End of American Hegemony, Part II

titanicIn 1997, America’s former national security adviser, Zbigniew Brzezinski wrote a book on America’s new role as the only global superpower, The Grand Chessboard: American Primacy and its Geostrategic Imperatives. He warned that America’s post-Cold War role in the world may not last long:

“In the long run, global politics are bound to become increasingly uncongenial to the concentration of hegemonic power in the hands of a single state. Hence, America is not only the first, as well as the only, truly global superpower, but is also likely to be the very last.” (p.209)

Eighteen years later, in a recent interview he suggests that this may have already taken place:

“The fact of the matter is that the redistribution of global power has produced a situation in which the US is no longer the sole hegemon. The US has to acknowledge the fact that the world is now much more complex.”

While the theater where the era of the Grey Wolf is to set to play out is primarily Europe, my attention for the moment is more focused on the point at which the United States officially (or forcibly) relinquishes her role as the “sole hegemon”. Why this is so important is that St. Hildegard’s five bestial era’s must align with well defined historical periods (she refers to them as “five ferocious epochs of temporal rule”) and the present one (the era of the Black Pig) that began with the fall of the Soviet Union, will likely end with a similar fall of the United States. Shifts in the world’s geopolitical power alignment, for historians, conveniently mark the end of an era and the beginning of another.

In the first part of this series we focused on the unsustainability of America’s financial condition and the consequence of the U.S. dollar losing its status as the world’s reserve currency. We did this by reevaluating the true total debt owed by the United States, combining the government’s reported “official” debt total with the present value of the country’s long-term unfunded liabilities like Social Security and Medicare. America’s official 18 trillion dollar national debt fails to account for these future obligations. Numerous economists have calculated the true dollar figure to exceed 200 trillion, likely forcing the government to devalue its currency through inflation.

dollarBut here in Part II, we will assume that these future liabilities don’t exist or somehow become manageable, leaving the 18 trillion in debt as all the government has left to worry about. Unfortunately America, you are still insolvent!. This will have far reaching domestic and international consequences,  triggering the end, or limiting of, America’s military role in Europe and elsewhere.

The End Result is Inescapable

There is a mathematical inevitability to the fate of the U.S.’s superpower status, it has to do with the nature of interest rates, together with the irresistible temptation to take on more debt as rates decrease. As the rates for American sovereign debt began decreasing in 2008, the government felt justified in taking on much more debt. More important to understand, is that the trouble will begin due to the simple reality that the lower the rate goes, the higher the percentage of increase in the service of the debt occurs when rates go up. This is the key to understanding the inevitability of a U.S. financial crisis, in whichever form it takes. If rates were at their historical norm, a gain from 7%-9% is a 28% increase in payments and could be manageable. But an increase from 3%-6% is an increase of 100%. The average annual rate of interest the U.S. government pays on it’s debt to the public today is about 3%.

The forcing down of interest rates by the Federal Reserve Bank in response to the economic crisis of 2008 and the Great Recession, brought the government’s interest rates to the lowest levels ever before seen in this country’s history. It encouraged an increase the government’s debt level by 125%, solely because it was not accompanied by an increase in its debt service. But it’s now 2015, and the Federal Reserve has announced that it will begin raising rates this year. A historically small 3% increase in rates would double the debt service requirements for a government budget that has been running an annual deficit for the past fourteen years. Half of the country’s tax revenue would be needed to service the debt, but assuredly, it would be covered by issuing additional debt. It’s an old story that has been repeated many times throughout history and this development would not go unnoticed by America’s bankers (foreign holder’s of U.S. dollar assets). At some point, they will decide to part with the devaluing dollar, the consequence of which itself will force interest rates up further. If it becomes panic-selling (it probably will), hyperinflation would commence.

But here’s the point: however the government chooses to respond to the economic crisis triggered by rising interest rates, in every scenario one thing is for sure, defense spending will be dramatically reduced. Consider the following chart:

military spending

The USA is a country that has not had a single military threat on any of its borders for over 70 years (except for the Cuban Missile Crisis). But the spending in the chart above isn’t only to defend those borders, but Germany’s, Italy’s, Japan’s, France’s, Poland’s, etc. If one examines a breakdown of the U.S. budget, it is obvious that defense spending is the only politically feasible place to cut. At best, the cuts will prevent a economic collapse and keep the country’s finance’s afloat, though no longer able to be the protector of Western Europe and elsewhere. The world’s geopolitical power structure will have changed and other nations will have to step into Americas former role.

The last time America ran an annual budget surplus was from 1998-2001. This came after the fall of the Soviet Union when President Bill Clinton began closing or shrinking military bases and facilities around the world (about 200 in all); this was known as the “peace dividend”. Clinton’s positive legacy, in spite of himself, was largely due to those rare surplus years and their benefit to the economy. It’s interesting to note that the Clintons stand a good chance of reclaiming the White House in 2016. What do you think their priorities will be?

…rjt

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