The imperial ambitions of the Bush Administration, post-9/11, are founded on quicksand and are eventually sure to founder, but for fundamental reasons not currently under discussion. Bush’s open-ended claims for US power–including the unilateral right to invade and occupy “failed states” to execute “regime change”–offend international law and are prerogatives associated only with empire. But Bush’s greater vulnerability is about money. You can’t sustain an empire from a debtor’s weakening position–sooner or later the creditors pull the plug. That humiliating lesson was learned by Great Britain early in the last century, and the United States faces a similar reckoning ahead.
The US financial position is rapidly deteriorating, due mainly to America’s persistent and growing trade deficit. US ambitions to run the world, in other words, are heavily mortgaged. Like any debtor who borrows more year after year with no plausible way to reverse the trend, a nation sinking deeper into debt enters into an adverse power relationship with its creditors–greater and greater dependency.
These creditors are both private investors and governments from Europe and Asia; now none of them have any incentive to disrupt their lopsided relationship with the superpowerful leader of the world. After all, it works for them: Their exports have unfettered access to the largest consumer market in the world, producing trade surpluses and gaining greater market share. Their capital, meanwhile, reaps good returns on the loans and investments in the American economy. But history suggests that with sufficient provocation, the creditor nations will eventually assert their leverage over the United States, however reluctantly. That critical juncture is likely to arrive either because the American debt burden has become so great that additional lending would be too risky or because the creditor nations want to jerk Washington’s chain, perhaps to head off reckless new adventures. Either way, it will be a humbling moment for American triumphalism.
No one can know exactly what circumstances will prompt our old friends to give a sharp elbow to Washington and Wall Street–that is, refuse to lend more or threaten to withdraw capital–but US finance is currently getting a small taste of what it would feel like. Saudi Arabia (not the government but its wealthy private investors) has pulled as much as $200 billion out of US financial markets in recent months, perhaps to diversify holdings but clearly provoked by the Bush hawks, who are demonizing the Saudis as the “kernel of evil” behind Islamist terrorism. An investment consultant in Riyadh told the Financial Times, “People no longer have any confidence in the US economy or in United States foreign policy.” Extracting $200 billion from US stocks and bonds may have contributed to the weakening value of the dollar, but by itself it is not a major blow. If Asian money or Europe’s were to undertake a similar exit, the financial quake would send damaging tremors through virtually every dimension of US economic life. If severe and sustained, it could shut down economic growth and lead to a lower standard of living.
The threatening implications are seldom discussed with any clarity or candor, but the numbers are not secret. The US economy’s net foreign indebtedness–the accumulation of two decades of running larger and larger trade deficits–will reach nearly 25 percent of US GDP this year, or roughly $2.5 trillion. Fifteen years ago, it was zero. Before America’s net balance of foreign assets turned negative, in 1988, the United States was a creditor nation itself, investing and lending vast capital to others, always more than it borrowed. Now the trend line looks most alarming. If the deficits persist around the current level of $400 billion a year or grow larger, the total US indebtedness should reach $3.5 trillion in three years or so. Within a decade, it would total 50 percent of GDP. Instead of facing this darkening prospect, Bush and team regularly dismiss the worldviews of these creditor nations and lecture them condescendingly on our superior qualities. Any profligate debtor who insults his banker is unwise, to put it mildly.