Last updated at 7:39 AM on 2nd August 2011
For now, the American debt crisis is over. After a last-minute deal between President Barack Obama and his Republican opponents, Congress has agreed to raise the American debt ceiling by more than two trillion dollars, allowing the U.S. to keep borrowing money to fund the country’s operations.
To many of us here in Britain, the dispute seemed a bizarre exercise in brinkmanship, with posturing politicians taking the world’s largest economy to the verge of default.
Had the Americans been forced to default, the result would probably have been a second global recession, spelling disaster for thousands of British businesses and piling agony upon agony for hard-pressed families.
Global concern: Employees of a foreign exchange firm in Tokyo watch TV reports that President Barack Obama had announced a US debt limit deal
But the truth is that although disaster has been averted for now, the U.S. debt crisis has been a troubling sign of seismic change. After leading the world for more than a century, a shining advertisement for capitalist values, the American economy is in deep trouble.
Seventy years ago, the publisher Henry Luce claimed that the 20th century would be remembered as the ‘American Century’. By and large, he was right.
Having caught up with Britain in the dying years of the Victorian age, the U.S. had forged ahead in the first decades of the new century.
By 1941, when Luce wrote those words, not even the Great Depression could disguise the fact that the U.S. was by far the world’s most powerful and productive economy.
When Pearl Harbour forced America into World War II, its sheer industrial capacity tipped the balance in favour of the Allies. With U.S. GDP bigger than Germany, Italy and Japan combined, the Americans poured forth tanks, aircraft and ammunition.
Added to British spirit and Russian blood, their economic muscle proved irresistible.
Winning the war was expensive: by the end of the war, total American public debt had surged to some 120 per cent of GDP. Alone among the combatants, though, the U.S. had emerged richer and more prosperous than ever.
In the next few decades, the heyday of U.S. power and prosperity, the economy boomed. Under Presidents Harry Truman, Dwight Eisenhower, Jack Kennedy and Lyndon Johnson, jobs were plentiful; inflation and interest rates were low; unemployment was no more than nominal.
And through it all, successive administrations quietly paid off their wartime loans, so that by the end of the Seventies the total U.S. debt was less than 40 per cent of GDP.
Total war: Gen. Dwight D Eisenhower gives the order of the Day, "Full victory-nothing else" to paratroopers in England, just before the invasion of Normandy in June 1944
Across the world, the U.S. was recognised as by far the planet’s dominant economic power. At its peak in the Fifties, it produced a quarter of the world’s exports, half the world’s steel and one in every two cars, putting it far ahead of competitors such as Britain, Japan and West Germany.
Its value pegged to gold, the American dollar was the cornerstone of the world economic system, its purchasing power about ten times higher than it is today. And from televisions to cars, from Hollywood films to the latest teenage fashions, it was American consumerism that set the pace for the rest of the planet.
By the end of the Seventies, however, the first cracks in this hegemony had started to appear.
Fattened by decades of affluence, the American people shrank from the tough choices they needed to make to retain their position as top dog.
In 1980, Ronald Reagan won power by promising to cut taxes and increase defence spending — a combination that meant he would have to borrow billions. And by the time he left office, the U.S. had gone from being the world’s biggest creditor to the world’s biggest debtor, its total debt having surged from $997 billion to $2.85 trillion.
To his credit, Bill Clinton used the boom years of the Nineties to pay off some of Reagan’s deficits. But now the American people had had a taste of debt, and they decided they rather liked it.
Prudent: President Clinton at a NATO summit in 1999 used his presidency to pay off public debt
When George W. Bush became President in 2001, he set out to prove that the U.S. really could have it all. Despite launching two wars, in Afghanistan and Iraq, he slashed taxes by almost $2 trillion, gambling that growth would pay for itself.
He hurled money around like confetti at a wedding, with spending funded not by tax receipts but by rampant, reckless borrowing.
The statistics make horrific reading: in eight years, Bush drove up the national debt by more than 100 per cent, sending it well over $11 trillion.
And although Barack Obama lambasted his predecessor for creating a situation in which the U.S. government ‘can’t pay its own bills’, debt has continued to soar. Last year, the total was $13.5 trillion, and by 2021 it is predicted to reach an eye-watering $26 trillion.
As has often been pointed out, if this was any other country, the IMF would be at the door demanding tax rises and spending cuts.
Feckless: President George W. Bush's spending was funded not by tax receipts but by rampant, reckless borrowing
There is simply no way that the U.S. can continue to have the world’s biggest military and European levels of social security while paying only about 24 per cent of its output in tax — far less than the 40 per cent we pay here in Britain.
Behind these figures lies the disease that has afflicted so many great powers through history: complacency. After decades of having it all, many Americans refuse to believe that they simply must slash their debts.
Faced with the choice of cutting spending or raising taxes, they prefer to pretend the dilemma will go away.
The results are becoming clear. Hobbled by massive debts, the U.S. economy posted dreadful growth figures for the first half of 2011. Output remains poor, house prices have collapsed, and some states — notably California — have managed their budgets so poorly they make Greece look a model of self-discipline.
Meanwhile, neither President Obama nor his Republican opponents have emerged with any credit. At a moment of supreme economic uncertainty, they have conducted themselves like squabbling schoolboys.
And when contemplating the bickering midgets in Washington, it is no wonder so many Americans have turned their backs on mainstream politics, either sinking into apathy or flocking to the banners of the eccentric and fervently nationalistic Tea Party.
But there is a crucial international dimension to all this. The single biggest holder of American public debt is the Chinese government, which owns some 26 per cent of U.S. Treasury securities (a total of $1.16 trillion worth).
Control: The Chinese government has a view as to how the world should be run - and their power is growing
The Chinese were unsurprisingly appalled by the pitiful dithering in Washington over raising the debt ceiling. But the fact remains that by continuing to throw money around without raising enough in taxes, the Americans have handed their biggest international rivals a stranglehold over their economy.
Many in Washington fear that China could wield its massive U.S. debt holdings as a weapon to influence American government foreign policy.
At the root of all this is sheer hubris. From the Eighties onwards, the American people have refused to accept that to keep their status as the world’s most powerful economy, they need to make tough choices over the size of the government budget and levels of taxes.
Instead of working hard and consuming less, they have allowed themselves to grow fat and lazy. They’ve racked up debts as if there were no tomorrow, forgetting that one day those dues must be paid.
No wonder that many observers think this will be the century of China and India. For although the U.S. may hold what looks a commanding economic lead, we in Britain know better than anyone that such leads can quickly disappear.
It is no exaggeration to say that the American economy is at a crossroads.
If Washington somehow managed to conquer its addiction to debt, then the great productive capacities and inventiveness of the American continent would once again be unleashed.
But the spectacle of posturing politicians on Capitol Hill offers few grounds for optimism. What is far more likely is that we will go through all this again, and again, and again, while all the time the great engine of Chinese growth roars unhindered.
At some future moment, the American people will look around and wonder where it all went wrong. But by then, of course, it will be too late.
Read more: http://www.dailymail.co.uk/debate/article-2021313/US-debt-crisis-Could-end-Americas-economic-supremacy.html#ixzz1h3QrXSFd
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