THE DECLINE OF THE AMERICAN EMPIRE

Are we there yet?

THE DECLINE OF THE AMERICAN EMPIRE

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All empires rise, decline and fall. We are witnessing in real time the decline of the American Empire, which is failing from the inside.

For history lovers like myself, this is a rare opportunity to see first-hand what happens when the leadership of a nation goes down a rabbit-hole of magical thinking and then gets smashed by brutal reality.

However, President Donald Trump is not the sole cause of this decline, he is a symptom of a trend which has been building for decades. America is following the pattern set by previous empires, becoming less democratic as it struggles to hold onto its empire. The few increasingly tell the majority what to do.

Edward Gibbon wrote a famous series of books, “The History of the Decline and Fall of the Roman Empire’, from 1776 which had many parallels with what happened to other empires and is now happening in the USA.

Very briefly, Gibbon argued the Roman Empire suffered an internal loss of civic virtue among its citizens which then made it vulnerable to invasions. Civic virtue, closely linked to citizenship, is the dedication of citizens to the common welfare of each other even at the cost of their individual interests. When selfishness replaces civic virtue, then the foundations of society are undermined.

In a democracy, it is the civic virtues of the people which affect the quality of decisions. Under an oligarchy, the ruling class may adopt priorities which favour themselves at the expense of the majority. Under a monarch, it is the monarch’s virtues (or lack of them) which become dominant.

I’m sure readers can easily see where this is going, when they consider the current state of American politics, dominated by a selfish President ‘King’ who was supported by only 32% of eligible voters (36% irresponsibly didn’t even bother exercising their citizenship by voting), thinks he is above the law and is backed by rich oligarchs determined to plunder the wealth of the state and the globe to become even richer.

This is repeating history. Athens was dominated by male citizens whose Assembly made the laws about civic virtue, while Sparta’s civic virtue was as a military state. The Roman Empire peaked as the Senate representing the ruling class of wealthy men who were supposed to embody civic virtue lost power to the Emperors such as Julius Caesar, backed by the military.

It fell after Emperors such as Nero lacked civic virtues while the empire became hollowed out economically, unable to fund its own power and reach. There were not enough Romans to form their armies, so they had to hire foreigners. For example, most of the ‘Roman’ soldiers in Britain were actually Britons, hired to guard the borders.

Rome also lost control of North Africa, which was its food bowl, while rising debt caused Emperors to have to raid the provinces to finance the Roman occupying forces, which made provincials poorer and more rebellious. Rome could not assemble enough soldiers to repel the invading tribes from Gaul, who conquered and sacked Rome, Italy was devastated and the elite moved to Constantinople in Turkiye.

A similar thing happened with the British Empire. It had to hire local troops to maintain its control of subject nations, particularly India, and steal the wealth of those subject nations to sustain its own prosperity.

The British East India Company, a government-approved monopoly with its own army, was so lacking in civic virtue it forced Indians to grow heroin and then the company sent its ships and soldiers to force the Chinese to accept the heroin, causing enormous social problems, with the profits going back to London. When the Chinese revolted, they were brutally crushed.

World War I sent Britain deeply into debt and World War II finalised the decline of the British Empire, as Britain could not finance its own armies to defend itself and had to borrow huge sums from American financiers. Drowning in debt, Britain had to grant independence to India and other subject nations, and the empire subsided into an association of nations.

Now we see the same thing happening with America. After World War II, America persuaded the other victors to adopt the Bretton Woods agreement, which made the US dollar the world currency and caused countries to hold their wealth in US$, initially backed by gold reserves held in Fort Knox. This system caused other countries to subsidise American consumption by converting their currencies into US$, which meant the US could borrow huge sums at low cost.

In 1971, President Richard Nixon abandoned the gold standard, so the US$ became just worthless pieces of green paper, backed by nothing except the belief the US Government would act responsibly as a lender of last resort. However, its performance was very mixed and most of its subsequent wars were expensive failures, particularly Vietnam, Iraq and Afghanistan.

From Ronald Reagan onwards, successive populist Republican Presidents used large unfunded tax cuts to slash government income while subsidising the wealthy elite, resulting in fast-rising deficits, slowed only under Democrat Presidents, particularly Bill Clinton who was the last President to balance the budget.

Trump 1.0 added US$8 trillion to American Government debt, which now stands at a staggering US$36 trillion, predicted to rise by at least US$4 trillion if Trump 2.0’s current budget bill passes the Senate unchanged. (In comparison, Australia’s public debt is about AU$1.1 trillion.)

What happens if investors lose confidence in a government? We saw how former UK Prime Minister Liz Truss’s brief period at the top was ended by the bond markets which rejected her budget assumptions as magical thinking. Will the same fate smash Trump?

Global investors are openly questioning if the US$ is still a good investment. Their reluctance to buy has forced the US Treasury to have to raise the interest return it offers on US bonds by almost 1% in recent weeks just to find buyers. The US may not make a profit on its loans at such high interest rates.

Meanwhile, Trump’s tariffs have alienated America’s trading allies, who are stepping back from America and increasingly trading among themselves instead. Clearly, Trump’s people understand America is in big trouble, but their responses are doing nothing worthwhile to fix the real problems.

This quote about the decline of America from John Keane, Professor of Politics at the University of Sydney, sums up the current situation better than I could:

‘On the home front, whatever they say, Donald Trump and his supporters confirm the trend. They care little or nothing for democracy. Despotism is their thing. Constitutional niceties make no sense. Hero worship and demagoguery matter. Its rules are plain. Flood the zone. Strengthen executive power. Cross red lines. Defy existing laws and legal precedents. Bewilder citizens by issuing non-stop executive orders. Abolish guardrails and watchdogs. Arbitrarily dismiss inspectors general, judges and other guardians of public integrity. Reduce the power of legislatures to appropriate tax money and determine its spending. Trample on workers’ rights. End birthright citizenship. Freeze research, educational, social support and foreign aid programmes. Silence dissenters. Expect unquestioning loyalty from civil servants. Denounce journalists and experts who expose misconduct, corruption, and malfeasance as “far left” purveyors of fake news and partisans of the “deep state”.’ 1

Trump’s obsession with trade deficits is rejected by most credible experts as outdated 18th Century mercantilism, the idea that colonial powers can exploit subject countries to make themselves rich as the expense of the rest of the world. Put simply, Trump thinks if more physical goods are coming in than are going out, then that results in prosperity.

But that limited view ignores the fact that wealth can still flow into a country through knowledge and services, even while it imports cheap physical products. If an American company owns a factory in a cheap country and imports those cheap products, then the profits still flow back to America, plus American shoppers save money, lowering the cost of living. Trade deficits are not the cause of America’s economic situation and the increasing poverty of most of its citizens.

It was actually American companies which caused the trade deficits. The American executives of those companies, putting increasing profits first, closed their factories in the USA and shifted production to lower-cost countries, such as China, India, Bangladesh and Vietnam. Americans lost their jobs because the executives and shareholders of American multinationals preferred to hire cheap foreigners to boost their profits, rather than to pay American workers.

Putting tariffs on foreign countries will do nothing to change that situation. A Vietnamese, Chinese, Indian or Bangladeshi worker will always be paid less than an American worker, even on the poverty-level $7.70 American minimum wage. Tariffs won’t change such basic economics.

An example is Apple, which makes its products in China and India to boost profits. When Trump tariffed China, Apple simply sourced its production for America consumers from its factory in India. Apple didn’t open a new manufacturing factory in the USA. If it did, its iPhones could not compete with the cost of Korean Samsungs or Chinese Opos. Its basic economics. Trump reacted by threatening Apple with a 25% tariff on its products, but so far Apple is unmoved, because if it obeys Trump it’s costs will skyrocket.

Other companies could face similar threats. Amazon imports most of its products from Asia as do many other companies. Tesla’s biggest factory is in China.

Trump also threatened the European Union with a 50% tariff on exports to America, but then paused the threat. If the EU matched Trump’s 50% tariff on American imports, those American companies would lose most of their European customers, who would turn to cheaper alternatives.

Will people and companies leave America because of Trump’s tariffs and attacks on universities and international students? Students already are, or are not going there. Tourists are cancelling trips to America. If Trump’s tariffs made Apple’s imported products unsaleable in the USA, would Apple leave America and relocate to a friendlier country? How about Microsoft or other giant multinationals - could they jump ship, judging their global markets are worth more than their American sales? It’s a radical idea for such very American companies, but it’s possible. In these dangerous times, the unthinkable is suddenly possible.

No American manufacturer can change the basics of global exchange-rate economics. All that happens, if Trump slaps imported products with large tariffs, is American importers hike the cost of the imported products to recoup the tariff, and American shoppers have to pay more for those products, with the extra tariff money going to the US Treasury to fund Trump’s tax cuts for the rich American oligarchs who caused those problems by shifting their factories to low-cost countries.

The Americans who lost their jobs, and who Trump promised to help, will get nothing from Trump’s policies, except they will have to pay more for the imported products made by the foreign workers who gained those transplanted American jobs. Trump lied to them, they voted for him, and then he abandoned them to party with the billionaires.

As we saw above, ultimately most empires fail, not in war, but because of financial problems which make them unable to sustain their operations. America is well down that path with $36 trillion in debt, as I noted above, and public debt at 123% of Gross Domestic Product, the second-highest since World War II, but it hasn’t crashed yet because so far global investors are still funding American debt, despite the rising cost.

As I write, the 10-year US Treasury bond rate is at 4.43%, above the average of 4.25%, but well below the record of 15.8% in 1981 when the Federal Reserve raised rates to contain inflation. The 30-year Treasury rate is at 4.92%.

In comparison, Australian 10-year bonds are at 4.29%, the United Kingdom 4.65%, Germany 2.51%, Italy 3.50%, France 3.18%. Japan 1.50%, Canada 3.20% and China 1.70% (down from 2.2% a year ago). The lower the rate, the easier the government of that country is finding it to get investors to buy their bonds. So, investors think Japan, China and Germany are safer investments than America. There are reports Japanese investors, who hold the largest amount of US Treasury bonds, are considering fleeing America for safety in Japanese bonds.

The US Court of International Trade ruled Trump’s ‘Liberation Day’ import tariffs were mostly illegal and blocked them because the US Constitution says only Congress can impose tariffs, Trump appealed and an appeals court stayed the decision with hearings on the appeal scheduled for June.

If the appeals court upholds the lower court’s decision the tariffs are illegal, Trump would certainly appeal to the Supreme Court, which he has stacked with sympathetic judges. If the Supreme Court favours Trump over Congress and the US Constitution, then investors may decide the US government can’t be trusted to act responsibly and stop buying US Treasury bonds, and anything could happen.

Theoretically, if the US-China trade war became so bad that neither country could sell into the others’ markets, then China could retaliate by selling off its holdings of US bonds for less than they are worth, which would devalue the US dollar and have global consequences which are difficult to predict, but could only be bad for everyone.

However, China is unlikely to destabilise world markets because Chinese exporters need healthy markets for their products. Instead, President Xi has been touring Asian and other markets reassuring governments that China remains a reliable trading partner, unlike America.

Xi even invited Australian Prime Minister Anthony Albanese to visit Beijing, which is a sign Xi wants to keep trade flowing between China and Australia. About 30% of Australia’s exports go to China, so it is certainly in Australia’s interests for China’s economy to remain healthy. Only 5% of Australia’s exports go to the USA, so China is more important to Australia than America. However, if Trump causes China’s 5% growth rate to slow, that would affect Australian exports of iron ore and other products to China.

As American democracy fails, it is an opportunity for true democracies to step up and assert their independence from American domination.

So, to summarise, are we witnessing the decline and fall of the American Empire? So far, America is certainly declining, but it hasn’t fallen yet. However, these are very dangerous times. If you love history, you are seeing it happen in real time. Buckle that seatbelt, as it’s going to be a wild ride.

1. https://www.johnkeane.net/the-decline-of-the-american-empire-how-trumpism-threatens-democracy-worldwide/