The Endgame Begins

A year ago I predicted that there will be a “decoupling from the unwinding“, as “emerging markets” by and large ride out the temporary shocks of declining Western demand for their exports (China) and the interruption of Western credit intermediation (Russia) before resuming growth. This is one aspect of the trends leading to the imminent demise of Pax Americana, which will be replaced by “the age of scarcity industrialism” / “a world without the West“. We are now entering this Empire’s endgame.

After briefly stalling in early 2009, China’s economy roared back to life on the back of massive credit loosening to build (or overbuild) infrastructure and industrial capacity. Though not the most efficient use of resources, it did have the advantage of 1) maintaining growth, 2) forestalling the social unrest that would rise up if it wasn’t, and 3) at least Chinese investments went into building up their real economy (amongst other things, it became the world’s largest producer of wind turbines and photovoltaic panels in 2009), instead of the pork and oligarch welfare programs more characteristic of the US “stimulus”. And though Russia’s GDP contracted by 7.9% in 2009 – far higher than expected by most commentators, largely thanks to the dependence its big corporations acquired on continuous flows of intermediated Western credit – it began to slowly recover from mid-2009, industrial output is now rising at a fast clip, and investment banks are predicting growth of 4-6% for 2010. The other two BRIC’s, Brazil and India, didn’t have too many problems at all since they had neither a big credit nor trade dependence on the submerging Western markets.

In the long-term, I argued that the brunt of the crisis would fall on the “submerging” Anglo-Saxon markets, thanks to their “charades over “quantitative easing” (translation: printing money), transfer of toxic “assets” onto the public account”, and unsustainable fiscal stimuli. Today, the American political system is for all practical purposes broken. Republicans won’t agree to tax increases, Democrats won’t agree to cutting entitlement programs. The legislative process is reverting to that of the 17th century Polish-Lithuanian Commonwealth, when a single veto could (and did) prevent anything being agreed on in their Sejm, or parliament. (Hint: the ultimate consequences weren’t good for Poland).

The inflated hopes and expectations accompanying Obama’s accession to power were indeed, just as I suggested on his election, “greatly constrained by financial and institutional realities”. He is a weakling President, alternating between meaningless populist rhetoric and pandering to the Wall Street oligarchs; scorned by the left as Bush II with gloss, and condemned by the right as a foreign Marxist Islamofascist: his policies and outreaches failing at home and abroad, rejected in his own heartlands, these outcomes are engendered by and in large part made inevitable by his hopelessly pollyannish belief in his own messianic powers of compromise and persuasion.

If you think things look bad now, with the budget deficit at 10% of GDP for 2009 and a similar figure projected for 2010, don’t look at what awaits us in a few more years. The fiscal pressure is only going to increase as the baby boomers start retiring, and as long as the US remains a populist democracy the public will not allow it to cut entitlements (at least until China and the world’s oil exporters force it on them). For instance, the Congressional Budget Office believes that the US will never again run a balanced budget, and you can guess its consequences for American global power. Furthermore, this doesn’t take into account that 1) the vast majority of prior budget forecasts have been optimistic and 2) this assumes that none of the potential breaking-points that could doom Pax Americana (which I’ve identified as imperial overstretch, geopolitical shocks, and oil-credit perturbations caused by peak oil) come to pass.

As shown above, the US has had an almost continous budget deficit since the start of its “age of diminished expectations” in the 1970’s, funded by investors willing to buy up its Treasuries, accepting low returns in exchange for America’s perceived status as a “safe haven” (so-called “American alpha”). Yet with the American empire crumbling at the margins and their own most optimistic forecasts predicting a structural deficit into the foreseeable future, will investors continue buying up Treasuries – or will they turn to more promising emerging markets? Could it even be possible that the US is already in its imperial endgame, as argued by John Michael Greer?

A different reality pertains within the Washington DC beltway. Where states that fail to balance their budgets get their bond ratings cut and, in some cases, are having trouble finding buyers for their debt at less than usurious interest rates, the federal government seems to be able to defy the normal behavior of bond markets with impunity. Despite soaring deficits, not to mention a growing disinclination on the part of foreign governments to keep on financing the same, every new issuance of US treasury bills somehow finds buyers in such abundance that interest rates stay remarkably low. A few weeks ago, Tom Whipple of ASPO became the latest in a tolerably large number of perceptive observers who have pointed out that this makes sense only if the US government is surreptitiously buying its own debt.

The process works something like this. The Federal Reserve, which is not actually a government agency but a consortium of large banks working under a Federal charter, has the statutory right to mint money in the US. These days, that can be done by a few keystrokes on a computer, and another few keystrokes can transfer that money to any bank in the nation. Some of those banks use the money to buy up US treasury bills, probably by way of subsidiaries chartered in the Cayman Islands and the like, and these same off-book subsidiaries then stash the T-bills and keep them off the books. The money thus laundered finally arrives at the US treasury, where it gets spent.

It may be a bit more complex than that. Those huge sums of money voted by Congress to bail out the financial system may well have been diverted into this process – that would certainly explain why the Department of the Treasury and the Federal Reserve Bank of New York have stonewalled every attempt to trace exactly where all that money went. Friendly foreign governments may also have a hand in the process. One way or another, though, those of my readers who remember the financial engineering that got Enron its fifteen minutes of fame may find all this uncomfortably familiar – and it is. The world’s largest economy has become, in effect, the United States of Enron.

And it’s not only tree-hugging Druids that are raising the alarm. Niall Ferguson, court historian for Pax Americana, is also tolling the bell for its imminent demise on the pages of the Financial Times (A Greek crisis is coming to America).

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect. …

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941. …

The International Monetary Fund recently published estimates of the fiscal adjustments developed economies would need to make to restore fiscal stability over the decade ahead. Worst were Japan and the UK (a fiscal tightening of 13 per cent of GDP). [AK: Yes, Britain is screwed. So is Japan]. Then came Ireland, Spain and Greece (9 per cent). [AK: The PIIGS (Portugal, Italy, Ireland, Greece, Spain are screwed too, especially Greece and Spain at this point]. And in sixth place? Step forward America, which would need to tighten fiscal policy by 8.8 per cent of GDP to satisfy the IMF.

Explosions of public debt hurt economies in the following way, as numerous empirical studies have shown. By raising fears of default and/or currency depreciation ahead of actual inflation, they push up real interest rates. Higher real rates, in turn, act as drag on growth, especially when the private sector is also heavily indebted – as is the case in most western economies, not least the US.

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $15,000bn, that implies up to $300bn of extra interest payments – and you get up there pretty quickly with the average maturity of the debt now below 50 months. [AK: This refers to the dreaded “debt compound trap“, in which the real costs of servicing debt spiral out of control and the only way out is restructuring (partial / negotiated default) or “monetization” of the debt (inflation). PS. The “debt trap” is essentially what brought down the regime of Louis XVI in 1789].

The Obama administration’s new budget blithely assumes real GDP growth of 3.6 per cent over the next five years, with inflation averaging 1.4 per cent. [AK: Ha!] But with rising real rates, growth might well be lower. Under those circumstances, interest payments could soar as a share of federal revenue – from a tenth to a fifth to a quarter.

Last week Moody’s Investors Service warned that the triple A credit rating of the US should not be taken for granted. That warning recalls Larry Summers’ killer question (posed before he returned to government): “How long can the world’s biggest borrower remain the world’s biggest power?”

The US is a weakened skier and is now hurtling towards a rock-strewn double black for which it is not prepared in any way, shape, or form. But at least for now, its position looks stable – after all, it grew at an annualized 5.7% in Q4, 2009 (half due to inventories buildup). The same cannot be said of Greece and the Eurozone, which seem to be approaching a major crisis in mid-2010.

Afflicted with a dysfunctional political system and chronically unable to balance its budget (sound familiar?), yet without the manifold benefits of “American alpha”, Greece is facing a looming default propelled by a 13%-of-GDP budget deficit (even granting full benefit of the doubt to Greece’s dodgy statistics service), public debt at 113% of GDP (well above the 60% limit imposed by Maastricht), and draconian austerity plans that are politically unrealizable.

If Greece were to impose the draconian pay cuts under way in Ireland (5pc for lower state workers, rising to 20pc for bosses), it would deepen depression and cause tax revenues to collapse further. It is already too late for such crude policies. Greece is past the tipping point of a compound debt spiral. …

Remember, Athens holds the whip hand over Brussels, not the other way round. Greek exit from EMU would be dangerous. Quite apart from the instant contagion effects across Club Med and Eastern Europe, it would puncture the aura of manifest destiny that has driven EU integration for half a century. …

No doubt, EU institutions will rustle up a rescue. RBS says action by the European Central Bank may be “days away”. While the ECB may not bail out states, it may buy Greek bonds in the open market. EU states may club together to keep Greece afloat with loans for a while. That solves nothing. It increases Greece’s debt, drawing out the agony. What Greece needs – unless it leaves EMU – is a permanent subsidy from the North. Spain and Portugal will need help too.

The danger point for Greece will come when the Pfennig drops in Berlin that EMU divergence between North and South has widened to such a point that the system will break up unless: either Germany tolerates inflation of 4pc or 5pc to prevent Club Med tipping into debt deflation; or it pays welfare transfers to the South (not loans) equal to East German subsidies after reunification.

Before we blame Greece for making a hash of the euro, let us not forget how we got here. EMU lured Club Med into a trap. Interest rates were too low for Greece, Portugal, Spain, and Ireland, causing them all to be engulfed in a destructive property and wage boom. The ECB was complicit. It breached its inflation and M3 money target repeatedly in order to nurse Germany through slump. ECB rates were 2pc until December 2005. This was poison for overheating Southern states.

And according to Stratfor:

The crisis is rooted in Europe’s greatest success: the Maastricht Treaty and the monetary union the treaty spawned epitomized by the euro. Everyone participating in the euro won by merging their currencies. Germany received full, direct and currency-risk-free access to the markets of all its euro partners. In the years since, Germany’s brutal efficiency has permitted its exports to increase steadily both as a share of total European consumption and as a share of European exports to the wider world. Conversely, the eurozone’s smaller and/or poorer members gained access to Germany’s low interest rates and high credit rating. And the last bit is what spawned the current problem.

Greece now has the following choices:

1) Balance the budget. To do this Greece would have to cut its government spending by as much as half, resulting in sky-rocketing unemployment (20%+) and severe social unrest. Greeks are volatile, not like disciplined Germans or apathetic Latvians.

2) Leave the EMU. And print a New Drachma to inflate away its debt into oblivion, as was once typical for the Med nations. But then it would lose its geopolitical anchor in Europe and lose access to any further foreign investor money. According to Willem Buiter, this isn’t too likely.

Would a eurozone national government faced either with the looming threat of default or with the reality of a default be incentivised to leave the eurozone? Consider the example of a hypothetical country called Hellas. It could not redenominate its existing stock of euro-denominated obligations in its new currency, let’s call it the New Drachma. That itself would constitute a further act of default. If the New Drachma depreciated sharply against the euro, in both nominal and real terms, following the exit of Hellas from the eurozone, the real value of the government debt-to-GDP ratio would rise. In addition, any new funding through the issuance of New Drachma-denominated sovereign bonds would be subject to an exchange rate risk premium, and these bonds would have to be sold in markets that are less deep and liquid that the market for euro-denominated Hellas debt used to be. So the sovereign eurozone quitter and all who sail in her would be clobbered as regards borrowing costs both on the outstanding stock and on the new flows.

A sharp depreciation of the nominal exchange rate of the New Drachma vis-a-vis the euro would for a short period improve the competitive position of the nation because, with domestic costs and prices sticky in nominal New Drachma terms, a nominal depreciation is also a real depreciation. Nominal rigidities are, however, less important for eurozone economies than for the UK, and much less important than in the US. Real rigidities are what characterises mythical Hellas, as it does real-world Greece, Italy, Spain, Portugal and Ireland. The real benefits from a nominal exchange rate depreciation would be eroded after a year – within two years at most – before you could say cyclical recovery. The New Drachma would be a little currency in a big global financial market system – not an instrument to be used to gain competitive advantage or to respond efficiently to asymmetric shocks, but a source of extraneous noise, excess volatility and persistent misalignments, rather like sterling.

A eurozone member state faced with the prospect of sovereign default, or just having suffered the indignity of sovereign default, would be immensely relieved to be a member of the eurozone. The last thing it would want to do is give up the financial shelter provided by membership in the eurozone to try and emulate Iceland, New Zealand or the UK.

3) Old-school default. And be shunned by the rest of Europe. Though threatening to blow up the bomb is to Greece’s advantage, since this will shift the burden to…

Europe – or precisely, Germany – having to make their choice.

1) Let them burn. Germany is getting impatient of being used as Europe’s cash cow for the past 60 years, and may simply tell Greece to deal with it herself. This will likely lead to spiraling debt service costs, fiscal-social-political breakdown, and heightened borrowing costs for the other PIIGS, maybe even a “cascading collapse” of Europe’s entire southern periphery (in the most extreme case, even Belgium and France would be threatened). This would finish off the EU as a meaningful institution, and with it will go the main vehice through which Germany and France wield power at a global level.

2) Berlin bails out Greece. Involves a different set of problems. A straight-out bailout will invite moral hazard and political dissatisfaction amongst the German electorate, who have had their wages constrained for years while the PIIGS wallowed in their bubbles. But all in all, preferable to the above scenario, or the prospect of a spreading crisis of confidence also forcing Germany to bail out Italy, Spain, or even France, all of whom have far bigger borrowing needs (and for which even Germany doesn’t have the resources). Therefore, Germany will probably lead an EU bailout of Greece (even though there is no formal mechanism for doing so) – but in exchange, it will want major political concessions.

But the days of no-strings-attached financial assistance from Germany are over. If Germany is going to do this, there will no longer be anything “implied” or “assumed” about German control of the European Central Bank and the eurozone. The control will become reality, and that control will have consequences. For all intents and purposes, Germany will run the fiscal policies of peripheral member states that have proved they are not up to the task of doing so on their own. To accept anything less intrusive would end with Germany becoming responsible for bailing out everyone.

Granted, at the moment the EU is stalling, not making any commitments; not surprising, given the cluttered and unwieldy talking shop that it is. But as Greece’s bond auctions (almost certainly) fail over the next few months to meet its soaring debt financing commitments, and as it falls into its debt compound trap, the fiscally secure nations – that is, primarily Germany – will realize the dangers of allowing the contagion to spread. And Germany in particular will see a chance to regain the sphere of influence over Mitteleuropa denied it since the Second World War.

Either way, in 2010 the EU institutions are going to be sidelined in favor of more workable, bilateral relations – especially between the Franco-German core and the weakening peripheries. The way will be opened for the return of Great Power politics to the European continent.

Looking further ahead, within a year the US will again enter a state of crisis. Based on Obama’s low popularity at the end of his first year (is he going to set a time record for failed Presidency?) and his loss of Massachusetts (!) to the Republicans, the political gridlock will only harden. As I forecast last September, “the feds will face challenges from the far-left (new Huey Long’s, anarchism, etc) and the far-right (demands for more state rights, anti-tax movements, “American reactionary patriots”, etc)”  – though right now, the far-right movements appear to be the more powerful emerging faction (see the grassroots appeal of the reactionary, back-to-the-18th-century Tea Partiers, who in an electoral contest would now garner 17% of the vote – is the US finally going to see a powerful 3rd party?). PS. American corporations can now legally buy themselves political parties.

Second, in addition to the political problem, there will be a renewed economic and credit problem as the Second Wave of the Housing Crisis engulfs the nation because of rising defaults from adjustable-rate mortgages, many of which will be coming due by 2011.

And this brings us to a third problem, a renewed banking crisis. But this time, instead of withdrawing from emerging markets to the “safe haven” of the US, the banks will instead invest more into promising emerging markets (e.g. the BRIC’s) and commodity speculation (see peak oil), while divulging their US holdings and triggering capital flight. This will compount the political and economic problems, as America’s “rootless cosmopolitans” / financial and their political flunkies come under fire from both the far-left and right-wing producerist reactionaries.

Then there’s the fourth problem – peak oil. World oil production capacity may have peaked in 2010, and projections indicate that 2012 will see an accelerating downslide. This time there will be a both severe credit contraction, far exceeding the one in 2008-2009 (because this time capital will be fleeing the US) and soaring oil prices. The American consumer will live through a far more severe retrenchment than in 2007-2009, starting in 2011. The entailing fall in consumption will further reinforce the banking crisis, the wider economic crisis, and the political crisis. By this point, the “Tea Party”-Republican candidate may be well ahead of Obama, who by this point is utterly discredited.

Now what should Obama do? Note that by this time the Iran crisis will be coming to a head. Sanctions will have failed (China and Russia will see no reason to cooperate seriously). Israel will be getting extremely restless, since it treats the Iranian nuclear bomb as an existential threat. And Obama may well come to view a decisive resolution of the Iran issue as the only road still left open to him to claw back domestic and international legitimacy. However, Iran likely has the capability to block the Strait of Hormuz to oil tankers for several weeks using mines and anti-ship missiles. 20% of the world’s oil shipments pass through those narrow Straits. Needless to say, in a world entering the downslope of Hubbert’s peak, any disruption to global oil supplies will have tremendous, chaotic repercussions – economic, financial, political, and geopolitical – that we have no way of predicting in advance.

In conclusion, Pax Americana is going to face a series of severe crises in the next three to five years (and not only its lynchpin, the US). The European crisis, linked to the Med credit bubbles, is leading to the slow unraveling of the EU’s legitimacy in favor of its core states, France and especially Germany. It will come to a head in the next few months. Japan is facing an irredeemable fiscal and debt crisis, which will explode in the next few years: eventually, it will likely bandwagon with China (leveraging its technological base to gain favorable access to China’s markets and labor force) and ditch its post-1990 turn towards neoliberalism, which was never suited for the Japanese mentality anyway, in favor of Asian socialism.

Finally, the US itself will face a panoply of challenges – fiscal profligacy (stemming from its belief that it can have both guns & butter on a shrinking industrial base), imperial overstretch (Afghanistan, Iraq), political dysfunction, a new housing, credit, and economic crisis, soaring energy prices (disastrous for suburbia), and geopolitical challenges (Iran, China, Russia). It can deal with any one of them, but I can see no way how it would be able to deal with all of them coming within a few years of each other. The consequences?

Namely, there will be a partial collapse of legitimacy in the government; the feds will face challenges from the far-left (new Huey Long’s, anarchism, etc) and the far-right (demands for more state rights, anti-tax movements, “American reactionary patriots”, etc); fertility will collapse from the current replacement-level rates to around 1.3-1.7, as welfare shrinks and the utility of having children for the very poor, currently the most fecund social group, drops; crime will increase, etc. Yet within a decade a new social order will gradually emerge, probably fiscally and socially conservative and more authoritarian than the current one, and with it a new equilibrium will slowly, painfully come into being.

However, the US will almost certainly remain a Great Power. I certainly do not see it collapsing into separate states or regions, as dreamt of by the likes of Igor Panarin or Gerald Celente. In some ways, by casting aside its global imperial shell, it will actually become stronger – it will no longer be weighed down by the burden of global empire, and can focus on other activities the more effectively, such as reconstructing its industrial base and reinforcing its neo-colonial sphere around North America, the Carribbean, and perhaps Central America / Venezuela. Whatever form America’s new political economy takes (something resembling Putinism?, or maybe Chavismo?), it will likely be far better suited for the coming age of scarcity industrialism (characterized by economic statism, Realpolitik, and mercantile trade relations), than the crumbling colossus that is today’s Pax Americana.


  1. J.P. Wilcox says:

    Had you up until that last paragraph of the US coming through in pretty good shape. Don’t think so. At some juncture of economic descent, due to excessive debt load and loss of oil imports from peak oil supply crunches to come, the US will devolve into Kunstler style local communities.

    The big question is; How does a system that is devolving support 7 billion people? It can’t, so who lives and who doesn’t? What percentage of 7 billion remains standing?

    • The US will suffer severe shocks that will translate into severely reduced living standards, much like the case in post-Soviet Russia. However, I’m not a fan of Kunstler’s uninterrupted “long emergency” hypothesis.

      1) What will happen with the collapse of Pax Americana is a significant reduction in system complexity. As pointed out by Tainter, less complex systems do not need the same high levels of energetic / organizational flows to support themselves. My assumption is that the US will stabilize by 2020, albeit at a significantly lower base (think 1930’s-1950’s with today’s level of technology). Same goes for Japan and Western Europe.

      2) The oil shock will of course be very severe, since there was no prior effort at mitigation. However, the US still has big gas reserves and unconventional gas sources (shale gas, coal seam gas) which can be exploited, not to mention coal. They should last at a flat or even slowly rising plateau for the next 20-40 years (though any volume increases will be undercut by declining EROEI). Cars can be converted to run on gas, and they doubtless will be. And the US state, being a state and it being natural for states to do this, will not want its domains to “devolve into Kunstler style local communities”; the center will eventually reassert control. Finally, there’s the neo-colonial possibilities I mentioned – for instance, the likes of Hugo Chavez may not last long once the new US reemerges.

      3) See John Greer’s theory of catabolic collapse. Basically, if a system is allowed to collapse naturally, it tends to be quite bumpy, severe declines alternating between plateaus and even limited recoveries. I agree with him that in many ways the “myth of apocalypse” narrative pushed by Kunstler or Jay Hanson are as flawed as the cornucopian narratives.

      Re-carrying capacity. I may address this in detail in a later post, and certainly in my book. In principle, under the world’s current climatic conditions, 7bn people may be supported by a mass global adoption of permaculture, hydroponics, and fish farming. The two big elephants in the room that could wreck everything are 1) climate change which could devastate the world’s current grain breadbaskets (staple food shortages) and acidify the oceans (fisheries collapse), and 2) if states try to preserve the current, wasteful industrial system at all costs, – which I happen to believe is the most likely scenario – then Collapse when it comes will be very rapid, very deep, and will usher in universal anarchy and violence, thus bringing down the carrying capacity of the land. Either one of these, or both, could trigger a dieoff back to 1-2bn people.

    • I totally agree with you, the US won’t come out of this all nice and neat in a few years of it falling down. I’m with Celente and Igor, the US will breakup into pieces and form their seperate countries or “Cantons”. And thats because once central govt. falls on it’s face and can’t support the rest of the country, parts of the country will be looking to itself or elsewhere for support and/or governance.

  2. “Today, the American political system is for all practical purposes broken. Republicans won’t agree to tax increases, Democrats won’t agree to cutting entitlement programs. The legislative process is reverting to that of the 17th century Polish-Lithuanian Commonwealth, when a single veto could (and did) prevent anything being agreed on in their Sejm, or parliament. (Hint: the ultimate consequences weren’t good for Poland).”

    While it is true that Democrats with 60 votes cannot get anything significant through the Senate due to Republican obstruction and their own fecklessness, Republicans with 51 votes can implement much of their agenda. However, since the Republican agenda tends to include things like “Lets divert resources from the arguably justifiable and winnable war in Afghanistan to a lunatic attack on a country that had nothing whatever to do with 9-11, keep those resources there until the Afghanistan war is no longer winnable, and finance both wars with tax cuts!”, Republicans being able to get their way merely accelerates the processes you describe here.

    • Agreed, except for the idea that Afghanistan is a worthy cause or winnable. I don’t think it ever was.

      • georgesdelatour says:

        The British Empire lost two wars in Afghanistan at the height of its power. The Soviet Empire lost in Afghanistan at the height of its power. So the historical precedents were never good there.

        Right at the start, thoughtful commentators compared the war in Iraq for the US with the Boer War for Britain.

      • Hence the word “arguably”. Support for the Afgham war was not necessarily a sign of impaired brain function, while support for the conspiracy to wage aggressive war against Iraq clearly was.

        • I would beg to differ. Potentially, Iraq could have been the much more worthwhile investment.
          1) Afghanistan – A lot of rocks, a lot of crazy gun-toting people, a graveyard of empires, and a gas pipeline route from Central Asia to the Indian Ocean that will probably never be built because of aforementioned crazy gun-toting people. (At least not as long as US troops remain in Afghanistan).
          2) Iraq – A lot of sand, a very important strategic position in the Middle East, with potentially vast untapped oil reserves (though perhaps not).
          If I had to choose, I’d have fought in Iraq.

          • OTOH, US efforts in Afghanistan had significant international support, so an actual multinational coalition effort was possible there. And President Putin seemed to agree, until Dubya stiffed him.

            In Iraq, all the US ever had was “poodle” Blair and the “Coalition of the Bribed”.

            As for the point of the Iraqi oil, Saddam was a willing seller. No point invading to get it.

            • georgesdelatour says:

              I’m with you AK. Iraq is the more worthwhile prize, and is at least winnable. Afghanistan has heroin, I guess. For the US to win in Afghanistan they’ve got to engineer a sweeping social revolution in the country, and seal the border with Pakistan. Can they do either?

              At the start of the Afghan war, the US received tons of really useful intelligence from Iran, because 1) Iran hated the Taleban, and 2) the then Iranian government wanted to improve relations with America. But Bush responded by including Iran in his Axis Of Evil. I will never understand this. By any rational calculation of national self-interest, the US should drop Israel and form a strong Nixon-Mao type alliance with Iran.

              The parallels between the Second Boer War and the Iraq War are:
              1) The Empire fights a conventional war, which it wins relatively quickly.
              2) But it then finds itself fighting a protracted guerilla war. The guerilla tactics are seen to be successful, showing others that the Empire can be resisted (Michael Collins copies Boer tactics against Britain in Ireland, Afghan rebels copy Iraqi tactics against the US).
              3) The Empire has to commit massively more forces to overpower the guerillas. It eventually wins. But the Empire spends massively more money than expected, loses its appearance of invincibility before the world, and is internationally reviled.

  3. Great article! But I’m afraid I have to agree with J.P. I think the divisions within U.S. society (and western society in general) are much greater than they seem. When the progress myths of the American dream no longer have the power to unite, the differences between left/right, rich/poor, christian/non-believer, white/other etc. will become that much more raw. A new equilibrium wil be reached at some point, but I think the birthing pains will be so great that the new America will resemble very little of the old.

  4. georgesdelatour says:

    Plenty of interesting stuff here.

    A couple of points.

    1. I’m not convinced by Willem Buiter:

    “A eurozone member state faced with the prospect of sovereign default, or just having suffered the indignity of sovereign default, would be immensely relieved to be a member of the eurozone. The last thing it would want to do is give up the financial shelter provided by membership in the eurozone to try and emulate Iceland, New Zealand or the UK.”

    I notice, for starters, that he doesn’t mention Norway or Switzerland in his analysis. The Polish Zloty keeps going up and up – its rise started long before the Greek crisis. The Poles are supposed to join the Euro, but increasingly their own national currency looks like a far better “financial shelter”.

    2. One thing about the US is, even with all the massive problems you correctly highlight, it still dominates in several forward-looking areas: Apple, Microsoft, Google, Amazon, Ebay, Wikipedia for instance. Right now I can’t see a Chinese company successfully competing with Apple. And even with Google largely excluded from China, will a China-based corporation compete with Google globally any time soon?

    • 1. As I understand it, Buiter was referring to countries whose fiscal and debt situation is worse than for the EU as a whole (since the EU is treated largely as an extension of Germany). They would be well off to join the EU because then refinancing their debt would become much cheaper.

      Of course, if the contagion spreads beyond Greece to Iberia, Italy, and France, then any EU promises of aid will lose their credibility because though Germany can bail out Greece, it can’t do it for the whole Med. In that case, joining the Eurozone would indeed become pointless except for the oldest and original reason – to have a unified currency space to facilitate cross-border commerce.

      2. That is a valid point, and its scientific and hi-tech strength is one of the reasons why its false to write off the US altogether. That said, even here there are many problems.
      A) Many of the workers at America’s flagship hi-tech companies, especially the technical ones, are foreigners (Indians, Chinese, Koreans, Russians, etc). The US immigration process tends to be a long, bureaucratic nightmare – will they continue to come and stay when there are rapidly growing information ecosystems in places like Bangalore and Suzhou?
      B) California is a bankrupt state within a Union rapidly approaching it. Either infrastructure and human capital spending will collapse (not that the state of either is great at this time), or successful companies will be used as piggy banks. See Why Government is Set to Extinguish Silicon Valley.
      C) Specifically about the corporations you cited. Wikipedia is free source. Ebay and Amazon are nothing special, just online marketplaces that can be (and are – e.g., Alibaba) easily replicated. The only worth in Apple’s products are the gloss Steve Jobs paints over them. Microsoft and Google, however, will probably continue to flourish (though, they might well relocate from California to the East Coast).

      • georgesdelatour says:

        It’s good not to run up more and more debts that you have no chance of repaying, whether you’re in or out of the Euro. Greece inside the Euro has run up far bigger debts than it would have outside, precisely because the Germans were seen as effective final guarantors of these bad loans. But Germany can’t sort out all the debts of all the “PIGS”.

        The Euro is a political/theological matter, not just an Economic one. So the politicians/theologians will fight hard to keep Greece inside. Then again, a Euro without Greece would be a more solid, reliable currency for investors. What do you want, an unreliable Imperial currency like the US Dollar, or a trusted currency like the Swiss Franc?

  5. Nice piece of work, here, A.K.

    A few thoughts.

    I wouldn’t assume that the US ruling elites will sit by peacefully and watch rival powers surpass them economically and militarily. The US still has “the guns” and may well use them to take China down a notch or two, if current trends continue.

    Also, it is quite imaginable that at some point ruling elites in developed nations (who can plainly see that the world cannot long continue on its present course of unrestrained growth) will conspire to engineer a dieback, say through a man-made pandemic. Michael Ruppert has written about this some in “Crossing the Rubicon”.

    Of our use of domestic supplies of nat gas and coal, it’s hard for me to picture this being scaled up adequately. It’s just not happening.

    Of your Tainter remarks, I agree that we in the US have a lot of flab to cut – or “resilience”, shall we say. We are so extravagant in our use of natural resources that it wouldn’t be hard for most of us to cut back some on our use.

    Welcome to the US. And the Bay Area.

  6. The US power base is like the internet it is spread and centred around the world and with countries used as off shore holdings plus working through US private military security firms like MPRI contracted by the Pentagon mainly Islamic but also non Islamic global mercenary force it can use financed by the black market in organised crime mainly drugs and sex trafficking.

    Since the founding of Mao’s Communist state in China the CIA and MI6 have been supporting and training separatist/terrorist factions in China with the Tibetans and the Uighers in Xinjing which continues to this day even more so both being on the NED CIA payroll with ties to Islamic terrorism attending terrorist training camps in Afghanistan prior to 9/11.

    Plus the US/UK essentially controls the mass media around the world as well as all the major NGO, human rights and philanthropy organisations.

    So I think it is psychically impossible for US power to diminish. It is more likely that it will be restructured, less visible like the British Empire who still kept the financial banking empire and intelligence network in tact in conjunction with the US and maintain its global influence.

    The biggest problem facing the US is its internal problem with debt and increasing domestic population birth rate especially among its minority populations mainly Mexican and Blacks especially under financial crisis will outnumber the native white birthrates.

  7. 1) Where is the evidence of MI6/CIA training terrorists in Tibet?

    2) “US/UK essentially controls the mass media around the world” Do they? As far as I’m concerned, RT isn’t too sweet towards them. I doubt China is either..

  8. @Anatoly
    Excellent article; a bit frazzled to add anything much. I don’t think the EU is finished yet.

    The thing about America is that the media is really biased towards a certain class of people. I think the tea party really is ‘playing’ to an extent. Ron Paul offered a coherent libertarian voice at the time, and was sneered at by many ‘conservatives’ including Glen Beck. I’m not a libertarian myself, but I think a lot of Americans like playing libertarians, but don’t vote that way when the time comes.

    Anyway, my point is that the USA does seem pretty divided: far more than Europe is. But I don’t think that the media gives much voice to these divisions. How genuinely sincere they are is another matter.

  9. My own color, as an American, is that regionalism is one of the most overlooked areas of political stress in a possible American disintegration event. The wounds of the “Northern War of Aggression” are not healed and begrudgingly recalled in the South. The Coasts see Flyover Country literally as lesser beings. And everybody else just wishes California would sink into the seas already. The ideological divisions are as much geographical as right/left.

    In my opinion, we will see a legitimate state secession movement before a non-Astro Turfed, non-Gatekeeper, organic third party gains national legitimacy.

    • ‘In my opinion, we will see a legitimate state secession movement before a non-Astro Turfed, non-Gatekeeper, organic third party gains national legitimacy.’

      But it seems to me that these people want conflicting things. Look at Sarah Palin addressing the ‘Tea Party’ to rapturous applause. Maybe she’s on the economic right, but she’s also all for causing trouble with Russia and Iran. Even if they did establish a third party, then the lobbies that have corrupted the other two would still be there.

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