Economic Collapse & the Post-American World
Washington’s declining fiscal responsibility was not resolved after the Great Financial Crisis of 2008-09 as the US instead kicked the can down the road. The problem has subsequently grown in magnitude as the banking crisis caused by too much borrowing and spending was overcome by borrowing and spending even more to get the economy restarted.
More than 15 years of low interest rates have fueled many asset bubbles, caused malinvestments, ballooned the debt, and laid the foundation for another banking crisis. The US public is deeply indebted, the middle class is shrinking, and the national debt stands at 35,5 trillion dollars. The US now pays 1 trillion dollars a year in interest on this debt.
The contradictions in the economy are evident as the stock market continues a prolonged strong performance as new money is recklessly introduced into the system, while the real economy goes from bad to worse.
The next banking crisis will likely cause a dollar crisis as the US cannot significantly increase the interest rate to save the dollar without sinking the economy, and it cannot significantly reduce the interest rate to save the economy without destroying the dollar. The US simply lacks the tools to deal with the coming economic crisis.
Reversing the Decline Without Addressing the Underlying Problems
The US attempts to revive its economic competitiveness by subsidizing its industries, demanding geoeconomic loyalty from allies, and sabotaging the industries of rivals. Subsidies are financed by debt and there is subsequently a risk that the US will exacerbate the basic problems. The generous subsidies for its industries under the Inflation Reduction Act have encouraged German and other European industries to relocate to the US. Furthermore, disconnecting Europe from cheap Russian energy with sanctions and the destruction of Nord Stream also incentivised energy-intensive European industries to move across the Atlantic. As the war in Ukraine continues and the sense of insecurity in Europe grows, the US can convert European security dependence into geoeconomic loyalty as Europe is also told to decouple from Chinese technologies.
With the future of NATO at risk as the US sets its eyes on Asia, the Europeans attempt to increase their value to Washington by abandoning former ambitions to pursue strategic autonomy and “European sovereignty”, and instead subordinate national interests to the whims of Washington. The gains of Washington’s renewed influence on the old continent will come at a cost as Europe becomes weakened and less relevant, while political alternatives in Europe are increasingly winning elections by challenging Washington and Brussels.
The economic coercion against China to roll back its technological and economic development is failing. The disruptions to supply chains by for example banning the export of computer chips to China resulted in American tech giants such as Intel taking huge losses in terms of revenue and losing thousands of employees as their main customer was China. While the US cannot diversify away from China, China can diversify away from the US by enhancing its technological sovereignty and establishing new technological partnerships. This has striking similarities to the EU’s failure to sever its economic ties with Russia. Russia could diversify away from Europe by reorienting its economy to the East, while Europe could not diversify away from Russia as evidenced by Europe’s economic problems.
American efforts to reshore its production are also disrupted by Chinese counter-sanctions on for example rare earth elements. The US has also discovered that tearing up the supply chains developed over decades creates problems as new competitive supply chains will take many years to establish. The old house is demolished before the new house has been built.
Efforts of “friendshoring” by sourcing supplies from friendly countries such as India also have limited success. India responds to the increased demand by sourcing more materials and technologies from China, which increases the costs to the US and further intensifies India-China economic integration in BRICS. This also has similarities to the EU’s economic coercion against Russia, as the Europeans buy Russian natural resources at a higher cost through third parties. Russia sells some of its resources at a discounted price to its economic partners to make up for the risks of secondary sanctions, and this discount only further increases the competitiveness of Asia vis-à-vis the West.
The US is also unlikely to recover its industrial might due to the heavy financialization of its economy as rent-seeking activities in the economy make it impossible to compete with industrial economies such as China. While China built infrastructure to enhance the economic competitiveness of its companies, the US burdens its companies with many costs that do not contribute to the production process.
US competitiveness worsens as China continues to increase its competitiveness in high-tech, and the profits from the positive trade gap are reinvested in the form of subsidies. The industrial might of China enables innovations, while the growth of patents increases rapidly. These developments are also seen in the education sector as Chinese universities are becoming more competitive and many Chinese researchers in the US even return to China. While American universities still dominate in areas such as finance, law, psychology and marketing, Chinese universities have begun taking the lead for the real economy and thus attract foreign students. The US economy will likely face growing structural problems as an economy cannot be built on the financial activities from growing debt, suing each other, and treating the growing mental disorders.
Finding Solutions
Many of America’s problems derive from imperial overstretch as its economy cannot sustain its military and strategic commitments around the world. Resources are transferred from the core to the periphery, resulting in the degradation of infrastructure, growing economic inequality, social instability, and political polarisation and decline. The US economy, society and political system are exhausted and need deep restructuring and adjustment to the multipolar realities on the ground. The US is not unlikely to make the necessary changes due to the prevailing ideology, demonisation of adversaries, crushing of dissent, and lack of political imagination for alternatives. The US will either default on its debt or pay back in devalued dollars by printing its way out of trouble.
There are no simple solutions to America’s economic problems, and we live in a time when political leaders respond to socio-economic complexities with ideological sloganeering and simplistic solutions. The US could have restructured its economy with for example ambitious industrial policies and restoring fiscal responsibility, without an aggressive economic war with China. However, this solution would have required the US to give up on its objective to preserve global privacy.
Too many economic disputes are instead militarised, and the expensive US military is itself overburdened with responsibilities around the world. As the US military transitions to confronting great powers, rival powers have another reason for why they should not invest in US Treasuries or use the dollar as this entails financing their own military containment. The attacks on China’s tech sector and the theft of Russia’s sovereign funds have sent shock-waves throughout the international system as all rules are seemingly suspended under the so-called international rules-based order.
A Post-American World
The rest of the non-Western world can see the coming disaster and is getting out of the splash zone. This is done by constructing a parallel international economic system with new supply chains, tech hubs, energy pipelines, a grain corridor, new commodity exchanges, new bimodal transportation corridors, development banks, digital currencies, payment systems, insurance systems and other important components of the international economy.
Much of the decoupling from the US, including de-dollarisation, is being facilitated by BRICS which creates the economic institutions for a multipolar world order. Historically, liberal international economic systems and free trade occur under an economic hegemony such as with Britain in the 19th century and the US in the 20th century as it creates incentives for the dominant state to embrace liberal economics to organise the world economy under its administration, which cements its economic and political power. BRICS attempts to form a vastly different economic system by accommodating a multipolar system through a “balance of dependence”, in which a multivector foreign policy and economic diversification enable states to avoid excessive dependence on any one state or region. It remains to be seen if BRICS can create a more benign international economic system that harmonises the interests of rival economies, or if it will descend into neo-mercantilism. Either way, the world is making arrangements for the post-American world.
