Economic Collapse: The Financial
Death of the US Empire
by Doug Bandow
www.antiwar.com, October 10, 2008
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
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
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
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
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
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