UNITED STATES: by Jeffry Babb News Weekly
Will debt bring down the American empire?
, June 26, 2010
Debt has ended empires before and debt may close the curtain on America's century of global domination, says Niall Ferguson, one of the world's pre-eminent economic and business historians.
Debt is the economic story of the moment. Europe is roiled by the collapse of an economic bubble based on the Euro, cheap money and profligate government spending. First it was the Baltic States, which, almost unknown in Australia, reached a point of near collapse a year ago. Then it was the PIGS - also known as Club Med - Portugal, Italy, Greece and Spain, plus Ireland, which have come near to default. Now the contagion is spreading to Eastern Europe, with Hungary in dire straits.
Scottish-born Ferguson, who holds dual chairs at Harvard University, has been warning about the effects of debt on the politics of sovereignty since well before the current blow-up. His acclaimed documentary series The Ascent of Money
was broadcast on ABC television last year.
Because he is an economic historian, rather than an economic theorist, he sees the current crisis as one episode in a pattern as old as Western civilisation.
Economic historians have an advantage over economic theorists in that most of them have more of that precious quality, common sense. Those of us who were poring over our copies of Paul Samuelson's economics textbook in the 1970s must recall the little inserts about how the centrally-planned economy of the Soviet Union could match the free market economies of the West, something that was manifestly silly even before the Soviet Union's eventual and inevitable economic collapse.
What looms on the horizon is default or repudiation of debts.
"There are all kinds of wonderful words for default that you'll need to know because they will be appearing in the Wall Street Journal
and the Financial Times
quite frequently in the months ahead," said Ferguson in an address to the Petersen Institute for International Economics in Washington DC in mid-May. "You can have repudiation, standstill, a moratorium, restructuring, rescheduling and so on. But it all boils down to changing the terms of the original loan - default."
The current explosion in debt is unmatched except in wartime. When will these debts by paid off? Ferguson uses his native United Kingdom as an example. Its debt to the United States after World War II was only paid off during Tony Blair's Labour Government.
Only one nation in history has dug itself out of a debt catastrophe of the current dimensions faced by the United States; that was Britain after the end of the Napoleonic Wars in 1815.
Ferguson says: "Britain paid down its debt through growth and running primary budget surpluses. There was no default. There was no inflation. But this, unfortunately, is the only case history offers us.
"And, remember, Britain did have some unusual advantages at that time. It was, or course, the first country to enjoy an Industrial Revolution. It had the world's biggest empire to draw on, and it had an undemocratic franchise throughout the period, which means the propertied were represented and the propertyless essentially were not. That makes it much easier to make tough fiscal decisions, believe me."
This brings us back to America. One can only be driven to near despair at times by the functioning of the American polity. The current oil disaster in the Gulf of Mexico is certainly an environmental disaster, but one that is so far beyond the best efforts of oil giant BP to stem the flow of oil.
Remarkably, the blame is falling on President Barack Obama, who has little or nothing to do with the disaster. Why is this so? Because he is perceived as being "too professorial", "not angry enough", and so on - in other words, not a Great Communicator like the former US philanderer-in-chief, Bill Clinton.
America faces some tough political decisions. Its debt is about the same percentage of GDP as is Greece's. At current levels of taxation, federal expenditure on debt servicing will consume about 20 per cent of GDP, or, in other words, all current federal expenditure.
Ferguson warns: "Within, I would say, the next six years, interest payments on the federal debt will exceed the defence budget. I think one of the clearest lessons of history is that that is a major turning point for any power - from Spain in the 17th century, the Netherlands in the 18th century, through the Turks in the 19th century and the British in the 20th century.
"When you're spending more on your debt than on your army or navy, it's all over as a great power."
What does this mean for Australia? First, we need America to be more involved in our region, not less, to counter China. We need a prosperous and healthy America.
Second, Australia now has its own debt problems, not least due to dodgy insulation programs and useless school halls. That's why the Rudd Labor Government is raiding the piggy banks of the only industry in Australia with real money - the mining industry.
The mining industry heist is not about fairness, equity or simplifying the tax system - it's about taking money from the mining industry and paying off the government's debts. No carbon tax? Try a mining tax instead.