Wednesday, April 09, 2008

The Fall of the US Empire

By Michael Akerib, Rusconsult

US Motivations
The fall of communism seemed to offer the US a unique opportunity to further its goals of spreading democracy and trade to a large part of the world and to establish a revised and improved version of the new world order in which a Pax americana would prevail. It offered also the possibility of controlling the major sources of fossil energy in the world.

World domination by one country inexorably leads to the rise of challengers and in the present case the challengers have been terrorist groups rather than nations. This has led the US to concentrate on the fight against terrorism and lose the overall geostrategic perspective.

Return to the nest
Repeatedly throughout history, when it appeared that the international situation became too complex and dangerous for the interests of the country, the US decided to fold on itself and its internal problems in an isolationist mood.

The sense of hopelessness comes today not only from the inability to solve the problems in Afghanistan and Iraq, but also on the absence of a clear and concerted vision of how to disengage US troops, and incidentally that of its remaining committed allies, from the area.

To this sense of hopelessness one can add fear - a fear of terrorist activity at home, of course, but also a fear of a loss of identity due to illegal immigration. Both are fueled by the US government itself who communicates intensely on both issues.

It has translated into blocking sales to foreign buyers of US-owned oil companies and port infrastructures, a refusal to alter immigration regulations, building a wall on the border with Mexico and, above all, stalling progress on the Doha agreement.

The Committee on Foreign Investment in the United States (CIFUS), that reviews acquisition of certain US businesses by foreign buyers, has lengthened the review process and increased requirements for approval. Its role was extended in 2007 through the Foreign Investment and National Security Act.

Protectionism is further fueled by the feeling of the average American that the globalization process is hurting rather than improving living conditions and in particular purchasing power and unemployment. This view is particularly prevalent with the younger generation and in the industrial mid-West.

Moral issues
The US is no longer credible as a leader in sustaining moral issues. Guantanamo, secret prisons, kidnappings by CIA operatives and torture, have undermined any claim to moral virtue. The very idea that democracy can be installed by force in countries that reject it as contrary to their traditions and what they believe to be the will of God, is deemed ludicrous particularly when, simultaneously, the US is backing dictatorial regimes to prevent the rise of anti-US movements.

Increasingly the US is perceived, not only in developing countries but also in many European countries, as practicing a form of imperialism and of behaving arrogantly, endangering world peace. The increased wealth of multinationals although, to be fair, not all are of US origin, and the considerable exploitation of the weakest, particularly in the developing countries, is also perceived as immoral.

The US' engagement behind liberal market economics to be imposed willy-nilly as the only possible way forward has left the country bearing the brunt of the revolt against exploitation and the increased wealth gap.

A looming economic crisis
Even though the size of the US economy relative to that of Asia and Europe is no longer what it used to be, the huge debt of the US could significantly weigh down on the global economy, if only because of a sharp reduction in imports, and lead to a massive devaluation of the dollar and the total loss of confidence of foreign investors. Asian economies, including Japan's, are largely export-driven by US demand.

Unless US taxes are significantly increased, or spending on non-defense items reduced, the defense budgets will not enable the US to maintain its present exceptional global military dominance.

Today the US government is almost totally dependent on oil producing and emerging nations the governments of which hold two-thirds of the US debt. China alone is believed to hold nearly $1 trillion in US bonds and the oil exporters of the Gulf $3.5 trillion. They surely hope that forecasts that US government debt will one day be classified as 'junk bonds' are over-pessimistic.

These sovereign funds, which have a growth potential to reach $ 15 to 20 trillion by 2015 - 2020, could be used by foreign governments to acquire US assets. In a second phase, they could also be used to destabilize American financial markets through massive sales of these same holdings. China has recently made repeated threats in that direction.

Abu Dhabi, Dubai, Kuwait, Qatar and Saudi Arabia are increasingly investing in currencies of emerging markets and Kuwait no longer pegs its currency to the dollar.

Iran now receives payment for its oil shipments to Japan in Yen, no longer wanting to hoard dollars. In an OPEC meeting, President Ahmadinejad called for other OPEC members to abandon the dollar as a payment currency; an idea that did not encounter much echo for fear that such a declaration would further weaken the US currency.

Gazprom is considering the possibility of invoicing part of its gas shipments in Rubles.

Because of a number of trade and other sanctions against certain countries, decided unilaterally by the US, and of the risk of asset confiscation this entails for corporations trading with these 'rogue' countries, multinational corporations and financial institutions are avoiding both the currency and the clearing procedures carried out in New York.

US financial woes are not purely domestic and tied to bad loans in real estate, but are also due to differentials in interest rates with other currencies such as the Euro and to fears Central Banks may shift their reserves to non-dollar currencies.

The situation with the US economy contrasts with Russia's. Foreign reserves are of the order of $ 400 billion which, on a per capita basis, makes it the world's leader. The Stabilization Fund, which collects 80% of oil revenues above $ 27 per barrel, amounts to $ 120 billion and has effectively been split into two: a purely reserve fund, that might be used to support the ruble, and a National Prosperity Fund that will be used to invest in the economy.

Russia is also continuing to attract an increasing amount of foreign direct investments, and this is not targeted exclusively at natural resource industries.

All of the above presently make the ruble a highly undervalued currency and has led Putin to call for a 'new international financial architecture' starting with a revamp of the role of the IMF and the domination of the EU over the nomination of its director.

There is little chance that his call will be listened and none of the three candidates to the US election have even broached the subject.

By burrowing their heads in the sand will American leaders lead their country to an irreversible isolation and decline?

And if so, who could replace them as the world's leading economic power?