The Decline and Fall of the Empire

The following article is published in the latest Irish Foreign Affairs. You can read and subscribe using the links.

The conflict in Ukraine is the latest step in America’s downward spiral. Perhaps if Trump had remained as President the empire might have retrenched. An alliance with Russia in order to counter the economic power of China might have enabled the United States to retain her pre-eminent position, but now we are witnessing “pride before the fall”.

Since at least the 1960s the empire has over-extended itself. The 1975 defeat in Vietnam not only exposed the limits of her military power, but also her financial power. In 1971 the US broke the dollar’s link to gold and started printing money in order to finance the war. The consequent devaluation reduced the value of her dollar denominated debt much to the chagrin of her creditors and political allies.

Nixon’s Treasury Secretary John Connally famously told a group of European finance ministers worried about the export of American inflation that the dollar “is our currency, but your problem”.

The political hegemony of the US enabled her to avoid the normal economic consequences. The dollar remained as the world’s reserve currency. The inflationary consequence of decoupling the dollarl from gold was exacerbated by the oil ‘crisis’ of the early seventies. This ‘crisis’ was only a crisis for the West. By means of the OPEC cartel, which ensured that the real value of oil was maintained, there was a massive transfer of wealth from the West to the oil producing countries. The massive surplus in funds arriving in the Middle East was returned to the Western Banking system. But, unlike in former times, these funds were in the form of credit. The west owed rather than owned this money.

During the 1970s it was very noticeable that the Western banking system found it difficult to make an economic return on the credit extended from the Middle East. In many countries in the West the working class had achieved a level of power which prevented capital from obtaining an adequate rate of return, but had not achieved enough power to organise the economy on different lines.

Walter Wriston, the Chairman of Citicorp, thought he had arrived at a solution. He reasoned that individuals and companies can go bankrupt but countries can’t. But the extending of credit to various Latin American countries didn’t end well. So the contradictions between capital and labour remained unresolved.

In the 1980s the rise of political forces represented by Reagan and Thatcher reflected an attempt to tilt the balance of power in favour of capital. Finance capitalists, such as James Goldsmith, felt that corporations were run for the benefit of managers and workers and it was time for shareholders to assert their rights.

The collapse of the Soviet Union opened up new markets as well as providing new sources of cheap labour to exploit in the 1990s. Similarly the opening up of China gave new opportunities for western capital.

Expansionary monetary policies in recent years have preserved living standards in the West. The import of cheap commodities from China have (until recently) mitigated inflationary pressures (unlike in the 1970s). But is this sustainable? The rise of Putin diminished the opportunities for extracting massive profits from Russia (which is why he is hated by the West), and the export of capital to China has proved to be a double-edged sword. Western companies have outsourced manufacturing to China and have extracted massive profits because of the cheap labour, but they have paid a price. The presence of such Western companies has given China access to western technological know-how, which has enabled her companies to compete with Western companies. Also, the policies have undermined the West’s manufacturing base.

Donald Trump was aware of the problem and proposed that American-owned production be repatriated to the United States (or at least to other countries in the American continent). A second strand to his political platform was that the US should cease to fight costly foreign wars with unlimited objectives.

There is now a consensus in the US concerning his economic policies, but the political Establishment (or as Eisenhower called it: the military industrial complex) eschewed his foreign policy and indeed undermined his attempts to implement it when he was President.

We are now seeing the consequences of American hubris. The United States has already lost the war in Ukraine. At the outset, the Americans thought that the pressure of war, plus the economic sanctions, would destabilise the Russian Government. It was an arguable proposition. Putin could not be sure that it was wrong. He hoped that his initial intervention would result in some kind of peaceful compromise.

By about August of last year it became clear that: America was not interested in compromise; the economic sanctions had not undermined the Russian economy; and internal political support for the Russian Government remained strong. Accordingly, Putin felt able to mobilise more than 300,000 soldiers in response to the escalation of the war by NATO.

Far from undermining the Russian economy, the sanctions have weakened the Western economies. The dollar’s role as the International Reserve Currency has been challenged. Nixon’s policy of driving a wedge between Russia and China is in tatters. Russia, with its rich resources and military strength, has now combined with the industrial might of China.

The War in Ukraine has exposed the consequences of decades of out-sourcing of production. The West is incapable of manufacturing the required level of weapons to counteract the overwhelming advantage that Russia has in artillery.

“The old is dying and the new cannot be born. In this interregnum there arises a great diversity of morbid symptoms.” Or so said Antonio Gramsci, the Italian communist, during an earlier crisis. Western economists can observe the symptoms but they cannot grasp their significance.

Interest rates in Russia are running at about 7% and inflation is about 4%. It could be said that both inflation and interest rates are too high, but at least it can be said that it is a functional system. Savers have an incentive to place their money in the bank, which is a condition of investment. And borrowers have access to funds from the bank.

But in Western economies it is almost the opposite (i.e. inflation at 7% and interest rates at 4%). For many years now, there have been negative real interest rates in the Western economies. There is no incentive to place funds on deposit. Instead, Central Banks have been pumping money into the system in order to inflate assets with dubious underlying value. There are at least 600 billion dollars of unrealised losses in the American banking system, which is enormous given the total capital is 2 trillion.

Nouriel Roubini, the economist who predicted the last economic crisis, is anticipating another “hard landing”. He says the sum of the world’s private and public debt was 100% of GDP in 1970. It is now about 350%; and in advanced capitalist countries over 400%. But he doesn’t attempt to understand the underlying causes. Debt, no more than credit, is not created out of thin air. For every dollar or euro of credit, there must be a corresponding amount in debt.

China has been extending credit to the US for decades in order to sustain a standard of living in that country which is not warranted by her level of production. But all of that is coming to an end.

By expropriating Russian assets following the outbreak of the conflict in Ukraine, the US has announced to the world that she reserves the right to renege on debts to countries with which she is in conflict. The creditor countries have taken note.

The alliance between China and Russia has been followed by a rapprochement—brokered by China—between Saudi Arabia and Iran.

But the Europeans seem to be oblivious to the new geopolitical dispensation! Germany is not perturbed by the Americans destroying the Nordstream Pipelines. It seems quite happy to buy American Liquid Natural Gas at four times the price of the Russian equivalent and, more recently, Biden has been talking about transferring Germany manufacturing to the US.

It is scarcely believable that Europe is prepared to sacrifice its economic well-being on the altar of a moribund political and economic configuration. When will the Europeans dis-engage from the ideological fog that has saturated the Western media and recognise where their true interests lie? Perhaps, only a decisive Russian victory in Ukraine will bring them to their senses.