Your assignment today is to read your Roubini. It’s a bit weighty, but important. We’re starting the backslide into the twilight, folks. I’ll highlight the important bits for you.
Recent economic, financial and geopolitical events suggest that the decline of the American Empire has started. After the collapse of the Soviet Union there was a brief period where the world switched from a bipolar balance of two superpowers to a unipolar world with one economic, financial, geostrategic superpower, or better, hyperpower, i.e the United States. But by now three factors suggest that the US has squandered its unipolar moment and that the decline of the American Empire – as the US was in effect a global empire – has started.
Let us explain how and why…
First, the US squandered its power by relying excessively on its hard military power in the wars of Iraq and Afghanistan and in its unilateralist foreign policy – including economic issues such as global warming – rather than relying more on its soft power of diplomacy and multilateralist approaches to global policy issues.
Second, regardless of mistaken US policies the rise of other economic and financial powers – the rise of China, the recent resurgence of Russia, the process of economic and political integration in the European Union, the emergence of India, and the rise of other regional powers such as Brazil, South Africa and Iran – implies that the relative economic, financial and geopolitical power of the US will be reduced over time. We are indeed slowly moving towards a multipolar world where there will be a balance of Great Powers rather than the hegemony of a single hyperpower. While on military terms the US is still the only superpower even its military power is now restricted by imperial overstretch and its armed forces being bogged down in Iraq and Afghanistan; thus, Russia has now been able to flex its muscle in its Central Asian backyard and humiliated the US – not just Georgia – in the latest conflict on South Ossetia. For the Bush administration having supported Georgia by words only and show its impotence – or unwillingness – to support an ally in spite of the administration push to have Georgia join NATO shows the limits of the American power. The US is at fault for effectively letting Georgia start a reckless attack on South Ossetia. Russia has scary and dangerous neo-imperial goals but deeply flawed US foreign policy of encircling a paranoid Russia allowed the worst nationalist tendencies of the Russian bear to reemerge.
Third, and more important, the US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits. The last time around the current account started to go into negative territory in 1991 after a brief surplus during the 1990-91 recession. In the 1990s the growing US current account deficit was driven by a private investment boom – the internet technological revolution – and thus the accumulation of foreign liabilities of the US was driven by FDI and M&A activity, i.e the US accumulated foreign liabilities in the form of equity rather than debt. But since 2001 the further worsening of the US current account deficit was driven instead by growing fiscal deficits – especially in the 2001-2004 period – caused by unsustainable tax cuts and by the buildup of spending on foreign wars and on domestic security and since 2002 by the collapse of household savings and boom in investment in unproductive stock of housing capital that the housing bubble induced. And while the weak dollar is now inducing a modest improvement of the external deficit the looming sharp increase in fiscal deficits – that the current recession and financial crisis is inducing – will cause a return of twin deficits in the coming years. By now the US is the biggest net borrower in the world – running current account deficits still in the 700 billion dollars range – and the biggest net debtor in the world with its foreign liabilities now over 2.5 trillion dollars.
Let’s review, class. 1) We did some really cool stuff after the USSR fell, but we got cocky and made assholes out of ourselves over the last 20 years. 2) Everybody else saw what we did right, copied it, and left out the stupid mistakes we made like invading a country halfway around the world. Twice. 3) Those mistakes we made are now costing us trillions (yes, with a T) and the other countries footing the bill are realizing that it’s economic stupidity to let us get away with borrowing $2.5 trillion to throw a $3 trillion dollar war.
Result? The fun is now over. The pain is already beginning for many of us.
It will only get worse…much worse. Even the good news is bad right now. Take for example the housing rebound in Cleveland.
The good news in the worst housing slump since the Great Depression is that the market in Cleveland is recovering. That’s also the bad news.
The Cleveland area led the nation for home price gains in April and May with an 18 percent jump in the lowest price tier of the S&P/Case-Shiller home price index after values fell to levels last seen in 2000. The median home price was $117,500 in the second quarter, 15 percent higher than the prior three months, the National Association of Realtors said in a report today.
A housing revival in this city of 438,000 on the shore of Lake Erie may portend deeper drops in U.S. markets. Prices for entry level homes in Cleveland had to tumble 37 percent from a September 2005 peak to an almost 11-year low in March before enticing first- time buyers. That may be a sign that U.S. markets with the biggest price increases during the 2000 to 2005 boom have much further to fall before stabilizing, said David Blitzer, chairman of Standard & Poor’s Index Committee.
“The areas of the country that saw prices go through the roof and then fall into the basement won’t be the first ones to see an upturn,” Blitzer said in an interview. “It’s more likely to come in a place like Cleveland or other Midwestern cities that largely missed the boom.” Cleveland never experienced the big home-price gains of its coastal counterparts such as New York or San Francisco.
Gains were more modest as Cleveland, like other cities in the Midwest, saw jobs in steel, automotive and manufacturing shipped overseas.
In other words if you start expecting that housing prices in the US will begin to stabilize in 2009-2010 at 35-40% below market highs across the country, that’s a total economic meltdown. Housing prices have already plummeted 15-20%. Another 20-25% will annihilate our economy. Already the drop in housing has been enough to trigger talk of a global recession. Another equally bad drop over the next 12 months will spell disaster for the US. Trillions in real estate value will vanish and as Roubini has pointed out, we’re already trillions and trillions in the hole from the Bush years.
Whoever our next President is, they will be facing the worst economic crisis since the Great Depression. It’s vitally important to understand this, becuase it should be the basis of your vote this November. You will most likely be losing another 15% or so off the value of of your home. Already, a full one-third of all people who bought a home in the last five years owe more on their homes than the home is worth. Another 15-20% drop in home equity values will push millions and millions more American families into this position — the “underwater mortgage” — and our economy and the world economy will all suffer greatly over the next several years.
Among Americans who bought homes since the beginning of 2003, some 29.1% are in negative equity according to research by Zillow.com, an online specialist in house values. For those who bought in 2006, as many as 45% have mortgages under water in comparison to the sale value of their property.
“For homeowners who need to sell, this is a gravely serious situation,” Stan Humphries, Zillow’s vice-president of analytics, told Bloomberg News.
“It can also be harmful to communities where the number of unsold homes adds more houses to inventory and puts downward pressure on prices.”
The latest figures on house prices showed a year on year drop of 9.9%.
Worst hit are previously booming areas such as Los Angeles, where prices are down 27%, and Las Vegas, which has seen a drop of 21%.
Citigroup’s housebuilding analyst, Josh Levin, yesterday predicted that property prices could continue falling through 2010 and possibly 2011.
While many of us would like to see strong progressive programs in place under a new Obama administration, the reality of the situation is that this economic disaster will dominate the entire 2009-2013 term and the money for these programs will not be there. Many tough economic choices are going to have to be made, but all of them start with America getting back on financial track by ending the wars in Iraq and Afghanistan. We simply cannot afford them anymore.
Not only is ending the war morally correct, financially it is the only way to save our economy. We’re staring at a multi-trillion dollar collapse triggering the loss of hundreds of trillions in derivatives that will decimate the global financial system if we do nothing. Obama at least seems to recognize this danger. McSame does not understand the danger ahead, and he has admitted as such. More than anything else, this is the logic behind who I am voting for in November. I’m hoping that more people will come to realize this logic as well.
Cross-posted at Zandar Vs. The Stupid.