How the mighty are falling.

• Author: Thomson, James W.
• Position: Economics

A VERY UNCERTAIN future has been predicted for the U.S. by University at California, Berkeley, economists Steven Cohen and J. Bradford DeLong in The End of Influence: What Happens When Other Countries Have the Money. These academics contend that America has followed an all-too-familiar pattern for once powerful but slowly declining nations by borrowing unwisely--and much too often--against the future. As for who has the money now, many countries are holding substantial reserves of dollars and U.S. debt obligations.

Perhaps the most disturbing finding is that certain creditor nations, in particular China and Japan, have kept the American economy afloat by hoarding dollars in reserve accounts, buying U.S. Treasury securities, and investing directly in U.S. enterprises. How did these foreign nations acquire trillions of dollars? The answer is simple enough--by exporting shiploads of goods to our shores. After many decades of mounting current account deficits, the U.S. has become the world's largest debtor nation: it owes three trillion dollars to the rest of the world. At present, that is about $400,000,000,000 per year, which averages out to more than $1,000,000,000 a day.

The U.S.'s major trading partners, especially Asia, have been accumulating American debt obligations for years. The authors contend that this trend of mounting foreign indebtedness cannot continue indefinitely without some potentially damaging consequences. As a result, they maintain that the U.S.'s status as an economic, political, and cultural superpower will end--not with a sudden bang, but with a lengthy, drawn-out whimper.

As an example of the recent declinist economic literature concerned with the ongoing financial meltdown, The End of Influence indeed is chilling because it focuses upon an economic predicament that eventually could rival the destructive force of the ongoing recession. In Newsweek, staff writer Daniel Gross has declared that the depiction of the U.S.'s expected fall from grace has become "the preferred intellectual preoccupation of the elite--left, right, and center." Gross trots out some stellar authorities to support this thesis. Joseph Stiglitz, the Nobel Prize winning economist, argues that the Obama Administration's tepid response to the recession and financial crisis has acted to "sandbag the U.S. recovery."

Like another well-known British historian, Paul Kennedy, who penned a similar caveat in the 1980s, Niall Ferguson has suggested that the staggering debt burden and out-of-control spending will cripple the "American empire." Harvard University economist Ken Rogoff, coauthor of This Time is Different: Eight Centuries of Financial Folly, worries that the U.S. might become another Greece--the victim of its own profligate conduct. Pres. Nicolas Sarkozy of France, although staunchly pro-American, strongly criticizes the global capitalist model advanced by many U.S. leaders over the last quarter-century.

After the failure of the Lehman Brothers investment bank in September 2008, the financial panic gathered steam as the U.S. economy lurched into dangerous territory. Gross estimates that, from the end of 2007 through the first quarter of 2009, nine trillion dollars of global wealth simply "evaporated." To grasp a loss of this size, consider that the value of the U.S.'s gross domestic product in 2009 was about 14 trillion dollars. Only a handful of countries were spared, including the unlikely combo of India and Canada, supposedly because their financial sectors were much more carefully regulated.

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The harsh effects of the crisis especially are being felt by the approximately 30,000,000 Americans who either are unemployed, underemployed, or reluctantly have withdrawn from the labor force all together. As for the American Dream, one poll found that a mere 27% of the public remains confident that their children's standard of living will be better than their own. This sour view is on target for any number of compelling reasons: real per capita incomes, after adjusting for inflation, scarcely have improved since the mid 1970s, while real incomes for adult males have declined somewhat since then. Faced with stagnant or declining incomes, many families sent wives and mothers off to work and labored many more hours (hundreds more per year than in Europea) and assumed greater risk in the high-tech stock market craze of the 1990s, and then by borrowing heavily to participate in the ill-fated real estate bubble.

By definition, financial crises always are unexpected, and so it was for this latest one. Most economists thought that a major collapse could not happen because the developed countries had the knowledge and means to prevent such a fiasco. A majority of analysts were focused on the growing trade imbalances between the U.S. and Asia, believing that a crash would occur in the form of a currency crisis when, and if, China and Japan dumped their hefty dollar reserves. In stead, what actually happened was that the financial beat-down initially occurred in the U.S. before spreading quickly to other developed nations--precipitating a gigantic run on the global banking system, bringing it close to a breakdown. Most central bankers, including the last two Federal Reserve chairmen, Alan Greenspan and Ben Bernanke, believed that monetary policies could be used effectively to stabilize the U.S. economy even after a serious "jolt" such as the Asian crisis of the 1980s or the high-tech Internet stock bubble of the late 1990s. Surprisingly, that flawed judgment seemed to work quite well until the subprime mortgage fallout in late 2007.

Past financial crises often led to notable changes in international financial agreements. The Great Depression brought final closure to the word gold standard, termed a "barbarous relic" by British economist John Maynard Keynes. The financial turmoil of the late 1960s and early 1970s shattered the 1944 Bretton Woods agreement. Cohen and DeLong contend that, after World War IL the U.S. served as the...