Depression and Decline: American Irresponsibility is Ending the American Era with a Bang

Despite the assurances of US Treasury Secretary Timothy Geithner it is increasingly likely there will be no debt deal. The United States is going to default on its debt. I know it sounds crazy, but I believe it is going to happen. If it does, this is the black swan event no one imagined or was prepared to contemplate. It’s impacts are going to be significant. Possibly immeasurable.

For history, August 2nd, 2011 could end up marking the American Era. Sadly, it will not have been inevitable, it will have been entirely self-inflicted and it may now be irreversible. Even if an agreement is reached tomorrow I suspect the world will increasingly be unwilling to entrust the role of global financial system caretaker to the United States. The world has lost faith in America. And why not. Its Congress has demonstrated that it can no longer be trusted with the responsibility of global financial management. Indeed, even it’s closest allies have had their confidence shaken.

The economic and geopolitical ramifications of this outcome cannot be underestimated.

Economically, we may now be closer to a global depression than at anytime since 1930s. For all the talk of the financial crises being a near miss, this could potentially be much, much worse, simply because the consequences fall outside our predictive models.

What is clear is that America is trapped. In the short term spending less will devastate its population. Today more Americans (18.1%) than ever use food stamps. It takes American workers 40 weeks (and rising) to find a job, twice as long than in any previous recession. 1 in every 6 Americans use Medicaid. Any cuts to these services will have an immediate and harsh affect on the quality of life of a huge number of Americans.

Longer term, America cannot restart its economy. Already the top 5% of Americans by income account for 37% of all consumer outlays. This is unsurprising given the top 5% of Americans account for 34.7% of all income. This is similar to 1929 when the top 5% accounted for the top third of all personal income. This is precisely the type of economic structure that Kenneth Galbraith argues in The Great Crash, 1929, transformed the great crash into the great depression. Rather than being able to rely on a broad consumer base to power economic growth, the United States then (as now) was dependent on a high level of investment and luxury consumer spending driven by a small elite. The crash caused that elite to seize up, leaving the American economy paralyzed.

In other words, the Bush Tax cuts may have killed the US economically, and possibly geopolitical. By killing the surpluses they have broken the US treasury. By radically curtailing wealth redistribution they have fatally eroded the capacity of the US domestic economy to power new growth. Combine this with two wars that have sapped trillions of taxpayer dollars, and it is hard not to see a United States more ill prepared than at any time in its history to deal with an economic crisis. The only question that may remain is how much of the rest of the world it drags down with it.

Of course economic decline could become a leading indicator for political decline.

When I arrived to grad school in 1998 to study international relations the field had spent much of the previous decade grappling with the issue of American decline. Books like The Rise and Fall of Great Powers and Lester Thurow’s Head to Head seemed to suggest that economically and militarily, the United States was in, at the very least, relative decline as a the world’s leading power.

But then the successes of the US economy – coupled with the turn around in the size of the US government’s debt – meant that as a peer, China felt a long way off while Brazil and India seemed more distant still. Europe was too old, disorganized and unambitious to matter. Russia, was fading quickly from the scene. Suddenly decline theory was, itself in decline.

But today the writings of Kennedy feel even more urgent. America, with or without a raised debt ceiling, cannot afford its empire, or the means to protect it. It may be able to find allies to help shoulder the burden – today the central challenge of 21st century geopolitics is the integration of India into the Western Alliance, something that proceeds apace. But if it defaults (and maybe even if it does not) it’s capacity to raise money at a reasonable rate should a major conflict arise, may be compromised. War, for America, is going to get more expensive because investors may be more nervous.

I want to clearly state that I don’t write any of this with any glee. Leftish non-americans who relish a world without the US hegemony should look at the what the period after Britain’s decline, or any period of hegemonic decline. They generally aren’t pretty. Indeed, they are often unstable, violent and nasty. Not something any country should wish for, especially smaller countries (such as my own – Canada). Moreover, while there is no immediate peer that could take America’s place, it isn’t clear that the most likely candidate – China – is one that most people would feel more comfortable with. Be careful what you wish for.

I hope that I’m wrong. I hope a deal will be reached. And that if it is, or if it isn’t, the impact on the markets will be minimal or non-existent. Or maybe, I just need to have more confidence in what I have often tell others: do not to underestimate America. As Sir Winston Churchill famously noted: “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” And maybe they’ll have enough time to boot.

But I genuinely fear that in the haze of summer this crisis, as much as it has spurred some scary headlines, remains a sleeper. That we are confronting the mother of all black swans, and that a period of financial turmoil that will make the last two years look like a merry ride, could be upon us. Worse, that that financial turmoil will lead to other, great military and/or political turmoil.

These are scary times.

I can honestly say I never written a blog post that I hope I’m more wrong about.

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Andrew Krzmarzick

This seems like a fair commentary, David. Like you, I hope we can reach a deal…but it does feel like we’re headed toward a bit of an implosion that will have far-reaching effects.

Julie Driver

I, too, have become increasingly more concerned about the repercussions of a possible U.S. loan default. And, you’re quite right in stating that we have brought this upon ourselves. Personally, I’m disgusted by the political posturing and hope that our elected officials come to their senses quickly enough to avoid the most serious and immediate damage. I’ve written to my state’s entire congressional delegation urging them to put aside politics and find a compromise. I challenge everyone on govloop to do the same!

Becky Siekmeier

Up until this week I was confident that the two sides would reach a mature agreement, one that is not mired in political posturing, but one that is in the best collective interests of all Americans. I am quickly losing hope that this is possible. David, I hope we are both wrong.

Sterling Whitehead

Okay, first off — nobody panic. Yes, this is an issue. Just remember that the more we read, listen and watch about it, the more anxiety we are likely to generate within ourselves.

Let’s pull back for a few minutes and realize a few things — we’re not going to die. The US, while in a slump, is far from down. We are able to dig ourselves out of this mess, even if we don’t come to an agreement. The debt is high, but guess what — we’re been in far worse financial cirsumstances (Great Depression and US financial situation after the Revolutionary War). We are going to prosper; even if we fail to make a deal now, we don’t go down in flames. We get our credit downgraded, things get worse, but in the long-run, we will pick ourselves up. History shows recessions and depressions occur, but then…guess what…longer periods of prosperity. It will happen. Be patience and have faith.

David Dejewski

This is not news to some. Notables such as David Walker have been talking about the burning platform for almost ten years now. I’ve dedicated the last seven years of my own federal career to the problem.
 From my perspective, it’s a problem that is not well understood. Many people have the capability to understand it, but a large percentage of those people are in denial. This is also not an unfamiliar circumstance. When confronted with a problem that seems to big to control, human beings have often chosen to pretend it does not exist. History is full of examples.

My interest is not so much for the uncontrollable, but for the controllable. Our action (or inaction) with respect to things that are within our own sphere of influence is disturbing.
There are a great many “little” things that we can do that would make a big difference, but those “little” things are deceptively insignificant. People seem to believe that doing them or not doing them doesn’t matter. It does.
Some examples of things that everyone can do:
• Get educated. Understand what is happening and why. An informed person is more likely to make the best of whatever situation comes about.
• Talk with your politicians. If you’ve gotten educated and have an opinion, don’t let that opinion stay locked up in your head. Politicians are having a very difficult time making decisions today. Just about any move they make is flirting with career suicide. They need to hear (and have evidence of) the voices of their constituents to support their decisions.
• Vote. No matter what your political bent. Get involved. understand the issues and the positions your elected officials are taking.
• Improve the quality of government investment decisions. From the responses I got to my “Seven words or less” discussion, it’s obvious that many GovLoopers are in the business of supporting the decision making process. Don’t be bullied or ignored. What you’re doing IS valuable and those who diminish it’s importance are living in a self absorbed fantasy. If you have evidence of a sloppy business case, of customer needs being ignored, or of duplication of effort – stand up and be heard! Don’t be a pain in the butt, but be assertive and well organized.
• Protect your family. Learn about how the various financial scenarios might affect your retirement, your investments, and your standard of living. Make some decisions now to protect yourself – regardless of how things play out. It might not hurt, for example, to have your eggs in a few baskets like **precious metals as a hedge against inflation. **Note: I’m not offering investment advice. Seek competent counsel for your situation.
• Reach out. Forums like GovLoop are excellent for reaching across organization boundaries. Look for signs that people are doing things better than your organization are – and for signs that people could learn from something you’ve done. Make contact. Share best practices. They make us all better.
• If you’re a business owner, give back to the communities that support you. Find ways to provide value above and beyond what’s traditionally on the P&L. Sometimes a small give back can make a big difference in people’s lives. Use the difference you make as your competitive advantage.

What I’m suggesting might sound like common sense to some, but I am amazed at how many people just go about their routine without taking action. We are mistaken when we think our daily activities don’t make a difference. Even ants know that they have purpose and work together to realize it. If we all did just a little bit, we can and will make a difference.