Exactly a year ago to the day, we published our article titled # 1 THE END OF AMERICA, where we developed the first of our four mega-trends, the end of the era of dominance of America.
After two weeks of intense immersion at HARVARD KENNEDY SCHOOL OF GOVERNMENT, the Impeachment of Donald Trump yesterday, the third President to be impeached in the American history, and on the eve of a new year that will be full of events, we feel it is important to revisit this fundamental mega-trend and share with our readers our thinking and analytical conclusions.
Nations and empires rise and fall throughout history, it is the nature of power and dominance, to ultimately breed arrogance and decline through cycles. It is also the nature of economic and technological evolution to bring about rises and falls of Empires as military might depends on economic might.
Political cycles, like economic cycles, are nothing new.
China, Persia, the Greeks, the Egyptians, and the Roman to take a few all dominated the world well before the Byzantines, the Arabs and the Western civilizations of Europe emerged from the Dark Ages.
Economists have identified several economic cycles lasting between 60 and 80 years that characterize the succession of dominant powers since 900. China, Venice, Portugal, Spain, The Netherlands, France, and the UK all ruled the world and the seas before America became the dominant superpower after WW2.
Harvard Kennedy School likes to talk about “World Order 1.0” and “World Order 2.0” to describe the changes between America before Donald Trump and America since Donald Trump, but the truth is that we are probably at “World Order # X” as there has been so many World Orders that the current differentiation is not really applicable.
What we are seeing, rather, is the difference between a rising nation, as America was in the first half of the 20th century and the accelerated decline of the same nation after the Obama Presidency.
America’s rise in the 1920’s was inexorable,
as China’s rise today is inexorable
Never in the recent history has America been so divided, so polarized, so doubtful of its own political and social system and of its own economic successes.
Fear is growing and self-confidence is declining. Americans fear China and US Presidents start targeting individual companies on National Security considerations, something never heard of before and totally in contradiction with the very principles that led to its foundation in 1776.
America clearly has its flaws.
A an objective analysis of America’s achievement over the past century reveals that despite its rise to economic predominance and unparalleled military might, America has had a number of weaknesses and failures. Suffice to mention just a few that may explain the current state of affairs and global
. America has created the largest income disparity between its citizens in the world
. 30 % of the American population lives on the threshold of poverty
. America has the largest stocks of public and private debt
. America has the highest proportion of criminals in its population
. America has, by far, the largest number of mass shootings in the world
. America has been at war continuously for the past 50 years
. America has had the largest percentage of its population serving in conflict theatres
Countless books examine these flaws, but they often conclude their grim analyses with a chapter on “how to make things better.”
Rarely is the possibility that these flaws are structural and cannot really be fixed examined, as rarely Americans of the 21st century will accept the fact that America could lose its economic and political dominance.
What if the flaws in Amercia’s principal institutions, from Capitol Hill to the National Security apparatus to the Federal Reserve, were unfixable? What if they were to exacerbate one another, resulting in an unsolvable nightmare?
Is the reality that America has already begun its irreversible decline, after only 250 years since its inception staring the Americans and the world in the face?
Empires do decline
All empires fall, after all. It’s just a matter of time before America goes the way of Rome. And most empires fall because their system of Governance becomes unadapted to the new world realities and
The fall of the Roman Empire, and the equally advanced Han, Aztec, and Egyptian Empires, as well as so many advanced Mesopotamian Empires, are all testimony to the fact that advanced, sophisticated, complex, and creative civilizations can be both fragile and impermanent.
Excess resource extraction and unequal wealth distribution were crucial to every civilizational collapse of the past 5,000 years. Privileged elites rapaciously exploited the environment and labor while shielding themselves from the consequences. The lives of commoners ultimately descended into chaos, creating a destructive vacuum that obliterated the foundational pillars of society.
Excess resource extraction and unequal wealth distribution are problems currently plaguing America, and for which there are few proposed solutions. In fact, they have no possible solutions without questioning the very logic of the system
As early as in 2008, Thomas Fingar, former Chairman of the National Intelligence Council, stated that US global leadership would “rapidly deteriorate in political, economic, and arguably cultural arenas.” NIC’s Global Trends 2030 says that in the coming decades the US will be mired in internal crises as a result of low economic growth. Despite the cheery optimism of America’s politicians, the Intelligence community seems certain that ticking debt-bombs and social instability will mightily diminish America’s global standing.
Is this not exactly what we are currently seeing with sub-par economic growth, exploding deficits, a massive debt build-up that feeds asset inflation and increasing poverty despite the lowest employment rate since at least 1969?
Is this not exactly what we are seeing with the phenomenal polarization of America’s public debate where 43 % of the population supports unequivocally a President that has just been impeached while the other 53 % are unable to influence his decisions and watch in dismay the course of American politics drifting into very dangerous territories.
Morris Berman’s trilogy on the American Empire and William Ophuls’ Immoderate Greatness: Why Civilizations Fail offer brilliant analyses on why America’s problems are irreparable and reminiscent of past empires.
As our readers know, we have ourselves predicted that the fall of the American Empire and the rise of the Chinese ear of world dominance will be full of threats and DOandl Trumps’ trade war with China is only the beginning of the Thucydides trap that we wrote extensively about.
1) The era of U.S. Dollar hegemony is coming to an end
On November 20 th 2019 we wrote an article titled SELL THE US DOLLAR at 1.10 against the EUR for structural reasons. Let us deepen the analytical framework
In 1944, the Allied Powers constructed the post-war monetary order at the Bretton Woods Conference in New Hampshire. Because America had cemented itself as the world’s preeminent superpower, it was agreed that the U.S Dollar would officially be the global reserve currency. It had been gradually replacing the British Pound in international transactions since the 1920s but it took the 1944 conference to formalize the shift form one to the other.
The bulk of international transactions would now be conducted in U.S. Dollars and since then the world’s central banks have been holding massive quantities of US Dollars. As of today, the U.S. Dollar still constitutes 60% of global reserves and 80% of global payments.
As has been the case with all the previous empires, the US dominance was buttressed by the dollar’s role as the global reserve currency. The reserve currency privilege has numerous implications, as the credit risk of last resort, it benefits from the lowest interest rates and has no reason to sterilize assets in foreign exchange reserves.
The fall of the dollar as the global reserve currency would be one of the sharpest indications of a loss of US global economic position, equivalent to the sterling’s demise as the world’s currency, contributing to the end of the British Empire in the post-World War II period.
Simply put, the current monetary system allows America to pay for goods and services with printed dollars. If other countries printed giant sums of their money to buy imports, their currency’s value would crash on the foreign exchange market. Because the USD’s reserve currency status creates an unlimited demand for dollars, America has been merrily churning the printing presses to bolster its military and buy foreign goods. Hence its massive debt and the massive holdings of US Treasury bills and bonds by foreign powers such as Japan ad China.
Contrary to Donald Trump’s constant focus on China, the US runs trade deficits with virtually every country in the world. Other countries sell goods to America and America gives them printed money in exchange.
The US Dollar is neither the world’s first reserve currency nor will it be the last and it was extremely symptomatic to hear the last Governor of the Bank of England, Mark Carney, advocate the rise of a new independent and supranational crypto-currency modeled on Facebooks’ LIBRA to replace the US DOllar as the world reserve currency at last summer’s Central Bank’s annual symposium in Jackson Hole.
The average reserve currency tenure length is 95 years. That the U.S dollar will lose its status as the global reserve currency by 2040 is unavoidable. This will lead to Americans paying much higher prices for imports and much higher interest rates to finance their deficits.
The federal government will have to downsize drastically and 2020 may prove to be a turning point in that respect as the US deficit swells to 1.2 Trillion in the first quarter, to be compared to 525 Billion at the end of 2016, when Donald Trump took power.
This, of course, will be happening as the US Dollar plummets on the foreign exchange market as investors start worrying about the creditworthiness of the USA.
2) The U.S. is only a few months, if not weeks, away from another financial crisis
In 1998, Wall Street bailed out a hedge fund called Long-Term Capital Management to prevent a meltdown of the global financial system. The stock market collapsed in 2000 with the Nasdaq losing 80 % of its value.
In 2008, the world’s central banks bailed out Wall Street after Bear Sterns and Lehman Brothers collapsed in the summer of 2007 under the weight of unregulated sub-primes going belly up. Once again, equity markets fell by 40 to 60 % and the entire world had to suffer a major financial crisis coming form the US excesses for the third time ina century.
Ten years later, America has gone into a leverage binge once again with Government, Individuals, and above all US corporations taking advantage of record low nominal interest rates to load up on debt to invest in highly expensive assets such as their own shares or real estate.
The most striking feature of the past 10 years, and where it differs massively from the debt load put in by China, is that US productive investments and Fixed Capital formation have been extremely low over the period. The debt has been used to buy unproductive investments or existing assets.
Additionally, Central banks have grown their balance sheets massively to buy extremely low yielding bonds. What’s going to happen when central banks need to be bailed out?
Since 2008, Central banks have printed over 12 trillion dollars to prop up the financial system. They’ve engendered monstrous speculative bubbles in stocks, bonds, and real estate.
A question that begs to be asked is whether Donald Trump’s presidency, Brexit, and the rise of the European Far-Right are, in part, responses to Western nations buoying a broken monetary system at the expense of the general public.
James Rickards’ The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis details how the international monetary system is more unstable and disaster-prone than ever.
Unprecedented levels of risk and criminality exist within it. The world’s governments, corporations, and citizens have never been this indebted.
Once the global economy slows again and debt-bombs begin exploding, the world’s Central Banks will be printing obscene amounts of money in an attempt to mitigate the damage. Their efforts will prove futile as citizens rush to hard assets to preserve their wealth.
Overvalued equities, bonds and real estate will collapse, further dampening economic growth and pushing interest rates and the value of the US Dollar lower in an infernal and vicious deflationary cycle
As we enter 2020, we may be much closer to this nightmare scenario than most people think…
3) America has lost the American Dream
America’s founding in 1776 was, like all revolutions, an accident of history. None of the actors of the Boston Tea Party that opposed British Taxes and threw Tea caskets into Boston harbor thought or even wanted a new Nation. It is only through the ebbs and flows of the resistance to the British forces and the congress of the three colonies that the idea of an independent democracy took hold and the Independence of the United States of America proclaimed in 1776.
However, America’s Founding Fathers were prescient about America’s current predicament. They were keenly aware of man’s tyrannical impulses and the usurious nature of banks. They knew once the American public favored idols and indulgences over liberty, prudence, and goodwill, their leaders would follow suit.
It is both shocking and at the same time perfectly normal to see how far America has deviated from what it originally was and suffice to watch a few of the 1950’s American iconic movies to fathom how the values of the American people have evolved.
Whereas America used to embrace self-sufficiency and limited Federal governance, it is now a profligate, warmongering police state.
Those who have suffered at the hands of America’s imperialistic wrath are still seething.
in 2001, and as predicted by many geopolitical analysts, 9/11 saw a non-state group engage in destructive behavior against the United States in a massive scale, in 2010, a military-grade, Russian attack virus was found in the NASDAQ operating system, in 2016, the Russian meddled in the US elections, and one of the biggest fear of the US intelligence is if a foreign State, Group or limited number of individuals succeed at taking control of US power grids or banking systems.
America has been at war in Afghanistan for 18 years, is still present in Iraq and Syria, is in non-armed conflicts with Iran, North Korea, and China and is being regularly challenged by Russia in Ukraine and Syria.
America’s defense budget is exploding with its public deficits right at the time where North Korea has mastered Nuclear weapons and China launches its first entirely home-made aircraft carrier.
Finally, in 2018, America started a technological war with China that will most probably end-up making America lose its technological grip on the world as China goes alone in its technological development. The Huawei ban will mark the beginning of a new world where countries, corporations, and citizens have to choose between American-made or Chinese-made technologies that may not be compatible.
Unfortunately, it is more than likely that America will lose this battle due to the respective size and financial, means of the two countries, in exactly the UK lost the technological battle with Amerfic ain the first half of the 20th century.
Donald Trump’s policies have changed forever the way the world looks at America, from his pulling out of multilateralism and the Climat change accords to the building up of walls on the Mexican borders, to the singling out of individual corporations to the regular distribution of sanctions against other countries as if America was a schoolmaster in a world of indisciplined kiddoes.
In a very few numbers of executive orders, he has managed to question the notion of the Rule of Law in America and of the reliability of global supply chains in an integrated world.
Donald Trump’s ways and character have exposed the flaws of America’s public Governance system where a single man can inflict tremendous damages to people, corporations, and nations on his own signature and where the same man can be indicted by the house of representatives on solid legal grounds but relaxed by the Senate on pure political grounds.
The one thing that is for sure is that America no longer symbolizes the values of the American Dream
4) The end of a civilization
The splintering of civilization does not happen overnight; it’s a gradual process.
IN 1776, America’s democracy was the first experiment of the Sovereignty of the People in history. It came as an opposition to the tyrannic rule of Kings and Emperors who not only rules nations but also OWNED the land, the only productive asset of the times. Then, Military conquest was an economic conquest above all.
Democracy implemented a Public governance system whereby the ruler was chosen by the People and supposedly controlled by the representatives of the people as well.
However, over these 250 years, the economic scene changed drastically with the industrial, power and knowledge revolutions and land and agriculture are now less than 4 % of GDP. Territorial control is no longer a priority.
Economic power no longer belongs to the political ruler but to corporations the governance of which has been developed pragmatically across nations and over almost 300 years since the first known corporation: The East India Company.
And the interesting part is that no one would invest in Apple Shares if its CEO was chosen for four-year terms by the clients of the company!
Just imagine if Steve Jobs had to leave after two 4-years terms at the helm of the company !
In fact, what the world is showing today is that the West Private Companies’ Governance is a far superior system of governance than the public Governance system of the western democracies invented in 1776.
And no one would think of qualifying Stev Jobs methods of management as “Authoritarian” !
The decline of the American Empire is not only the decline of America but the decline of the Governance system of Western democracies.
China’s public governance is modeled on the west’s Private Companies model of Governance.
Like Western corporations, it has Stakeholders : Clients (The People ), Employees ( The Civil Servants ), Shareholders ( The Communista Party ), A General Assembly of Shareholders *( The Congress of the Communist Party ) a Board of Directors ( The STanding committee of the Communist party) and an Executive made of a President and a CEO ( the Chairman and the Prime Minister )
As is the case with western private Corporations, the Chairman and the CEO are highly experienced people, carefully chosen by highly experienced people ( The Board of directors ) to run the company to satisfy its Clients ( The People ) and Grow the wealth of the Company ( its GDP )
There again, no one in the West claims that the way Apple Inc operates is unfair, undemocratic, authoritarian or even dictatorial. No one would even think that the clients should have a say on the industrial strategy of the Company or should vote on the launch of this or that product.
The phenomenal social and economic success of China over the past 40 years is entirely due to this Western Private corporations approach to Public Governance and the decline of America in the past 40 years is entirely due to the failure of its democratic model of public governance.
Are we going to see, as some do predict, major social unrest in the USA as we start seeing it in Hong Kong, Chile, France, Spain, Iraq or Lebanon?
By now, it is clear that the soul-searching of a polarized America going into an election year with an Impeached President will be full of risks.
The U.S. political juggernaut has duped Americans into believing, “Once candidate X gets elected, everything will be OK!” but the fact of the matter is that the division of the Americans will not disappear and that the damages caused to America’s standing in the world will not be reversed.
Oas always, it is the vastness and complexity of empires that conspire against them.
But the main destructive factor is their inability to question and change their own system.