Thursday, October 9, 2008

Crash of 2008: Unexpected Consequences

As world financial markets continue their historic swoon, one can only wonder when and where we will find the bottom. One could also wonder what additional - perhaps unexpected - effects that a marginalized U.S. economy could produce. I am highlighting three articles that examine some sobering possibilities.

America's Nervous Breakdown

Even though the U.S. government rushed to restore trust, hundreds of billions of dollars in paper assets simply vanished. Friends and enemies abroad were unsure whether the irregular American heartbeat was a major coronary or a mere cardiac murmur. How strong — really — was the world’s greatest economy? Was this panic the tab for years of borrowing abroad for out-of-control consumer spending? Had America finally gone too far enriching dictators by buying energy that it either could not or would not produce itself? Had the chickens of lavishing rewards on Wall Street and Washington speculators rather than Main Street producers finally come home to roost?

Allies trust that the United States is the ultimate guarantor of free communication and commerce — and they want immediate reassurance that their old America will still be there. In contrast, opportunistic predators — such as rogue oil-rich regimes — suddenly sniff new openings.
The natural order of the world is chaos, not calm. Like it or not, for over a half-century the United States alone restrained nuclear bullies, kept the sea lanes free from outlaws, and corralled rogue nations. America alone could provide that deterrence because we produced a fourth of the world’s goods and services, and became the richest country in the history of civilization.

But the bill for years of massive borrowing for oil, for imported consumer goods, and for speculation has now has finally come due on Wall Street — and for the rest of us as well.

Should that heart of American financial power in New York falter — or even appear to falter — then eventually the sinews of the American military will likewise slacken. And then things could get ugly — real fast.
Hidden Behind Defense
At the end of this 60-year period, defense and entitlement spending had roughly traded places. This allowed the largest spending exercise in U.S. history to be absorbed without dramatic impact on the federal budget. That budget elasticity has now ended.

With declining defense spending gone and Baby Boomer retirements beginning in 2011, America confronts unmitigated and unleashed entitlement spending. According to the Congressional Budget Office, the three largest entitlement programs - Social Security, Medicare and Medicaid - alone will increase from 8.4 percent of GDP in 2007 to 25 percent in 2082.

Even this enormous increase to a quarter of U.S. economic output is built on the conservative assumption that "rates of spending growth in the Medicare and Medicaid programs would probably moderate to some degree" to below their past performance.

Russia Pushes Pact to Rival NATO
In a challenge to 60 years of U.S. leadership in Europe, Russia's president said Wednesday that America's financial crisis had diminished its power and called for a new security pact to rival NATO.

Medvedev proposed that European countries work with Russia to form a new trans-Atlantic organization in which the United States was no longer the dominant power.

His statements came as Russia takes a more aggressive stance against the West, especially following this summer's war in Georgia.

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