This is blog of Dr Jayanti Bhadesia about religious, patriotic, inspiring and human heart touching things to share with friends
Thursday, August 12, 2010
America on the brink of collapse?? - An Article
Professor Niall Ferguson is a contributing editor for the Financial Times and a regular contributor to Newsweek. As a Historian and economic expert, he contributes often to television and radio shows in the U.K. and the U.S. He has authored multiple books, among them best-selling book "Ascent of Money: A Financial History of the World", published in 2008. He is a Professor of History at Harvard University and Professor at Harvard Business School. He graduated from Magdalen College (Oxford University) in 1985. He was a Hanseatic Scholar in Hamburg and Berlin and a Research Fellow at Cambridge. He was then a Professor and Financial History at Oxford.
As a distinguished historian his analysis contained in the following three pieces cannot, therefore, be brushed aside:
the first, titled, "Niall Ferguson: Empires Fall Abruptly, And The American Empire Is On The Brink" by Gregory White;
the second, "Sun Could Set Suddenly on Superpower as Debt Bites" by Niall Ferguson himself; and
the third, "Niall Ferguson's guide to sovereign debt crises."
The first two articles are reproduced in full below. Also the link to the third.
Briefly, he thinks America (I do not understand why the learned professor calls America "the American Empire" when America has no empire), will collapse because of three reasons:
1) His theory, based on a historical critique of how empires fracture and fall, notes the fiscal instability of the Hapsburg Spanish, Bourbon French, and British Empire prior to their falls.
2) The size of America's debt will continue to grow, and debt servicing costs, specifically interest payments, will consume a rising proportion of tax revenue and could sqeeze the defense budget.
3) Cuts in defense spending will become inevitable and would lead to the decline of the US, a withdrawal from portions of the world, and the expansion of China in the Asia-Pacific region.
Therefore, while Professor Niall Ferguson's thesis must be carefully read, all is not lost if America starts taking the right steps NOW.
BUSINESS INSIDER MONEY GAME
Niall Ferguson: Empires Fall Abruptly, And The American Empire Is On The Brink
Gregory White | Jul. 29, 2010
Niall Ferguson, writing in The Australian, believes that the American Empire could be on the brink of extinction. His theory, based on a historical critique of how empires fracture and fall, notes the fiscal instability of the Hapsburg Spanish, Bourbon French, and British Empire prior to their falls.
Ferguson then notes that the American Empire could be next, not just because of the size of its debt, but because of the size of payments needed to service that debt. He suggests that debt servicing costs, specifically interest payments, could rise above that of defense spending within the next decade.
And that's where it gets frightening for Ferguson, who notes that those cuts in defense spending would lead to the decline of the U.S. Empire, a withdrawal from portions of the world, and the expansion of China in the Asia-Pacific region.
Further from this, its quite obvious that this could have an impact in multiple areas the U.S. currently dominates. An example would be South Asia, where India and Iran could rise to compete over dominance in Afghanistan and Pakistan. China could even play there too.
Sun Could Set Suddenly on Superpower as Debt Bites
By Niall Ferguson
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.
Complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes, what scientists call the amplifier effect.
Empires exhibit many of the characteristics of other complex adaptive systems, including the tendency to move from stability to instability quite suddenly. But this fact is rarely recognised because of our addiction to cyclical theories of history. The Bourbon monarchy in France passed from triumph to terror with astonishing rapidity. The sun set on the British Empire almost as suddenly. The Suez crisis in 1956 proved that Britain could not act in defiance of the US in the Middle East, setting the seal on the end of empire.
What are the implications for the US today? The most obvious point is that 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.
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.
For now, the world still expects the US to muddle through, eventually confronting its problems when, as Churchill famously said, all the alternatives have been exhausted. With the sovereign debt crisis in Europe combining with growing fears of a deflationary double-dip recession, bond yields are at historic lows.
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.
And remember: 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 ready for such a dramatic change in the global balance of power?
Judging by what I have heard here since I arrived last Friday, the answer is no. Australians are simply not thinking about such things.
A favourite phrase of this great country is "No dramas". But dramas lie ahead as the nasty fiscal arithmetic of imperial decline drives yet another great power over the edge of chaos.