Sep 08
29
Fiddling While The World Burns
Here is an op ed piece written by John Gray, the author from The Observer over the weekend:
Our gaze might be on the markets melting down, but the upheaval we
are experiencing is more than a financial crisis, however large. Here
is a historic geopolitical shift, in which the balance of power in the
world is being altered irrevocably. The era of American global
leadership, reaching back to the Second World War, is over.
You
can see it in the way America's dominion has slipped away in its own
backyard, with Venezuelan President Hugo Chávez taunting and ridiculing
the superpower with impunity. Yet the setback of America's standing at
the global level is even more striking. With the nationalisation of
crucial parts of the financial system, the American free-market creed
has self-destructed while countries that retained overall control of
markets have been vindicated. In a change as far-reaching in its
implications as the fall of the Soviet Union, an entire model of
government and the economy has collapsed.
Ever since the end of
the Cold War, successive American administrations have lectured other
countries on the necessity of sound finance. Indonesia, Thailand,
Argentina and several African states endured severe cuts in spending
and deep recessions as the price of aid from the International Monetary
Fund, which enforced the American orthodoxy. China in particular was
hectored relentlessly on the weakness of its banking system. But
China's success has been based on its consistent contempt for Western
advice and it is not Chinese banks that are currently going bust. How
symbolic yesterday that Chinese astronauts take a spacewalk while the
US Treasury Secretary is on his knees.
Despite incessantly urging
other countries to adopt its way of doing business, America has always
had one economic policy for itself and another for the rest of the
world. Throughout the years in which the US was punishing countries
that departed from fiscal prudence, it was borrowing on a colossal
scale to finance tax cuts and fund its over-stretched military
commitments. Now, with federal finances critically dependent on
continuing large inflows of foreign capital, it will be the countries
that spurned the American model of capitalism that will shape America's
economic future.
Which version of the bail out of American
financial institutions cobbled up by Treasury Secretary Hank Paulson
and Federal Reserve chairman Ben Bernanke is finally adopted is less
important than what the bail out means for America's position in the
world. The populist rant about greedy banks that is being loudly
ventilated in Congress is a distraction from the true causes of the
crisis. The dire condition of America's financial markets is the result
of American banks operating in a free-for-all environment that these
same American legislators created. It is America's political class
that, by embracing the dangerously simplistic ideology of deregulation,
has responsibility for the present mess.
In present
circumstances, an unprecedented expansion of government is the only
means of averting a market catastrophe. The consequence, however, will
be that America will be even more starkly dependent on the world's new
rising powers. The federal government is racking up even larger
borrowings, which its creditors may rightly fear will never be repaid.
It may well be tempted to inflate these debts away in a surge of
inflation that would leave foreign investors with hefty losses. In
these circumstances, will the governments of countries that buy large
quantities of American bonds, China, the Gulf States and Russia, for
example, be ready to continue supporting the dollar's role as the
world's reserve currency? Or will these countries see this as an
opportunity to tilt the balance of economic power further in their
favour? Either way, the control of events is no longer in American
hands.
The fate of empires is very often sealed by the
interaction of war and debt. That was true of the British Empire, whose
finances deteriorated from the First World War onwards, and of the
Soviet Union. Defeat in Afghanistan and the economic burden of trying
to respond to Reagan's technically flawed but politically extremely
effective Star Wars programme were vital factors in triggering the
Soviet collapse. Despite its insistent exceptionalism, America is no
different. The Iraq War and the credit bubble have fatally undermined
America's economic primacy. The US will continue to be the world's
largest economy for a while longer, but it will be the new rising
powers that, once the crisis is over, buy up what remains intact in the
wreckage of America's financial system.
There has been a good
deal of talk in recent weeks about imminent economic armageddon. In
fact, this is far from being the end of capitalism. The frantic
scrambling that is going on in Washington marks the passing of only one
type of capitalism – the peculiar and highly unstable variety that has
existed in America over the last 20 years. This experiment in financial
laissez-faire has imploded.While the impact of the collapse will be
felt everywhere, the market economies that resisted American-style
deregulation will best weather the storm. Britain, which has turned
itself into a gigantic hedge fund, but of a kind that lacks the ability
to profit from a downturn, is likely to be especially badly hit.
The
irony of the post-Cold War period is that the fall of communism was
followed by the rise of another utopian ideology. In American and
Britain, and to a lesser extent other Western countries, a type of
market fundamentalism became the guiding philosophy. The collapse of
American power that is underway is the predictable upshot. Like the
Soviet collapse, it will have large geopolitical repercussions. An
enfeebled economy cannot support America's over-extended military
commitments for much longer. Retrenchment is inevitable and it is
unlikely to be gradual or well planned.
Meltdowns on the scale we
are seeing are not slow-motion events. They are swift and chaotic, with
rapidly spreading side-effects. Consider Iraq. The success of the
surge, which has been achieved by bribing the Sunnis, while acquiescing
in ongoing ethnic cleansing, has produced a condition of relative peace
in parts of the country. How long will this last, given that America's
current level of expenditure on the war can no longer be sustained?
An
American retreat from Iraq will leave Iran the regional victor. How
will Saudi Arabia respond? Will military action to forestall Iran
acquiring nuclear weapons be less or more likely? China's rulers have
so far been silent during the unfolding crisis. Will America's weakness
embolden them to assert China's power or will China continue its
cautious policy of 'peaceful rise'? At present, none of these questions
can be answered with any confidence. What is evident is that power is
leaking from the US at an accelerating rate. Georgia showed Russia
redrawing the geopolitical map, with America an impotent spectator.
Outside
the US, most people have long accepted that the development of new
economies that goes with globalisation will undermine America's central
position in the world. They imagined that this would be a change in
America's comparative standing, taking place incrementally over several
decades or generations. Today, that looks an increasingly unrealistic
assumption.
Having created the conditions that produced history's
biggest bubble, America's political leaders appear unable to grasp the
magnitude of the dangers the country now faces. Mired in their
rancorous culture wars and squabbling among themselves, they seem
oblivious to the fact that American global leadership is fast ebbing
away. A new world is coming into being almost unnoticed, where America
is only one of several great powers, facing an uncertain future it can
no longer shape.
