Colossus

by Niall Ferguson

  In any case, the Bush administration at times seems intent on biting the hand that lends to it. The relationship between the United States and China described above is in no way based on Chinese altruism. The Chinese buy dollar-denominated bonds not to help George W. Bush out, but to maintain the exchange rate of their own currency against the dollar and hence the competitiveness of their own products in the eyes of American consumers.59 Last year China had a $105 billion trade surplus with the United States. The real reason for this—indeed the key to the whole Sino-American interdependence—is, as we have seen, that Chinese households save significantly more of their incomes than do their American counterparts. But to those Americans whose companies come under pressure from cheaper Chinese competition, it is tempting to take another view: that China is unfairly undercutting American firms. This explains the mounting pressure in Washington during 2003 for either a revaluation of the Chinese currency relative to the dollar (code for a dollar devaluation) or tariffs on Chinese imports.60

  There are two reasons why such calls are ill advised, to say the least. The first, to repeat, is that a dollar devaluation would have grave implications for Chinese financial institutions, many of which hold their reserves in dollars but have renminbi-denominated assets. The consequence could be deflation spreading throughout the Chinese economy.61 The second reason is that anti-Chinese measures would hurt American firms, a growing number of which are investing directly in China to exploit its combination of cheap but relatively good-quality labor in an apparently stable institutional setting. Foreign direct investment in China now totals around 40 percent of Chinese GDP, a level of Western participation in the Chinese economy not seen since the era of the imperial Open Door.

  Low long-term interest rates are the key to the postponement of America’s fiscal reckoning. So long as the debt can be financed abroad at rates of little more than 4 percent, there will be no incentive to grasp the political nettles that surround Medicare and Social Security. The price of these low rates, however, is that the United States cannot expect to devalue the dollar; it must live with a static or even rising real exchange rate because its trading partners in Asia are buying dollar-denominated securities precisely to maintain nominal exchange rates as they are. Put like that, the world sounds as if it has arrived at a more or less happy state of equilibrium. In history, however, no equilibrium goes unpunctuated. In the decade before 1914, it seemed to many observers as if economic interdependence between Britain and Germany were making a war between the two great empires unlikely, if not impossible. Still war came. In the months after the Wall Street stock market bubble burst in October 1929, it seemed as if the United States would experience nothing more than a conventional recession. The Smoot-Hawley tariff bill, enacted in June 1930, triggered a global depression.

  None of us can know what will trigger a shift from last year’s equilibrium to something quite different.62 It could be domestic anxieties about a default on welfare entitlements; it could be a strategic change of heart in East Asia. Nor can any of us know when the shift will happen or how big it will be. As with an earthquake, its timing and magnitude are simply impossible to forecast. We cannot even be sure where the effects will be most severe. The possibility cannot be discounted that, as in the 1980s, a dollar devaluation might be more costly to East Asia’s banks than to the United States economy. If that is the case—if China suffers the fate of Japan and is tipped into deflation by the vagaries of American economic policy—the future of the dollar as the world’s favorite currency will surely cease to be assured. Today’s open door between America and Asia could close with a surprisingly loud bang.

  Conclusion:

  Looking Homeward

  La comperai

  per novecentonovantanove anni,

  con facoltá, ogni mese,

  di rescindere i patti.

  Sono in questo paese

  elastici de, par, case e contratti.

  [I’ve bought it

  for nine hundred ninety-nine years,

  but I can cancel the arrangement at a month’s notice.

  It seems that in this country

  both houses and contracts are elastic.]

  GIACOMO PUCCINI, Madama Butterfly, Act I

  Each of us is all the sums he has not counted: subtract us into nakedness and night again, and you shall see begin in Crete four thousand years ago the love that ended yesterday in Texas. The seed of our destruction will blossom in the desert….

  THOMAS WOLFE, Look Homeward, Angel1

  PINKERTON AND SCHWARZENEGGER

  The United States today is an empire—but a peculiar kind of empire. It is vastly wealthy. It is militarily peerless. It has astonishing cultural reach. Yet by comparison with other empires it often struggles to impose its will beyond its shores. Its successes in exporting American institutions to foreign lands have been outnumbered by its failures.

  In many respects, this American empire shares the same aspirations and ambitions as the last great Anglophone hegemon. Despite originating in a revolt against British imperialism, the United States inherited many of its begetter’s defining characteristics. Styling itself, in good Whig terminology, an “empire of liberty,” the fledgling Republic embarked on an astonishingly rapid colonization of the central belt of the North American continent. If anything, the independent Americans were even more ruthless in the way they expropriated indigenous peoples than they had been as British subject2. However, the differences between the British and American empires became more apparent as the United States sought to extend its influence overseas.3 Its experiment with overt imperialism after 1898 had distinctly mixed results, ending unhappily in both the Pacific and the Caribbean, with the notable exceptions of Hawaii and Puerto Rico. Like the fickle Lieutenant Pinkerton in Puccini’s Madama Butterfly, American overseas interventions went through three phases: ardent in Act I, absent in Act II, anguished in Act III.

  Only when the United States could cast itself in an anti-imperialist role—first against the British Empire during the Second World War and then (more wisely) against the Soviet Union during the cold war—were Americans able to perform their own cryptoimperial role with self-confidence. Even then, there were clear limits to American stamina. The doctrine of limited war led to a draw in Korea and a defeat in Vietnam. Contradictory commitments undermined U.S. predominance in the Middle East too. It took a succession of humanitarian disasters abroad in the 1990s and terrorist attacks at home in 2001 to rekindle public enthusiasm for a more assertive American foreign policy, though even this had to be cloaked in euphemism, its imperial character repeatedly denied.

  The United States has invaded and occupied many countries over the past two centuries. Yet in terms of their economic and political institutions relatively few of these have evolved into anything remotely resembling miniature Americas. Will things go any better in Kosovo, Afghanistan and Iraq? And can President Bush live up to his implied threats to deal sooner or later with the other members of the “axis of evil” Iran and North Korea—to say nothing of Cuba, Libya and Syria, added to the list of rogue states in May 2002, as well as Burma and Zimbabwe, also singled out for presidential opprobrium in November last year?4

  At the time of writing, simply imposing order in Iraq was proving difficult enough, even with British and Polish assistance. After all the bravado of the Three-Week War, the Bush administration felt constrained to request assistance from the United Nations for its Coalition Provisional Authority. To have any hope of securing this, the United States had to promise to expedite the transfer of power from the Anglo-American coalition to an elected Iraqi government. American power also looked circumscribed in the Middle East. When George W Bush visited the region in June 2003, some expressed the hope that the overthrow of Saddam would help break the deadlock in the Middle Eastern peace process, sending a signal to Syria and Iran that their support for terrorist organizations bent on the destruction of Israel would no longer be tolerated, bolstering the moderates among the Palestinian
leadership and encouraging a skeptical Israeli government to take the route marked on the American “road map.” By the fall, however, Yasser Arafat had reasserted his control over the Palestinian administration, Ariel Sharon was building a replica of the Berlin Wall around the Palestinians and for the first time Americans were being targeted by terrorists in the occupied territories. At the same time, al Qa’eda began to attack the one Arab autocracy that the United States had pledged itself to preserve, the house of Saud.

  The Bush administration had meanwhile made equally little headway in dealing with what was surely the most dangerous of all the world’s rogue regimes, North Korea. Pyongyang’s development of long-range missiles and its research into nuclear, chemical and biological weapons—to say nothing of its huge conventional armed forces—plainly posed a huge threat to the stability of East Asia. In December 2002 the.North Koreans had repudiated a 1994 agreement shutting down its nuclear reactors and had expelled UN monitors; in October 2003 a North Korean Foreign Ministry spokesman threatened, somewhat opaquely, to “open [North Korea’s] nuclear deterrent to the public as a physical force.” Could the United States do anything about this? Apparently not—despite the fact that the country continued to depend on American aid to feed its half-starved population. Insisting that it be given not just handouts but a fully fledged nonaggression treaty with the United States, this repulsive little dictatorship defied the American hyperpower with impunity.

  The United States even hesitated before sending a tiny force to the one basket case country in Africa for which it can be said to have any historical responsibility, Liberia. In August 2003 three ships, carrying around 4,500 sailors and marines, were sent to Liberia after repeated requests for American intervention. In all 225 U.S. personnel went ashore, of whom 50 succumbed to malaria. Two months later the Americans were gone.

  This halfhearted African adventure seemed to exemplify the limits of American power. But how are we to explain these limits? As we have seen, by most conventional measures of power—economic, military and cultural—there has never been an empire mightier than the United States today. Its recent difficulties in achieving its foreign policy goals cannot simply be blamed on the Bush administration’s alleged diplomatic ineptitude. Rather, we need fundamentally to rethink what we mean by power, for all too often we confuse that concept with other, quite different things— wealth, weaponry and a winning way with “soft power.” It is in fact perfectly possible to have a great deal of all these things, yet to have only limited power. Indeed, that is precisely the American predicament.

  The election of the actor Arnold Schwarzenegger as governor of California in October 2003 offered an important clue to the nature of American power. In his most recent film, Terminator 3, Schwarzenegger plays a muscle-bound and almost indestructible robot, programmed to protect a young man who is destined to save the world. The film abounds in irony, not all of it intentional. In the climactic scene, the Terminator’s operating system becomes corrupted; instead of rescuing the future savior, he comes close to killing him. As his original program battles this contradictory command, the word ABORT flashes in bright red letters in his head, all but paralyzing him.

  In three distinct ways the Terminator is a perfect, if unwitting, metaphor of American power. Though he has the body of a man half his age, Schwarzenegger himself is in fact just a few years short of his sixtieth birthday. His determination to remain forever Mr. Universe typifies the determination of an entire generation never to grow old, though grow old they must—with significant economic consequences. The Terminator is also a very American hero for the simple reason that there is only one of him. In this he personifies the chronic manpower shortage that currently constrains American nation building. Above all, the Terminator exemplifies the limits of American power because the word ABORT starts flashing in his head before he has completed his mission. Outwardly, Arnold Schwarzenegger is without question a colossus; it is hard to imagine the male body looking any bigger and stronger. He is to the human frame what the United States is to the capitalist economy. Yet his character embodies the three key deficits that explain why America only looks immensely strong without actually being immensely strong.

  THREE DEFICITS

  In this book I have tried to show that there are three fundamental deficits that together explain why the United States has been a less effective empire than its British predecessor. They are its economic deficit, its manpower deficit and—the most serious of the three—its attention deficit.

  In the space of four years Americans intervened militarily against three rogue states in the Balkans, Central Asia and the Middle East. As I write, American troops patrol the streets of Kosovo, Kabul and Kirkuk. Whatever the rationale, each U.S. incursion has led to a change of political regime, of military occupation and an attempt at institutional transformation euphemistically described as nation building. But where will the money come from to make these undertakings successful? How many Americans will be willing to go to these places to oversee how that money is spent? And how long will the American public at home be prepared to support a policy that costs not only money but also lives—even if the quantities in both cases are comparatively modest?

  There may be ways of bridging two of these three deficits, at least for a time. Since 1985, as we have seen, the United States has gone from being a net international creditor to being the world’s biggest debtor; its net international liabilities are now equivalent to around a quarter of gross domestic product. However, that is far from being the maximum ever run up by a developed economy. In the 1990s Australia’s net foreign debt touched 60 percent of GDP, while New Zealand’s came close to 90 percent.5 It may therefore be possible to carry on borrowing from abroad since there seems to be an insatiable appetite on the part of foreign investors for dollar-denominated securities, no matter how low the return on them.6 Unlike Australia and New Zealand, after all, the United States gets to issue debt denominated in the global reserve currency.

  Admittedly, America’s reliance on foreign capital is a balancing act on a very high wire. One conceivable and troubling scenario is that foreign expectations could shift, leading to simultaneous pressure on the exchange rate and bond prices, with higher interest rates threatening American growth more than a weak dollar boosts it.7 No one should rule out the possibility that American fiscal profligacy, even with the most accommodating monetary policy in the history of the Federal Reserve system, could still coincide with a Japanese-style deflation rather than a return to inflation, especially if American consumers began to save more and attempt to reduce their indebtedness. Two generations with no experience of sustained declines in prices would struggle to adjust their behavior in appropriate ways. In particular, people with large accumulations of mortgage and consumer debt would find apparently low nominal interest rates becoming painfully high in real terms if prices fell by more than 1 or 2 percent a year.

  Yet the costs of such a crisis would be heavier outside the United States than inside. Even a modest reduction in the growth of American consumer demand in the years ahead would have serious consequences for the rest of the global economy, given that nearly 60 percent of the total growth in world output since 1995 has come from the United States.8 And if the United States were to press for a devaluation of the dollar and some measure of protection against Chinese imports, there could be a deflationary chain reaction throughout the world economy.9 A deflationary world would not necessarily be a disastrously depressed world; it might be more like the 1880s than the 1930s. The original Great Depression that began in the aftermath of the 1873 crash and lasted until 1895 saw prices depressed much more than output (which more than doubled in the United States), and although the period was associated with increases in tariffs, these were not so large as to choke off global trade. If such a Great Deflation were to happen again, America’s latent fiscal crisis would not go away, of course; indeed, it might get even worse if real interest rates rose above the real growth rate or if the costs of Medicar
e continued to rise at a time when other prices were declining. As in the depression of the 1880s, the deflation losers might well turn to radical forms of politics to express their disgruntlement. Populism and socialism thrived as falling prices squeezed farmers and workers, while white-collar workers and small-business owners often turned to new strains of xenophobic nationalism. These were the first harbingers of the “end of globalization” in the mid-twentieth century.10 On the other hand, the British Empire’s strategic position was positively enhanced by the late Victorian slowdown, not least because it discouraged the strategic ambitions of potential rivals. It was only after the deflation was over that the Germans began to build their navy and to pursue their “world policy.” A Great Deflation would be likely to hurt Europe and China more than it hurt America.

  Nor is America’s manpower deficit insuperable. There is undoubtedly something perplexing about the apparent lack of American combat-effective troops at a time when the U.S. population is growing at 1.25 percent per annum, unemployment is proving stubbornly resistant to economic recovery (by one estimate there are 4 million victims of the current “job gap”) 11 and the American prison population exceeds 2 million—1 in every 142 American residents.12 If one adds together the illegal immigrants, the jobless and the convicts, there is surely ample raw material for a larger American army. One of the keys to the expansion of the Roman Empire was, after all, the opportunity offered to non-Romans to earn citizenship through military service. One of the mainsprings of British colonization was the policy of transportation that emptied the prison hulks of eighteenth-century England into ships bound for Australia. Reviving the draft would not necessarily be unpopular, so long as it was appropriately targeted.