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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.

(Republished from Sublime Oblivion by permission of author or representative)
 
With increasing signs of economic collapse, military overstretch and political problems, is the US doomed to go the way of the late USSR?
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Inspired in no small part by the political charade over the bail-outs and boondoggles that plague the TV screens and electronic ether, I’ve compiled a top 10 list of ways in which the US increasingly resembles the collapsing Soviet Union for your information / despair / entertainment / Schadenfreude / ridicule / etc.

A list of how Russians screwed up and Americans are repeating their mistakes step by step. A list that may provoke much needed debate and change that we can really believe in.

10

An alcohol epidemic from the 1960′s on that kept Russian life expectancy flat ever since.

Dietary catastrophe resulting in historically unprecedented obesity and diabetes rates.

9

Hated and feared for human rights violations, invasion of Afghanistan and Communist rhetoric, and its socialist model discredited.

Hated and feared for use of torture, invasion of Iraq and post-Cold War triumphalist arrogance, and its neoliberal model discredited.

8

Military overstretch, economic distortion and disaster in Afghanistan.

Imperial overstretch, runaway military budget and return to the “graveyard of empires”.

7

Wasteful investments into infrastructure, bloated bureaucracy and inefficient industry.

Decaying infrastructure, misplaced investments into suburbia, bloated financial system and hallowing out of industry.

6

Collapse in morality, bloated bureaucracy and soaring corruption.

Regulatory capture, bloated special interests and legalistic mafia.

5

Suppression of statistics and silencing of dissent.

Manipulation of statistics and ignores dissent.

4

Dependence on foreign credit from debts and oil sales.

Dependence on foreign credit from debts, “dark matter” and the $’s status as global currency reserve.

3

Young reformer takes power and talks of glasnost and perestroika while avoiding real reform.

Young “outsider” wins the elections and talk of change and hope…

2

Ethnic nationalism and separatist tendencies.

Tax revolts and state rights.

1

More and more people began to predict Soviet collapse in the late 1980′s.

More and more people are beginning to predict an American collapse now…


10) The first disturbing similarity is the rapidly deteriorating health of the population. From the 1960′s, an alcohol epidemic began to sweep Russia as binging graduated from something done on holidays to a monthly and then a weekly affair. The drinking epidemic spread to women and younger people, and intensified amongst middle-aged men. Once subjected to the cheap alcohol and social dislocations of the post-Soviet world, an already stagnating average life expectancy plummeted.

As late as 1990, not a single state in the Union had an obesity rate of greater than 15% of the adult population; today, not a single state (with the marginal exception of Colorado) has an obesity rate of less than 20%. The national obesity rate soared to 34%. The percentage of American adults suffering from diabetes is now 11%, and another 26% have impaired glucose tolerance. Although improvements in US life expectancy haven’t stalled, change has been slower than in most other developed countries and even then was mostly accounted for by improved medical technology, and successes in reducing tobacco smoking and overconsumption of animal fats. An economic collapse now would trim the vastly expensive healthcare system and almost certainly result in a mortality spike – especially considering that the baby boomers are now nearing retirement age.

Both the Russian and American epidemics affect poor, middle-aged people the most; a difference is that the alcohol epidemic affected men more than women, whereas in the US obesity is slightly more prevalent amongst women than men. Vodka sales made good profits for the state (via taxes) during the Soviet period and good profits for private distilleries in the post-Soviet period; the American diet makes good profits for fast food outlets and the parasitic “food processing” companies that degrade good corn into corn syrup. Perhaps the most poignant comparison is in the kinds of TV adverts that dominate the airwaves in both countries. In Russia after 9pm, every third commercial suddenly becomes about some or another kind of beer (that’s an improvement over the 1990′s, when they ran all day); in the US, day or night, every third commercial praises the virtues of some kind of meretricious fat-soaked starchy thing.

9) Throughout the early Cold War, the USSR was a source of inspiration to leftist Western intellectuals and Third World countries looking to throw off the imperialist yoke and modernize quickly. But by the early 1980′s, pressure was being applied to the Soviet Union on account of its violations of the human rights treaties it was a signitary to. Central planning remained an alien ideology to all Western societies, increasingly so as its failures became clearer. It was condemned for its invasion of Afghanistan (in reality, an intervention at the request of its new socialist government to defend them from Islamists).

The United States gained a great moral victory from the collapse of the USSR (despite it being a result of internal dynamics) and enjoyed it during the 1990′s. However, this came to an end after 2001 due to the hypocritical and immoral way it went about waging the Orwellian-sounding “war on terror”. Preemptive war on made-up pretenses, extraordinary renditions of terrorist suspects and the neocons’ incessant freedom-rhetoric was something the world by and large couldn’t square together. This resulted in its poor showing in international approval ratings and its repeated “victories” in the “world’s greatest threats to peace” category with Iran, Israel and North Korea as regular runner-ups and after party company. Although the fairness of such characterizations can be disputed, they are ultimately immaterial since it is perceptions that matter – not right or wrong, however defined.

The central planning model of the USSR was fully discredited by the 1980′s; neoliberalism is similarly on en route to the ashcan of history.

8) The USSR was spending about 25% of its GDP on the military by the 1980′s. Not only did this squeeze consumption and contribute to stagnant real incomes from around the mid 1970′s, it divested resources from investment into renewing the capital stock, civilian R&D and improvement of human capital via education and healthcare. However, official figures were ridiculously low – around 2.5% or so of GDP – due to statistical fudging and giving purely military enterprises funny names like the Chelyabinsk Tractor and Machine Building Factory (invented example).

The US maintains unrivaled power projection capabilities, a global network of 700 military bases and the world’s most technologically advanced military force – but it comes at a steep price. While the official military budget for FY2008 is around 520bn $, to this must be added the costs of the wars in Iraq and Afghanistan (170bn $), interest on past military expenditures (170bn $), nuclear weapons (30bn $), veterans (70bn $), “homeland defense” (70bn $) and other spending on their lavish healthcare and education entitlements, military foreign aid and “black projects”. (And btw, the figures for interest, nukes and veterans are from 2005). Therefore, it is probably entirely reasonable to double the entire military budget to better appreciate its true magnitude – i.e., quite possibly close to 10% of GDP. Add in the distortions – military production has the smallest multiplier effect on the economy (machine building has the biggest), and its claim on skilled workers (something like half of R&D outlays in the US are for military applications), and you get a superpower severely hobbled by its arms’ burden.

This is not a good situation, but not critical either. Yes, it ties down a big chunk of the economy in unproductive pursuits and contributes to the institutional corruption and runaway spending that is typical of military-industrial complexes. I happen to consider that most of the procurement programs currently being pursued are useless, from unproven missile defense to the overhyped F-35 (just build a few hundred much superior F-22′s instead) to the shiny new surface warships and aircraft carriers that are of dubious value in our era of advanced cruise missiles, UAV’s and supercavitating torpedos. (But this for another post). Most poignantly, Obama is now preparing to withdraw from Iraq (where stability is not yet assured, and which is far more strategically important) to free up troops for Afghanistan, the graveyard of empires…and ignoring Soviet veterans’ warnings of what might await them. And the economy is nowhere near as dominated by the priorities of the Armed Forces as was the case in the USSR. Nonetheless, huge military spending and foreign adventures do not necessarily lead to collapse – by themselves. However, the other economic and confidence problems now facing the US now make that a realistic possibility.

7) The Soviet Union invested vast resources into industrial development. However, they were frequently inefficient, wasteful and of questionable quality; and in any case were being severely undercut by the arms burden by the 1980′s.

Although the US built up a world class public infrastructure prior to the 1980′s, since then investments in this area have dropped off. The roads in California are frequently cracked and potholed – vastly inferior to what one might find in Germany, and not much better than in Russia. One quarter of bridges are structurally deficient, in most cities the water pipeline system is a century old and the electrical grid befits a Third World country.

Even worse is that much of the “infrastructure” that was built up in the past few decades consisted of lavish homes in sururbia requiring massive inputs of cheap energy to function normally. When oil is at 10$, spending an hour driving to work is monetarily (if not spiritually) sustainable; as we pass the oil peak and other resources (almost certainly) fail to make good the gap in time, this will change as petrol soars in price, even assuming it will remain available on the open market. Due to the “psychology of preveious investments” (see James Kunstler’s work) it is unlikely Americans will summon the will to scale down its suburbia before the laws of economics and geology force them into it.

Soviet industry was inefficient and was destroyed when subjected to market forces. American industry has already been hallowed out; high productivity growth masks a huge decline in quantity and complexity of its “industrial ecosystem”. US vehicle production fell from 13.0mn to 10.8mn from 2000 to 2007, held up only by the (doomed in the long-term) SUV market which is the only sector in which the Big Three made any profits. (During the same period, Germany increased production from 5.5mn to 6.2mn and Japan from 10.1mn to 11.6mn). Its machine tool building industry has for all intents and purposes collapsed. The only marginally healthy manufacturing industries left are in aerospace and defense. This is going to have very bad consequences when inflows of cheap credit from abroad can no longer sustain the US consumption boom; the manufacturing sector that could potentially have led to a quick revival simply no longer exists.

6) Whatever the faults of the USSR in its early years, there was genuine enthusiasm for building socialism relatively untainted by corruption. This began to change rapidly for the worse from the 1970′s. The elites became exclusively concerned with their own power and wellbeing, ultimately leading to the “insider buyout” that probably best describes what happened in its dying days. The size of the bureaucracy exploded and its effectiveness plummeted. A small change for the better under Gorbachev in the mid to late 1980′s led to catastrophic collapse, endemic corruption under Yeltsin, and some improvements under Putin from a very low base. Blatant self-enrichment of the elite at society’s expense became an accepted norm.

How does this translate to the US?

Collapse in ethics, quoting Buiter in Fiscal expansions in submerging markets:

… Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles. Corporate governance, especially but not only in the banking sector, became increasingly subservient to the interests of the CEOs and the other top managers. There was a steady erosion in business ethics and moral standards in commerce and trade. Regulatory capture and corruption, from petty corruption to grand corruption to state capture, became common place. Truth-telling and trust became increasingly scarce commodities in politics and in business life. The choice between telling the truth (the whole truth and nothing but the truth) and telling a deliberate lie or half-truth became a tactical option. Combined with increasing myopia, this meant that even reputational considerations no longer acted as a constraint on deliberate deception and the use of lies as a policy instrument. As part of this widespread erosion of social capital, both citizens and markets lost faith in the ability of governments to commit themselves to any future course of action that was not validated, at each future point in time, as the most opportunistic course of action at that future point in time – what macroeconomists call time-consistent policies and game theorists call ’subgame-perfect’ strategies.

Under bloated special interests, I put the bloated financial services industry, the legalistic mafia, the healthcare industry and the prison-industrial complex. Finance as a share of GDP doubled in the last 30 years, transforming it from a service industry to a rent-seeking one. The proliferation of lawyers amidst amidst burgeoning legalism in society is another example of a self-serving mafia feeding on the blood of the citizenry, as are the “justice” systems and prisons that have gone together with them (the US has an incarceration rate that is unprecedented amongst anything but totalitarian societies). Finally there’s the healthcare industry, perversely regulated in such a way as to make it far less efficient than if it were nationalized or completely private and delivering one of the worst results for the buck in the world – and like a metastasizing cancer, it’s share of GDP has also exploded in the past few decades.

5) Since the 1970′s real wages for workers in the Soviet Union ceased growing, pressed down by the demands of the military-industrial complex. When statistics began to show that the average life expectancy was stagnating and infant mortality rising, they ceased publishing them.

Real median income in the US slowly increased from 35,000$ in 1967 to 46,000$ in 2005; however, the rate of increase slowed and for the first time in modern history it didn’t exceed the level reached at the peak prior to the last recession in 2000-2001 during the growth years of the Bush Presidency. In reality however the situation is even worse because since the time of Reagan the definition of inflation used by the government was being continuously reworked to make the figures appear better than they otherwise would have been, using substitutions and hedonics to spruce up the figures (i.e. adjusting for consumers switching to other products when similar products become expensive, and trying to put values on quality improvements). If the BEA (Bureau of Economic Analysis) continued using its old measuring standards, then a) the economy would have been in stagnation during the 1990′s and recession in the 2000′s, b) inflation would have been steadily increasing to a peak of nearly 14% in 2007 and c) median incomes would have been in steep decline. According to this thesis, then, the only reason the US avoided a big fall in living standards was due to the massive expansion in credit…which brings us to the next point.

4) The Soviet Union grew rapidly in the 1950′s and 1960′s because it was easy to move plenty of rural farmhands into relatively low-skilled industrial jobs. However as labor stocks became limited and focus shifted towards improving technology and productivity, GDP growth slowed and eventually stagnated. Collapse was delayed by the onset of high oil prices, which allowed the USSR to more easily import food products, machinery and technologies. When that collapsed in the mid-1980′s, the state was forced to run up huge debts to maintain mounting entitlement obligations, an overgrown military and bail out its East European satellites. Corruption and hidden inflation overtook the state and broke it.

According to Willem Buiter writing in Can the American economy afford a Keynesian stimulus?, America is a nation in fundamental disequilibrium. It can finance its continuous double deficits by giving its foreign investors an atrocious rate of return. In prior times, they accepted this because of America’s status as the largest economy, sole superpower and global financial center. This was presumed to reduce risk, so investors traded profits for security. From 2000-2004, it is estimated that the US exported some 559bn $ of this “dark matter“, or some 5% of its GDP at the time (the UK was second with 234bn $, or a stunning 15% of GDP). It also draws immense strength from the $’s role as the global reserve currency, for instance by allowing it to comfortably buy oil at $-denominated prices even when the currency is weak.

Due to its imperial overstretch, moribund financial system and frozen credit markets prepped up only by the federal government means that American alpha is almost certainly going to disappear in the next few years. The US fiscal deficit is going to be more than 12% of GDP in 2009 and will remain in the red for at least the next few years. Once global flight to quality ceases, the US will experience difficulties borrowing due foreign f ear of American reluctance to commit to servicing their external obligations without inflation. The interest rates on them are going to be punitive and so a greater amount of resources will have to go towards servicing the debt, thus triggering a potential debt crisis. Buiter predicts a global dump of US dollar assets including Treasury bonds within the next two to five years as investors lose faith in the ability of the US Federal government to generate the primary surpluses required to service its debt without selling much of it to the Fed on a permanent basis, or that the nation as a whole will be able to generate the primary surpluses to service the negative net foreign investment position without the benefit of “American alpha”.

In conclusion, the only reason the US can afford to have both guns and butter is that the outside world is willing to provide it with cheap credit. This will no longer be the case as soon as global panic subsides, and the US will face the real possibility of a debt-and-currency crisis which it will have to inflate its way out of (on which they seem to be making a good start). The 2010′s will see plummeting global oil extraction and sky-high prices. If the $ were to collapse, the imports of oil that fuel the economy will plummet and may lead to a post-Soviet-scale drop in GDP (unless the US uses its military clout to lock in Iraqi and Saudi production – however, given its fiscal problems, questions about political unity and rhetorical commitment to human rights, that would be hard to achieve).

America can take consolation in one thing, however – the collapse in Britain, which is three times as reliant on “dark matter”; which is a much bigger energy importer relative to production; whose industry is in a far more decayed state; and where real breakup is far more likely because of ethnic tensions, will be much worse.

3) When Mikhail Gorbachev (the youngest member of the Politburo) came to power he talked of increasing transparency (glasnost) and restructuring (perestroika). Yet the most dangerous moment for a bad government is when it starts to reform. In reality the Soviet system was already very probably unsalvageable by then, partly because even the leader himself continued to be a part of the system, beholden to dominant interests (in the Soviet case, to the military-industrial complex, the nomenklatura and workers) and steeped in delusions of grandeur. Even as he attempted to liberalize and solve many interlocking social and economic problems at once, social entitlements were increased, new weapons systems ordered and foreign borrowing increased. Half-measures and reckless credit giveouts to save the system led to massive waste, insider plunder and the start of the disintegration of the economy by the late 1980′s.

The similarities with Obama are striking. Obama is one of the youngest Presidential candidates ever, and talks of hope and change. He comes after the zastoi, deterioration in political and civil liberties and reckless foreign military adventures of Bush II. Like Gorby, he is immensely popular throughout the world. He plans on expanding healthcare and other social entitlements, burdening the economy with farcical green schemes* and is intent on rescuing the troubled financial system by massive infusions of credit, with no regard for the future inflationary consequences. His advisors are the same clique of insiders under previous administrations, especially the Clinton one. He is beholden to the financiers and industrial lobbying groups that fund him and the middle classes that are the bedrock of American political power (as were Soviet workers), which are now being whittled down by the collapse in credit and repossessions. Major cuts in funding for the the Armed Forces and sustainable retreat are simply not envisioned. *As anyone who reads this blog nows, I consider global warming one of the greatest challenges faced by civilization. The problem is that schemes to fund “clean coal” or implement carbon trading are too little, too late, too costly and too unreliable.

Obama is steeped in the Pax Americana mindset (just as Gorbachev was steeped in scientific socialism), which is complacent and rests on its laurels; and as such the possibility of collapse simply cannot seriously enter his mind or considerations. Therefore the truly revolutionary reform that is needed to preserve the current system is unlikely to be contemplated, if its even possible.

2) As economic and political difficulties mounted in the USSR, they were further reinforced by disintegration on ethnic lines, diverting administrative and economic resources away from what should have been more pressing matters.

Recently New Hampshire formally requested a casus foedoris with the other states of the union separately from the federal government in a RESOLUTION affirming States’ rights based on Jeffersonian principles.

That this State does therefore call on its co-States for an expression of their sentiments on acts not authorized by the federal compact. And it doubts not that their sense will be so announced as to prove their attachment unaltered to limited government, whether general or particular. And that the rights and liberties of their co-States will be exposed to no dangers by remaining embarked in a common bottom with their own. That they will concur with this State in considering acts as so palpably against the Constitution as to amount to an undisguised declaration that that compact is not meant to be the measure of the powers of the General Government, but that it will proceed in the exercise over these States, of all powers whatsoever: that they will view this as seizing the rights of the States, and consolidating them in the hands of the General Government, with a power assumed to bind the States, not merely as the cases made federal, (casus foederis,) but in all cases whatsoever, by laws made, not with their consent, but by others against their consent: that this would be to surrender the form of government we have chosen, and live under one deriving its powers from its own will, and not from our authority; and that the co-States, recurring to their natural right in cases not made federal, will concur in declaring these acts void, and of no force, and will each take measures of its own for providing that neither these acts, nor any others of the General Government not plainly and intentionally authorized by the Constitution, shall be exercised within their respective territories; and

That the said committee be authorized to communicate by writing or personal conferences, at any times or places whatever, with any person or person who may be appointed by any one or more co-States to correspond or confer with them; and that they lay their proceedings before the next session of the General Court; and

That any Act by the Congress of the United States, Executive Order of the President of the United States of America or Judicial Order by the Judicatories of the United States of America which assumes a power not delegated to the government of United States of America by the Constitution for the United States of America and which serves to diminish the liberty of the any of the several States or their citizens shall constitute a nullification of the Constitution for the United States of America by the government of the United States of America. Acts which would cause such a nullification include, but are not limited to:

I. Establishing martial law or a state of emergency within one of the States comprising the United States of America without the consent of the legislature of that State.

II. Requiring involuntary servitude, or governmental service other than a draft during a declared war, or pursuant to, or as an alternative to, incarceration after due process of law.

III. Requiring involuntary servitude or governmental service of persons under the age of 18 other than pursuant to, or as an alternative to, incarceration after due process of law.

IV. Surrendering any power delegated or not delegated to any corporation or foreign government.

V. Any act regarding religion; further limitations on freedom of political speech; or further limitations on freedom of the press.

VI. Further infringements on the right to keep and bear arms including prohibitions of type or quantity of arms or ammunition; and

That should any such act of Congress become law or Executive Order or Judicial Order be put into force, all powers previously delegated to the United States of America by the Constitution for the United States shall revert to the several States individually. Any future government of the United States of America shall require ratification of three quarters of the States seeking to form a government of the United States of America and shall not be binding upon any State not seeking to form such a government; and

That copies of this resolution be transmitted by the house clerk to the President of the United States, each member of the United States Congress, and the presiding officers of each State’s legislature.

New Hamphshire isn’t isolated. States rights bills are being pushed in nine states this year and almost half the states’ legislatures have plans to pass similar resolutions. While most are addressed to Congress or the President to back off from further violating state’s rights, New Hampshire is appealing for solidarity from other states to develop a casus feodoris / alliance to develop a counter-weight to the federal government in case it increases interference in state matters or moves towards authoritarianism to manage the consequences of the economic crisis. The incidence of tax revolts are growing.

This is all still very far from the situation in the USSR, where after all half the population wasn’t even Russia whereas the US is a nationally homogeneous nation. Nonetheless, the trends are ominous. There is no visible horizon to the end of the economic crisis, and even as late as 1989 no Soviet republic except the Baltics wanted out.

1) Economist Willem Buiter believes there will be a global dumping of $ assets within two to five years. Financial advisor James West writing in SeekingAlpha believes a US debt default and dollar collapse are “altogether likely”. Russia fund investor Eric Kraus has been lamenting the unsustainability of American disbalances for years and predicted the US will fall into a debt trap last November. The economist Nouriel Roubini, one of the few to have foreseen this crisis, predicts this recession will be far longer and deeper than any other post-war recession. Even the Economist mentioned the possibility of a US debt-and-currency crisis in one of its recent issues.

Dmitri Orlov explicitly compares the US to the USSR, and concludes that the collapse will be worse, at least in social terms, in the former. The Russian economist Mikhail Khazin predicts a 25-40% drop in American GDP. Future and trends analyst Gerard Celente, who succesfully predicted the collapse of the Soviet Union, now foresees an unprecendented fall in US economic output, tax rebellions and food riots. Russian professor Igor Panarin sees disintegration and civil war as soon as this year.

(Republished from Sublime Oblivion by permission of author or representative)
 
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Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.