A shattering moment in America's fall from power
Source Jim Devine
Date 08/09/30/22:55

The global financial crisis will see the US falter in the same way the
Soviet Union did when the Berlin Wall came down. The era of American
dominance is over

John Gray

The Observer,
Sunday September 28 2008

OUR GAZE MIGHT be on the markets melting down, but the upheaval we are
experiencing is more than a financial crisis, however large. Here is a
historic geopolitical shift, in which the balance of power in the
world is being altered irrevocably. The era of American global
leadership, reaching back to the Second World War, is over.

You can see it in the way America's dominion has slipped away in its
own backyard, with Venezuelan President Hugo Chávez taunting and
ridiculing the superpower with impunity. Yet the setback of America's
standing at the global level is even more striking. With the
nationalisation of crucial parts of the financial system, the American
free-market creed has self-destructed while countries that retained
overall control of markets have been vindicated. In a change as
far-reaching in its implications as the fall of the Soviet Union, an
entire model of government and the economy has collapsed.

Ever since the end of the Cold War, successive American
administrations have lectured other countries on the necessity of
sound finance. Indonesia, Thailand, Argentina and several African
states endured severe cuts in spending and deep recessions as the
price of aid from the International Monetary Fund, which enforced the
American orthodoxy. China in particular was hectored relentlessly on
the weakness of its banking system. But China's success has been based
on its consistent contempt for Western advice and it is not Chinese
banks that are currently going bust. How symbolic yesterday that
Chinese astronauts take a spacewalk while the US Treasury Secretary is
on his knees.

Despite incessantly urging other countries to adopt its way of doing
business, America has always had one economic policy for itself and
another for the rest of the world. Throughout the years in which the
US was punishing countries that departed from fiscal prudence, it was
borrowing on a colossal scale to finance tax cuts and fund its
over-stretched military commitments. Now, with federal finances
critically dependent on continuing large inflows of foreign capital,
it will be the countries that spurned the American model of capitalism
that will shape America's economic future.

Which version of the bail out of American financial institutions
cobbled up by Treasury Secretary Hank Paulson and Federal Reserve
chairman Ben Bernanke is finally adopted is less important than what
the bail out means for America's position in the world. The populist
rant about greedy banks that is being loudly ventilated in Congress is
a distraction from the true causes of the crisis. The dire condition
of America's financial markets is the result of American banks
operating in a free-for-all environment that these same American
legislators created. It is America's political class that, by
embracing the dangerously simplistic ideology of deregulation, has
responsibility for the present mess.

In present circumstances, an unprecedented expansion of government is
the only means of averting a market catastrophe. The consequence,
however, will be that America will be even more starkly dependent on
the world's new rising powers. The federal government is racking up
even larger borrowings, which its creditors may rightly fear will
never be repaid. It may well be tempted to inflate these debts away in
a surge of inflation that would leave foreign investors with hefty
losses. In these circumstances, will the governments of countries that
buy large quantities of American bonds, China, the Gulf States and
Russia, for example, be ready to continue supporting the dollar's role
as the world's reserve currency? Or will these countries see this as
an opportunity to tilt the balance of economic power further in their
favour? Either way, the control of events is no longer in American

The fate of empires is very often sealed by the interaction of war and
debt. That was true of the British Empire, whose finances deteriorated
from the First World War onwards, and of the Soviet Union. Defeat in
Afghanistan and the economic burden of trying to respond to Reagan's
technically flawed but politically extremely effective Star Wars
programme were vital factors in triggering the Soviet collapse.
Despite its insistent exceptionalism, America is no different. The
Iraq War and the credit bubble have fatally undermined America's
economic primacy. The US will continue to be the world's largest
economy for a while longer, but it will be the new rising powers that,
once the crisis is over, buy up what remains intact in the wreckage of
America's financial system.

There has been a good deal of talk in recent weeks about imminent
economic armageddon. In fact, this is far from being the end of
capitalism. The frantic scrambling that is going on in Washington
marks the passing of only one type of capitalism - the peculiar and
highly unstable variety that has existed in America over the last 20
years. This experiment in financial laissez-faire has imploded.While
the impact of the collapse will be felt everywhere, the market
economies that resisted American-style deregulation will best weather
the storm. Britain, which has turned itself into a gigantic hedge
fund, but of a kind that lacks the ability to profit from a downturn,
is likely to be especially badly hit.

The irony of the post-Cold War period is that the fall of communism
was followed by the rise of another utopian ideology. In American and
Britain, and to a lesser extent other Western countries, a type of
market fundamentalism became the guiding philosophy. The collapse of
American power that is underway is the predictable upshot. Like the
Soviet collapse, it will have large geopolitical repercussions. An
enfeebled economy cannot support America's over-extended military
commitments for much longer. Retrenchment is inevitable and it is
unlikely to be gradual or well planned.

Meltdowns on the scale we are seeing are not slow-motion events. They
are swift and chaotic, with rapidly spreading side-effects. Consider
Iraq. The success [sic] of the surge, which has been achieved by
bribing the Sunnis, while acquiescing in ongoing ethnic cleansing, has
produced a condition of relative peace in parts of the country. How
long will this last, given that America's current level of expenditure
on the war can no longer be sustained?

An American retreat from Iraq will leave Iran the regional victor. How
will Saudi Arabia respond? Will military action to forestall Iran
acquiring nuclear weapons be less or more likely? China's rulers have
so far been silent during the unfolding crisis. Will America's
weakness embolden them to assert China's power or will China continue
its cautious policy of 'peaceful rise'? At present, none of these
questions can be answered with any confidence. What is evident is that
power is leaking from the US at an accelerating rate. Georgia showed
Russia redrawing the geopolitical map, with America an impotent

Outside the US, most people have long accepted that the development of
new economies that goes with globalisation will undermine America's
central position in the world. They imagined that this would be a
change in America's comparative standing, taking place incrementally
over several decades or generations. Today, that looks an increasingly
unrealistic assumption.

Having created the conditions that produced history's biggest bubble,
America's political leaders appear unable to grasp the magnitude of
the dangers the country now faces. Mired in their rancorous culture
wars and squabbling among themselves, they seem oblivious to the fact
that American global leadership is fast ebbing away. A new world is
coming into being almost unnoticed, where America is only one of
several great powers, facing an uncertain future it can no longer

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