Moment In America's Fall From Power
The global financial crisis will see the US falter in the same
way the Soviet Union did when the Berlin Wall came down. The era
of American dominance is over
By John Gray
Observer" --- --
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
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.
• John Gray is the author of Black Mass: Apocalyptic Religion
and the Death of Utopia (Allen Lane)
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