Not long ago there was speculation that the EU would disintegrate due to a crisis that threatened the very existence of the Euro, the common currency of 19 EU states. One sign of the instability was bond yields – Greek bonds rose to over 10%, while Ireland, Spain, Italy and Portugal had to pay over 6% to issue bonds. Germany and the healthier economies had yields below 1%. The higher the percentage, the more expensive it is for a country to borrow money.
Today the 10 Year Treasury bond for the us is at 2.38%. Italy’s bond is healthier at 1.80%, Spain even better at 1.47%. To be sure, Germany is still the best at 0.38%, while France is at 0.74%. Greece is still over 5.0%, but Ireland has recovered fully and is at 0.62%
That may seem a boring statistic, interesting to only bankers and investment analysts, but it is really telling. Right now investors feel better betting on the Spanish, Italian and Irish economies than on the US. This means that despite Brexit and concerns about Euro stability, Europe’s economy looks stronger on the world stage than does that of the US.
Why the bearish approach to the American economy? One reason is debt. Every industrialized state has historically high debt to GDP ratios; indeed, never has so much of the world had so much debt. But looking at government debt only shows part of the picture. Italy as a 130% debt to GDP ratio, while the US is at 106%. Germany is at 70%, Spain at 99%, and Greece way up at 180%. Sweden is healthy at only 41%, while Japan is in bad shape at 245%.
The US looks especially unhealthy when total debt- which includes business, consumer, and all debt – is considered. It is nearly 350% of GDP. The US has also been on an unsustainable path of consuming far more than we produce, relying on a capital account surplus (foreign investment in the US) to finance that practice.
Right now it appears that the US may be teetering on a debt crisis of its own, as recent years have seen the US stimulate the economy without making structural adjustments to bring the budget back in line. Moreover, with the Trump administration calling for massive tax cuts without spending cuts, there is concern that the US economy could even be flirting with inflation. Add to that the fact that US leadership is considered suspect – Trump is seen by most as an incompetent populist way over his head – and the global community has quietly but decisively shifted away from confidence in the US economy, or America as a global leader.
So what does all this mean?
Decline does not mean collapse, the US economy and the country as a whole will remain an important factor in global politics. But the 21st Century has introduced some new realities. American military strength is seen as relatively less important. There appears to be no major military threats, and failures in Iraq and Afghanistan show the US to be somewhat of a paper tiger. The military is huge, but it has trouble projecting power.
The threats are from terrorism and new tactics like cyberwarfare. Big armies aren’t effective against those threats; intelligence gathering and special operations are key. So the world in general sees the huge US military more as a drain on the American economy than a bastion of global stability.
The symptoms will be less US influence on global affairs, fewer allies rallying to American causes, and an economy that continues to weaken for average workers, even as the very wealthy gain. That is also a symptom of decline – rather than the whole country gaining in prosperity, divisions occur, making things like Trumpian populism viable – something unthinkable not that long ago.
Debt will mean an increase in power and wealth for the big banks and financial institutions, who increasingly do not see themselves as “American” but “global.” What’s good for Goldman Sachs isn’t necessarily good for America. Working class anger will increasingly give fodder to populists – including racists and xenophobes, while both parties will tend towards more extreme positions.
Can this be reversed? Yes. The US can only revive itself by embracing the demographic trends that promise a “new America.” Whites will be less than 50% by 2050, increased diversity means a shift in culture and economic activity. To revive, the “new America” needs to break out of continual high debt and consumerism, embrace the need to save and produce, and break the unholy alliance between big money and big government.
I believe the values that define this country will overcome the current troubles. Indeed, militarism and the desire to be a global power broke with those values, and help set up the conditions that threaten our future. First, however, the US must exorcise the demons of nationalist populism, militarism, and consumerism. This will require an awakening of sorts, as people recognize we’re on a very dangerous path. Alas, there is no sign of that happening yet.