In 1972, the British Empire collapsed. Yes, it had been in decline certainly since the end of World War Two (some historian’s would say since 1918). Faced with a monetary crisis, a run on the British pound, the government in London decided it had to trade the certainty of one collapse to stave off another. Defense expenditures had to be reduced as part of a general belt-tightening by the British Government. So, the costs of empire had to be reduced. Hence, the British abandoned its military positions and, in effect, its alliance commitments, everywhere East of Suez.
When the British walked away from half the world, the United States was there to take its place. The question now is, if this country is forced to make a similar choice, who will take our place?
Is such a scenario farfetched? Hardly. America’s financial situation today is, if anything, even more parlous than that of Great Britain just before the 1972 crash. The budget deficit for 2009 was $1.6 trillion; that for 2010 is estimated to be at least $1.4 trillion, about 11.2 percent of GDP, the biggest deficit in 60 years and that was while we were fighting World War Two. This means that all discretionary expenditures in this year’s budget, including national defense, are being deficit financed. All national tax receipts are going simply to fund entitlements. Public debt is expected to more than double in the coming decade, from $5.8 trillion in 2008 to $14.3 trillion in 2019. As a result, interest payments on that debt are forecast to leap from 8 percent of federal expenditures to 17 percent. Debt servicing will then exceed all expenditures for national security as a percentage of the federal budget.
Everyone knows that the current program of trillion dollar deficits as far as the eye can see is unsustainable. But nothing is being done to rein in spending. If critics of Obama Care are to be believed, there is a trillion dollar time bomb awaiting taxpayers in the next decade when it will no longer be possible to balance the books by counting ten years of tax receipts to cover six years of increased medical benefits. So at some point, there will be a financial crisis, a run on the dollar, a dramatic rise in the interest rates on U.S. treasuries, and a collapse of government finances. The only way to cut defense spending and to do it rapidly will be to withdraw from overseas bases, and demobilize forces. The end result will be the biggest international power vacuum since the sack of Rome in 367 AD.
Nassim Nicholas Taleb, the brilliant author of The Black Swan: The Impact of the Highly Improbable, makes the point that the likelihood of such events is always underestimated before they occur, but in their aftermath it is demonstrated how obvious it was that they were about to occur. Just think dot.com and housing bubbles or even the so-called failure to connect the dots prior to September 11. I would note that Taleb is telling every American to short T-bills meaning that interests rates will rise as will payments to service that debt.
In other words, the American empire is at great risk of declining and doing so not smoothly and gracefully but with a bang and a whimper. The consequences for the world are likely to be damaging at best and, catastrophic at worst.
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