Monday, October 19, 2009

When Giants Fall: the Erosion of U.S. Wealth and Influence

Unlimited borrowing and falling assets do not make for a robust global empire.

Analyst/author Michael Panzner effectively predicted the financial implosion which occurred in September 2008 in his prescient March 2007 book Financial Armageddon: Protecting Your Future from Four Impending Catastrophes.

His latest work, When Giants Fall: An Economic Roadmap for the End of the American Era, ties together many of the themes I have covered recently: the structural imbalances in the U.S. economy and Federal spending, the devaluation of the dollar and other fiat currencies (when priced in gold), and the financial burdens and questionable benefits of the American Empire (maintaining bases in dozens of nations, executing two hot wars thousands of miles away from the homeland, etc.)

Given Panzner's track record and the care with which he has sourced his reporting, we would do well to study When Giants Fall with care.

The basic premise--Imperial over-reach--will be familiar to readers of The Rise and Fall of the Great Powers by Paul Kennedy and Nemesis: The Last Days of the American Republic by Chalmers Johnson. But Panzner brings a financial perspective and present-day media sourcing to the topic which is of special interest to those of us who believe geopolitics and Imperial decline can both be best understood by "following the money."

Oftwominds.com readers know that I am short-term bullish on the U.S. dollar--that it is due for a reversal due to near-universal belief in its imminent collapse. While its long-term prospects are indeed poor (please see The Dollar Crisis: Causes, Consequences, Cures), we should also note that same can be said of all other fiat currencies, all of which have lost value in the past decade when priced in gold.

All of which is to say that we have to careful not to place too much of the causal weight of America's decline from global preeminence on the dollar's long slide.

Panzner makes a comprehensive case for U.S. decline across multiple fronts.He notes the supreme complacency of the American populace (always a perfect setup for terminal decline) and the rise of great competitors in east Asia. In other words, in today's world, treading water results in relative loss of prestige and power as other nations earn a larger share of global growth, wealth and income.

Perhaps most telling, Panzner documents the U.S. as a "nation bereft of fiscal discipline," having borrowed 340% of the U.S. GDP, exceeding the Great Depression high of 265%. The causes of waning influence are many: a faltering currency, over-stretched military commitments, a perception of the U.S. as a source of instability rather than stability (President Obama's Peace Prize notwithstanding) and the aforementioned financial profligacy and consequent dependence on foreign funding of our rising debt.

He also touches on some of the over-arching global trends I discussed in Survival+--the demographic consequences of an ageing populace, the end of cheap, abundant commodities, and the geopolitical tensions this mismatch of demand and supply creates.

Last but not least, When Giants Fall addresses the pernicious effects of globalization and the resulting backlash (protectionism, etc.) which is leading to what he terms "deglobalization."

These topics will be familiar to readers of Globalization and Its Discontents by Joseph Stiglitz, but Panzner discusses the tensions brought on by globalization within the context of waning U.S. power--"hard" (military and financial) and "soft" (culture and values).

While he grants the coming devolution of the present world order will diminish all players, Panzner makes a case for the U.S. to be the primary loser. As for where to put one's money, he suggests commodities will be the place to be, not as a daytrade but as the major trend to ride in a period of mismatched supply and demand. Given the rising demand and falling availability, that is hard to argue with, and I would only add the caveat that buying commodities at tops and selling them at bottoms can erode wealth just as quickly as buying stocks at the top (like now, for instance) and selling them at the low.

I have to confess that Mr. Panzner and I share a similar view of the best approach for individuals and households to cope with the coming disruption of the old order: cutting back on a reliance on (furiously outsourcing) corporate America for jobs in favor of self-reliance and a broader spectrum of income, community and sources of prosperity.

That is speculative, of course, and only time will tell. But whether you agree with this conclusion or not, you will find the book's 50-page bibliography of sources interesting.

It seems to me the drop in U.S. real wealth--that our debts are rising even as the value of our assets are falling--will inevitably detract from the nation's influence, power and prestige. While we can debate the consequences and speed of this decline, that there will be consequences is beyond debate.

As always when I post Amazon.com links to books: I find the reader reviews worth a look (though they are a mixed bag, like the entire Web itself). You may be able to borrow a copy from your local library as well.

Here are a few other related titles on empire and globalization which may be of interest:

The Prize: The Epic Quest for Oil, Money & Power by Daniel Yergin

Power and Prosperity: Outgrowing Communist and Capitalist Dictatorships

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

End of the Line: The Rise and Coming Fall of the Global Corporation

Permanent link: When Giants Fall: the Erosion of U.S. Wealth and Influence

Check out my article in American Conservative Magazine No Easy Money: The case for raising interest rates.

You can also find my work on AOL's Daily Finance and Seeking Alpha.

If you want more troubling/revolutionary/annoying analysis, please read Free eBook now available: HTML version: Survival+: Structuring Prosperity for Yourself and the Nation (PDF version (111 pages): Survival+)

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