Today we got the news that the Fed’s James Bullard thinks the U.S. is heading for a deflationary period. He’s not the first to suggest this. Richard Koo has been on it for months (if not years) warning that the U.S. could turn into Japan, with a lost decade, as our free money spigot produces nothing but stingy corporate chiefs cutting costs and paying down debt.
Combining this with Niall Ferguson’s analysis that the U.S. is an empire on the wane, at the risk of collapsing under the weight of its own interest payments, and we have a potentially devastating scenario.
The reality is right now the government has tried nearly everything to spur growth. They’ve lowered interest rates to near zero, continued quantitative easing programs, and instituted fiscal stimulus. All that has done is created a larger debt burden on the U.S. government and made sure we didn’t slip into unemployment oblivion. That debt burden is only going to get bigger, as the government will need to keep spending through the period when corporates are paying down debt to keep people in jobs and tax receipts coming in.
But those tax receipts will not be able to keep up with the massive growth in the government deficit and, more importantly, interest payments. Which means that, according to Ferguson, the U.S. government could be spending more on interest payments than the military by the end of the decade. The final insult could be a failed bond auction, or a downgrade in the U.S. credit rating, but the damage will be done long before then.
Richard Koo is right, the U.S. is a lot like Japan. But the U.S. is also the U.S. and it has a much different position in the world than Japan did in the 1990s.
The global U.S. empire, and by empire we mean its military presence at every corner of this Earth, will be changing. It will not be everywhere all at once.
You will see the U.S. pull back from its commitments in South Asia and the Middle East, the most costly venues. Their power will be ceded to an emerging India, wealthy Gulf states, and a rising Iran.
In East Asia, the U.S. is already managing a retraction. South Korea is sliding towards China, noting that they both share an interest in containing the madness in North Korea.
And in Europe, Russia, Germany, France, and the UK are learning to manage a new balance on the continent.
This retraction will be the result of a reduction in U.S. military spending and rising expenditures by powers like China, India, and Brazil.
Right now the debate in government is still centered around simple arguments like austerity v. stimulus or deflation v. inflation. But what America needs to wake up to is that it is managing the fall of an empire, and that wisdom lies somewhere at the centre of the debate, not at either end.