Thursday, July 29, 2010

Such is the end of Empires

Niall Ferguson has a critically important article out at RealClearWorld. History and economics. Facts are hard things.
We have been raised to think of the historical process as an essentially cyclical one.

We naturally tend to assume that in our own time, too, history will move cyclically, and slowly.

Yet what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid. They operate somewhere between order and disorder, on "the edge of chaos", in the phrase of the computer scientist Christopher Langton.

Such systems can appear to operate quite stably for some time; they seem to be in equilibrium but are, in fact, constantly adapting.

But there comes a moment when complex systems "go critical". A very small trigger can set off a phase transition from a benign equilibrium to a crisis.
Examples?
... imperial falls are associated with fiscal crises: sharp imbalances between revenues and expenditures, and the mounting cost of servicing a mountain of public debt.

Think of Spain in the 17th century: already by 1543 nearly two-thirds of ordinary revenue was going on interest on the juros, the loans by which the Habsburg monarchy financed itself.

Or think of France in the 18th century: between 1751 and 1788, the eve of Revolution, interest and amortisation payments rose from just over a quarter of tax revenue to 62 per cent.

Finally, consider Britain in the 20th century. Its real problems came after 1945, when a substantial proportion of its now immense debt burden was in foreign hands. Of the pound stg. 21 billion national debt at the end of the war, about pound stg. 3.4bn was owed to foreign creditors, equivalent to about a third of gross domestic product.
And were do we stand in comparison?
Alarm bells should therefore be ringing very loudly indeed in Washington, as the US contemplates a deficit for 2010 of more than $US1.47 trillion ($1.64 trillion), about 10 per cent of GDP, for the second year running. Since 2001, in the space of just 10 years, the federal debt in public hands has doubled as a share of GDP from 32 per cent to a projected 66 per cent next year. According to the Congressional Budget Office's latest projections, the debt could rise above 90 per cent of GDP by 2020 and reach 146 per cent by 2030 and 344 per cent by 2050.

These sums may sound fantastic. But what is even more terrifying is to consider what ongoing deficit finance could mean for the burden of interest payments as a share of federal revenues.

The CBO projects net interest payments rising from 9 per cent of revenue to 20 per cent in 2020, 36 per cent in 2030, 58 per cent in 2040 and 85 per cent in 2050. As Larry Kotlikoff recently pointed out in the Financial Times, by any meaningful measure, the fiscal position of the US is at present worse than that of Greece.
You have heard me warn of the budetary train wreck that is coming. The shipbuilding "Terrible 20s" - and the fact that the salad days are long gone. Why?
There is a zero-sum game at the heart of the budgetary process: even if rates stay low, recurrent deficits and debt accumulation mean that interest payments consume a rising proportion of tax revenue. And military expenditure is the item most likely to be squeezed to compensate because, unlike mandatory entitlements (social security, Medicaid and Medicare), defence spending is discretionary.

It is, in other words, a pre-programmed reality of US fiscal policy today that the resources available to the Department of Defense will be reduced in the years to come. Indeed, by my reckoning, it is quite likely that the US could be spending more on interest payments than on defence within the next decade.
We have a lot of friends in the world, we like to tell ourselves, but remember - nations do not have permanent friends, but permanent interests.
...half the federal debt in public hands is in the hands of foreign creditors. Of that, a fifth (22 per cent) is held by the monetary authorities of the People's Republic of China, down from 27 per cent in July last year. It may not have escaped your notice that China now has the second-largest economy in the world and is almost certain to be the US's principal strategic rival in the 21st century, particularly in the Asia-Pacific. Quietly, discreetly, the Chinese are reducing their exposure to US Treasuries. Perhaps they have noticed what the rest of the world's investors pretend not to see: that the US is on a completely unsustainable fiscal course, with no apparent political means of self-correcting. That has profound implications not only for the US but also for all countries that have come to rely on it, directly or indirectly, for their security.

Australia's post-war foreign policy has been, in essence, to be a committed ally of the US.

But what if the sudden waning of American power that I fear brings to an abrupt end the era of US hegemony in the Asia-Pacific region? Are we (Australians) ready for such a dramatic change in the global balance of power?
The view from the outside is often needed.

Things are fixable - but time is money, and we are running out of time to stop this run to the cliff's edge.

Ponder.

20 comments:

MR T's Haircut said...

<span>What happens when the Fed starts cranking out money to pay for everything?... watch consumer goods sky rocket.. and the bow wave is just starting to build for the foreign companies when we cannot afford to buy their crap anymore..   We have 2 or 3 years most at this level.. we will know the gig is up when Social Security is frozen or payments are not made... meanwhile China ascends... 
what happens next?</span>
<span></span>
<span>No manufacturing base</span>
<span>No jobs</span>
<span>No growth</span>
<span>No confidence</span>
<span>Stagnation to be followed by inflation... </span>
<span></span>
<span>a National Security threat for the US and our allies.. </span>

sid said...

Just know I'm too old to work in the fields....

Gonna have to finagle a house job.

sid said...

You can bet your bippy, the Chinese haven't forgotten this...


 When China was defeated by Japan in 1895, European powers responded with a policy they called, "carving up the Chinese melon." Following the partitioning of Africa among European powers, they turned their sights to what they saw as a terminally weak Chinese government. European powers and America began to scramble for what was called "spheres of interest." These spheres of interest involved holding leases for all railway and commercial privileges in various regions. The Russians got Port Arthur, the British got the New Territories around Hong Kong, the Germans got a leasehold in Shantung, and the Americans got nothing. Concentrating largely on the Philipines and Guam, the Americans had missed the Chinese boat and so insisted on an "open door" policy in China in which commercial opportunities were equally available to all European powers and the political and territorial integrity of China remained untouched.

Sure is a shame this guy is wearing those 3D rose colored blinders....

sid said...

Yeah, but didn't the Big O do well on that couch Mr T?

John said...

Probably a dozen out of 535 Congresscritters have the intelligence and guts to cut spending to the levels necessary to survive.  The rest are simply buying votes with other people's money and playing partisan political games for their own benefit.  Not a Chris Christy in the bunch, sadly.

This must change, and damn quick.  November 2nd can be a good start, but it must be a huge tsunami of change in attitudes, and patriotism to do what is right.

While those attuned to the new media may have a pretty good idea of what is going on, the vast majority of the electorate are clueless, and frankly my dear, don't give a damn.  Worse, what pitifully small knowledge thay have of political issues or candidates or national security or economics comes from the biased leftists in the mainstream media.  Election of Obama serves as proof of the failure of the media to dig for and tell the truth.

Too many voters get their orders from "community organizer" types.

And, the Chicago way" of politics has proven adept at stealing elections across the country, and the DOJ under holder will not prosecute those likely to support Dems, but refuses to take legally required steps to ensure the votes o military members get counted (who are likely not Dem voters).  Senatore Al Franken? Gov. Christine Gregiore of Washington?

We have met the new enemies and they are domestic. 

At this critical juncture, we can no longer afford to stabilize Afghanistan, although we may try to make Iraq a useful ally in the region, but we may not even be able to afford that
Oh, and Best Wedding wishses to Chelsea, with an event that spends enough to feed, house and arm a significant number of people for a long time.

xformed said...

The I don't really want to be the cynic in me is being brought to life, as the evidence mounts that "intelligent people" act stupified in the the face of the very answer to the peoblem:  Tighten the belt, and don't spend what you don't have.

Either they are playing stupified (and it's playing well before the public as The WON points at GWB), or they are truly the least educated smart people to walk the earth.

In either case, we're toast unless 11/2 says "STOP!" in a very loud voice.

ewok40k said...

Mark my words, Midway 2042 redux?
other than that, do more with less...
Absalons (or similar FFG) instead of LCS
LST (old style) instead of LPD-17
re-open CH-53 instead of V-22
SSGNs and light carriers with F-35s instead of Super Star Destroyers (aka CVNs)
You can't dismantle social expenditures - as much as your millionaires want it, there is no return to XIX century Dickensian England.
Get the trade balanced. One nice way to counter Yuan undervalued is to introduce tax on exchange Yuan to $. If Walmart will try to bribe you tell them "buck stops here". And drill, drill, drill despite the oil spill. (no pun intended) Someday Iran will get its nukes and shit will hit the fan in the Middle East.

MR T's Haircut said...

Sid,

I know pretty ridiculous...

Grumpy Old Ham said...

Mark Levin discussed this article at some length last night.  Terrifying, to say the least.

I do have one small nit to pick.  While it's true that assuming that history is essentially cyclical blinds us to the potential for disruptive change, it's equally true (as xformed points out below) that because intelligent people act stupified in the face of hard solutions to hard problems there is a very repeatable pattern of great nations (empires, if you prefer) rising and falling over the course of millennia.  The trigger event(s) may be chaotic and difficult to predict in the short term but the long-term pattern is basically cyclical.

Butch said...

Make friends with your local warlord NOW!

MR T's Haircut said...

I hope we dont break in to Tribes or Balkanize.. hard decisions to made if start to break up.. we are already not on the same page as a nation with the courts telling states what to do, self serving politicians without the consent of the governered.  scary times.. and in the breech?  People like us who swore our sacred honor on our oaths to defend it.  I hope we can.

Sparticus said...

How the mighty has fallen.

Public servants that have partially forgotten that they serve the people and not the other way around. There should be term limits to end career politicians with their hands in the money pots with lobbyists and special interests groups. Self-serving and self-preserving politicians. Political vote buying and money padding instead of acting soley for the good of the people and nation. The ironic thing is they buy votes, power, position for their own self-interests and agendas with the people's money. Politicians blatantly disregarding and ignoring the oath to the U.S. Constitution and choosing to serve themselves to the gravy train called the tax dollars.

How the mighty have fallen.

The Founding Fathers warned about the dangers of allowing dishonorable and low character people into positions of public service.

Voters better wake up and seek out bold and intelligent politicians to replace the politicians that need to go. If we had 500 politicans lile NJs Gov. Christy then there could be real solutions to hard problems.  

Chris van Avery said...

I think there's an even more fundamental problem at work: government has become so byzantine and complex that no one actually understands how it works. You can see it even in the rules by which the House and Senate work. The system facilitates so much subterfuge and manipulation that 2nd and 3rd order effects are nearly to predict.

In short, the only way I think changing the people will have any lasting impact is if they can simplify government drastically. Good luck with that....

Byron said...

When government has made it's processes and it's means of doing business with it's customer, us taxpaying citizens, then it is no longer a fit government.

One more... HEY BARRY! You do realize that within a very short time, there won't be enough people actually paying taxes to keep you jackasses in DC living the high life anymore, do you?

CDR Salamander said...

Chris,
Drop me an email in the next day-I'd like to drop something by you.

Radagast said...

Australia is quietly preparing for a change from US hegemony, as are other south east Asian nations.It may not be discussed publicly, but long term planning and announced government policy tends to confirm it.

As this blog is navy centric, the following will give some idea of preparation for the apparently inevitable:

The Armidale class patrol boats (270 tonnes) & Huon mine sweepers are to be replaced one for one with 2000 tonne corvettes. The industry briefing went out a couple of weeks ago.
The six Collins class submarines are to be replaced by 12 next generation submarines. 
The eight Anzac class 3600 tonne Meko 200 patol frigates will be replaced with 8 x 7000 tonne ASW vessels.
The three Perth (Charles F Adams) class destroyers are being replaced 15 years late by three F100 class Aegis frigates.
The two Newport class amphibs are being replaced by 2 x 20000 tonne Juan Carlos class LHDs.
The FFG7s are going unreplaced.
A contract will be signed next year for new ASW Helicopters to replace the old Sea Kings and Sea Hawkes.

The Airforce is getting a one for one replacement of its fighter/attack fleet, but a reduced number of P8s & Global Hawke to replace the Orions. It also getting KC45 tankers, Wedgetail AWACs and the army is getting the Euro Tiger attack helicopter. 

As we have made nice with our nearest possible belligerent (Indonesia), such an increase in naval capability, or replacement of outdated equipment after years of delay suggests a worry at government levels about our strategic outlook.
The above is the stated policy on equipment of the socialist party that is currently in power, so a change of government is not likely to see any cuts. A lot of it is still vapourware, but it is being planned for and the tenders are being rolled out on schedule.

Of course, Australia entered the financial meltdown with money in the bank, and although the govt has managed to blow all of it, our debt levels are not huge and unemployment is tracking at around 5%. If the previous conservative govt. had not paid down all debt (it took ten years to do)then we would probably be in the same boat as the US.

MR T's Haircut said...

I remind the porch, that when Rome was sacked and fell, her 34 armories were full of the latest state of the art weapons...

ewok40k said...

@ Radagast: interesting... Japan seems to quietly expand Navy (erm, Naval SDF) up to and including light carriers capable of F-35 basing.
@ MTH - well, when Rome was sacked most of the provinces providing the income for supply of the army were already "under new management". Writing was on the wall since Adrianopol, and 407 winter Rhine border collapse was final death sentence for the West.
I doubt US will fragment or Balkanize - at worst it will shrink into post-imperial isolationism and status of todays UK or France - only bigger. Which troublemakers all over the world will mercilessly exploit.

WillSims said...

<span>

I suppose words like this "We have met the new enemies and they are domestic." will become more and more common place on this board. So how long before you all start lining up and shooting Americans who are not of your political persuasion?
</span>


 

MR T's Haircut said...

huh?  You can't fix stupid...