[R-G] [BillTottenWeblog] The Old Titans All Collapsed

[Bill Totten]

Is the US Next?

by Kevin Phillips

washingtonpost.com (May 18 2008)


Back in August, during the panic over mortgages, Alan Greenspan offered
reassurance to an anxious public. The current turmoil, the former
Federal Reserve Board chairman said, strongly resembled brief financial
scares such as the Russian debt crisis of 1998 or the US stock market
crash of 1987. Not to worry.

But in the background, one could hear the groans and feel the tremors as
larger political and economic tectonic plates collided. Nine months
later, Greenspan's soothing analogies no longer wash. The US economy
faces unprecedented debt levels, soaring commodity prices and sliding
home prices, to say nothing of a weak dollar. Despite the recent
stabilization of the economy, some economists fear that the world will
soon face the greatest financial crisis since the 1930s.

That analogy is hardly a perfect fit; there's almost no chance of
another sequence like the Great Depression, where the stock market dove
eighty percent, joblessness reached 25 percent, and the Great Plains
became a dustbowl that forced hundreds of thousands of "Okies" to flee
to California. But Americans should worry that the current unrest
betokens the sort of global upheaval that upended previous leading world
economic powers, most notably Britain.

More than eighty percent of Americans now say that we are on the wrong
track, but many if not most still believe that the history of other
nations is irrelevant - that the United States is unique, chosen by God.
So did all the previous world economic powers: Rome, Spain, the
Netherlands (in the maritime glory days of the 17th century, when New
York was New Amsterdam) and 19th-century Britain. Their early strength
was also their later weakness, not unlike the United States since the 1980s.

There is a considerable literature on these earlier illusions and
declines. Reading it, one can argue that imperial Spain, maritime
Holland and industrial Britain shared a half-dozen vulnerabilities as
they peaked and declined: a sense of things no longer being on the right
track, intolerant or missionary religion, military or imperial
overreach, economic polarization, the rise of finance (displacing
industry) and excessive debt. So too for today's United States.

Before we amplify the contemporary US parallels, the skeptic can point
out how doomsayers in each nation, while eventually correct, were also
premature. In Britain, for example, doubters fretted about becoming
another Holland as early as the 1860s, and apprehension surged again in
the 1890s, based on the industrial muscle of such rivals as Germany and
the United States. By the 1940s, those predictions had come true, but in
practical terms, the critics of the 1860s and 1890s were too early.

Premature fears have also dogged the United States. The decades after
the 1968 election were marked by waves of a new national apprehension:
that US post-World War II global hegemony was in danger. The first, in
1968-72, involved a toxic mix of global trade and currency crises and
the breakdown of the US foreign policy consensus over Southeast Asia.
Books emerged with titles such as "Retreat From Empire?" and "The End of
the American Era". More national malaise followed Watergate and the fall
of Saigon. Stage three came in the late 1980s, when a resurgent Japan
seemed to be challenging US preeminence in manufacturing and possibly
even finance. In 1991, Democratic presidential aspirant Paul Tsongas
observed that "the Cold War is over ... Germany and Japan won". Well,
not quite.

In 2008, we can mark another perilous decade: the tech mania of
1997-2000, morphing into a bubble and market crash; the September 11
2001, terrorist attacks; imperial hubris and the Bush administration's
bungled 2003 invasion of Iraq. These were followed by OPEC's abandoning
its $22-$28 price range for oil, with the cost per barrel rising over
five years to more than $100; the collapse of global respect for the
United States over the Iraq war; the imploding US housing market and
debt bubble; and the almost fifty percent decline of the US dollar
against the euro since 2002. Small wonder a global financial crisis is
in the air.

Here, then, is the unnerving possibility: that another, imminent global
crisis could make the half-century between the 1970s and the 2020s the
equivalent for the United States of what the half-century before 1950
was for Britain. This may well be the Big One: the multi-decade endgame
of US ascendancy. The chronology makes historical sense - four decades
of premature jitters segueing into unhappy reality.

The most chilling parallel with the failures of the old powers is the
United States' unhealthy reliance on the financial sector as the engine
of its growth. In the 18th century, the Dutch thought they could replace
their declining industry and physical commerce with grand money-lending
schemes to foreign nations and princes. But a series of crashes and
bankruptcies in the 1760s and 1770s crippled Holland's economy. In the
early 1900s, one apprehensive minister argued that Britain could not
thrive as a "hoarder of invested securities" because "banking is not the
creator of our prosperity but the creation of it". By the late 1940s,
the debt loads of two world wars proved the point, and British global
economic leadership became history.

In the United States, the financial services sector passed manufacturing
as a component of the GDP in the mid-1990s. But market enthusiasm seems
to have blocked any debate over this worrying change: In the 1970s,
manufacturing occupied 25 percent of GDP and financial services just
twelve percent, but by 2003-06, finance enjoyed twenty to 21 percent,
and manufacturing had shriveled to twelve percent.

The downside is that the final four or five percentage points of
financial-sector GDP expansion in the 1990s and 2000s involved mischief
and self-dealing: the exotic mortgage boom, the reckless bundling of
loans into securities and other innovations better left to casinos.
Run-amok credit was the lubricant. Between 1987 and 2007, total debt in
the United States jumped from $11 trillion to $48 trillion, and private
financial-sector debt led the great binge.

Washington looked kindly on the financial sector throughout the 1980s
and 1990s, providing it with endless liquidity flows and bailouts.
Inexcusably, movers and shakers such as Greenspan, former treasury
secretary Robert Rubin and the current secretary, Henry Paulson, refused
to regulate the industry. All seemed to welcome asset bubbles; they may
have figured the finance industry to be the new dominant sector of
economic evolution, much as industry had replaced agriculture in the
late 19th century. But who seriously expects the next great economic
power - China, India, Brazil - to have a GDP dominated by finance?

With the help of the overgrown US financial sector, the United States of
2008 is the world's leading debtor, has by far the largest
current-account deficit and is the leading importer, at great expense,
of both manufactured goods and oil. The potential damage if the world
soon undergoes the greatest financial crisis since the 1930s is
incalculable. The loss of global economic leadership that overtook
Britain and Holland seems to be looming on our own horizon.
_____

Kevin Phillips is the author, most recently, of Bad Money: Reckless
Finance, Failed Politics, and the Global Crisis of American Capitalism
(2008).

Copyright (c) 2008 The Washington Post Company

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/16/AR2008051603461.html


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