Civilisations die from suicide, not by murder.
“Civilisations die from suicide, not by murder" - Arnold J. Toynbee
In July 1969, when Neil Armstrong took his first steps on the Moon, his great leap for mankind was uniquely an American achievement. American vision and management, American science and technology, American finance and investment, American skill and diligence, American will, planning and dedication accomplished what was arguably the greatest human achievement of the 20th century – perhaps of all time thus far – and America and Americans stood alone as the only country and the only people who could have done it.
Yet it came just at a point when, as the passing years have increasingly demonstrated, American power had begun to wane. In retrospect, what was a peak of human achievement at that time was also a peak in American power.
In that same month, as a harbinger of the American decline, the Federal Reserve Board of the United States raised the rate of interest sharply to “fight” what was then, in the midst of the Cold War and the intensely hot Vietnam War, a comparatively modest inflation. In effect, that simple act of economic policy would put an end to what had been, up until then, an ever more spectacular set of achievements by the American people and their administrations.
From that point on, the space race and much else besides became suspended or curtailed. The Apollo series was completed; but more than three decades have passed since then and Vietnam and the Cold War are history; but the grandeur of the American vision has faded whether for travel to the stars or realisation of human aspirations here on earth.
In August 1971, just two years after the first Moon walk and the simultaneous interest-rate hike, the Nixon administration cut the dollar’s link with gold. The IMF’s “Gold Window” was closed. After a quarter century, the IMF ceased effectively to monitor, regulate and stabilise the world’s currencies. Currencies were allowed to float, some freely according to trade and monetary flows, some less freely through membership of a currency group and some through a peg to a major currency, usually the depreciating but still mighty American dollar.
A month before Nixon closed the “Gold Window”, National Security Adviser Kissinger paid a sensational visit to Peking, presaging a visit by Nixon in February 1972. In between, the United Nations General Assembly once more debated which of Peking or Taiwan should occupy China’s seat in the Assembly and thus, even more importantly, its permanent seat on the Security Council. This time the Assembly voted for Peking. At last, twenty-two years after taking power at home, the Government of the People’s Republic of China took its rightful place in the United Nations.
That was an epic victory for the People’s Republic; but, at that very moment, with stagflation under way and the Gold Window closed, an even greater victory was being prepared for it in the workshops of the economic and financial world. In time, the interest-rate changes by the Fed in 1969, the closing of the Gold Window in 1971 and related economic and financial developments later would fundamentally transform the world economic environment and the balance, not only of economic power, but of political and strategic power as well.
Having delivered a first oil shock in 1973, the decade of the 1970s ended with a second and bigger oil shock and even worse consumer-price stagflation, especially – though not only - in the United States. Inflation peaked at about 13.5% in 1980. The Fed raised its key interest rate to a peak of 18%. Intriguingly, those events nearly coincided with Deng Tsao Ping’s declaration in 1979 of a new and robustly capitalist economic policy for the People’s Republic of China. China would, Deng said, follow the Japanese economic model. “To get rich,” he added, “will be glorious.”
Although he could not have known its miraculous potential at the time, Deng was destined to have the full, though largely inadvertent cooperation of the United States in accomplishing his economic objectives – and in “getting rich.” From the 1970s through to the present, United States policies have been steadily directed to building up, quickly and substantially, the economic strength of China, along with other countries in Asia. All the while, those same policies have drained the real life out of the American economy.
After 1982, inflation in the United States fell to more normal levels, Reaganomics came into vogue and the United States began to challenge ever more robustly an ailing Soviet Union with the productive and innovative power of its economy and the might of its military technology. Less dramatically, in China, especially in the Hong Kong hinterland, infrastructure was being built and factories were going up. Production was getting under way that, in time, would supply markets all around the world – including especially the mighty consumer markets of the United States.
United States inflation continued to moderate. The price of oil stabilised. From a peak of about $800 an ounce to which it zoomed in 1980, gold fell back to around $250. The United States irregular trade surpluses of the 1960s shrank to become deficits in most of the 1970s. In the 1980s, the deficits grew larger almost every year and became chronic. Reaganomics and the challenge of the Cold War put the budget into serious deficit. Though it received little public recognition, supply from overseas solved the problem of domestic inflation and the countries providing the supplies – including China to an ever-increasing extent – held their proceeds in dollars and so helped critically to settle both the American trade deficit and the American budget deficit.
That decade of the 1980s was a time of mounting economic and financial disequilibria; but, at its end, one historic political and strategic objective of the United States was realised: the Soviet Union collapsed and with it the Soviet empire. The satellite countries were freed. The United States became the world’s single, unchallenged superpower.
However, again, if some trends were positive, other less positive developments were stirring in the background. From being the world’s greatest creditor country, the United States was slipping ever more heavily into debt. At some point in the late 1980s – while the Soviet Union was nearing its death-throes – the United States crossed the frontier from net creditor into net debtor territory.
For more than a decade before that, Japan and the newly industrialising Asian Tigers had been supplying the American consumer market. American manufacturing had started to decline. Asian manufacturing took over and supplied American markets as well as markets around the world, with ever more sophisticated and high-quality products. Now, Chinese industrial development began to accelerate and, especially as the 1990s advanced, spread more intensively along the Pacific seaboard to serve foreign markets around the world.
The high-tech boom of the 1990s saw the United States return, for a few years, to something like the innovative and entrepreneurial glory of its venture-capitalist past. Stock-markets boomed, entrepreneurs made fortunes overnight, real investment recovered something of its former vitality, the budget deficit transformed itself into a surplus and, for a while, between 1994 and 1997, even the trade account suspended its chronic downward plunge.
Then, again, it all collapsed.
Too much air had inflated too many market bubbles. Underlying trends in real investment, productivity and production were too weak. The stock-market boom burst. Fixed-capital investment slumped. Finance capitalism and the shift in domestic inflation to external trade deficits pushed the United States deeper into debt nationally and households into heavy borrowing to maintain their consumption levels. Unemployment increased and real wage levels stagnated or fell. People played more and more with fancy financial paper in what had become – through such obsessions as free markets, privatisation and globalisation – a casino-like, speculative American and world economy.
From being the world’s greatest creditor, the United States now became – ever more definitively – the world’s biggest debtor. By 2005, the national debt stood at about $8 trillion – around 60% of Gross Domestic Product – with 40% of it held by foreigners, including foreign governments and central banks. Household debt reached $2 trillion. Total national, corporate and household debt was now computed to be around $41 trillion or, some said, as high as $49 trillion. According to United States Treasury Department figures, President Bush borrowed, in his first five years in office, more money than all previous United States presidents together had ever done. The forty-two previous presidents borrowed a combined total of $1.01 trillion from foreign governments and financial institutions. By comparison, between 2001 and 2005 alone, the Bush administration borrowed $1.05 trillion – an all-time record and still rising, it is said, at $1 trillion every 18 months. The only ambiguously comforting consideration was that the real value of the American dollar had grown less each year so, in real terms, the debt was less. In turn, however, the sobering prospect was that the value of the dollar will continue to erode, probably at an accelerating pace especially, for example, in terms of gold, oil and other real commodities.
With debt of a magnitude few of us can readily conceive, with trade deficits of enormous proportions, with a gutted manufacturing sector and the ruthless reduction of the numbers of skilled factory workers, with a corporate culture that has lost its traditional dedication to real investment, productivity and production in favour of “ownership” and speculative enterprise, the United States appears to be moving rapidly along the road to ruin. The most forbidding of economic crises – with a variety of themes, aspects and complexities – seems to threaten just a short distance down that road from where we are now. If and when it arrives, a turmoil and misery to put the Great Depression of the 1930s to shame could afflict the American economy and the American people – and persist perhaps for a decade or more.
But the menace goes much deeper even than that. The United States has not just participated, as one of the mob, in a malaise that has afflicted everyone, worldwide. Some, especially the Anglo-Saxon countries, have similar problems; but, while they and the United States have been slipping, some other countries have made unprecedented progress in developing their economies and advancing their influence and power in whatever area – economic, social, cultural, political and, most menacing of all, strategic. The United States has itself engineered both its own decline and the elevation of those who might be regarded as its actual or potential rivals. These include China which has, in the last two decades, moved rapidly up the ranks of high economic achievers to lie now fifth among the world’s biggest economies. Only the United States, Japan, Germany and possibly Britain are still ahead of the awakening giant. Given the great differences in rates of economic growth, China is likely to move into third position fairly soon and, not many years thereafter, push ahead of Japan, the country that Deng chose as his model back in 1979. Only the United States will then lie ahead – assuming that the American economy, with its several bubbles, does not collapse in crisis even earlier. If present disparate rates of growth continue, China will close the gap in Gross Domestic Product with the United States quite rapidly and, though we cannot give any date, will become the world’s number-one economy and will still be growing.
Power accrues to those who know how to navigate efficiently on the stream of time. That efficiency is closely related to economic competence: the ability to manage and grow in real terms on the back of real investment, rising productivity and mounting production. Economic power nourishes other forms of power: political and strategic power in particular. Traditionally, conflicts tend to be related to changes in economic power and the status that economic power confers. The causes that precipitate the conflicts are varied but can include such crucial concerns as access to oil and other vital resources.
On these bases, we could have ahead of us a world in turmoil as the mantle of the world’s single superpower falls from the shoulders of the United States and is assumed perhaps by China or a group of countries collaborating together. The Bush Administration has recently been talking to two of its closest allies, Japan and Australia, about the “containment of China”. In the same vein, it has been cosying up to India as a possible counterweight to China. Australia is dubious about “containment.” Japan seems more responsive; but any ideas of “containment” may now have passed their use-by date. If they were to be effective, they should have been a major influence on policy some time in the last twenty or thirty years when and after Nixon and Kissinger paid their visits to China. To mean anything, “containment” now can only imply a reversal of the American policies that have turned China into a candidate for “containment,” and those policies seem already to have done the job too well for their reversal to affect substantially the relative power positions of China and the United States now and, ever more importantly, in the ten, fifteen or twenty years ahead.
The position of India is not so clear-cut. As a late starter, there may still be a rough chance that India can, in some way, be “contained” – whatever meaning may be given to that concept by those who espouse the policy. However, President Bush and his peripatetic Secretary of State seem not yet to have understood the reasons for the scale and speed of India’s and China’s growth and that they are essentially the same for both. To “contain” India therefore requires the reversal of the same American policies as those that have so miraculously transformed Chinese destinies. In Washington, policy seems not yet to have reached such a stage of thinking; but, in the light of the policy of “containment of China”, we may reasonably enquire: how soon will it be before the United States sees India and perhaps others as candidates for “containment” too? When it does, will the present policy of “cosying up” be enough? If India, instead of being “contained”, is conceived to be a “counterweight” to China, then the strategic reversal of the policies that made the latter powerful may need to be maintained to keep India on its path of rapid and substantial economic growth. The complexity of the developing power situation would seem to be too much for the present Bush administration and to be a rare challenge for whatever administration might succeed it.
The superpower challenge is of course only one of the challenges facing the United States and other countries around the world. United States policies – which have too often formed a model for others – have intensified almost every problem that humanity has designed or had thrust upon it: the environment, poverty, population growth, racial and religious conflict, commodity issues and the “limits to growth,” the dilemmas posed by failed states, the spread of disease, the plunder of the planet’s resources with ever more insatiable rapacity and so on. These issues are not only unresolved; they are, in essence though not in some of the empty rhetoric, comprehensively ignored and neglected. Vision has been lost. Enlightenment has vanished. Only more self-destruction – for the United States and, indeed, for all of us - seems to lie ahead.
“America’s Suicidal Statecraft” is the story of these developments. It draws a picture of what has gone before, especially during the years since 1969; and suggests ways in which we might find a path out of our current dilemmas. The challenge that those dilemmas pose will be hard to meet. A “soft landing” for the world politically and strategically is as hard to guarantee as a “soft landing” for the American or world economy. However, the stakes are high for the future of humanity and, indeed, for the survival of life on the planet, as well as for individual countries; so high that the challenge is one that we must – as an absolute imperative – take up with all the energy and enlightened vision that we can muster.
"Central bankers everywhere have failed to see that interest-rate increases so raise costs and cut supply that, in most circumstances in modern economies and societies, they do not curb consumer-price inflation; on the contrary, they increase inflation and cause stagflation, as indeed they clearly did in the 1970s. Especially since the early 1980s, tight interest-rate policies in the United States and countries addicted to the American model have usually been followed by reductions in consumer-price inflation. However, the lower inflation has not been won through tight monetary policy; rather tight monetary policy has shifted or has coincided with a shift in inflation from domestic price rises to deficits in the balance of trade and payments. Moreover, fixed-capital investment and employment, as well as whole industries sometimes, have migrated overseas: they have been “outsourced” in a way that has gutted especially domestic manufacturing. The gusts of interest-rate changes have caused Schumpeter’s “gale of creative destruction” to be replaced with chronic gales of self-destruction of industry through a cluster of financial follies, damaging changes in corporate culture, the creation of a multitude of opportunities for the speculator, the promotion of self-indulgence for the consumer and the erosion of rewards for lower-income producers."