Moody’s Investors Service issued a statement on Monday that said U.S. treasury bonds are at risk of losing their triple-A rating if that country’s government fails to manage its growing national debt. While the rating agency’s warning covered a number of western countries, Canadians are focused on the U.S. question because of its obvious implications for our economy here.
James Laxer, an author and professor of political science at York University, believes we are witnessing nothing less than the decline of the American empire. He says that the U.S. has taken on so much debt – government, business and personal – that its position as the world’s dominant economic power is in jeopardy. Laxer argues that Canadians need to adapt to a new economic order in which no single country leads. He and I traded emails this week.
Why is the U.S. in decline?
The crash of 2008 has been widely recognized as the most severe global economic cataclysm since the crash of 1929 and the subsequent Great Depression. A compelling case can be made that the crash signifies the end of an economic epoch – the neo-liberal age of globalization and the American-centred global economy. What lends weight to this thesis is both the nature of the system of finance whose collapse is at the centre of the global crisis and the crushing problems that face the U.S., making the re-assertion of an American-centred global economy exceedingly improbable.
The proximate cause of the crash of 2008 was the bursting of the sub-prime housing bubble in the U.S. whose immediate consequences were the collapse of major financial institutions and the freezing of credit. The crash brought into play the vast and multi-layered problem of American indebtedness. The three peaks of the American debt mountain were as follows: the national debt, owed by the federal government, which totaled about US$11 trillion and was set to climb much higher with the prospect of annual deficits in coming years of more than $1 trillion; the swiftly increasing net indebtedness of Americans to the rest of the world, totaling trillions of dollars; and the indebtedness of individual Americans, amounting to about $11 trillion, centred on the explosive use of credit cards.
The U.S. national debt is financed in part by securities held by U.S. government accounts, among the most important, the Federal Employees Retirement Funds, and the Federal Old-Age and Survivors Insurance Trust Fund. At the beginning of 2008, 55% of the debt was held by the public, meaning those who purchased U.S. treasury bonds. Forty-five per cent of these public purchases were made by foreigners, two-thirds of that total by foreign central banks. By far the most important of the central banks making these purchases were those of China and Japan. In total, foreigners have been financing about 25% of the gigantic U.S. national debt, a percentage that the Obama agenda could drive much higher.
Between them, the central banks of China and Japan hold over $1 trillion worth of the U.S. securities used to finance the U.S. national debt They don’t buy them because they regard them as a good investment. Quite the contrary, they buy them to save the U.S. from the crippling consequences of its own internal weakness. This, they do, not as an act of generosity, but to safeguard their vitally important export markets in the U.S. and to prevent an even more calamitous global economic collapse.
In the dizzying run up to the crash, the debt mountain, swollen by the lax regulatory environment and the gluttonous appetite of financiers, meant that Americans were enabled to live beyond their means. Now the time has come to pay the piper. Not only does the crisis of American indebtedness herald a lengthy global economic malaise, it points to a new configuration of economic power in the world in coming decades.
Who will the new leaders be?
China, India, Japan, the European Union, Russia (a petro-state like Canada), Brazil and South Africa. The new global economy will certainly not be one in which national autarchy will prevail. While the era of globalization to which we have been accustomed will be at an end, what is coming will be an economy in which trade, commerce and investments will tie countries and regions to one another. National economies and their linkages, however, are highly unlikely to adhere to a single set of norms. The rule book the U.S. managed to impose on much of the world is bound to be replaced by a myriad of rule books and norms.
How long will this transition take?
This shift has already been under way for a number of decades. The relative decline of the proportion of global economic output accounted for by the U.S. has been steadily dropping. It reached its peak in 1945 when the GDP of the U.S. accounted for about 50% of global output. Today, the U.S. accounts for about 20% of global output. Over the next decade, given growth rates in China, India, Brazil and other countries, the U.S. proportion is likely to fall to 15%. The U.S. now has to come to terms with the layers of indebtedness I discussed in answer to your first question. Over the next decade, no matter how intelligently the U.S. is managed politically and economically, it cannot sustain its current proportion of global output. Fifteen per cent of global output is still a lot, but the shift elsewhere is unstoppable, and it will have huge geopolitical effects.
Are there signals Canadians should watch for?
Watch Canada’s current account balance. In 2005, Canada enjoyed a $25 billion current account surplus, relying overwhelmingly on a $62 billion surplus in our trade in commodities. In 2006, 2007 and 2008, the surplus in the current account dropped to $20 billion, $15.6 billion and $8 billion. In 2009, Canada had a current account deficit of $41 billion. The major reason for the declining performance was the decline year by year in Canada’s surplus in its trade in commodities. In 2009, Canada ran a deficit in its goods trade of $4.3 billion. That’s a shocker. Canada never runs a deficit in its trade in commodities. Our commodities trade with the U.S. has remained in surplus, while we run deficits with the rest of the world. While the U.S. is recovering from the worst of its downturn and that will boost our exports to the U.S., they’re not going back to the glory days of 2005. That’s a warning; a signal that we have to change course.
What’s your advice to Canadian investors?
Here are a few things of which I’m fairly sure. The value of the U.S. dollar will decline, with ups and downs, against other currencies over the middle term. The euro will rebound as the EU bails out Greece, and the EU will bail out Greece. The price of oil, with ups and downs, will rise over the next decade. Investments in rebuilding cities to make them denser and to move away from the car-dependent suburbs and exurbs will be a major theme over the next couple of decades – it already is in much of Europe. And with a few exceptions based on location, real estate will not be a good investment for the next decade in the U.S. and Britain.
This has trade policy implications too.
Before the mid-1920s, Canada did more trade with Europe, mainly Britain, than with the U.S. During the decades since then, Canada has become ever more attached in its commerce with the U.S. To succeed in the 21st century, Canada needs to move away from being a regional extension of the U.S., to once again become engaged with the wider world. Our leaders talk about that but they don’t understand it and they don’t mean it.
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