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October 10, 2008

Economic Collapse: The Financial Death of the US Empire


by Doug Bandow

The American empire is kaput. Neither John McCain nor Barack Obama realizes that fact yet, but the myth of the omnipotent unipower, the essential nation, the country which declares that what it says goes, has been exposed to all. The Iraq debacle sullied Washington's reputation, but did not destroy the illusion of American indispensability. Assorted politicians, like McCain and Obama, promised to restore US primacy, either through more bluster or better diplomacy. But the financial crash has wrecked the economic basis of America's imperial pretentions. Washington simply can't afford to attempt to run the world any longer.

The US stock market has dropped 2500 points in 9 days. Trillions of dollars in wealth disappeared as the Dow lost six years worth of growth. The Bush administration and Congress have tossed ever increasing amounts of money at failing firms, hoping to appease the economic gods, rather as the ancient Canaanites sacrificed children to Baal. But the markets refuse to be appeased, and financial contagion has circled the globe.

Even before the economic crisis spiraled out of control, the US government was effectively broke. The national debt currently stands at $9.8 trillion, up $4 trillion (about 72 percent) since George W. Bush took office. With the pre-bail-out federal deficit in 2009 expected to hit a half trillion dollars, earlier this year Congress upped the debt ceiling to $10.6 trillion. But truly frightening are the many liabilities yet to come due. Uncle Sam is an extraordinary wastral and soft touch, like the person who cosigns notes for relatives, buys rounds of drinks for his friends, and promises everyone he knows that he'll take care of them.

The federal government makes loans and loan guarantees for most any purpose known to man or woman education, energy research, housing, agricultural land, airlines, veterans, and more. The Federal Deposit Insurance Corporation is billions of dollars short of the reserves necessary to cover expected bank losses. Washington is on the hook for generous pensions for its own workers as well as billions of dollars in guarantees of pensions for private workers whose companies fail. Then there's Medicare and Social Security, which together have an unfunded liability that is, promised benefits exceeding expected revenues of more than $100 trillion. No one knows where the money is going to come from to pay all of these bills, but that hasn't stopped Congress from continuing to expand benefits. In 2003 the Republican Congress and Republican president created the Medicare drug benefit without bothering to figure out how to pay for it, adding trillions of dollars more to the system's unfunded liabilities.

Now the government's liabilities are going up again, as Congress and the administration spend wildly in an attempt to revitalize the economy. Indeed, the administration and Congress apparently are prepared to bankrupt America to save American business. So far this year they have spent: $850 billion for the Wall Street bailout plus the financial "sweeteners" needed to buy enough votes for passage; $300 billion to bail out the housing industry largely through the Federal Housing Administration; $200 billion in Federal Reserve loans to commercial banks; $200 billion (and probably more) to bail out and essentially nationalize the political piggy banks Fannie Mae and Freddie Mac; $144 billion or more to buy mortgage-backed securities through Fannie and Freddie (yes, the same entities being bailed out by Uncle Sam because of their past purchases of bad debt); $87 billion to repay JPMorgan Chase for financing Lehman Brothers trades; $85 billion for a loan to bail out and effectively nationalize insurer American International Group; $50 billion to guarantee money market funds; $37.8 billion in a second loan to AIG, $29 billion to finance the buyout of Bear Stearns; $25 billion in loans to the auto industry, which continues to sink as demand for cars falls; $10 billion in direct Treasury Department purchases of mortgage-backed securities; $4 billion in mortgage community grants.

That's $2 trillion, which is real money even in Washington. It's even more to the American people, running about $18,000 per household. Some, and hopefully much, of that money eventually will be repaid. But don't hold your breath. And the bailouts aren't over. Just two business days after Congress approved the $700 billion buy of bad securities and any other assets desired by the Treasury Secretary, the Federal Reserve announced that it may purchase unsecured short-term corporate debt. If so, the Fed will be directly lending to the firms in the biggest financial trouble with no security; we all know how that is likely to end. Moreover, the Treasury Department says it wants to "directly strengthen the balance sheet of individual institutions" by acting like a common investor and buying an equity stake in companies. Treasury also is considering taking a formal ownership position in US banks, giving them cash directly. The Fed then cut interest rates, even though its ongoing policy of cheap, easy money is one of the primary causes of the boom that just went bust.

As Congress and the president continue to pile debt upon debt, America's financial problems will cascade. In May the Congressional Budget Office warned: "Budget deficits that grow faster than the economy ultimately become unsustainable. As the government attempts to finance its interest payments by issuing more debt, the rise in deficits accelerates. That, in turn, leads to a vicious circle in which the government issues ever-larger amounts of debt in order to pay ever-higher interest charges. In the end, the costs of servicing the debt outstrip the economic resources available for financing those expenditures. At some point, then, policy has to change: Taxes must be raised, spending must be reduced, or both."

With the post-bailout 2009 budget deficit now expected to run around one trillion dollars, Uncle Sam may soon have to worry about who is going to buy all of this debt. Will the Chinese continue purchasing securities from a financially irresponsible entity that keeps adding obligations with no obvious means of paying? Will Americans want to take on the increasingly risky paper? Will they be able to afford to do so?

Earlier this year before the tsunami of federal bailouts covering anyone even walking near Wall Street Moody's Investors Services announced that it was considering downgrading federal bonds, citing the government's failure to fund Social Security and Medicare. "These two programs are the largest threats to the long-term financial health of the United States and to the governments' AAA rating," Moody's Vice President Steven Hess explained. Tom Lemmon, also of Moody's, warned that "the underlying credit rating of the US government faces the risk of downgrading in the next ten years if solutions are not found to our growing Medicare and Social Security unfunded obligations." Lowering the investment rating for US debt would hike federal expenditures even more.

As credit dries up and the US economy stalls, how can Washington continue to engage in social engineering the world over? The Iraq war continues. Nearly $600 billion so far has been wasted on Bush's folly, and the total cost will exceed $2 trillion, according to the Congressional Budget Office, and maybe $3 trillion or even more, if Joseph Stiglitz's and Linda Bilmes's numbers come true. Getting out now would cut the expense, but many of the costs are impossible to escape, such as the expense of caring for America's grievously wounded, which will stay with us throughout their lifetimes.

Then there are Washington's other military activities. America accounts for roughly half of the globe's military outlays. The US maintains nearly 800 military bases and other facilities around the world. In 2009 Uncle Sam will be spending roughly $515 billion on "normal" military operations more, in real terms, that at any time since World War II. That means Americans now are spending more per year to patrol the globe than they spent to fight the Cold War, Korean War, and Vietnam War.

But that's not including Iraq and Afghanistan, which together cost roughly $12 billion a month. Toss in those costs and include some money for unexpected contingencies, and we're talking $700 billion. That's the amount of the Wall Street bailout, but an expense that will continue year after year.

It's one thing to act like the global dominatrix when the country is living on easy street, enjoying record economic growth and government revenue. But as the economy is crashing and Uncle Sam will soon have to visit the equivalent of global loan sharks to finance its operations, the time for the pretention of international hegemony is over.

Why are over-burdened US taxpayers expected to defend the Europeans, who have a larger collective economy and population, from nonexistent threats? Yes, the government in Moscow has an ugly edge, but Vladimir Putin is not the reincarnation of Joseph Stalin and there will be no Red Army dash through Germany and France and on to the Atlantic. And if that was a possibility, then why shouldn't the Europeans sacrifice a little more of their abundant wealth to defend against it? In fact, with the financial crisis hitting Europe as well, military spending there is likely to drop. Observed Mark Stoker of the International Institute for Strategic Studies in London, "I can't see defense is going to escape any kind of austerity measures. It would be very difficult for any government to justify cutting health and education in favor of, say, building two aircraft carriers and buying a load of planes to stick on them." Surely the US shouldn't be subsidizing Europe if those nations spend even less on their own defense. What they spend for the military obviously is their decision to make, but they should bear the full consequences of whatever decision they do make.

Even worse, why should Washington take on the role of protecting former pieces of the Soviet Union and even the Russian empire? We should wish the Baltic States, Georgia, and Ukraine well. But they never counted as a security interest to America. Just how much US money and blood should be spent to guarantee Georgia's right to supress secessionists and settle a century-old feud to its satisfaction? If Europe believes this to be an important goal, wonderful. Let the Europeans spend the money and take the risks necessary to make it happen.

It is equally nonsensical for America to continue subsidizing the defense of Japan, which has the second or third largest economy in the world, depending on the measure used. Yet it spends less than one percent of its GDP on defense, a quarter of America's burden. The ongoing economic crisis is a good time to tell Tokyo: you're a big country now, so defend yourself and your region.

The same goes for South Korea. It possesses one of the largest economies in the world and has 40 times the GDP of its decrepit northern antagonist. A majority of younger South Koreans say they fear America more than North Korea. Why are nearly 26,000 US troops still on station there? Bring them home and demobilize them, while the Republic of Korea takes over responsibility for its own defense. South Korea has matured. It should act like it and take on "adult" international responsibilities.

Finally, it's time for Washington to give up on nation-building. Social engineering is difficult enough at home. It's well-nigh impossible for outsiders, especially naïve and ignorant even if well-intentioned Americans, to transcend history, tradition, geography, religion, ethnicity, and culture to remake other societies. Iraq has been a catastrophe. We've been trying to fix Haiti for more than a century. Arresting warlords in Somalia was one of Washington's dumbest ideas. Neither Bosnia nor Kosovo are real countries, despite years of American attention.

And, to be perfectly blunt, who cares if they become real countries? We should be concerned about the mistreatment of people everywhere. But Washington has demonstrated no competence in setting foreign nations right, and ivory tower humanitarians have no right to risk the lives of our brave servicemen and women in the name of a glorious crusade for democracy in Mesopotamia, the Balkans, Caribbean, Africa, or anywhere else. War truly must be a last resort, which means no resort at all unless American society truly is at risk in some fundamental way. No wars of choice or convenience, no matter how easy and cheap they appear likely to be.

The American economy will eventually recover from its current trauma. But the myth of US omnipotence likely is shattered forever. Over the last six years the US has tossed away its moral superiority, diplomatic indispensability, and military infallibility. Now it has lost its economic security. Washington is broke, having made a succession of financial promises the country can ill afford to cover.

There was never a good time for empire. But if there ever was a good time, it has passed. Instead of attempting to micro-manage global affairs, America should again become a normal country, strong enough to protect itself, but no longer claiming responsibility for maintaining global security, stability, and prosperity. Doing so isn't possible, at least at an affordable price.

Empire isn't worth the risk to American society or the lives of American military personnel. It certainly isn't worth the cost, especially at a time of economic crisis. Let us make John Quincy Adams' apt dictum the lodestar of our new foreign policy: America "goes not abroad in search of monsters to destroy. She is the well-wisher to the freedom and independence of all. She is the champion and vindicator only of her own."

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  • Joshua Frank is the author of Left Out!: How Liberals Helped Reelect George W. Bush, just published by Common Courage Press. You can order a copy at a discounted through Josh's blog at www.brickburner.org. He can be reached at brickburner@gmail.com.

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