Shifting Winds: The End Of Pax Americana

Every once in a while, there occurs a major shift in the international arena. The First World War and its consequences were the seminal change of the last century, collapsing ancient empires and ushering in a new era of ethno-nationalist clashes, political radicalism and emerging powers challenging the established order of Versailles, forces that were fully unleashed in the aftermath of the Great Depression. From the middle of the Second World War, it became clear that the new world order would be defined by a bipolar competition between the USSR and the US. The next major shift occurred with the oil shocks of the 1970’s, when growth throughout the industrialized world, capitalist and socialist alike, declined, and they were beset with increasing social problems, while the beginning of the rise of China and the economic re-emergence of Western Europe and Japan heralded a new, globalizing multipolarity that was confirmed by the end of the Cold War and the collapse of the USSR.

The next two decades saw the triumph of “Western liberal democracy as the final form of government” and the spread of the neoliberal consensus, all underwritten by American military dominance and the new resources unlocked by the opening of formerly autarkic economies. Generally speaking, this was a rather peaceful and prosperous time. Though wars continued and there was the occasional genocide in Rwanda or Darfur, the overall incidence of violence declined sharply in all categories, the sole exception being terrorism. Similarly, the opening up of world trade sharply increased consumer power in the US and Europe as China’s reserve armies of labor set about producing cheap goods, a process lubricated by cheap oil, gargantuan freighters and developments in supply-chain management. And though its flowers still bloom and the politicians smile and exude the air that nothing’s much amiss, the winds of time are shifting, the sun is already setting on this world, and darkness is about to creep in.

Quite literally. The cheap oil that underpins industrial civilization is ending, as the world approaches peak oil production – the point when about half of recoverable reserves have been taken out of the ground. The remaining half lies in remoter places and will be much harder to extract, especially taking into account that the resources for doing so will be significantly more limited due to the collapse of the world credit system, a system that should have died a free-market death in late 2008, but which limps on, zombie-like, sustained by governments whose solvency now hangs by a thread only maintained by investors still naive enough to believe in their credibility.

This is because the defining feature of this crisis is not so much even the collapse of world industrial output and trade, which was by itself unprecedented in its magnitude this century except by the Great Depression, but the sheer burden of bad debts and fiscal obligations accumulated by  governments in the developed world, especially in the Anglo-Saxon world. First, they are running unprecedented peacetime budgets – both as a consequence of their disastrous pro-cyclical spending during the fat years, and to fund the stimuluses with which they hope to get their economies out of the rut. Second, they printed lots of money under the euphemism of “quantitative easing”. Third, they carried over private losses and bad debts onto the public account – socialism for the rich, capitalism for the rest.

In the next few years, according to commentators like Willem Buiter, these reckless policies are going to lead to classic emerging-market currency crises in the Anglosphere, or “submerging markets” as he calls them. This is not surprising. Taking the United States as the most significant and typical example, to run the kind of deficits projected – 13% of GDP this year, over 10% again in 2010, and red into the rest of Obama’s term even under the rosiest projections – requires a very credible commitment to returning to a balanced budget within a limited timeframe.

First, this requires a rapid economic recovery. However, all the monetary and fiscal tools for accomplishing this have already been used at and beyond their limits. In the 1980’s, once the task of breaking inflation was accomplished, interest rates were eased back and the economy recovered rapidly. Today, interest rates have already been cut to minimal levels and the economy seems to have bottomed, but even so it remains extremely feeble, with the real unemployment rate (“U-6”) currently at 16.8% and rising. Recovery is likely to be slow as households begin to pay off their debts instead of increasing consumption, the linchpin of the US economy. If it is politically feasible (uncertain) and should there be high inflation brought on by the recent monetary splurge and once-again soaring oil prices (almost certain), interest rates will have to be raised, which risks short-circuiting a feeble recovery.

Second, even during the mis-named “Bush boom” growth was large jobless and inequality-enhancing, with half coming from distribution (the “Wal-Mart effect) and the other half from better productivity from financial services!, as measured by the number of transactions undertaken. These are not going to be repeated, the first because rising energy prices are increasingly making the JIT distribution model untenable, the second because the financial system, outside of a few well-connected insiders like Goldman Sachs and JPMorgan, now lives on government guarantees.

Third, the next years are going to see rising demands for social spending as younger Americans make themselves heard, whose worldviews are relatively more socialist and European-like. The rising number of retiring baby boomers will necessitate far more Social Security, Medicare and Medicaid spending, out of funds that will simply not be there because the cookie jars were looted a long time ago. Then there’s the whole chimera about greencollar jobs. In principle, as a convinced peakist with serious concerns about the consequences of anthropogenic global warming, I support subsidizing green industries like renewable energy and hybrid automobiles. But these are luxuries only a more prudent economy could afford, like China. In the US, it will result in very few jobs being created and will constitute further drains on its fiscal credibility – and hence the means of sustaining this very program. More spending on healthcare? The sector is already horrifically bloated, and should if anything be reduced and rationalized.

So in conclusion, the US faces years of relative stagnation, and no credible way of paying back its metastasizing public debt. As long as investors stick it out and rates remain low, this remains a sustainable, albeit unsatisfactory, state of affairs. The reason the US Treasury rates fell so low and the country even tipped over into deflation was that the global equity collapse had investors fleeing to the perceived haven of last resort – US Treasury bonds. Yet as I pointed out in Decoupling from the Unwinding, one of the effects of this crisis will be to decisively sever the links between the West and the Rest (emerging markets). In a few more years, investors will realize that whereas China has real long-term growth prospects, they are unlikely to ever see positive returns on their US bond investments, as the US gradually monetizes its debt. They will jump ship, resulting in rising rates on US debt and making it increasingly unaffordable to service. Unless they inflate it away, of course. Would you like to die by ice or fire?

Let’s whimsically set the date for this collapse for August 2012. The liberal international order, Pax Americana, will collapse with it. However, there will be numerous signs of its slow demise well beforehand, which will be reflected in geopolitical events.

The focal point is the Middle East, that great intersection of energy, power, instability and hatred. Iran is continuing in its efforts to build a nuclear bomb to consolidate the new Persian empire. It is currently strong, demographically, but destined to get weaker as the younger, sub-replacement level generations become adults. The regime is also increasingly ideologically insecure. The nation is currently at around where the Soviet Union was in the early-1980’s on its belief matrix – the egalitarian, totalitarian ideals of the Islamic Revolution are now a distant memory, clouded over by the drugs, lasciviousness, and Westernization now typical of its larger cities. Part of the population yearns for the West, disillusioned with their own society and skeptical of the clear evidence of clerical corruption. Yet the most influential clerical elites have retrenched around the hardline Ahmadinejad and the Islamic Revolutionary Guard Corps (IRCG), who want to return to a future of austere Islamic government. Thus there is currently a revival of radicalism in the Islamic Republic, less potent than in the 1980’s, yet now married to its greater technological capabilities. This revival is almost certainly destined to be short-lived, but has the potential to go out with a bang.

This possibility must be considered especially seriously given that Israel is now ruled by Benjamin Netanyahu, a man who in 2007 opined: “It’s 1938, and Iran is Germany, and Iran is racing to arm itself with atomic bombs”. It is likely that were it not for US restraint, the Israelis would have long since bombed Iranian nuclear and military facilities. They have received permission from Saudi Arabia, via backdoor diplomatic channels, to fly over their territory to do so. This is unsurprising, because the Gulf monarchies face a significant challenge from Iran, which foments Shi’ite unrest in Bahrain and parts of Saudi Arabia, and is suspected of funding a Shi’ite insurgency in northwest Yemen that threatens to spill over the borders. Though moderate Arab rulers pay lip service to Islamism, they certainly have no intention of allowing it to infringe on their political power. Iran’s other lever is its control of Hezbollah, an impressively disciplined organization that managed to (arguably) win a war against Israel in 2006. Though they do not pose an existential threat to Israel, they can create an serious political and strategic problem through massed rocket attacks, to counter which Israel is now assembling a multi-layered, world-class ABM system.

If Iran gets the bomb, it will unleash a Middle Eastern arms race, in which Saudi Arabia, Egypt and Turkey will feel compelled to build up arsenals of their own. Iran will become much more confident about sponsoring Shi’ite separatism and drawing Iraq closer into its fold. In the endgame, the US cannot allow this challenge to its hegemony in the oil-rich Middle East to go unanswered, in particular the dependence of the Gulf States and now Iraq on its military tutelage, no matter the cost of meeting the call. It will strike Iran, or give Israel the go-ahead, well before Iran comes close to testing its bomb.

The pressure will be ratcheted up gradually. If talks scheduled for 1st October 2009 fail to achieve any Iranian compromises on its nuclear program, as usual, then the US will probably activate what it calls “crippling” sanctions on Iran with the connivance of Britain and France, especially targeting the 40% of gasoline it imports. In practice, this is unlikely to achieve much, especially since Russia – having received no firm guarantees from Washington recognizing its desired sphere of influence over the post-Soviet space – will likely help Iran shrug off sanctions by allowing Iran to satisfy its shortages through imports from Russia’s Caspian ports.

This talk of Russia’s role brings us to another point. The US is currently in a profound strategic dilemma, having to choose three areas in which to exert its strength – in particular its limited manpower: a) Afghanistan / Pakistan and the “war on terror”, b) blocking the arrival of a new Persian Empire with nukes and c) containing a resurgent Russia possibly intent on rebuilding its own old empire.

The recent American successes in Iraq have generally stabilized the country, though smaller-scale violence lingers on and might well flare up again should pressure be loosened up. This necessitates that the bulk of US military manpower remains locked up in Iraq, which gives nations like Russia, which desires to reverse its post-1991 geopolitical losses, a “window of opportunity” to make its challenge. And although the US presence in Iraq is winding down, it is simultaneously becoming pressured by requirements elsewhere – as of today, counting contractors, there are more Americans fighting in Afghanistan today than the Soviets deployed at their peak. (A common counter-argument is that of the 120,000 armed US personnel stationed there, some 68,000 are contractors who mainly do things like fixing electrical lines or washing pots and pans; however, the comparison remains valid because these would be the functional equivalent of Soviet “Class C” divisions mostly concerned with logistical issues).

The Afghanistan quagmire will likely be seen by future historians as an American strategic blunder of the first magnitude. First, it developed as a simple reaction to al-Qaeda’s use of Afghanistan as a base to plot out the 9/11 attacks, yet apart from that, the expansionist Taleban were a much bigger problem for Iran and Russia than for the US (even as the US oil corporation Unocal, with the backing of the CIA, was negotiating with the Taleban over the construction of a Trans-Afghanistan Pipeline to carry natural gas from Turkmenistan to the Indian subcontinent in 1998, Iran was seriously threatening war with the Taleban for the murder of Iranian diplomats). By keeping Afghanistan and the Central Asian jihadi threat suppressed, the US uses its own resources to spare Russia’s and Iran’s from the necessary work of patrolling Afghanistan’s borders, aiding the Northern Alliance and other anti-Taleban insurgents, intercepting jihadi aid to their domestic Islamic militants and maintaining the stability of the Central Asian republics. Hence Russia’s generally quiescent attitude towards allowing the US to transport non-military supplies to Afghanistan and usage of Central Asian bases.

Second, and more importantly, the US is not fighting to win. Afghanistan is not Serbia, and it is not even Iraq. It is a proud tribal society with a total fertility rate of nearly 7 children per woman. Trying to instill “liberal democracy” is a quixotic endeavor. Preaching, let alone practicing, “human rights” is (correctly) interpreted as a sign of moral weakness, and an incentive to up the pressure. The only way to actually win in Afghanistan is through burned-earth like brutality and ruthlessness, like Cromwell’s pacification of Ireland. Anything else is a waste of time and money. As it is, the US is pouring its resources like water into the sands of the “graveyard of empires”, and taking NATO along for the ride – a strain that threatens the very survival of the alliance. This would not be nearly as critical if the jihadi threat was the only storm-on-the-horizon the US-centered world order faced; yet in combination with Iranian brinkmanship, the Russian resurgence, the Chinese mercantile challenge and the increasing reflection of the limits to growth onto the world economy, the days of Pax Americana may well be numbered. Let’s return to Iran.

From this year, the countdown will be really on as Iran reaches for the bomb, Israeli hysteria (understandably) rises and the US becomes ever more desperate for a radical solution. By 2011-12, Obama will be coming under increasing conservative pressure – an again worsening economic position and a “patriotic-reactionary” movement to counter the perceived intrusion of government onto an ever expanding array of economic and social activities – which will if anything make his administration more conductive to the thought of a foreign adventure to take the population’s mind of economic stagnation, rising poverty and perhaps by that point, capital flight. The Israelis will receive the signal to strike. Since this would draw in the US anyway, it will decide that it might as well strike Iran itself, and degrade the Iranian military as much as possible so as to circumscribe the Islamic Republic’s retaliation capabilities.

The US will have no problem in gaining air superiority and destroying a vast array of fixed Iranian targets, because the Iranian integrated air defense system is relatively obsolete and can be eluded by stealth, defeated by electronic countermeasures and neutralized. However, given the dispersed nature of Iran’s military forces it will retain a significant amount of retaliatory capacity – in particular, the ability to mine the Strait of Hormuz using fast attack craft and harass shipping with coastal shore batteries, diesel submarines in the shallow waters of the Strait, and perhaps suicide attacks from civilian-appearing vessels armed with explosives. Iran’s development of an indigenous UAV capability, by enabling it to scout out the presence of oil tankers, represents a significant force multiplier, especially if Iran also has the technological capacity to network its findings with its other military assets.

This is not to say that the War Nerd is correct when he says that any US naval assets off the coast of Iran will be blown to smithereens, which referred to a rather artificial and improbable scenario. In all likelihood the Iranian threat will be contained within weeks, the country will be thoroughly bombed into submission and perhaps the regime will be overthrown. But in its death throes, it could also kill the world economy:

Most importantly, it would not have to be effective. The mere possibility of mines — the uncertainty factor — would not only slow down the movement of tankers in the Gulf, but also spike insurance rates. Tankers cost a lot of money and their cargoes these days are incredibly expensive. Risking both ship and cargo is not something tanker owners like to do. They buy insurance. If the possibility of mines in the Gulf existed, insurance rates would not only rise, but might become altogether unavailable. Insurance and re-insurance companies these days do not have enormous appetites for unpredictable risk involving large amounts of money. And without insurance, as we saw during the tanker wars in the 1980s, owners won’t take the risk themselves.

Iran’s counter could be to increase the potential risk to the point where insurers back off. At that point, governments would have the option of insuring tankers themselves. Given how quickly governments move, particularly in what would have to be an international undertaking, oil supplies could be disrupted for days or even weeks. At this point, speculators and psychology aside, prices would spike dramatically. The creaking sound would turn into a cracking sound for the world economy.

Ergo, oil prices spike well north of 200$ per barrel in a time of global economic weakness and all-round instability. The psychological effects cannot be anything but extremely negative, and such a scenario may constitute the signal for global investors to finally throw in the towel on the US.

The third key element in near-future geopolitics, in addition to the Afghanistan imbroglio and the Iranian Question, is the continuing resurgence of Russian power across Eurasia. Far from being weakened by the economic crisis, it has used it to build up its relative strength, from politically-motivated loans to Belarus, to its decision to only enter the WTO as part of an economic bloc encompassing Belarus and Kazakhstan, to continuing pressure against Ukraine. It has also consolidated its military position in Abkhazia and South Ossetia and the state has reinforced its control over the commanding heights of the economy, suborning the last of the independent-minded oligarchs to its will. Driven by a belated recognition of its immutable geographic and climatic disadvantages that doom it to eternal backwardness and submission within the context of Westernization, it is slowly but inexorably returning to its “steady state”, its past-and-future as a Eurasian empire defined by political sovereignty, economic autarky and spiritual sobornost. The only thing still missing is an ideology, but that can be re-invented. The collapse of liberal globalization can only accelerate these trends.

As long as Washington stands in the way of this reassertion – which it has, from its unleashing of an infowar against Russia following the Yukos Affair in 2003 to its persistent championing of NATO membership for Ukraine and Georgia – it will remain Russia’s “prime enemy”, at least in the minds of those who matter. As such, Russia will do absolutely nothing to help the US maintain the current world order, which is not favorable to Russia’s interests. Expect a tense, uneasy game of give-and-take and tit-for-tat involving Russian arms sales to Iran and Venezuela, covert American support for colored revolutions across the post-Soviet space, intrigues over Central Asian allegiances and the placing of natural gas pipelines, Russian revanchism in the post-Soviet space, Russian and Chinese stalling of Western-promoted sanctions in the UN, etc… Above all, bear in mind that the Western view on Russia is fundamentally wrong, since Russia’s leaders distrust the “liberal interventionists”, “end of history” ideologues of the Clintonian era at least as much as they dislike the neocon “New Cold Warriors”.

Herein lies the gulf between the West and the Russians. The West divides the world between the Cold War and the post-Cold War world. It clearly prefers the post-Cold War world, not so much because of the social condition of Russia, but because the post-Cold War world lacked the geopolitical challenge posed by the Soviet Union — everything from wars of national liberation to the threat of nuclear war was gone. From the Russian point of view, the social chaos of the post-Cold War world was unbearable. Meanwhile, the end of a Russian challenge to the West meant from the Russian point of view that Moscow was helpless in the face of Western plans for reordering the institutions and power arrangements of the region without regard to Russian interests.

… Russians saw their efforts as a deliberate attempt to destroy Russia and the degree to which Russians are committed never to return to that time. It is hard to imagine anything as infuriating for the Russians as the reset button the Clinton administration’s Russia experts — who now dominate Obama’s Russia policy — presented the Russian leadership in all seriousness. The Russians simply do not intend to return to the Post-Cold War era Western experts recall so fondly. …

While Russia’s concerns with Georgia are the noisiest, it is not the key Russian concern in its near abroad — Ukraine is. So long as the United States is serious about including Ukraine in NATO, the United States represents a direct threat to Russian national security. A glance at a map shows why the Russians think this.

Russia remains interested in Central Europe as well. It is not seeking hegemony, but a neutral buffer zone between Germany in particular and the former Soviet Union, with former satellite states like Poland of crucial importance to Moscow.

… As the United States causes discomfort for the Russians, Russia will in turn cause discomfort for the United States. The U.S. sore spot is the Middle East, and Iran in particular. Therefore, the Russians will respond to American pressure on them where it hurts Washington the most.

The Cold Warriors don’t understand the limits of Russian power. The post-Cold Warriors don’t understand the degree to which they are distrusted by Russia, and the logic behind that distrust. The post-Cold Warriors confuse this distrust with a hangover from the Cold War rather than a direct Russian response to the post-Cold War policies they nurtured.

Finally, there’s China. Over the last decade, the world economy came to be powered by a powerful global symbiosis termed “Chimerica”, a state of affairs in which Americans spent and lent China money to build up the industrial capacity to produce ever more goods for Americans to spend on. Now as long as the limits to this unsustainable, imbalanced growth kept put – limits as in affordable oil and other commodities, access to credit, etc – the party continued.

This is no longer the case. The world economy has crashed. Chinese students laughed in the Secretary of the Treasury Tim Geithner’s face when he tried to assure them the US would keep the US dollar strong and that the trillions of dollars of Chinese investments are safe in the US. The Chinese leadership seems to agree and has started to massively step up its acquisitions of natural resource companies, farmland and foreign elites (via politically-motivated loans at preferential rates). Though there is little overt evidence of a ditching of the dollar, this is to be expected – given that China has so much invested in the US, trying to get out visible would provoke a catastrophic scramble in which it will lose more than it gains. That said, the signals of retreat are certainly visible, especially when set against the typical opacity of China’s rulers.

Globalization allowed China to build up a massive industrial base – as of 2008, it produced 48% of the world’s steel and 50% of its cement – and it has already bought up, or stolen, the majority of key technologies needed to build an advanced industrial system. They can now afford to gradually stop subsidizing American purchases of their products and concentrate on the development of a consumer consciousness among their own, 1.3 billion strong population. This decision to reorient their political economy will complement current rhetoric about building the “harmonious society“, with its emphasis on reconciling socialism, regional and internal inequalities, democracy and environmentalism. From now on, growth will be slower as it is curbed by stagnant world demand, accumulating bad loans, diminishing returns, etc, – it will likely be around 5-7% a year in the 2010’s, rather than the 10% typical of the 1980’s to 2000’s. Nonetheless, it should continue at a fast enough rate to soak up the new landless labor, ease social tensions and enable it to launch a geopolitical breakout. The inevitable transition from a centrally-weak, disbalanced and commercialized nation to a centralized, internally-peaceful hegemonic empire will not be smooth, but China’s forward momentum is simply too large to derail its rise to superpower status.

Externally, China will use its rapidly growing relative strength to create a new geopolitical reality, especially as the retreat of American power becomes ever more evident in the early to mid-2010’s. As the only major industrial nation still enjoying rapid growth, it will now be the main setter of world demand for oil and other strategic commodities, putting a floor on most commodity prices in the years ahead – especially since the state is now taking advantage of low prices to diversify itself from US Treasuries and lock in or accumulate the reserves needed to power its industrialization in the decades ahead. (A related recent story is China’s plans to restrict rare earth metal exports, which if rapidly implemented could create a hi-tech crunch in the decade before mines elsewhere could reopen and ramp up production to meet global demand). China’s influence in South-East Asia, East Asia, East Africa and the Middle East will rise in counter-balance to the US, but the process is unlikely to lead to military clashes because both nations will be much more preoccupied with managing internal tensions.

In conclusion, the geopolitical winds are shifting. There is a gathering storm that will sweep away the current liberal globalized order, and a new reality of econo-political blocs competing for markets, land and resources will take its place. The root cause is the accelerating fiscal and economic collapse of the system’s underwriter, the United States. (The even deeper reason would be that limited oil and energy reserves would be more efficiently used in China to make things than spent on American gas-guzzlers).

However, these changes will appear to observers as an incomprehensible cascade of failings of the international system and spreading chaos: jihadi successes (mounting losses in Afghanistan, continuing terrorist attacks carried out by al-Qaeda’s “franchises”, the possible collapse –  or radicalization (Turkey?) – of moderate Muslim governments); state collapses (peak in world food prices, out-of-control insurgencies, falling revenues from energy exports and climatic catastrophes like drought – watch Pakistan, Mexico); the confrontation with Iran (whether or not it ends with a Middle Eastern war, this saga is only beginning to get played out); the Russian resurgence (may be manifested in renewed expansionism in the post-Soviet space – Georgia, Crimea and the Baltics are potential flashpoints – and the race of countries like Germany, Finland, Turkey and / or Japan to reach some kind of accommodation with Russia, contrary to US interests) and the continuing secular ascent of China (due to its gradual nature, this is unlikely to result in any “big events” (although a flareup over Taiwan or the South China Sea is always a possibility) – that said, in the longer run this is going to be one of the most significant geopolitical trends).

By 2019, we will look out upon a new world as different from 1989, as 1944 was from 1914, or 1991 was from 1961. A partially revived American superpower will face a real “peer competitor” in China, though their competition will be restrained by domestic troubles and a shared concern for global stability and the future of industrial civilization. Many of the world’s least developed regions will have begun to fall apart, forsaking the torturing lights of civilization for the comforting darkness of simplistic barbarism. The European Union will have fallen apart under the stresses of its contradictions and its constituent nations will have reverted to their traditional balance-of-power rivalries, while Japan decides it would be better off band wagoning with China. A more insular, nationalist and powerful Russia is a wildcard, either in the throes of demographic and economic stagnation – or enjoying new, unprecedented power accruing from its energy wealth and warming landmass. By then, the clouds will be gathering for an even greater storm – the point sometime in 2030-2050 when the limits to growth make themselves really felt, and industrial civilization falls into its moment of greatest peril. The shifting winds will have become a gale.

If you like the words I write, and want me to write more of them, consider donating or supporting me on Patreon.