Debt and the collapse of the US economy

The debate over stimulus, or Keynesian economics, opposed to austerity measures has been debated vigourously over the last year. Paul Krugman (Noble Prize winner – pictured on left of the photo) has been very much in the Keynesian camp whilst Niall Ferguson (Harvard Professor) is of the belief that austerity measures are the way forward.

However, Ferguson has gone further in his analysis suggesting that the recurrent deficits which are approximately 5% of GDP will start to consume a rising proportion of tax revenue from the US economy. Ultimately this will mean that military expenditure is most likely to be cut as it is discretionary and therefore the resourcing of the US military in the next 5 years will be severly affected. At some stage in the next decade the US will reach a crossing point where it will be spending more on debt servicing than it is able to spend on defence. What is of concern is that 50% of this debt is in the hands of overseas creditors of which 22% is held by the China’s central bank. Last week China overtook Japan as the second biggest economy in the world and there is no doubt that they are going to be the USA’s strategic rival over the next 10 years. But what he does allude to is that the Chinese authorities are now reducing their exposure to US treasury bills and investing into tangible commodities. And without this funding the USA is on a completely unsustainable course with no apparent political means of self-correcting.

It is no coincidence that the Soviet Union withdrew from Afghanistan in the annus mirabilis of 1989. What happened 20 years ago, like the events of the distant fifth century, is a reminder that empires do not in fact appear, rise, reign, decline, and fall according to some recurrent and predictable life cycle. It is historians who retrospectively portray the process of imperial dissolution as slow-acting, with multiple overdetermining causes. Rather, empires behave like all complex adaptive systems. They function in apparent equilibrium for some unknowable period. And then, quite abruptly, they collapse. Niall Ferguson

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