SHIFTING SANDS OF ECONOMIC POWER
Oct 17 - 23, 2011
Around 140 years back, Winwood Reade, the much criticized author of The Martyrdom of Man wrote: "The government of England possesses at the same time the freedom which is only found in a republic, and the loyalty which is only felt towards a monarch. Some writers believe that this monarchy is injurious to the public and argue as follows: There are no paupers in America and America is a republic.
There are many paupers in England and England is a monarchy. Therefore, England should imitate America. It may astonish these writers to learn that America is in reality more of a monarchy than England. Buckingham Palace is a private dwelling; but the White House, though it has none of the pomp, has all the power of a Court.
The king of America has more to give away than any king of Great Britain since the time of Charles the Second. He has the power to discharge of his own good pleasure and mere motion every ambassador, every consul, every head of department, every government employee, down to the clerk on two hundred dollars a year, and to fill their places with his own friends. In America, the opinion of the public can with difficulty act upon the government. The press has no dignity, and very little power."
During these 140 years, America has undergone many transformations - the world having seen the change of its status from multi polar to bipolar, and finally from bipolar to unipolar - yet not much has been changed in American approach towards its own people and the people around the world. Its diminishing influence, both military and economic, over the world nations is observed by the analysts with interest.
At the time of the outbreak of Cold War, US was the richest and mightiest of the world nations. Its systematic fall from that position was triggered by its outsize geopolitical ambitions. Regarding its perceived military supremacy, Clyde Prestowitz writes in his book The Betrayal of American Prosperity: "During a 2009 trip to China, Secretary of State Hillary Clinton never mentioned the words human rights. This was in sharp contrast to the statements of such former secretaries of state as James Baker, Madeleine Albright, and Condoleezza Rice÷Although the United States has on several occasions gone to the brink of war with China in order to protect Taiwan, it is today inconceivable that Washington would do so again or that it could be successful if it tried."
Military power is a function of economic power. Since the times of Reagan, the US economic roost has been ruled by the Chicago free market economists led by Milton Friedman. To borrow the phrase from Alan Greenspan, the ex-Fed chairman and a diehard devotee of Friedman, the "irrational exuberance" of Chicago economists about the infallibility of an obviously fallible economic model that decreed an ostentatious shift from industrialization to consumerism was the root cause of America's economic downfall. It did not take centuries before it changed its status from the biggest creditor nation to the biggest debtor nation with its public debt reaching the $15 trillion mark - the near equivalent of its total output. Its shift from an industrial economy to a consumer economy transformed it into a consumption-addicted nation dependent on exports from Asian economic powerhouses China, Japan, Hong Kong, Singapore, Taiwan and others. As industrial control shifted to Japan and China, the US found solace in its technological and financial services dominance.
Tracing the causes of Roman downfall, Winwood Reade wrote in 1872: "By day the Ostia Road was crowded with carts and muleteers, carrying to the great city the silks and spices of the East, the marble of Asia Minor, the timber of the Atlas, the grain of Africa and Egypt - and the carts brought nothing out but the loads of dung. That was their return cargo."
Describing US capitulation to the Asian industrial giants, the American writer Clyde Prestowitz writes after 138 years: "What, you may ask, does the state of Rome and Roman trade have to do with the condition of the United States today? Anyone who visits Long Beach, California, will quickly understand the answer...Long Beach is the Ostia of our day, the gateway to the great American market. Even more striking than the size of the port and the armada of ships is the contrast between the cargo that's off-loaded and that being loaded for a return trip to Osaka, Busan, Shanghai, Hong Kong, and Singapore. The imports are as numerous as the sands on the nearby beach, including everything from shoes and shirts to computers, autos, advanced telecommunications gear, and photo voltaic panels for generating solar energy. The exports, though, are few, consisting mostly of scrap metal and waste paper - this millennium's dung, you might say."
Its overreliance on services sector exposed the US to such traumas as Savings & Loan fiasco, dotcom bubble, and subprime mortgage crisis that almost broke its economic back. The bailouts were managed through additional printing of dollars which remains America's only enviable edge over other economies. But this position is also under threat as world nations are mulling over the idea of getting divorced from the draconian dollar. The lust for consumption triggered huge US trade deficits giving rise to massive dollar accumulation at exporting countries' end - presently China alone holding two trillion dollars in its reserves. The arbitrary decoupling of dollar from gold value in seventies of the last century - when governments could convert their dollar holdings into gold by exchanging at the rate of 35 dollars an ounce - gave the free market US economists a chance of lifetime to showcase the might of American dollar. US government could print any quantity of dollars any time - the only cost of course being the printing charges.
One of the former chairmen of US president's Council of Economics is reported to have said of US foreign trade: "They will sell us Toyotas and we will sell them poetry." He was perhaps alluding to the US free market economists' ambitions to get divorced from industry and focus on high-tech R & D, software, travel and tourism, and finance. Amidst a White House discussion in 1984 on Japanese dumping of semiconductors in the US market, Richard Darman, assistant to the president quipped: "Why do we want a semiconductor industry? If our guys can't hack it, let "em go." In December 2007, the vice chairman of Lehman Brothers, while addressing the Global Strategy Group, predicted a sustained US economic boom based not on yesteryears' powerful American industry but on the shenanigans of the Wall Street bankers - their ability to design exotic financial products using the modern day, sophisticated financial engineering. Countering the fears of the audience about the weak future of dollar, he raved about the strength of US economy and its capital markets that, according to him, were a unique attraction for the foreign investment. In response to concerns about the low US savings rate, he enlightened the audience about the untapped US citizen's equity worth trillions of dollars hidden in US homes.
This latent equity when factored in, he said, the US savings rate will be much higher than the officially stated one. By the end of the next year, Lehman Brothers had gone bankrupt. The unaccounted-for home equity was wiped out. The "double casualty" happened to be the common US citizens as, besides heavily loosing in the home mortgage market, their tax dollars were used to bail out the financial sector. A US businessman of Hungarian origin, Andy Grove, the former chairman and CEO of Intel Corporation observes: "America is in danger of going down the tubes, and the worst part is that nobody knows it. They are all petting themselves on the back as the Titanic heads for the icebergs full speed ahead."
Being a US follower by default, the Euro zone has its own problems with its member countries falling in debt trap every now and then. Having its roots deeply entrenched in the US-propagated free market fundamentalism, Europe can not be expected, at least in the near future, to be the heir to the throne of economic leadership. Who is then going to lead the world from the economic front? Clyde Prestowitz attempts to give an answer in his book The Betrayal of American Prosperity: "The crisis that brought down Lehman Brothers, most of Wall Street, and much of the global financial system has unmasked the long-running erosion of America's fundamental economic vitality. It has also signaled a shift away from the United States and toward China, the oil producers, and emerging-market countries such as India and Brazil."
Military or economic, power has a sandy texture. A fistful of power will last as many days, months, years, decades, or centuries as its sandy grains will allow it to stay in a human hand. As the sands of global economic power are visibly shifting from the West to the East, the Eastern nations should strive not to clinch their fist too tight. Rather they should allow the sand grains to settle in the alien Eastern hand and engage themselves in economic pursuits that are beneficial to the mankind. The lessons of the West should be their guide.