Keynes

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The New Swedish Model?

Swedish-flag-credit-Matti-Matilla

The advocates of “austerity now!” are talking about Sweden.

Last year Fraser Nelson wrote in The Spectator:

When Europe’s finance ministers meet for a group photo, it’s easy to spot the rebel — Anders Borg has a ponytail and earring. What actually marks him out, though, is how he responded to the crash. While most countries in Europe borrowed massively, Borg did not. Since becoming Sweden’s finance minister, his mission has been to pare back government. His ‘stimulus’ was a permanent tax cut. To critics, this was fiscal lunacy — the so-called ‘punk tax cutting’ agenda. Borg, on the other hand, thought lunacy meant repeating the economics of the 1970s and expecting a different result.

Three years on, it’s pretty clear who was right. ‘Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,’ he says. ‘Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.’ Tax-cutting Sweden, by contrast, had the fastest growth in Europe last year, when it also celebrated the abolition of its deficit. The recovery started just in time for the 2010 Swedish election, in which the Conservatives were re-elected for the first time in history.

So, how is the Swedish economy doing?

Well, the good thing about assessing the Swedish economy is that Sweden remains monetarily sovereign, meaning that its economy is not dependent upon the monetary policy of a foreign agency like the ECB. This means that it can be fairly assessed side-by-side with other Western monetary sovereigns like Britain, America and Japan.

The thing that austerians are so excited about is that Sweden currently has low debt and is running balanced budgets:

sweden-government-debt-to-gdp

But that hasn’t meant that unemployment has been low. In fact, right now it’s worse than American, British and Japanese unemployment:

sweden-unemployment-rate

And while Sweden’s low debt and balanced budgets may have resulted in low rates, its rates are not significantly lower than Britain and America, and are higher than Japan who carry the highest debt load of all:

sweden-government-bond-yield

But to be fair real GDP growth in Sweden since the crisis has been relatively decent — although notably still below its pre-2008 trend — beating the other three countries who all performed poorly:

fredgraph

I think that Sweden is benefiting less from its actions during the slump and more from its actions during the boom.

In my view, Sweden’s focus on bringing down deficits in the years from 2004 until the crisis in 2008 was very responsible and prudent. Sweden had no wasteful expansionary spending in the mid 2000s on things like occupying Iraq. It was not enacting expensive legislation like No Child Left Behind, Medicare D and unfunded tax cuts that bloated government budgets.

Coming into the crisis with a low debt-to-GDP ratio is very healthy because it gives the government additional fiscal space to cut taxes, and spend money on infrastructure, public goods and tax rebates to bring down the unemployment rate, which is the one aspect of the Swedish macroeconomy with significant room for improvement. An unemployment rate approaching 9% is undeniably unhealthy, and it is disappointing that the Swedish treasury with so much wiggle room is not doing more to assist the private sector in bringing down unemployment. And even though Sweden has had more growth than other Western countries, it has still not caught up with its pre-2008 growth trend.

Sweden’s unemployment woe illustrates that Sweden is not a paradigm of the supposed virtues of austerity in all seasons. Austerity in the slump just frees up resources while the economy is already suffering from a high degree of slack in resources — capital (high savings, low interest rates) and labour (high unemployment). Sweden illustrates this just as much as other Western nations.

The lesson we should take from Sweden is that a countercylical spending policy — less spending in the boom, more spending in the slump — is preferable.

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Are Cameron’s Economic Policies Working?

Britain has returned to growth:

But compared even to the USA — which has huge problems of its own — Britain is still mired in the depths of a depression:

An Olympic bounce does not constitute a recovery. As I noted in March, Britain is under-performing the United States — in GDP and in unemployment. Although Cameron and Osborne keep claiming that they are deficit hawks who want to cut the government deficit, the debt keeps climbing.

Defenders of Cameron’s policies might claim that we are going through a necessary structural adjustment, and that lowered GDP and elevated unemployment is necessary for a time. I agree that a structural adjustment was necessary after the financial crisis of 2008, but I see little evidence of such a thing. The over-leveraged and corrupt financial sector is still dominated by the same large players as it was before. True, many unsustainable high street firms have gone out of business, but the most unsustainable firms that had  to be bailed out — the banks and financial firms who have caused the financial crisis — have avoided liquidation. The real story here is not a structural adjustment but the slow bleeding out of the welfare state via deep and reaching cuts.

Britain has become welfare-dependent. Britain’s welfare expenditure is now over 25% of its total GDP. Multi-billion pound cuts in that figure are going to (and have) hurt GDP.

I believe countries are better with small governments and a larger private sector. The private sector consists of many, many individuals acting out their subjective economic preferences. This dynamic is largely experimental; businesses come and go, survive, thrive and die based upon their ability to stay liquid and retain a market, and this competition for demand forces innovation. The government sector is centrally directed. Governments do not have to behave like a business, they do not have to innovate or compete, as they have the power to tax and compel. (The exception to this is when governments become overrun by the representatives of private industries and corporations, who then leverage the machinations of the state to benefit corporations. When this occurs and markets become rigged in the favour of certain well-connected competitors, it matters little whether we call such industries “private sector” or “public sector”).

So I am sympathetic to the idea that Britain ought to have a smaller welfare state, and fewer transfer payments than it presently does. But the current and historical data shows very clearly that now is not the time to make such an adjustment. The time to reduce the size of the welfare state is when the economy is booming. This is the time that there is work for welfare claimants to go to. Cutting into a depressed economy might create a strong incentive for the jobless to work, but if there is little or no job creation for the jobless to go to, then what use are cuts? To reduce government deficits? If that’s the case, then why are British government deficits rising even though spending is being reduced? (The answer, of course, is falling tax revenues).

An alternative policy that would reduce unemployment and raise GDP without increasing the size of government is to force bailed-out banks sitting on huge hoards of cash to offer loans to the jobless to start their own private businesses. The money would be transferred to those who could be out working and creating wealth, but who cannot get credit through conventional channels, unlike the too-big-to-fail megabanks who are flush with credit but refuse to increase lending to the wider public. Even if the majority of these businesses were to fail, this would ensure a large boost in spending and incomes in the short run, and the few new businesses that succeed would provide employment and tax revenues for years to come. Once there is a real recovery and solid growth in GDP and in unemployment, then the government can act to decrease its size and slash its debt. Indeed, with growing tax revenues it is probable we would find that the deficit would end up decreasing itself.

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Global Japan & the Problems with a Debt Jubilee

Bill Buckler critiques the notion of a debt jubilee:

The modern “debt jubilee” is characterised as “quantitative easing for the public”. It has been boiled down to a procedure where the central bank does not create new money by buying the sovereign debt of the government. Instead, it takes an arbitrary number, writes a check for that number, and deposits it in the bank account of every individual in the nation. Debtors must use the newly-created money to pay down or pay off debt. Those who are not in debt can use it as a free windfall to spend or “invest” as they see fit.

The major selling feature of this “method” is that it provides the only sure means out of what is called the global “deleveraging trap”. This is the trap which is said to have ensnared Japan more than two decades ago and which has now snapped shut on the whole world. And what is a “deleveraging trap”? It is simply the obligation assumed when one becomes a debtor. This is the necessity to repay the debt. There are only three ways in which a debt can be honestly repaid. It can be repaid with new wealth which the proceeds of the debt made it possible to create. It can be repaid by an excess of production over consumption on the part of the debtor. Or it can be repaid from already existing savings. If none of those methods are feasible, the debt cannot be repaid. It can be defaulted upon or the means of “payment” can be created out of thin air, but that does not “solve” the problem, it merely makes it worse.

The “deleveraging trap”, so called, is merely a rebellion against the fact that you can’t have your cake and eat it too. So is the genesis of the entire GFC. Debt can always be extinguished by means of an arbitrarily created means of payment. But calling that process QE or a Debt Jubilee doesn’t (or shouldn’t) mask its essence, which is simple and straightforward debt repudiation.

A “debt jubilee” is the latest attempt to make a silk purse out of a sow’s ear. It is the latest pretense that we CAN print our way to prosperity, but only if we do it in the “right” way.

Well, he’s right  — it is the latest attempt to make a silk purse out of a sow’s ear. But that’s the hand we’ve been dealt. I’ve always said I would have preferred it if markets had been allowed to clear in 2008, if prices had fallen of their own accord to a sustainable level, and if all the junk and bad debt had been liquidated. Painful — but then there would have been no deleveraging trap at all.  In a truly free market debts that can’t be repaid, aren’t.

Yet that’s not the world we have; we have a world where central bankers are prepared to engage in unlimited liquidity injections, quantitative easing, and twisting — pumping new money into the financial system to keep the debt serviceable.

It’s like central banks’ efforts to stabilise markets and the financial system put the wider economy into an induced coma following 2008 in order to prop up the financial sector and the huge and exotic variety of credit assets created in the boom years. With the debt load sustained by the efforts of central bankers, the wider economy is left in a deleveraging trap paying down debt that in a free market would have been repudiated long ago.

This process not only enriches the financial sector by propping up bad debt that would otherwise be liquidated, but also transfers purchasing power from the productive sectors to the financial sector via the Cantillon effect. Meanwhile unemployment remains elevated, industrial production remains subdued, the West remains fragile to trade and resource shocks, wages and salaries are at an all-time low, and total economic activity remains depressed.

So this is a painful and unsustainable juncture — truly a sow’s ear of a situation. The deleveraging trap is a catch-22; while debt remains excessive, economic activity remains subdued, and while economic activity remains subdued, generating more production than consumption to pay down debt is extremely difficult. As we have seen in Japan — where the total debt load remains above where it was 1991 — fundamentals can remain depressed for years or even generations.

Certainly, the modern debt jubilee isn’t going to cure the culture that led to the excessive debt. Certainly, it won’t wash away the vampiristic TBTF megabanks which caused the GFC and live today on bailouts and ZIRP. Certainly, it won’t fix our broken political or financial systems where whistleblowers like Assange are locked away and fraudsters like Corzine roam free to start hedge funds. And certainly it won’t wash away the huge mountain of derivatives or shadow intermediation that interconnect the economy in a way that amplifies small shocks into greater crises.

We are, I think, passing through a strange phase of history where a myriad of ill-designed and heavily-leveraged economic planning experiments are failing.

The modern debt jubilee would at least provide some temporary relief for the debt-ridden wider economy, instead of the financial sector. Instead of pumping money solely to the megabanks — and the costs of deleveraging such a huge debt bubble means that more easing is inevitable, eventually — pumping to the public would also negate the problem of transferring purchasing power to the banks via the Cantillon effect.

It’s not going to save us from the wider problems — imperial overstretch, bailout culture, deindustrialisation, job migration, financial and political corruption, etc, etc, etc — but it would still be much better than the status quo.

The biggest problem with the modern debt jubilee, though, is that Wall Street and the financial sector are greedy and will likely fiercely resist any such efforts. And the financial sector holds lots of political leverage.

The cost of the status quo is a perpetually depressed economy and global Japan. That will be painful.

But on a long enough timeline, the survival rate for everything — even reinflated debt bubbles — drops to zero. 

Could be a long wait, though.

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Fiat Money Kills Productivity?

I have long suspected that a money supply based on nothing other than faith in government could be a productivity killer.

Last November I wrote:

During 1947-73 (for all but two of those years America had a gold standard where the unit of exchange was tied to gold at a fixed rate) average family income increased at a greater rate than that of the top 1%. From 1979-2007 (years without a gold standard) the top 1% did much, much better than the average family.

As we have seen with the quantitative easing program, the newly-printed money is directed to the rich. The Keynesian response to that might be that income growth inequality can be solved (or at least remedied) by making sure that helicopter drops of new money are done over the entire economy rather than directed solely to Wall Street megabanks.

But I think there is a deeper problem here. My hypothesis is that leaving the gold exchange standard was a free lunch: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.

And now I have empirical evidence that my hypothesis may possibly have been true — total factor productivity.

In 2009 the Economist explained TFP as follows:

Productivity growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour. Unfortunately, productivity growth is itself often inefficiently measured. Most analysts focus on labour productivity, which is usually calculated by dividing total output by the number of workers, or the number of hours worked.

A better gauge of an economy’s use of resources is “total factor productivity” (TFP), which tries to assess the efficiency with which both capital and labour are used.

Total factor productivity is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour. So if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%.

Here’s US total factor productivity:

As soon as the USA left the gold exchange standard,  total factor productivity began to dramatically stagnate. 

Random coincidence? I don’t think so — a fundamental change in the nature of the money supply coincided almost exactly with a fundamental change to the shape of the nation’s economy. Is the simultaneous outgrowth in income inequality a coincidence too?

Doubters may respond that correlation does not necessarily imply causation, and though we do not know the exact causation, there are a couple of strong possibilities that may have strangled productivity:

  1. Leaving the gold exchange standard was a free lunch for policymakers: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.
  2. Leaving the gold exchange standard was a free lunch for businesses: revenue growth could be achieved without any real gains in productivity, or efficiency.
And it’s not just total factor productivity that has been lower than in the years when America was on the gold exchange standard — as a Bank of England report recently found, GDP growth has averaged lower in the pure fiat money era (2.8% vs 1.8%), and financial crises have been more frequent in the non-gold-standard years.

The authors of the report noted:

Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives.

Still think it’s a barbarous relic?

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Britain Isn’t Working

George Osborne claims that spending cuts will produce a recovery.

From the Guardian:

The main test of a budget at this time is what it does for the recovery and growth of the British economy. George Osborne has repeatedly made clear that he wants to be judged by this test. He believes that deficit reduction is a growth policy which will be vindicated by its results. Growth has been postponed but, he insists, it is about to happen. So is he right?

It doesn’t look like it:

UK GDP has ground to a halt, while the United States has ticked slightly upward.

Now here’s unemployment:


Looks painful.

But at least we’re paying off the debt right? Nope:


Readers are of course advised to ignore the nonsensical future projections — particularly those for the United States — and focus instead on the fact that the UK is still amassing debt in spite of austerity.

So what the hell are we doing? Unemployment is ticking up, GDP is stagnant, and debt is still rising? Is this policy supposed to be working? Does the Cameron government not understand that cutting government outlays during a recession to pay down debt leads to falling tax receipts, which leads to bigger deficits (exactly what has happened!)?

The truth is — as Keynes noted — that the time for austerity at the treasury is the boom, not the bust. The only exception to this is if you can give back enough money to the taxpayer in tax breaks to offset the deleterious effects of spending cuts (as Ron Paul recommends), which itself is a form of spending. That way, government outlays remain roughly the same.

Cutting government waste is always a good idea; but using the savings to pay down debt (which very often in the modern world means sending the money overseas) during a recession seems like a very bad one. And it should be noted that the Cameron government isn’t even really cutting back much on what I consider to be waste. Britain spent billions effecting regime change in Libya.

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Austerity & Taxation

One of the main conclusions of — on the one hand — Austrian economics, and on the other, Modern Monetary Theory is that it is bad and dangerous for government to take more out of the economy than it puts in, i.e. running a surplus. The two schools of thought take this idea to different conclusions; Austrian economics advocates for far less government in recessions, whereas MMT advocates for greater deficit spending in recessions.

Basing my conclusions on the disastrous austerity contractions of the Bruning Chancellery, as well as contemporary Ireland and Greece, I have already railed quite strongly against the concept of austerity during a recession. Readers have (understandably) been quite sceptical. The position I am taking puts me in line with Professor Krugman, and various other Keynesian characters. And I agree that every dollar spent by the government must be taken out of the economy in taxation. And, government spending is often (but not always) plagued with problems such as regulatory capture, mismanagement and malinvestment.

But the evidence is clear — heavily indebted nations that slash spending and (as in the case of Greece today) raise taxes to “pay down debt” actually tend to experience not just greater economic contraction, but also increased deficits as tax revenues dip.

This was the American experience during the Great Depression. A great deal of attention has been given to “monetary inflexibility” (i.e. keeping the gold standard) as a “cause” of the depression, but very little attention has been given to the fact that Hoover drastically raised taxes and cut spending in 1932, just as the depression really started to bite:

The onset of the Great Depression in 1929 led to a sharp decline in tax revenues, as the economy contracted. President Herbert Hoover’s response was to push for a major tax increase. The Revenue Act of 1932 raised tax rates across the board, with the top rate rising from 25 percent to 63 percent. That increase was justified on the grounds that the budget needed to be balanced to restore business confidence. Yet the $462 million deficit of 1931 jumped to $2.7 billion by 1932 despite the tax increase. Interestingly, the major cause of the deficit’s rise was a sharp decline in income tax revenue, which fell from $1.15 billion in 1930 to $834 million in 1931, $427 million in 1932, and just $353 million in 1933.

The bottom line here is that it cuts both ways: just as cutting spending in a recession can deepen the problems, so too can raising taxes. This is because both of these things can push the nation to a position where government is sucking in more than it is pushing out. When the economy is contracting, the last thing it needs is a bigger net drain.

So the problem here is residual debt. Governments have lots of it. When leaders like Cameron, Papandreou and Merkel propose austerity, what they are actually proposing is paying down debt, much of which is held off-shore. Very often their commitments to cut are attached to a promise to raise taxes. This means that governments are committing to suck in more (sometimes much, much more) than they are paying out, which is by definition contractionary. If governments were to default on their debt, this would be a different story — governments could then maintain any kind of regime, statist or non-statist, without the problem of sucking more money out of the economy than they are disbursing. But right now — even with Iceland’s positive example — default is considered to be politically unachievable, particularly in regard to the larger states such the U.S. and the U.K.

So it is very clear that governments embarking on austerity policies are making precisely the same mistakes as the Hoover administration 80 years ago. And, of course, as revenues drop due to the punishing austerity, the situation will only get worse.

Default will become increasingly attractive for the advanced economies.

From the Economist:

Perhaps the most provocative paper comes from Jeffrey Rogers Hummel who reasons that default is virtually inevitable because a) federal tax revenue will never consistently rise much above 20% of GDP, b) politicians have little incentive to come up with the requisite expenditure cuts in time and c) monetary expansion and its accompanying inflation will no more be able to close the fiscal gap than would an excise tax on chewing gum. Most controversially, he argues that ”the long-term consequences (of default), both economic and political, could be beneficial, and the more complete the repudiation, the greater the benefits.”

Why does he take this view? Allowing for the Treasuries owned by the Fed, the trust funds and foreigners, total default could cost the US private sector about $4 trillion. In contrast, the fall in the stockmarket from 2007 to 2008 cost around $10 trillion. In compensation, however, the US taxpayer would no longer have to service the debt; their future liabilities would be lower.

After all, it has worked well so far for Iceland

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The Non-Paradox of Inactivity

The Paradox of Thrift states:

If everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.

It is in many ways a microcosm of Keynesian economics — mostly right, but in a few details spectacularly and outlandishly wrong

(A small detour: In many cases, these few details matter — big time. Austrian economics, of course, is the inverse of this — mostly wrong, but in a few details spectacularly and outlandishly right. I remain unsure as to which set of ideas gives more insight; although I am deeply impressed by some insights of Austrian economics, I generally think the only sensible economic outlook is to scavenge for whatever explanations fit the facts.)

If many people in the economy cease economic activity and hoard their capital, of course the economy will slow down — both in nominal (GDP) and generally also in real terms. Satisfying supply and demand requires a constant and continuous flow of productivity, and goods, and services and money.

Of course there is no paradox there: lowered economic activity is almost always deleterious (the exception being the rare cases when a type of economic activity is itself deleterious to the health of the economy.)

But here is where the paradox of thrift really falls down: saving is not necessarily the same thing as hoarding. Hoarding is saving without investment. And there’s a good chunk of evidence to suggest that more saving with investment is correlated with stronger economic health.

From Lawrence Kotlikoff:

Facts reinforce the idea that spending is no cure-all for what ails America. Most countries experiencing full employment and rapid growth do so while saving at very high rates. China is growing like crazy with a saving rate of more than 30 percent. Japan also saved at very high rates when it was booming. Since then, both rates have plummeted.

The U.S. has also done better when saving was high. In the 1950s and 1960s, saving averaged 14 percent of national income, which grew at 4.4 percent a year in real terms. In the 1990s and 2000s, saving averaged 5.1 percent and national income increased only 2.4 percent.

The connection between saving and growth runs through domestic investment. Countries that save invest not only by building inventory for tomorrow; they also invest in physical capital that makes workers more productive.

U.S. saving is highly correlated with domestic investment; when we save, we primarily invest here at home in starting businesses, buying equipment, and building factories.

In reality, Keynes (and his antecedents) identified an important economic eventuality — a slowdown resulting from hoarding. However, associating this with saving — and subsequently tilting policy toward consumption — is really a misidentification. Societies need investment to grow, and investment requires saving.

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The Decline and Fall of the American Empire

Does the hypochondriac who is ultimately diagnosed with a real, physiological illness have the right to say “I told you so”?

Well, maybe. Sometimes a “hypochondriac” might be ill all along, but those diagnosing him just did not conduct the right test, or look at the right data. Medical science and diagnostics are nothing like as advanced as we like to hope. There are still thousands of diseases and ailments which are totally unexplained. Sometimes this means a “hypochondriac” might be dead or comatose before he ever gets the chance to say “I told you so.”

Similarly, there are are many who suggest that their own nations or civilisations are in ailing decline. Some of them might be crankish hypochondriacs. But some of them might be shockingly prescient:

Is Marc Faber being a hypochondriac in saying that the entire derivatives market is headed to zero? Maybe. It depends whether his analysis is proven correct by events. I personally believe that he is more right than he is wrong: the derivatives market is deeply interconnected, and counter-party risk really does threaten to destroy a huge percentage of it.

More dangerous to health than hypochondria is what I might call hyperchondria.


This is the condition under which people are unshakeably sure that they are fine. They might sustain a severe physical injury and refuse medical treatment. They brush off any and all sensations of physical illness. They suffer from an interminable and unshakeable optimism. Government — or, at least, the public face of government — is littered with them. John McCain blustered that the economy was strong and robust — until he had to suspend his Presidential campaign to return to Washington to vote for TARP. Tim Geithner stressed there was “no chance of a downgrade” — until S&P downgraded U.S. debt. Such is politics — politicians like to exude the illusion of control. So too do economists, if they become too politically active. Ben Bernanke boasted he could stanch inflation in “15 minutes“.

So, between outsiders like Ron Paul who have consistently warned of the possibility of economic disaster, and insiders like Ben Bernanke who refuse to conceive of such a thing, where can we get an accurate portrait of the shape of Western civilisation and the state of the American empire?

Professor Alfred McCoy — writing for CBS News — paints a fascinating picture:

A soft landing for America 40 years from now?  Don’t bet on it.  The demise of the United States as the global superpower could come far more quickly than anyone imagines.  If Washington is dreaming of 2040 or 2050 as the end of the American Century, a more realistic assessment of domestic and global trends suggests that in 2025, just 15 years from now, it could all be over except for the shouting.

Despite the aura of omnipotence most empires project, a look at their history should remind us that they are fragile organisms. So delicate is their ecology of power that, when things start to go truly bad, empires regularly unravel with unholy speed: just a year for Portugal, two years for the Soviet Union, eight years for France, 11 years for the Ottomans, 17 years for Great Britain, and, in all likelihood, 22 years for the United States, counting from the crucial year 2003.

Future historians are likely to identify the Bush administration’s rash invasion of Iraq in that year as the start of America’s downfall. However, instead of the bloodshed that marked the end of so many past empires, with cities burning and civilians slaughtered, this twenty-first century imperial collapse could come relatively quietly through the invisible tendrils of economic collapse or cyberwarfare.

But have no doubt: when Washington’s global dominion finally ends, there will be painful daily reminders of what such a loss of power means for Americans in every walk of life. As a half-dozen European nations have discovered, imperial decline tends to have a remarkably demoralizing impact on a society, regularly bringing at least a generation of economic privation. As the economy cools, political temperatures rise, often sparking serious domestic unrest.

Available economic, educational, and military data indicate that, when it comes to U.S. global power, negative trends will aggregate rapidly by 2020 and are likely to reach a critical mass no later than 2030. The American Century, proclaimed so triumphantly at the start of World War II, will be tattered and fading by 2025, its eighth decade, and could be history by 2030.

Significantly, in 2008, the U.S. National Intelligence Council admitted for the first time that America’s global power was indeed on a declining trajectory. In one of its periodic futuristic reports, Global Trends 2025, the Council cited “the transfer of global wealth and economic powernow under way, roughly from West to East” and “without precedent in modern history,” as the primary factor in the decline of the “United States’ relative strength — even in the military realm.” Like many in Washington, however, the Council’s analysts anticipated a very long, very soft landing for American global preeminence, and harbored the hope that somehow the U.S. would long “retain unique military capabilities… to project military power globally” for decades to come.

No such luck.  Under current projections, the United States will find itself in second place behind China (already the world’s second largest economy) in economic output around 2026, and behind India by 2050. Similarly, Chinese innovation is on a trajectory toward world leadership in applied science and military technology sometime between 2020 and 2030, just as America’s current supply of brilliant scientists and engineers retires, without adequate replacement by an ill-educated younger generation.

Wrapped in imperial hubris, like Whitehall or Quai d’Orsay before it, the White House still seems to imagine that American decline will be gradual, gentle, and partial. In his State of the Union address last January, President Obama offered the reassurance that “I do not accept second place for the United States of America.” A few days later, Vice President Biden ridiculed the very idea that “we are destined to fulfill [historian Paul] Kennedy’s prophecy that we are going to be a great nation that has failed because we lost control of our economy and overextended.” Similarly, writing in the November issue of the establishment journal Foreign Affairs, neo-liberal foreign policy guru Joseph Nye waved away talk of China’s economic and military rise, dismissing “misleading metaphors of organic decline” and denying that any deterioration in U.S. global power was underway.

Frankly — given how deeply America is indebted, given that crucial American military and consumer supply chains are controlled by China, given how dependent America is on foreign oil for transport and agribusiness — I believe that the end of American primacy by 2025 is an extraordinarily optimistic estimate. The real end of American primacy may have been as early as 9/11/2001.

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Did Cameron Just Kill the Euro?

I find it hard these days to praise any establishment political figure. Too often their actions are devoid of principle, too often their words are hollow, and too often their demeanour smacks of a rank ignorance on matters of economics and liberty.

And undoubtedly, Cameron’s austerity policies are not sound. As I have noted in the past, the time for austerity at the treasury is the boom, not the slump.

But today David Cameron seems to have bucked that trend.

From the BBC:

David Cameron has refused to join an EU financial crisis accord after 10 hours of negotiations in Brussels.

Mr Cameron said it was not in Britain’s interest “so I didn’t sign up to it”.

But France’s President Sarkozy said his “unacceptable” demands for exemptions over financial services blocked the chance of a full treaty.

Britain and Hungary look set to stay outside the accord, with Sweden and the Czech Republic having to consult their parliaments on it.

A full accord of all 27 EU members “wasn’t possible, given the position of our British friends,” President Sarkozy said.

There is an obvious fact here: scrabbling to reach an agreement in the interests of political and economic stability — which is exactly the path Japan has taken for the past 20 years, and America for the past 3 — allows broken systems to continue to be broken. All this achieves is more time to address the underlying issues, which as we are discovering is something that does not happen, because markets and policy makers fool themselves into believing that the problems have been “solved”, and that there is “recovery”.

Cameron’s intransigence could well be the spark that Europe — and perhaps even the globe — needs to degenerate to the point where the necessary action — specifically, some kind of debt jubilee — can occur.