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Monday, Nov. 15, 2004

Last gasp of U.S. hegemony

Special to The Japan Times

HONG KONG -- Sometimes it is difficult to fathom the mind of Mr. Market. After the Congress Party won the Indian election, the stock market plunged. After U.S. President George W. Bush's re-election was confirmed, markets everywhere were almost dancing with joy, seemingly oblivious to $50-a-barrel oil prices, the bloody mess in Iraq, the threats from al-Qaeda, America's jobless recovery and its yawning deficits.

TV's talking heads were jubilant, declaring that a victory for tax cuts that would boost economic growth and send Wall Street and other markets soaring. Perhaps it was the hallucinatory effect of the election slogans that had many voters believing that God and American guns could keep gays and terrorists at bay while restoring peace, harmony and prosperity to the world.

The reality is that Bush will be forced to make hard choices, and the American people will have to face pain for their profligacy. For the rest of the world, U.S. difficulties will bring hardships.

But while the rest of the world has the potential to recover, this is the beginning of the end of U.S. hegemony. It will be a tougher new world that emerges, but as with the British Empire or Ancient Rome, there is nothing God-given or eternal that says Washington must rule the world forever.

Perhaps the only good thing about the U.S. election was that it was over quickly and cleanly. However, the whole pantomime performance of the poll should raise doubts about the efficiency and validity of its contribution to democracy.

Bill Bonner of the Daily Reckoning said he had been hoping that both candidates would lose. He cynically noted that Americans are proud of their democracy: It gives them an opportunity to change leadership "by fraud, rather than by force. The candidates stir up the mob of lumpen voters however they can, dredging from the bottom of the pot the most sordid and titillating sentiments. One offers visions of apocalypse, and stands tall as the man who can protect them. The other says he will give voters more pills, at someone else's expense of course, and a whole new range of bribes while also cutting the federal deficit in half!

"No matter that the promises are implausible, impossible, oxymoronic or merely stunningly counterproductive, the crowd takes to it like a shot of Jack Daniels after escaping from a dry-out center."

Bonner does exaggerate, but the problem with this U.S. version of democracy is that the demos gets a single chance every four years -- or two years if you count the congressional elections -- to make their voices heard.

Since both houses of Congress now have stronger Republican majorities, there is little to stop Bush doing whatever he wants, especially now that he has the moral advantage of a 51 percent majority of the popular vote. In 2000 Bush lost the popular vote and won in the electoral college only after the intervention of the Supreme Court. But that did not stop him from opening a perilous second front in the war against terror on the basis of badly flawed intelligence.

As a European, I find it hard to understand how the American people can swallow Bush's contradictory claim that the war against terror is going jolly well but that, since the danger is greater than ever before, he is the leader to keep America safe. I pray that in the wake of his triumph, he listens to British Prime Minister Tony Blair's pleas that renewed efforts must be made in the quest for a Middle East peace as the key to defeating the terrorists.

The war in Iraq is more than a sideshow. Indeed, it is an expensive drain in both manpower and money on an already overstretched American economy. This is the real problem that Bush faces, and it will not go away even if he zaps all the terrorists from Iraq to Afghanistan.

Stephen Roach, Morgan Stanley's perceptive economist, drew attention to the fact that some of the numbers are nothing short of frightening. The U.S. currently has $38 trillion in debts, and there is a $54 trillion federal funding gap -- the difference between what the government is committed to pay out and what it will receive in tax revenues.

Not to worry, say cheerful economists who point to the fact that, although the 3.7 percent growth in the third quarter was a bit below expectations, consumers are still spending. In fact, consumer spending accounts for about 70 percent of the U.S. gross domestic product.

By many measures, Americans are far better off than they have ever been, with more electric devices and gadgetry crammed into even bigger homes. The average American house was 135 square meters in 1970 -- today it is 201 square meters. And of course those homes are worth more and more when measured in dollars -- the world's monopoly money.

But, Roach noted, America's net national savings rate fell to a record low of 0.4 percent early last year. It has risen slightly to just 1.9 percent. Roach warned that, with such low domestic savings, America imports foreign savings to fund economic growth. "The external deficit [has] risen to 5.7 percent of GDP." The U.S. is now absorbing more than 80 percent of the world's surplus savings, "requiring $2.6 billion of capital inflows each business day to fund its domestic saving shortfall."

The U.S. is spending at all levels like there is no tomorrow. The trade deficit is hitting new records. The budget deficit is growing and will grow faster while Iraq bleeds American money. Meanwhile, a demographic time bomb is ticking as aging baby boomers reach retirement age. The number of Americans aged 65 and above will rise from 12.4 percent of the total population to 18.2 percent over the next 25 years, though that's well after Bush leaves the White House.

When will the economic nuclear explosion occur? Like riding a bicycle, continuous momentum is important. The situation may continue as long as the rest of the world is prepared to accept dollar assets.

Roach concluded that savings is the sustenance of long-term growth for any economy. And yet America is lacking in savings as never before. It has finessed that shortfall by consuming the wealth generated by asset appreciation and by drawing heavily on the world's pool of surplus savings.

In my view there is nothing stable about this arrangement. In fact, there is a growing risk that America's savings shortfall will only intensify in the years ahead -- especially given Washington's total lack of fiscal integrity. As always, the flows will give the impression that this outcome is sustainable. In the end, nothing could be further from the truth.

Kevin Rafferty, a former managing editor for the World Bank, is author of "City on the Rocks, Hong Kong's Uncertain Future" (Viking Press, 1990).

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