America in decline

An American friend, who shares my views on global politics, diplomacy and foreign policy but not on economics or fiscal and monetary policy, recently wrote:

“I agree that the US is in decline. In theory I believe it can come back, but it is getting harder all the time (and the recovery process more painful). If Trump or Biden are elected this year I will give up on the US as it will not recover to a meaningful degree (if at all) in my lifetime.”

Here is the substance of my response…

Whoever wins the election, the country will remain divided. To an outsider, at any rate, the national symbols and myths no longer seem to be working to create the sense of cohesion which they once provided. America is not the nation it once was. I wonder if it is still a nation at all. (It remains a very powerful state, of course.)

In terms of comparative economic and military might and the diplomatic leverage associated with this, the decline is (I think) irreversible. This may not be such a bad thing, given the increasingly destructive nature of US foreign interventions.

The projection of US power has, at least since World War 2, been closely associated with, and facilitated by, the global role of the US dollar in trade and its status as a reserve currency. But the current US-based system is breaking down. This has implications for all countries, but especially for the US.

The Federal Reserve responded to the 2008 financial crisis by lowering interest rates and pumping hundreds of billions of dollars into the system. This was supposed to be a short-term emergency operation. But the expansionary policies continued. A precarious economy increasingly dependent on government spending and a financial system increasingly dependent on cheap credit led the Federal Reserve (and other central banks) to suppress interest rates by any means possible, including by injecting money directly into the financial system through the purchase of securities from commercial banks and other financial institutions (i.e. quantitative easing). Such policies have facilitated and encouraged further borrowing and malinvestment on an unprecedented scale. The problems are now systemic.

Price signals, which are key drivers of any functioning market, have become so distorted that they can no longer be trusted. Fixed-interest securities, shares and many other financial instruments appear to be massively overvalued. Government and central bank interventions are largely to blame for this but other factors – such as the rise of index funds and other forms of passive investing – have contributed to the problem.

I see it as extremely significant that attempts made in recent years by the Federal Reserve gradually to raise interest rates towards more normal levels and to wind back quantitative easing have failed. In both cases, the Fed has reversed course.

In the event of another financial crisis occurring, what would happen? Interest rates are extremely low and central bank options are limited. Defaults and/or falling equity prices would destroy large amounts of paper wealth. In the short term, this could lead to a period of dollar strength but – if the actions of the Federal Reserve in recent times are any guide – the money-printing would be stepped up. This could easily lead to serious inflation and an undermining of international confidence in the dollar. Of course, no one can predict exactly how (or when) the endgame will play out but there is little doubt that the US dollar’s days as world reserve currency are numbered.

Before confidence – and properly-functioning markets – can be restored, bad debts need to be recognized as such and written off. Zombie banks and zombie companies must be exposed and either allowed to fail or taken over. But, because of the extent of the problems, the system itself – the entire post-Bretton Woods, USD-based system – is now irredeemably compromised. There is no easy way out.

Though it may appear otherwise, my basic sentiments are not – and never have been – anti-American. I am not a US citizen but I love and value many features of 20th-century American culture. Many of these features are exemplified and live on in individual Americans even if they are no longer reflected in contemporary social structures and institutions.

The old ways are dying, the old institutions are gone or changed beyond recognition. Even so, I hold to a hope similar to one I have expressed regarding older European and British traditions: namely, that what is good in what has been lost will eventually be rediscovered and find new (and perhaps more enduring) forms of expression.

Sinister influences

In a pluralistic society it seems sensible to let the market decide as far as possible who should be paid for doing what. The market may not itself be moral but ultimately it does reflect the values of market participants and in fact can provide fertile ground for the development and growth of many human virtues, such as prudence and a sense of responsibility.

It's all very well to say that someone should be paid to perform some (presumably worthwhile) activity, but if businesses or individuals are unwilling to fund them then any money must come from the state, from public resources. And - especially in these times of high government indebtedness - a strong case can be made that controversial or ideologically motivated activities or activities which are normally deemed to be inessential or which only benefit a small group should (whenever possible) be paid for directly by those involved.

Take sport and the arts. There is nothing to stop people getting together to play games if they want to. There is nothing to stop people putting on concerts or plays; and, if the product is popular, the audience will pay. Why should I subsidize writers or artists or performers in whom I have no interest and who, in many cases (given the left-leaning tendency of the arts community), are seeking to undermine the values I hold most dear?

I know that sports and the arts constitute only a small fraction of government budgets, but these areas are not discrete or easily defined, and they impinge on and merge into other more significant areas of government concern. For example, the arts merge into the media, advertising and propaganda. And sports funding is associated with community health initiatives. Nanny state, yes, but at least sport (unlike much activity in the arts) is not ideological.

Much arts funding is more about promoting multiculturalism (or, more cynically, about placating certain ethnic minorities) or winning votes from the broader 'arts community' than it is about encouraging artistic excellence (whatever that may be these days). But then, why should the state promote artistic excellence anyway? It is a good and worthwhile thing, but let it be left to artists to excel and to their followers to reward them.

At the elite end of the spectrum, both sport and the arts are used by governments to promote the 'national brand', an unfortunate tendency that appears - at least in respect of the arts in some European countries and in respect of sport just about everywhere - to have popular support.

Although the number of people directly employed by governments may be falling in some Western countries, the number who work for organizations which are dependent on government funding - including international organizations - is growing. And in areas such as health, education and aged care many mainstream churches and previously-independent welfare organizations have become mere 'service providers', following government rules and dependent on government largesse for their continued existence.

More insidious - if not sinister - is the way many groups espousing and promoting so-called progressive causes have inserted themselves, formally or informally, into the bureaucracy of national and local governments, redirecting resources and effectively reshaping the ethos of these bodies. Institutions and bureaucracies devoted to education are particularly culpable in this regard.

More broadly, laws and government regulations - promoted and encouraged by unions and other left-wing pressure groups - are making it increasingly difficult in many countries for businesses to make decisions about their own operations, including hiring and firing.

Similar constraints are being placed on professionals of all kinds. Once the professional-client relationship was, though essentially market-based, associated with well-understood and respected ethical standards. Direct and indirect government intrusions on this relationship are effectively undermining the very concept of the independent professional who maintains a direct relationship with clients based on trust and a sense of responsibility.

Freedom does not guarantee morality, but morality will only develop in the context of freedom, and withers in a highly regulated environment.