The End of American Hegemony

In St. Hildegard’s vision, the five beasts represent five brief historical periods of time that precede the arrival of the Antichrist (more here). I argue that the first three have passed and the fourth, the era of the Black Pig, I suggest in my book, is coming to an end.

Each one of the previous eras ended with major international crises that led to a redrawing of the map of Europe and a change in the world’s global power structure (the dramatic events of the year 1914, for example). When I look at the present situation in Europe and the West, I think the answer to the question of what sort of events will mark the end of this present era for future historians are not difficult to speculate about.

America has been Western Europe’s defender since the end of WWII. The demise of the Soviet Union and end of the Cold War in 1991 left America as the sole hegemon. It might have been a good opportunity to close most of America’s European military bases. Much of Europe was in the process of integrating, eliminating borders and forming the European Union. What chance was there of a WWII happening all over again? Today, America supports hundreds of military bases or facilities in Europe and the world. The question is: how long is this sustainable?

Do you remember the National Commission on Fiscal Responsibility and Reform, otherwise known as Bowles-Simpson? It was commissioned by President Obama in 2010 and charged with coming up with a plan to improve the long term fiscal sustainability of the U.S. government. It failed miserably. The vote against it’s recommendations in the House of Representatives was 382 to 38. It would have sliced 4 trillion off the National Debt, which at the time was about 12 trillion. Today, five years later, the debt has increased to 18 trillion. But there’s more to the story.

Boston College economist and member of the National Bureau of Economic Research, Laurence Kotlikoff, argues that the figure of 18 trillion is misleading. There are future obligations and promises, like Social Security and Medicare, the net present value of which should be included in the National Debt total. He began talking about this with the publication of his book, The Coming Generational Storm, in 2005. At the time, he calculated that the total debt of the U.S. was 80 trillion dollars. Since then, he says it has gone up to 210 trillion. He explains what would be needed to deal with it:

Eliminating it would require an immediate, permanent 59% increase in federal tax revenue. An immediate, permanent 38% cut in federal spending would also suffice. The longer we wait, the worse the pain. If, for example, we do nothing for 20 years, the requisite federal tax increase would be 70%, or the requisite spending cut, 43%. (http://www.nytimes.com/2014/08/01/opinion/laurence-kotlikoff-on-fiscal-gap-accounting.html?_r=1)

The point is that gutless politicians today have no intention of dealing with this problem in a responsible way and even the Bowles-Simpson recommendations would have had little effect, but better than nothing. They intend to hand the bill over to future generations, to be dealt with long after their political careers have ended. But I think it will have been dealt with long before that. What the government will be forced to do is what most of them do who have excessive debt: inflate it away.

Inflation benefits the debtor, and hurts the creditor. Inflation erodes the value of the currency and hence, the value of debts in that currency. Governments can get away with this because they can print money through their central banks. The only other option a government has is outright default, with far more unpleasant political consequences. It’s much easier to use freshly printed money to pay your bills, while at the same time the value of your debt is being eroded, it’s a win-win! History is full of examples; the most recent is Zimbabwe. I keep a one-hundred billion Zim dollar bill in my wallet; it was given to me by someone who had just visited the country. It would by a loaf of bread.

Don’t think it can happen here? Too much gloom and doom? I wouldn’t put my head in the sand like those congressmen that voted against the recommendations of Bowles-Simpson. It’s all in the math–America is overstretched. Inflation, or more likely hyper-inflation, appears unavoidable. It could happen suddenly and there is a reason for this. The U.S. dollar is the world’s reserve currency; this was one of the spoils of WWII. Most international commerce is conducted in dollars, so most foreign nations maintain large dollar reserves. At the onset of inflation, American holders of dollars would see the buying power of their money gradually erode, foreign holders, however, would see an immediate and dramatic decline in the exchange-rate value of their dollars vis-a-vis their own currency.This would result in the massive selling of dollar-denominated securities by foreign entities, forcing the central bank to print money to buy up the securities that would be flooding the market in an attempt to protect the dollar, triggering hyper-inflation.

This would all lead to a financial collapse, no ability to maintain foreign military bases, and a new international reserve currency. The days of America’s geopolitical hegemony would be decisively over. The end of an era, and the beginning of a new one.

…rjt