As many investors already know a massive shift in world economic power is definitely taking place. As always political and military reality must eventually follow suit. Americans for years now continue to believe that the United States is somehow exempt from the natural historical process that takes place when a nation loses sound monetary and fiscal policy.
It is true that the United States is a unique superpower with attributes that has allowed it to continue in the role it established for itself with the ending of the Second World War in 1945. With much of the industrialized world in ruins it was easy for the United States to have its way over European objections.
The American elite decided that the price for financial support was the dismantling of the European empire system. Americans wanted to be able to open the world up to Dollar Diplomacy and the closed colonial system employed by the individual European nations in relation to their colonies was a hindrance to that.
The new reality was quite obvious when the British and French with the Israelis invaded Egypt to take back control of the newly nationalized Suez Canal in 1956. The American President forced a European withdrawal and it became quite clear that the era of Europe in control of international affairs was now over.
The foundation of all this was established at Bretton Woods in 1944 that set the dollar up as the world’s new reserve currency. It would take an additional 23 years before the British were finally forced in 1967 to let the pound devalue in an effort to try to improve their domestic economy. An era had come to a close as the British finally recognized that it is difficult to afford an expensive domestic agenda as well as imperial ambitions.
In the Cold War that lasted from the late 1940’s to the late 1980’s it is true that the world was in a bipolar era but the military aspect exaggerated the power of the former Soviet Union. What doomed this 20th century superpower was once again the cost of empire. The economy of the Soviet Union could not sustain the military and political role that the leaders of the country had embarked on. It was only possible for the time it existed because the elites had decided that imperial ambitions would be paid for by a reduced standard of living by the citizens of the empire.
The collapse of the Soviet Union allowed the world to move from a bipolar to a unipolar world leaving the United States basically unchallenged in the international arena. However the seeds of destruction had already been planted.
The United States government had also decided that the country because of its unique status could afford both “guns and butter”. That is an expanding entitlement program along with imperial ambitions. The decision was made in the 1960’s and has expanded ever since regardless of the change in the subsequent presidential administrations. The only change would be the rate of growth in entitlements.
This situation was partly paid for by the growing American economy but was also funded by the role of the dollar in the world economy. The United States could just pay for the unaffordable spending by borrowing and later by printing more and more dollars.
Many Americans are fond of comparing European living standards with their own. The standard of living in many nations in Western Europe is only possible because those nations have given up imperial ambitions. They are also subsidized by the Americans who have taken on the responsibility to protect them in the Pax Americana (the American Peace). It is not a free ride as some individuals in the United States like to proclaim. The deal is they will continue to accept American dollars and will pretend that the value of those dollars are not shrinking at an accelerating rate.
Americans became somewhat alarmed when the true cost of imperialism began to be advertised with the incursions in Iraq and Afghanistan. What they didn’t realize is that the trillion dollar plus expense for these military adventures was totally on credit. The American taxpayer did not really afford them, at least not yet.
In 2008 the electorate in the United States made a decision to believe in the slogan “hope and change”. The policies of the new Administration only accelerated the move towards bankruptcy and the collapse of the dollar as a world reserve currency. Vast sums of money were spent on various programs in an attempt to stimulate an already over indebted economy.
Within a short time an enormously expensive new entitlement was being sold to the American public. One can debate the merits of the new health insurance initiative and its importance to the American people what is not readily known is that it is totally unaffordable. The reality to anyone who is interested in paying their bills is that if the cost is too high no matter how great the benefits you can’t have it. However, the President of the United States seemed oblivious to this simple fact.
American voters faced another decision in 2012. They decided to continue the belief that all was well and as a nation more spending on entitlements and infrastructure was sustainable. This election was the point of no return. The United States government is now taking on debt so fast that interest payments will begin to crowd out other spending. The federal budget itself is only 60% funded with the other 40% coming from “borrowing” and simply “creating” money through various devices.
The monetization of debt is the beginning of the end. That is that the United States is now buying its own debt. It is getting more difficult to hide the fact that the country has become insolvent. When interest rates rise as they eventually must, payments on the debt will force the United States to make very difficult choices where none of the outcomes will be palatable.
The year 2014 has begun to bring the reality home with the American government proposing major cuts in American defense spending at a time when American hegemony is being challenged around the world. What the public has still not been told is that the entire defense budget is not taxpayer funded. The total American defense budget stood at $682 billion USD in 2013. The deficit for the 2013 fiscal year came in at $845 billion USD. This was a drop in $300 billion USD from the year before. Although it shows tremendous improvement since the government had been running deficits of over a trillion dollars a year previously since 2009, it is a temporary dip. Within several years the debt will begin to move up dramatically as entitlement and interest payments on debt take over the federal budget.
Americans up to this point have only seen small changes in not having sufficient funding for all the priorities of the federal government. The gutting of NASA (National Aeronautics Space Administration) cuts in Veterans Affairs, the slowing increases in Social Security and Medicare are all indicators that something is amiss.
There is plenty of blame to go around in keeping the American public ignorant to the coming fiscal and monetary disaster. Politicians from both parties will stand up and insist that no spending cuts can be made anywhere. Often what the federal government calls cuts are actually a slowdown in the rate of growth.
Eventually the bills will need to be paid. This will be achieved through much higher taxes or rampant inflation or both. Then will come real spending cuts to many cherished programs of the past and Americans will finally be forced to accept the reality of living within their means, not just personally, but as a nation as a whole.
When the time arrives which will be in this decade Americans will be forced to give up dreams of superpower status. When the national debt ($17 trillion USD) has reached your GDP (Gross Domestic Product) which it already has and your unfunded liabilities are at least 3 times that, imperial overstretch becomes quite un-affordable.
For now most of the politicians in the United States continue to pretend that everything will be alright as they rearrange the chairs on the Titanic Economy which is heading towards the Iceberg of Debt. If you will forgive the metaphor. The game is just about up. The rest of the world will be less willing to fund this American profligacy as the protection of the American military and strength of the American economy wanes.
Most Americans are totally unaware that the dollar is in serious trouble already and will be abandoned in the near future in its role as the international world reserve currency. The rapid devaluation can no longer be avoided since many commodities including the all important energy market is factored in dollars and the world is awash in dollars. International investors have become wary of acquiring more and more dollars.
The United States has been able to maintain a higher level of spending with lower taxes partly because of the role of the dollar in the world. The recent foreign policy misadventures (with more to come) of the United States have exposed for all the world to see that the former superpower is no longer willing or unable to maintain the present world order. A new world order is on the horizon.