the huge demographic shifts taking place, with Europe, Japan, China and Russia aging so dramatically over the next few decades, the US should be running trade deficits and those countries should be running surpluses in order to help pay for the adjustment when it happens. This is a little like what happened during WW1 when European creditors had to liquidate their US investments to pay for the cost of the war, switching the US from world’s largest debtor to world’s largest creditor. My guess is that this will happen again over the course of the next three decades.
I enjoy reading Ferguson, but his lessons for the present often seem very far-fetched, and certainly the comparison between the Khedive of Egypt selling the Suez to the British and the US Treasury selling bonds to the PBoC is stretching things a little. Still, we Americans love to scare ourselves and Ferguson has found a great little business. I wish I had thought of it.
There is a big difference between buying solid assets with positive cash flows and financial institutions which are bankrupt given honest accounting.
Another difference is military and technological superiority. I would argue Roman decline is a better model than Ottoman collapse.
Michael — I doubt Ferguson’s little business pays as well as investment banking.
I was — funnily enough — commenting over at your blog.
Tis true that the US was a large debtor in the nineteenth century — though largely to private creditors. But from say 1920 to 1970, the US was actually a large creditor, with significant (by the standards of the time) current account surpluses. And I am not sure that there a clear historical correlation between financial sophistication and large debts — the UK was presumably the most financially sophisticated country of them all in the nineteenth century, and it was a major global creditor with a large current account surplus. I am not sure the difference in financial sophistication between the US and say switzerland is large enough to account for the difference in their current account balances.
Aging — you might say. But I am not sure this works. It isn’t obvious to me that China should be preparing for its aging population — given its low level of development — by building up external assets for example. It isn’t Japan, at least not yet. China is aging more rapidly than the US, tis true — but its urban labor force is still growing, so on that basis, urban china is still “young” due to ongoing rural migration. And on a global basis, the US isn’t that young — not compared to much of the emerging world that is also financing the US (Brazil, mexico, vietnam, the gulf, india, etc).
I agree that the US isn’t building up a balance sheet mismatch — which is an important distinction. And so far the interest rate on us external debt is very low. So the classic EM style risks aren’t present.
But those risks aren’t present in large part b/c the United States creditors have been willing to take large losses — or least accept lower returns than they could have gotten elsewhere — on their lending. And it seems to me that this in turn creates a very different set of vulnerabilities. The most obvious — tho perhaps the least probable — is the risk that those now taking big losses (and the $’s fall v a set of emerging currencies in 2007 means many cental bansk will start reporting losses, at least on paper) may decide that they have better things to do with their money.
Ergo, the sustainability of the US deficit hinges on low cost dollar financing — and that in turn makes the US vulnerable to any political change in its creditors …
The stupidity of trying to maintain an “empire” of military bases and backing them up with “wars” costing billions (a trillion?) of dollars will certainly backfire on the US sooner or later. The US has no need whatsoever for these bases or for the “empire” they represent. They do nothing for the US public and its well-being at all. And far from maintaining international “stability” they do the opposite. Presently most of the US imperial activity is directed against those parts of the Muslim world that want the US out of their territories and of course Israel is the root cause of that. US imperialism may serve Israel’s interests in the short run; but it doesn’t serve American’s interests as Mearsheimer and Walt have argued.
The huge foreign capital inflows into US in late 19 and early 20th centuries were financing productive capital accumulation (railroads,canals etc) and enabling to exploit agricultural and mineral resources.The multiplier and linkage effects were very positive for domestic production.
I do not that is the case with recent inflows.
Kaan — your point is an important one. Britain’s ability to exercise influence in Egypt hinged in no small part of its military superiority. There is a reasonable argument that Egypt’s debts were just a pretext for British intervention, which was motivated much more by a broader imperial dynamic (communication with India notably). Ferguson though argues that Britain’s position as a creditor was part of what motivated Britain to take on the burden of running a liberal empire, so the two points are, in his view, intertwined to some degree.
That said, one of the unique characteristics of the current era is that the us is simultaneously the world’s leading military power and the world biggest debtor — and rather ironically, the US is deeply in debt to the governments of some countries the US military considers potential threats (rightly or wrongly). If there is a good historical parallel for this, I would love to hear of it.
And I think Ferguson is right to hint that as China becomes more reliant on imported energy, it is becoming a bit less convinced that it really wants to depend on the US navy to assure the free flow of oil from the gulf to China. China’s own conception of its security requirements seems to be changing a bit –
I don’t want that to come across as alarmist though — I think any country in China’s position would look at the world and argue that its energy companies got a late start, have few external reserves and thus need a bit of a boost (especially given how many assets china has) to level the playing field.
What does worry me though is the extent to which the uS has come to depend on a financial subsidy from the rest of the world.
Brad,
With respect to aging problem in China you made a very good point. I am afraid rural elderly will be left to their own devices. A very different dynamic in western world will force politicians to extract from young who do not vote as much and bribe the elderly who will be biggest voting bloc.
Re: Pettis’ comments, it would be interesting to see a graph sometime of the history of US indebtedness cycles, demonstrating its historic ability to ‘grow’ itself out of external debt servicing burdens. Then it just requires a scenario to postulate how this might happen again.
The risk is more that foreign exporters stop accepting payment in dollars, rather than foreign investors stop investing dollars. The latter can’t really happen if the former doesn’t.
10 per cent corporate ownership limits are a form of equal opportunity asset protectionism - domestic and foreign.
“That said, one of the unique characteristics of the current era is that the us is simultaneously the world’s leading military power and the world biggest debtor — and rather ironically, the US is deeply in debt to the governments of some countries the US military considers potential threats (rightly or wrongly). If there is a good historical parallel for this, I would love to hear of it.”–Brad
I suspect one would find, if one researched it, that the Spanish Crown under Philip II (heavily indebted due to his incessant wars) borrowed money from Dutch and Protestant bankers while at the same time being at war with the Netherlands, etc. (Just a hunch; would have to research it more).
“The most obvious — tho perhaps the least probable — is the risk that those now taking big losses (and the $’s fall v a set of emerging currencies in 2007 means many cental bansk will start reporting losses, at least on paper) may decide that they have better things to do with their money.”
If I can be the Devil’s Advocate… It would be a bad instinct to infer, from the fact that one has taken large losses in the past, that one must cut the position that has caused those losses. It’s the future, not the past that matters. If China were to look around, then about the only large country with a currency that was pretty much certain to appreciate greatly against the dollar would be … Japan. But I’m sure the Japanese have told the Chinese that they would not be too thrilled if the Chinese were to start buying the yen.
Basically the Chinese are stuck, and the only thing they can do is buy the Euro (and the Europeans will do their best to make sure that the Chinese lose money on this bet) or U.S. assets. I say, sell them the IBs, and then let the IBs default.
http://www.amazon.com/exec/obidos/tg/detail/-/0945001533/ref=ase_explorbushhit-20/104-4378820-5342341?v=glance&s=books
“…China is cracking open the door for foreign investment banks seeking entry into China’s booming stock market… individual foreign investors are allowed to own as much as 20% of a domestic commercial bank. Total foreign investment in a single domestic bank is capped at 25%… The new rules give future entrants into the onshore market less access than what the two major foreign players that currently manage securities joint-ventures in China - Goldman Sachs Group Inc. and UBS AG…” http://www.financialnews-us.com/index.cfm?page=ushome&contentid=2349477231
This rising external indebtedness might be a dangerous thing if US external debts were extremely high and the US had difficulty making debt payments, but this is so far from the case that it is not worth worrying about just yet.
There’s a lot in this debate that I don’t understand as well as I probably should. That said, I think the comment above begs the following questions:
At what point is the size of the US external debt worth worrying about? And once one begins to worry, is it not too late to do anything about it?
“bail-out”?
“I don’t want that to come across as alarmist…” ?
“…because it means, among other things, that the US has been able to use foreign savings to power domestic investment, and it seems to me that this is one of the inevitable consequences of a well-functioning financial system…”
“…And it is not external debt - it is internal debt held by foreigners, which is very different…”
“…A lot hinges, as we have already discussed, on whether US external financing reflects domestic “over-consumption” or foreign “over-savings”…”
Written by Michael Pettis on 2008-01-03 00:26:57
___________
I don’t see much domestic investment of borrowed money - at least not in durable assets. Not infrastructure, research, emerging technologies, or any other hard or bankable asset. I see a net outflow of investment to emerging economies and energy/resource-rich countries (and that’s not good for anyone except the guys skimming fees off of the deals - the mortgage broker equivalent of international finance). I’m not saying it doesn’t exist, I simply don’t see it.
As for the second point, I also don’t see the glaring distinction between the two types of debt you mention. Can you explain when and why a debt is not a debt?
As for having the ability to distinguish between domestic over-consumption and foreign over-savings, I think it’s pretty clear, using a modicum of conservative analysis and intellectual honesty, which of the two has taken place over the past 30 years, or so.
On the other hand, I could be completely wrong, and the tremendous funk I’m smelling might be something stuck to my shoe - not the necrosis of our financial system.
“…And it is not external debt - it is internal debt held by foreigners, which is very different…”
What on earth does this mean?
The rest of the World including the Chinese, despite their dislike of US foreign policy, isn’t inclined to “blow-up” the entire global economy. The third wave of globalization, which doesn’t involve the United States, will be characterized by rising global cooperation between developing nation states of the world. Dashing the hopes of both Neo-liberals and Neo-conservatives, there will never be a single nation state that will dominate the entire world economically or militarily. The entire planet is much better off with a multi-polar world order.
P.S. In clear violation of the US Constitution, Bill Clinton should have been impeached for his illegal war on Yugoslavia. Under Clinton-Rubin Administration’s direct orders, the European capital Belgrade was carpet bombed resulting in thousands of civilian deaths. The US Constitution is explicit, only the US Congress has the legal authority to declare war on another nation state. Among other criminal acts, Bill Clinton clearly violated the US Constitution. At least Bush obtained Constitutional authority to invade Iraq.
“As for the second point, I also don’t see the glaring distinction between the two types of debt you mention. Can you explain when and why a debt is not a debt? ”
A debt is not a debt when a country can print as much paper as it wants to pay its debts and everyone around the world will still accept that paper.
“…The total for the communist democide before and after Mao took over the mainland is thus 3,446,000 + 35,226,000 + 38,000,000 = 76,692,000, or to round off, 77,000,000 murdered. This is now in line with the 65 million toll estimated for China in the Black Book of Communism, and Chang and Halliday’s estimate of “well over 70 million.” This exceeds the 61,911,000 murdered by the Soviet Union 1917-1987, with Hitler far behind at 20,946,000 wiped out 1933-1945. For perspective on Mao’s most bloody rule, all wars 1900-1987 cost in combat dead 34,021,000 - including WWI and II, Vietnam, Korea, and the Mexican and Russian Revolutions. Mao alone murdered over twice as many as were killed in combat in all these wars…” http://www.marginalrevolution.com/marginalrevolution/2005/11/democide.html
Michael Pettis - a “well-functioning financial system” does not channel foreign borrowing mostly into residential investments quickly declining in value and consumer spending, neither of which is conducive to paying off this borrowing. Nor is the “well-functioning financial system” proof of market forces at play but rather of large-scale intervention by LDC governments sending capital uphill. Moreover, why are banks in this “well-functioning financial system” resorting to SWFs to bail them out as their subprime losses mount? Shouldn’t such a system have prevented the accumulation of these assets of doubtful value in the first place?
As Marcus Aurelius points out above, perhaps a “well-functioning financial system” should be conducive to productive activity instead of sinking the citizenry deeper into a pit of debt. Last I checked, foreclosures and bankruptcies were both rising as the subprime mess rolls on. What will America do? Sell its creditors McMansions and SUVs? I doubt whether they’d go for those.
anonymous guest — the Mao point was off topic; it has nothing to do with any point raised in my post nor was any effort made to link it to any point above.
re: “”…And it is not external debt - it is internal debt held by foreigners, which is very different…”
I cannot speak for Mr. Pettis, but he is an old emerging market hand, so i suspect he is using external debt in the sense that it was used for most emerging economies, namely debt denominated in a foreign currency and governed by foreign law (i.e. Brady bonds, Latin Eurobonds, etc).
there are three ways of defining “foreign” debt –
a) The currency used to denominate the debt. If it isn’t your own currency, tis foreign.
b) The governing law of the debt contract. If it isn’t yours, it is foreign.
c) The residency of the creditor — if it isn’t a domestic resident, it is foreign debt.
c) is the balance of payments definition.
It used to be that a, b and c were highly correlated — countries issues debt abroad, in a foreign currency, using British or US or German law, in order to attract foreign creditors. Now both EMs and the big net borrowers like the US and Australia generally can attract foreigners to hold their domestic currency/ domestic law debt.
the fact that the US hasn’t assumed the risk of dollar depreciation (and its creditors has) is very important; it largely explains why the US net debt position hasn’t deteriorated even as the dollar slid.
OF course, this can be sustained only so long as the United States creditors are willing to take on the dollar risk.
“…The total for the communist democide before and after Mao took over the mainland is thus 3,446,000 + 35,226,000 + 38,000,000 = 76,692,000, or to round off, 77,000,000 murdered. This is now in line with the 65 million toll estimated for China in the Black Book of Communism, and Chang and Halliday’s estimate of “well over 70 million.” This exceeds the 61,911,000 murdered by the Soviet Union 1917-1987,
Written by Dave Chiang on 2008-01-03 08:33:38
The Clinton-Rubin Administration? WTF? What about Grenada? Remember the Maine!
Go ahead and point out Clinton’s “criminal acts” while you hold the door for the current crop of con men who are looting our treasury.
Your entire post is OT, but such BS shouldn’t pass without a rational rebuttal.
P.S: Have your blood sugar levels checked.
bsetser - thanks for foreign debt clarification
Missing from these discussions (for now) is the inclusion of the frightened and angry American zeitgeist and the enormously disproportionate American military power.
The American empire will not go down quietly, not without a “man on a white horse” and the killing of not millions, but hundreds of millions.
This mess will end in war, world war on a breathtaking scale.
“I suspect one would find, if one researched it, that the Spanish Crown under Philip II (heavily indebted due to his incessant wars) borrowed money from Dutch and Protestant bankers while at the same time being at war with the Netherlands, etc. (Just a hunch; would have to research it more). ” -Written by Guest on 2008-01-03 04:09:21
When Philip borrowed money to pay for his wars, he incurred personal debt. In other words, Philip, not the government of Spain, was obligated to pay his creditors from his own pocket. Spanish kings often declared bankruptcy when they ran out of money. Philip was able to keep borrowing but mainly from his subjects and allies, or with the unkept promise of high returns. Dutch debt was backed by Dutch government, which being more stable and wealthy than one man, was very reliable. When the Dutch finally won independence from Spain, some of its citizens were disappointed because it meant no more war bonds, which had proven safe and paid a good interest rate.
This says nothing about the English and does not prove the Dutch did not lend to Spain, but if they did, their investment was poorer for being traitorous. That’s not smart.
Amusingly and on a previous topic:
UAE central bank Governor al-Suwaidi said in an interview in Abu Dhabi today:
“We have come to the conclusion that the inflation problem does not lie with the peg against the U.S. dollar.”
http://www.bloomberg.com/apps/news?pid=20601087&sid=aH.6EC4ae1h8&refer=home
…a “well-functioning financial system” should be conducive to productive activity instead of sinking the citizenry deeper into a pit of debt.
Emmanuel, you are so old-school! We in the U.S. need not get our hands dirty with something as low-class as ‘production’ anymore. The buying and selling of assets — whether they exist in the degraded real world or not — is all that is required for prosperity in this most economically advanced of nations. Let the rest of the world, populated with inferior beings, do the mundane work of developing, creating, and maintaining actual things (bleech!).
Finally, you should also repeat the following truism: debt is wealth, debt is wealth, …
http://www.counterpunch.org/secor12152007.html
With the (inevitable and oft-predicted) meltdown of neo-conservative economics and the US’s irresponsibility and me-first attitude, the worth of the dollar is falling and predictions are for another Great Depression, this time truly involving the whole world. As China holds billions of US dollars in reserve and has threatened to sell them off–who wants to buy?–China is going to be affected in no uncertain terms. It seems that the US is on a mission of self-destruction and is intending to take the world down with it, like a maniacal Samson after his hair’s grown back or a Poe character who will be damned if he’ll be the only one to suffer because of his peccadillo; for the US Congress is bent on imposing tariffs and sanctions on China for its, the US’s, debt indemnity, as if it’s China’s fault that the US’s buy-buy-buy consumerism, with its corporate-created needs and wants, has put the country in debt.
Ferguson ’s analogy to the Ottoman empire is not a good one. The transfer of power from the Mediterranean to Northern Europe had in fact occurred centuries earlier (see Fernand Braudel’s “The Mediterranean…in the Age of Pilip II). Ottoman debt in the 19th century was used to maintain appearances of power long gone.
An earlier comment comparing the US to Spain under Philip II is indeed intriguing. Spain was able to become a European empire because of the massive infusion of gold and silver from the Americas. Inflation was another effect of the infusion, causing the Spanish elite to import European goods, which became cheaper. This in turn hollowed out the Spanish economy, leading to its eventual decline. I often think of it as an early example of “Dutch disease.” In the Spanish case, an inflow of currency, not natural resources, led to the collapse of the manufacturing and agricultural sectors.
Many empires seem to follow a similar cycle, beginning with a rise in productive capacity, followed by the rise of the finance sector, accompanied by the decline of the productive sector. My guess is that the US is closer to the tipping point than the endgame illustrated by Ferguson’s Ottoman example.
JohnH — interesting point. though a part of me thinks that the US (on a far more modest scale than the ottomans) is also borrowing to “maintain appearances of power long gone.” Though it would be far more accurate to say that the US is borrowing to maintain the appearance of a level of power that has eroded a bit relative to its peak — as the US even now is a formidable play, just not quite as formidable as in 40s and 50s, or for that matter, in the 90s immediately after the end of the CW and during the peak of US “financial” preeminance.
The shift in financial power incidentally has been far more pronounced than the shift in military power.
how do economists contribute to “productive activity”
I don’t think that comparisons are apt. If you have tweleve aircraft carriers and two thousand nuclear missiles and your creditors don’t, then they’ll refinance your debt. In fact, having twelve aircraft carriers and two thousand nuclear missiles, may be the reason why they are loaning you money in the first place.
Emmanuel: Michael Pettis - a “well-functioning financial system” does not channel foreign borrowing mostly into residential investments quickly declining in value and consumer spending, neither of which is conducive to paying off this borrowing.
I’m not sure that the high amount of US consumer spending is a bad thing. It causes Chinese savings to be reinvested in reasonably productive Chinese factories. I do think that if not for the round trip through the US consumer, Chinese savings would be invested in things that are much less productive than where the money is going now.
Emmanuel: Sell its creditors McMansions and SUVs? I doubt whether they’d go for those.
Actually there is a huge market for luxury real estate and big American cars among the people that are lending the US money, so yes, that might be a way of this……
bsetser: Though it would be far more accurate to say that the US is borrowing to maintain the appearance of a level of power that has eroded a bit relative to its peak.
I don’t think in absolute terms American power has declined. In relative terms, US power has, but that was because in 1945 and again in 1990, the US was so much more powerful over everyone else, that this state of affairs couldn’t be mantained.
Something that might be a sign of the future is London. London started as a world financial center when the British Empire was at its zenith, and still remains so long after the sun set on the British Empire. The curious thing about the London financial industry is that it is dominated by American banks.
Similarly, I wouldn’t be surprised in seventy years if New York City remains the place to do finance, even if the banks doing it are Chinese, Indian or Martian.
Ok, the US has 2,000 Nuclear Warheads and the Chinese have between 400-500, but isn’t 400 Nuclear warheads still enough to destroy the entire North America continent. In the past decade, the Chinese Nuclear force based on two ICBM missile platforms, has been completely modernized with a survivable second strike capability. The vulnerable, liquid fueled Silo based DF-5 missile have been replaced with the mobile, solid fueled DF-31 land missile system. The single Type-092 SSBN submarine has been replaced by a fleet of Type-094 SSBN with the JL-2 missile, each missile with 3 independent multiple re-entry warheads. The US Nuclear force is equally targeted at both Russia and China, whereas the Russian and Chinese Nuclear strike forces are totally targeted on the United States.
“the US hasn’t assumed the risk of dollar depreciation” as the ‘debtor’ maintains its controlling interest in the “foreign” ‘creditors’ where does the financial power lie?
by the way, have you hedged your - minority? - investment in RGE - assuming it is a US asset? what’s your ROI so far as compared with other assets?
bsester: China is aging more rapidly than the US, tis true — but its urban labor force is still growing, so on that basis, urban china is still “young” due to ongoing rural migration.
But that leaves the old folks back in the countryside to be funded from the money that the urban migrants make.
It is rather naive to believe that US is in decline. China needs to make up probably several hundred years of lags when it began to reform in 1980. Now there are 30-50 years of distance to catch up.
and the remittances from china’s sizable diaspora in the u.s. - and ‘wall street’
naive? disingenuous
DC: 400 Nuclear warheads still enough to destroy the entire North America continent.
The PRC has roughly 20 ICBM’s that can hit the United States, and no apparent interest in getting more. One reason the PRC has been pushing down on North Korea, is that without North Korea, the US doesn’t have a reason to develop ABM’s in the Western Pacific and without ABM’s the PRC’s minimal deterence strategy becomes more effective.
Also the PRC does not have and appears to have no interest in accquiring global power projection capabilities (i.e. aircraft carriers). I think part of the understanding that the US and the PRC have worked out is that the PRC will not challenge US global military power, and the US does not challenge PRC’s economic rise or do anything destabilizing over Taiwan. Personally, I don’t think that China really has any near term interest in displacing the US as a global military or political superpower, because it realizes that to do so would be really, really stupid.
One problem with discussing the “fall of empires” is that empires take a lot time to fall. From Philip V to the War of Spanish Succession took two centuries. From the defeat at Vienna to the mid 19th century also took that long. I do suspect that the “fall of the American empire” if it happens is something that is going to take decades. The problem with historical processes taking decades it that then things become complex, and you can’t really point to one thing that causes it if there really is a cause.
The only real quick imperial fall I can think of is that of Britain, and the British Empire fell largely because the British were tired of maintaining it.
The Chinese economy is really two countries wrapped in one. There are the modern metropolis cities on China’s coastline that display the latest in high-technologies (ie. Rockets, semiconductors, nuclear power plants, high speed railways, Fighter jets, etc.). Then there is the other backwards China in interior regions of China that lags decades behind in development and technology. Even former Prime Minister Zhu Rongji was shocked at some of the poor living conditions visiting some mountain villages in Guizhou. The management of two nations in one presents difficulties that Western Economic pundits can’t even imagine, so leave the Chinese alone to solve their own problems without meddling from foreign IMF do-gooders who mostly manage to make a mess everywhere across other developing nations.
There are other problems with the analogy. Egypt was de-facto independent from the Ottoman’s, and part of the reason the Ottoman’s and Egypt were both going into debt was that they were fighting each other.
Written by Twofish on 2008-01-03 12:53:16
Agree. I usually consider the beginning of Ming Dynasty(1400) is the peak of China in history. 1900 probably is the bottom. It took 500 years to go down. I would say 200 years is the minimum time period. That leads to 2100 if nothing goes wrong.
“The PRC has roughly 20 ICBM’s that can hit the United States”.
Those statistics from the 1990’s are outdated. The 20 ICBM referred to were liquid-fueled DF-5 Ballistic missiles in Silos. Those missile have been retired and replaced by the DF-31 mobile ICBM missiles. Furthermore, there are at least two Type-094 SSBN Submarines deployed with the China PLAN today.
Check out
http://www.china-defense.com
DC: The Chinese economy is really two countries wrapped in one.
More like twenty regional economies.
DC: so leave the Chinese alone to solve their own problems without meddling from foreign IMF do-gooders who mostly manage to make a mess everywhere across other developing nations.
I really don’t think that the IMF is quite that powerful.
Also China is in a pretty reasonable economic situation now, but that’s only after about 150 years of trial and error.
I agree with most of the points Michael Pettis raised. I am also intrigued by the new paper from Higgins and Klittgard. It suggests the external financing of US is more sustainable because it’s roughly equivalent to the US share of world output. I think one of the things that paper brought up and often ignored is how much rest of the world has grown and how far globazation has come in finances.
One other point regarding Ferguson: In his “Cash Nexus”, the power that pursued war brought about financial innovation and prosperity. Currently, I don’t see American creditors as hungry for war.
David Chiang. It’s time to move out of your mother’s basement and get a job. No one is paying attention to your posts anymore.
DC: If you add up the number of warheads for all ICBM’s and the SSBN, you get about 60. If you correct for the fact that not all are operational, you get about 20. You don’t get anywhere near 400.
And in any case, the PLA can’t put three divisions of troops in Iraq.
“I really don’t think that the IMF is quite that powerful.”
Not anymore today because the IMF do-gooders destroyed their credibility after destroying the Indonesian economy in Southeast Asia, and Argentina’s economy in Latin America during the late 1990’s with their Neo-liberalism agenda dictated by the Clinton-Rubin Administration.
“If you add up the number of warheads for all ICBM’s and the SSBN, you get about 60. If you correct for the fact that not all are operational, you get about 20. You don’t get anywhere near 400.”
40 DF-31 Missiles, (6000 mile range)
3 MIRVs = 120 Warheads
40 DF-21 Missiles, (2000 miles range)
3 MIRVs = 120 Warheads ( Guam, Hawaii? )
3 Type-094 Submarines, 18 JL-2 Missiles, 3 MIRVs
= 162 Warheads
“And in any case, the PLA can’t put three divisions of troops in Iraq.”
True, but 3 US Aircraft Battlegroups won’t survive for long in the Taiwan Straits versus,
50 Attack Submarines
30 Destroyers
100 J-10A Fighters
300 Su-27/30 Fighters
3000 J-7 Fighters
Thousands of Anti-ship missiles.
Please take time to post here more often, Michael Pettis. That was a great post you put up to initiate the comment section!!!
I think Higgins and Klitgaard found that inflows to the US are roughly comparable to the US share of global financial assets — not output (50% v 20%). If you net out europe (i.e. treat the eurozone as an integrated economic unit not as seperate states), the uS CAD is around 2/3s if not more of the global surplus. but the US share of global financial assets isn’t growing largely b/c US assets have underperformed, and the value of non-US portfolios has increased faster than the value of us portfolios even tho more flows are going to the us. At least that is my read of the data.
I don’t really but the financial globalization part either — sure, there has been an increase in financial globalization, but not as a big a one as is usually claimed and that isn’t what is financing the us. I say this for two reasons:
first, almost all gross outflows from emerging economies are coming from central banks and SWFs, which seems a bit different than financial globalization –
and second, the big increase in overall flows is dominated by the rise in flows between the US and Europe and the UK, along with the growth in intra-European flows. And here i think a lot is tied to the shadow banking system and tax arbitrage — i.e. Citi SIVs in london selling $ paper to us investors to buy US ABS. That looks like a huge increase in financial globalization, but it really isn’t anything more than a way of shifting accounting profits offshore. foreigners aren’t holding any more dollar assets in any real sense. I suspect a lot of the same thing has gone on inside europe. basically, lots of structures were set up in london to issue euro denominated paper and buy euro-denominated financial assets.
Certainly, all this activity hasn’t coincided with large net european financing of the US — the EU-27 runs an external deficit, as does the US.
so I basically see the world in very different terms.
Michael Pettis,
“Second and more importantly, the US has almost always been a debtor nation”
If you don’t mind me asking, where did you ever get such an idea? There is substantial body of literature showing that the US was a net creditor to the world from 1918 until 1985. Indeed, the US was a large net creditor throughout most of that period. The data from 1976 to 2006 can be found at http://www.bea.gov/international/xls/intinv06_t2.xls. A paper on the subject can be found at “U.S. net international investment (”debt”) position: a review of some major issues” (http://www.allbusiness.com/government/379286-1.html).
Aside from the facts, I object to your notion that the US is using foreign debt to finance domestic investment. Last time I checked the US had a (near) zero saving rate and household debt was exploding. That’s not investment as best I can tell. Of course, much of the “investment” has gone into the housing bubble which is now ending quite badly.
As Robert Schiller demonstrated in Irrational Exuberance, what we take as the “given” for long-term real returns to US equity assets is an historic anomaly. One imagines this anomaly coincides with the growth of the US as a super-power and its corresponding increasing share (now shrinking) of an expanding global GDP. Some part, perhaps even the dominant piece, of this anomalous equity growth is certainly productivity increase. But stepping back a ways from recent experience, it is entirely possible that Ferguson is correct. Much the same hypothesis was presented twenty years ago in Paul Kennedy’s The Rise and Fall of the Great Powers. As an investor and a steward of OPM, I think this is really the only big question worth trying to figure out.
Another point worth of a mention is the hatred of American empire especially in the Islamic world. The US is hanging there with bombs and support of corrupt rulers who have no standing with the masses. Everyone seems to ignore the signs of real movements taking birth for a Moslem world free of US imperialism. The US will loose control of vital supplies and major support bloc for its fiat currency and debt laden capitalism.
Every major poll of US in that region has shown negative feelings of over 90%. They are running out of excuses to justify their presence in Moslem world and continue the blood shed.
CCIE — your point is one i take very seriously. the current asset allocation decisions of the key oil exporters are made by those corrupt rulers, and it isn’t at all clear that their populations supports the investment policies of the rulers.
it looks tho that Bin Laden’s call on the Gulf to depeg has made it politically impossible to depeg, so petro$ flows to the US will continue.
and rather ironically, most polls in the us show almost as much dislike for gulf investment in the US as there is dislike for the united states foreign policy in the muslim world.
tis a strange world.
Brad Setser wrote:
“the fact that the US hasn’t assumed the risk of dollar depreciation (and its creditors hasve is very important; it largely explains why the US net debt position hasn’t deteriorated even as the dollar slid.
OF course, this can be sustained only so long as the United States creditors are willing to take on the dollar risk.”
Bingo! And the factors that will influence US creditors to (dis)continue accepting and holding dollars and dollar-denominated debt are the same factors that prompt the members of any society to regard an entity as currency: the perceived intrinsic usefulness and scarcity of the entity.
The “intrinsic usefulness” factor points to what creditors will be able to buy in the US with their dollar holdings.
The “scarcity” factor will become ever more critical due to the peaking in oil and food exports (which come before the respective production peaks because of rising internal consumption in exporting countries; apparently oil exports in 2007 have already been lower than in 2006). Because if the supply of transacted goods does not grow, any growth in the money supply translates directly into price rises, which is exactly what we are seeing right now in oil and food.
In other words, while the amount of internationally transacted goods was growing in real terms, the world needed a growing international money supply (in the international trade currency, i.e. the US dollar) to carry out those transactions, otherwise there would have been deflationary effects. But if the amount of internationally transacted goods stops growing (and starts shrinking), so should the quantity of dollars outside the US. In other words, the US current account should be brought to balance.
The question is who needs who more and it’s clearly the US that has less to offer and more to gain.
A lot of banks would go insolvent if they are subjected to honest accounting. You either let the system collapse or accept the help from outside to keep your system solvent. The rulers of these nations are part of the American empire and its in their best interest to keep it alive.
It’s the government on both sides that is corrupt and exercising socialism in the name of free markets.
“The only real quick imperial fall I can think of is that of Britain, and the British Empire fell largely because the British were tired of maintaining it.”
Kudos Twofish.
Next question. How long will the US be interested in our “empire”? The surging popularity of Ron Paul is evidence of imperial fatigue in the US.
Guest on 2008-01-03 00:54:38 wrote:
“The stupidity of trying to maintain an “empire” of military bases and backing them up with “wars” costing billions (a trillion?) of dollars will certainly backfire on the US sooner or later. The US has no need whatsoever for these bases or for the “empire” they represent. They do nothing for the US public and its well-being at all. And far from maintaining international “stability” they do the opposite.”
Could not agree more. I think the approach of establishing a big “global footprint” of bases reflects a line of thinking in which the best way to ensure that something (oil in this case) flows smoothly is to have the highest possible degree of control over it. (Every corporate worker that has suffered the kind of manager that wants a status report at each step of a job can understand what I mean.) Wrong! If you want to ensure it will flow, leave it alone, laissez faire!
And the reality-based economics view reinforces this case: most oil-exporting countries have population levels far in excess of their carrying capacities, i.e. they are big food importers. It is in their best interest to keep oil flowing.
Dave Chiang,
I am no advocate of a confrontation between the US and China over Tawain. However, you are missing a critical point. In a real war, the US would base its forces on Tawain itself. Unlike American ships, Tawain can’t be sunk.
However, I rather doubt such a disaster will ever occur. Tawain is unlikely to provoke a war and in time some sort of Hong Kong solution will likely emerge.
Regarding the aging population issue, in view of the realistic prospects for food production (basically we are at “Peak Food” now, with a coming decline due mainly to increased diversion of feedstocks into biofuels production), the prospect of zero or transitorily negative population growth are not exactly a liability for a country.
To DC: It’s debatable whether or not China has actually MIRV’s its missiles.
DC: True, but 3 US Aircraft Battlegroups won’t survive for long in the Taiwan Straits …..
That’s why the US did a naval exercise last year to see that it could get nine battle groups in the western Pacific in 30 days.
A lot depends on who draws first blood. If the PLA invaded Taiwan tomorrow, then the US does have the will and ability to fight. If Taiwan is seen as the side that provoked the issue (as is the case with Chen Shui-Bian’s referendum), then the US puts pressure on Taiwan not to make noise. This is good for Beijing since the US can pressure Taiwan in ways that Beijing just can’t.
The net result of this is that Taiwan is the *only* issue over which the PRC and the United States could get into a war over, and neither side really wants to fight over this.
Peter S: However, I rather doubt such a disaster will ever occur. Taiwan is unlikely to provoke a war and in time some sort of Hong Kong solution will likely emerge.
Chen Shui-Bian pushed things much closer to the edge than I would have liked, and I’m relieved that he’s about to leave office. One lesson of history is that you should never underestimate the ability of people to do massively self-destructive things.
A “HK solution” is just not going to work since Taiwan is not going to want to be a local government under the PRC and has no reason to agree to this. However, there are a lot of other options that can be considered, and probably if the KMT gets elected in May.
“It’s debatable whether or not China has actually MIRV’s its missiles”.
Chinese LM Carrier Rockets have released multiple satellites from a single launch which isn’t so different than MIRVs. A Chinese ASAT weapon precisely blasted an aging weather satellite a few months ago which is also no easy task. Moreover, the Chinese have developed miniatured Nuclear weapons so certainly the China PLA has the technological capability for MIRVs. Since there are some images of re-entry warheads posted on the Chinese internet, it is speculated that the JL-2 Missile will carry 3 MIRVs.
“3 US Aircraft Battlegroups won’t survive for long in the Taiwan Straits”
It is impossible to get 9 US Battlegroups to the Taiwan Straits in an emergency simply because half the US Aircraft carriers are based in Norfolk Virginia. The 10th Aircraft Carrier in the US Fleet is only a Vietnam era flight training ship. The Nimitz Nuclear Carriers can’t transit the Panama Canal because the ships are too damn large. In any formal declaration of Taiwan Independence, the China PLA Navy will only have to deal with 3 or 4 US Aircraft Carriers.
real think –
methinks excessive $ reserve growth was led to excessive inflation, contrary to the (evolving) views of the UAE’s central bank governor. $ reserve growth has been well in excess of what has been needed for trade and the like. the world isn’t growing all that much faster than in the 90s, and reserve growth is 6 times as fast (in nominal terms).
re: “A lot of banks would go insolvent if they are subjected to honest accounting. You either let the system collapse or accept the help from outside to keep your system solvent. The rulers of these nations are part of the American empire and its in their best interest to keep it alive. ”
I would rather not rely on nations that are part of the American empire (and I am pretty sure that China isn’t part of the US emprie and am totally sure China doesn’t see itself as part of the US emprie) to bail the US financial sector. The US gov should do it itself, not rely on the generousity of others.
those helping the us now will expect to be repaid later …
DC: Chinese LM Carrier Rockets have released multiple satellites from a single launch which isn’t so different than MIRVs.
The PRC clearly has the technological capacity to field MIRV’s. The question is whether or not they have done so, and there are good strategic reasons not to. If you have MIRV’s this makes your launchers more vulnerable to a first strike.
You have to be careful about reports that overestimate Chinese military strength, most of those seem to be designed to argue for a massive growth in the US military.
DC: It is impossible to get 9 US Battlegroups to the Taiwan Straits in an emergency simply because half the US Aircraft carriers are based in Norfolk Virginia.
Norfolk is the carriers home base for the Atlantic Fleet, but Norfolk based carriers are usually in the Mediterrean or Persian Gulf. Summer Pulse ‘04 showed that the US could put seven CVBG’s in the Western Pacific within 30 days. (And that doesn’t include the F-15 fighters from Okinawa.)
Saying that something is “impossible” because it would cause you to lose is a sure way of actually losing.
Wars are frighteningly unpredictable which is why it is stupid to start one. In the case where the US puts its entire military strength against the PRC over a Taiwan situation, the PRC would likely lose. The logical thing for Beijing to do is to just not get itself into that situation, which involves political and economic tactics.
However the degree to which the United States is willing to fight for Taiwan is a political question, and making it less likely that the US will intervene in Taiwan is one very big reason why I think the PRC is willing to get the US so much in the way of low interest loans.
Overconfidence is one of the quickest ways of losing a war, and one of the reason I’m rather optimistic about the PRC is that its political leaders seem very clear eyed and rational about the limits of Chinese power, and are unwilling to gamble on strategies that would cause it to lose.
Beijing took a very long look at what caused the Soviets to fall and one of the consequences of that was the notion that spending more on weapons can make you much less secure. Trying to match the US as far as military goes is just stupid.
bsetser: I would rather not rely on nations that are part of the American empire (and I am pretty sure that China isn’t part of the US emprie and am totally sure China doesn’t see itself as part of the US emprie) to bail the US financial sector. The US gov should do it itself, not rely on the generousity of others.
China does see itself as an integral part of the global village and the world community, and finance is a global project.
During the 1990’s, there were all sorts of think tank reports and papers saying that the goal of US foreign policy is to make China an integral part of the world political and economic system. This effort has wildly succeeded, and China today is a outward looking, confident, trading nation, strongly linked in with the world economic system.
So what’s the problem????
The word is “globalization” not “Westernization” or “Americanization.” During the 1990’s, there were voices against outward looking policies in China who argued that globalization was just a cover for the US trying to advance its own economic interests. The counterargument was that China had just gone through a generation of xenophobia which left it poor and powerless, and opening itself to the world is a very good thing.
One fact about globalization is that it constrains the actions of nations within it. This was brought up numerous times in the 1990’s, as people argued that globalization would make a nation less able to use naked military force against its neighbors. They were right.
I just can’t help thinking of the saying “be careful what you wish for since you might get it.”
2fish — I don’t think any American vision of globalization included $500b in foreign asset growth by the china’s government. America assumed — incorrectly — that globalization meant americanization, not sinoglobalization. and certainly not state led sinoglobalization. and it isn’t at all clear to me that most chinese citizens really want to lose as much money as they are likely to on their investments in the US (and here i am referring to the currency risk, not the risk of blackstone part 2). the particular form China’s integration into the global economy has taken does strike me as a real problem — for china, for the us and for europe.
Off-topic, but Ottomans involved:
Holocaust denial in the White House
The Turks say the Armenians died in a ‘civil war’, and Bush goes along with their lies
“How are the mighty fallen! President George Bush, the crusader king who would draw the sword against the forces of Darkness and Evil, he who said there was only “them or us”, who would carry on, he claimed, an eternal conflict against “world terror” on our behalf; he turns out, well, to be a wimp. A clutch of Turkish generals and a multimillion-dollar public relations campaign on behalf of Turkish Holocaust deniers have transformed the lion into a lamb. No, not even a lamb - for this animal is, by its nature, a symbol of innocence - but into a household mouse, a little diminutive creature which, seen from afar, can even be confused with a rat. Am I going too far? I think not.”
http://news.independent.co.uk/fisk/article3146418.ece
An excerpt from A Worker Reads History, by B. Bretch
“[...]
In the evening when the Chinese wall was finished
Where did the masons go?
[...]
Phillip of Spain wept as his fleet
was sunk and destroyed. Were there no other tears?
[...]
Each page a victory
At whose expense the victory ball?
Every ten years a great man,
Who paid the piper?
[...]“
I don’t think Philip borrowed PERSONALLY. It was the Crown that borrowed. The person of the king and the Crown were different legal entities. The Crown was the government of Spain; the King succeeded to the Crown. Just as today the private wealth of Elizabeth II is not the same as that of the British Crown. The Italian city states of Venice and Genoa were probably also lending money to the Habsburg monarchy. One would need to real Elliott and other more recent works on the reign of Philip II. Are you acquainted with all the recent research?
i most certainly am not, tho philip’s spain does seem to be the best historical case of a debtor superpower.
It is difficult for many to think outside of an American centered world; guns and bombs are just not enough. How, for example, does China see the ME–or Russia for that matter. Unlike former centuries, everyone and every viewpoint is now in coming into full play. When Rome fell, China and India barely noticed.
history shows that there are no parallels or precedents for the opening salvos of the twenty first century. the united states lost a battle with its own military, and meekly surrendered to ‘the enterprise.’ now it seems that the hawks are lame ducks and all america has done is to shoot herself in the achilles heel.
‘hegemony’ actually means ‘leadership of an alliance.’ what your country has unsuccessfully sought is monopoly. is it too late to return to hegemony ?
.
Perhaps the greatest vulnerability of the US economy comes from the physical side, as explained in the following article, also a must read for anyone interested in making economics aware of the role and limits of physical inputs.
FYI: EROI (aka EROEI): Energy Return On (Energy) Investment
http://www.theoildrum.com/node/3412
CONCLUSION
It seems obvious to us that the U.S. economy is very vulnerable to a decreasing EROI for its principal fuels, whether that comes from an increase in expenditures overseas if and as the price of imported oil increases more rapidly than that of the things that we trade for it, or as domestic oil and gas reserves are exhausted and new reservoirs become increasingly difficult to find, or as we turn to lower EROI alternatives such as biodiesel and or photovoltaics. We do not know exactly what all this means, but our straightforward model suggests that a principal effect will be a decline in disposable income and a greater requirement for getting energy, with all the economic impacts that entails. Since more fuel will be required to run the same amount of economic activity the potential for environmental impacts increasing is very strong. On the other hand protecting the environment, which we support strongly, may mean turning away from some higher EROI fuels to some lower ones. We think all of these issues are very important yet are hardly discussed in our society or even in economic or scientific circles.
Guest on 2008-01-03 22:06:13
still elliot? thought he was considered old school? anyway, (based on very dodgy memory of spanish history)was Spain’s borrowing on par with Elizabethean England? Finances then were even more fly by night ops, but the business of colonialism did make debt sensible (in a very weird way) then, hey, others were risking life and limb, you were just risking lucre. All that italian financing talk seems very reminiscient of Merchant of Venice stereotypes, any more talk and we’re likely going to be discussing anti-semitism and the impact of Jewish controlled finances upon social attitudes and racial stereotypes.
Brad, read that same Ferguson article but is it really relevant? Sure selling off assets represents a form of reduction of sovereignty but in a “free market” economy, should we be spouting semantics associated with older, “less free” times?! But seriously, the Ottoman empire was in decline from Selim the Sloth wasn’t it? The miracle was how long that decline took.In that case, the decline started from politics and power and spread throughout the rest of the empire.Maybe that’s a simplistic view but hey, no historian here.
Judy Yeo –
Spain had a ton of debt. The ottoman analogy isn’t perfect — no analogy is. But the Egyptian analogy — including the United STates use of its financial power in the Suez — did strike as relevant.
older, less free times? Think again. Back in the nineteenth century, a lot of private money was invested in say Egyptian or Ottoman bonds. Today the really big money is in sovereign hands, and the governments of Japan, china, Russia and Brazil (and perhaps the Saudis, but the level of disclosure is low) are likely the United States biggest four creditors. I don’t think history can be read as a steady march toward ever freer markets with less state involvement. The nineteenth century was quite liberal in a lot of ways, in the european sense of the world liberal. And the twenty-first century has been dominated by state actors in the market.
One fact about globalization is that it constrains the actions of nations within it. This was brought up numerous times in the 1990’s, as people argued that globalization would make a nation less able to use naked military force against its neighbors. They were right.
Globalization also cured my canker sores! Perhaps it’s a bit more complicated than this.
I will also mention that the biggest globalization pusher has used a hell of a lot of naked military force against its global neighbors. Wanna guess who?
When you say nations are constrained, you also are saying that the political power of the citizens of the nations is constrained. After all, who are the elected leaders of the neoliberal globalization? As with wealth, political power becomes more unequal, Plutocracy wins, Democracy loses, and some misguided souls celebrate. What a sad joke.
In the book “What went wrong?” from Bernard Lewis, he is writes about the fall of the Ottoman empire.
As Judy Yeo already wrote it is a very long decline of a huge empire.
He is not mentioning much finance issues, despite that even at that time Christian European countries lent money to the Ottomanians for making war on other Christian European countries.
Among other things a lack of innovation (most of the superior technology compared with the west was rather old and/or adopted from conquered countries) and too little knowledge of the European countries (e.g the Ottoman empire had not even an embassy in any European country in the beginning; they realised the threat much too late and did not concentrate on banning it) were factors. When they started to visit Europe, they copied some products and organisation, but never the underlaying system to make innovation on their own.
After a long time, where they simply did not realise, that the former “babarian” states were fast advancing, they were discussing what went wrong, but were not willing to accept, that their culture was innovation unfriendly.
Finally this led to military supremacy of the west.
Even if China becomes as well innovative, the USA will not stop to be and I think it will take at least a generation to become as innovative as the USA for China. From that point I think there is no danger/chance. The ME states are even less dangerous on that. If they sell their last drops of oil too expensive, someone will come and rob them, if the world gets rid of neccessity for oil earlier, they are dead as well.
The question about the knowledge may be more difficult. China’s decision making seems to be rather opaque, but US foreign policy is as well more opaque as I think is typical for democracies. At least there is no arrogance, that China is simlpy not important enough to be a threat, while ME states ARE not important enough to be a threat.
What inhibits the USA in the end to simply default on the bonds sold to China, if China tries to get too much influence on domestic policy issues? When the US stopped Bretton Woods, the $ did not stop to be world reserve currency, despite this effectivly was a form of partial default. I think there is no chance/risk, that the US empire ends any time soon, more likely a long and slow decline of relative power as the Ottoman empire had it, but to a more normal level of power and not into a new “ill man at Missisippi”.
DC:
AS usual you prove your true colors. You remind me of a smart child, filled with facts that fulfill your purpose but unable to see a bigger picture then the limited vision of a narrow agenda will allow.
The only thing that will see war, possibly, between the US and China, would be rurla instability in China needing a rallying cause, ie Taiwanese intransigence and Western imperialism (which you seemed to learn well in the parents chippy). Anyway, the government would only derail their grasp to devleop before the coming demographic collapse, exacerbated by the sinking of peasants savings in worthless dollar debt for development.
It amazes me that everyone is so concerned with the march of cellphones and plasma TV’s. in an ever more populated world, with diminishing arable land, shrinking water resources, and polluting industries, the real issue is the ability to feed your people.
I can not wait for the day of de-consumerism, de-materialism, and decoupling from the bottomless insularity of the “modernising” world.
As to 2fishs point that china is 20 places, it is, I know it, Chinese leadership knows it, and you should know it. Were continueed growth to subside, as I seem to be one of a few who think it will, invevitably the depth of that fallout may very well see some use of the weapons systems you so happily describe. Your second strike survivability, along with your supposition that Russia’s nukes are solely aimed at the US is laughable. Russian prestige is largely aimed at maintaining Czarist conquests. THe only threat to that is CHinese need, and potential, to assume some governance of Russian resources that spread across many time zones, more poignant considering the declining Russian population. Now, Russia, is enjoying the explosion of commodity prices where China competes against itself for resources. They will hope to manage that in the short term to the Russian States coffers benefit. But do not fool yourself into believing that they maintain the goal of allying with China however they desire a multi-polar world.
Son, step off the hate wagon and hop aboard the happy train.
Me, I remain amused and am happy that I put that extra insulation into the McMansion, built the house in terms of passive solar principles, installed hose solar hot water heaters, and built the house with my own two hands while using only cash. I will plant a victory garden along side the dozen Asian Pear trees that grow with little effort or pruning on my several acres as I water my garden with the fresh spring water I get from my clean well.
People we don’t need all these electronic things, and despite the havoc which might be had in “financial markets” suspect that the NA and EU are heading toward fortresses under principles of Roosevelt like programs where I am confident that collective will, will enable success if defined differently then some would have it.
As to energy, issue is not source, issue is transmission and effieciency. And I happen to know for a fact that there are transmission of energy advances that haven’t been advertised, nor likely will they be shared. As to unpopular Arab sheiks, they and their assets will likley buy a mid-western state in the future to house thousands of princes and tens of thousands of their immediate families. The resource is the one around which the world economy is built, not the only one upon which it needs to be built. Yet, is has served its purpose, no?
Brad
Wasn’t looking for the perfect analogy, yes, Philip II’s Spain had a ton of debt, but so did almost every other competitor nation, the biggest difference was how they managed to get things chugging along; “cannabalizing” their colonies and feeding the monster back in the motherland. War itself was very much an industry then, think of it as the ancient equivalent of venture capital, sure, venture capitalists wouldn’t like to think themselves as descendants of barbaric warmongers but hey, most people don’t like the truth.
As for the divide between state and the private individual, you’d be surprised what the history of major colonialist nations throw up, the East India Companies (based again on very dodgy memory of history lectures) both Dutch and British, started very much as state sponsored and protected industries before becoming private enterprise. Rich individuals then (and arguably now) are rarely strangers with big government. The behaviour of individuals in colonies in the West Indies would arguably make liberal governments blanch.
Not to be rude but your idea of liberal 19th century seems pretty much male and white, being female and Asian, I would naturally differ.Isn’t it a great part of 20th and 21st century liberalism that we can agree to disagree?
Something that might be overlooked is that the USA does provide “enforcement services” for the globalizing economy. As the only power that can really project force around the world at short notice, the USA provides valuable back-up for investors around the world. The USA is their “enforcer” in case any lesser country decides to try to resist or opt-out of the prevailing global economic regime.
Therefore it seems that the elites in countries around the world feel that is worth taking some currency losses to subsidize the USA. In effect, the USA has imposed a form of tax to pay for the continued availability of their “global enforcement services.”
Other countries’ elites might complain about the tax, and they might wish they had more policy input and more polite customer service, but they pay up nevertheless. None of them have taken any serious steps to try to provide competing enforcement services.
Meanwhile, the debates within the USA seem to focus more on how best to maintain the “brand integrity” of their enforcement services.
Is there a point at which the tax could get high enough that there could be a serious falling-out among pro-globalization elites?
Judy Yeo - it’s best not to discuss history on american blogs. Mostly due heavy brainwashing going on there for decades. You will find sources like “black book of this and that” quoted as a reliable facts or something even more loaded up with propaganda.
If someone thinks that genocide going on in western colonies was “liberal” and the goverments of communist regiemes all resembled Kambodgia it’s really a waist of time talking.