George w. Bush has described the American people as "addicted to oil." While that's true, oil may not be their most troublesome addiction.
Americans have also become addicted to cheap money. By "cheap" I mean money that can be had at unsustainably and ridiculously low interest rates. The past ten or so years have demonstrated that, when money becomes cheap enough, people will go after it like hogs at the trough.
In the United States low interest, together with mortgage deductability and booming house prices, created the "perfect storm" but, instead of winds and high seas, it came in the form of a sea of debt that eventually washed over the gunwales as it was bound to do. Everyone turned a blind eye to the leaks in the hull, even as the debt filled the bilges.
There was no secret to any of this. For years, economists have noted that America's buoyant economy was driven by its real estate market. Real estate, not manufacturing or resources, was America's economic engine. No one wanted to talk about what was bound to happen when that real estate market became saturated and shifted from a seller's to a buyer's market. There was hardly a mention of the mountain of debt upon which this housing market stood. You had to listen closely to hear the faint voices warning that homeowner equity levels were falling to all-time lows while homeowner debt levels were soaring to record highs. This was all happening right out in the open and no one did anything to stop it.
George w. Bush did nothing to stop it. He was, and remains, at least as irresponsible as anyone else. He cut taxes for the rich, cuts that were made good by - you guessed it - federal debt borrowing. He launched America into a war without end, a war that is being financed entirely with borrowed money.
Think about that. War without end paid for with borrowed money. It's nothing short of mind-boggling. This is lunacy writ large and it's a congenital Republican disease. If you doubt that, look at the books as they stood when Ronald Reagan became president and when he left office. When RR took office, America was the world's largest creditor nation. When he left, it had become the world's largest debtor.
Addicts are often driven to make unwise choices - committing crimes to finance their habits, neglecting their diet and health, sharing needles... the list goes on. That's why addictions tend to end poorly. It's the same for America's addiction to cheap money
Republicans and Democrats alike are ready to march through the streets demanding the Federal Reserve Bank cut interest rates. They want interest rates cut to forestall the worst of the fallout from the subprime mortgage catastrophe. High interest rates are going to mean more mortgage defaults. More defaults are going to mean more forced sales in a collapsing housing market which will mean tumbling property values triggering even more defaults along the way. No one knows where that will end and those in power are very afraid, especially with the 2008 elections looming.
Cutting interest rates is a viable option unless you're dependent on foreign lenders. When you slash your interest rates your bonds become a lot less attractive to those whose largess keeps you afloat. A lack of confidence in America's ability to bear the economic pain of setting right its own fiscal foolishness cannot help but undermine the US dollar. This prospect is one reason key lenders such as China are looking to move their foreign reserve holdings into Euros instead of dollars. The risk is that, at some point, the Americans may be forced to borrow in Euros or other foreign currencies instead of greenbacks. Borrowing in a currency stronger and more stable than your own can carry very dire, long-term consequences for the heavily indebted.
Could we be witnessing the beginning of the end of America's global paramountcy? Yes, quite possibly. It won't happen overnight but will likely take a decade or more and, even then, America's decline, while significant, won't be catastrophic. It will more closely resemble the end of the British Empire than the collapse of Rome. Just as North America ascended as Europe declined, now Asia will rise while our fortunes ebb. It's their turn to undergo the transformation from backward, agrarian states to industrial and economic powerhouse.
It's not that this reality wasn't foreseen by Washington. Bush and the neo-cons apprehended the threat to American economic and military paramountcy so vividly that they were driven to craft the Bush Doctrine. This Orwellian dictate provides that America will be entitled to use military force to prevent any other nation or bloc of nations (think EU) from achieving economic or military parity with the United States - in perpetuity.
The Bush Doctrine won't work, of course. America's prospective rivals won't have it and it's even more doubtful that the American people would be willing to support that type of thing. It is, however, illustrative of the position in which the United States now finds itself and what the coming decades hold for it and other key nations.
When it comes to Asia at least, American fears of economic eclipse may be exaggerated. I suspect that climate change in that corner of the planet all but guarantees that China's and India's economic rise will be relatively brief. In Asia, as elsewhere, groundwater resources are approaching depletion. Aquifers are being pumped to exhaustion. The magnificent glaciers of the Himalayas, which provide a substantial amount of India's and China's river waters, are rapidly receding. Even the Ganges is forecast to become a seasonal river, in effect a great culvert to carry the monsoon runoff to the sea. Both China and India are about to be confronted by a number of social, economic and environmental challenges that will be extremely difficult to surmount.
Then there's the math, it always comes down to the math. The US, with 5% of the world's population, uses 25% of the world's energy to drive its economy. To achieve that same standard, both China and India would need 100% of the world's energy. The planet simply does not have nearly enough resources to enable these countries to achieve anything resembling Western standards of living.
However they will demand more, a greater share of the already finite resource pie, and that's going to have to come from other nations' current share. In the realm of natural resources it will remain a seller's market. Things will be tougher for those on the buyer's side of the market and, when you're facing a looming bidding war, being heavily indebted is not an enviable position.