I think Gray has it mostly wrong. US dominance is far from ending, not even close. The financial crisis is now hurting Europe perhaps as much as the U.S. The US dollar remains strong while the Euro and other currencies are declining. The big funders of the US such as China and Japan are now holding more dollars rather than dumping them. While the U.S. was the beginning of the financial crisis it is now going global.
The crisis provides a golden opportunity for further mergers worldwide especially in financial institutions and often with government help. It also provides a wonderful opportunity to attack the social entitlements that people have won in developed countries because budgets will be tight. Even though hundreds of billions will be spent on a bailout there will be cries that entitlements such as Social Security and Medicare in the U.S. are no longer affordable. The crisis there will not be to bail them out but will require cutting them back. Meanwhile the U.S. public is told that bailing out the banks is socialism! This article is from the Observer.
A shattering moment in America's fall from powerThe global financial crisis will see the US falter in the same way theSoviet Union did when the Berlin Wall came down. The era of Americandominance is overJohn Gray
The Observer, Sunday September 28 2008
Our gaze might be on the markets melting down, but the upheaval we areexperiencing is more than a financial crisis, however large. Here is ahistoric geopolitical shift, in which the balance of power in theworld is being altered irrevocably. The era of American globalleadership, reaching back to the Second World War, is over.You can see it in the way America's dominion has slipped away in itsown backyard, with Venezuelan President Hugo Chávez taunting andridiculing the superpower with impunity. Yet the setback of America'sstanding at the global level is even more striking. With thenationalisation of crucial parts of the financial system, the Americanfree-market creed has self-destructed while countries that retainedoverall control of markets have been vindicated. In a change asfar-reaching in its implications as the fall of the Soviet Union, anentire model of government and the economy has collapsed.Ever since the end of the Cold War, successive Americanadministrations have lectured other countries on the necessity ofsound finance. Indonesia, Thailand, Argentina and several Africanstates endured severe cuts in spending and deep recessions as theprice of aid from the International Monetary Fund, which enforced theAmerican orthodoxy. China in particular was hectored relentlessly onthe weakness of its banking system. But China's success has been basedon its consistent contempt for Western advice and it is not Chinesebanks that are currently going bust. How symbolic yesterday thatChinese astronauts take a spacewalk while the US Treasury Secretary ison his knees.Despite incessantly urging other countries to adopt its way of doingbusiness, America has always had one economic policy for itself andanother for the rest of the world. Throughout the years in which theUS was punishing countries that departed from fiscal prudence, it wasborrowing on a colossal scale to finance tax cuts and fund itsover-stretched military commitments. Now, with federal financescritically dependent on continuing large inflows of foreign capital,it will be the countries that spurned the American model of capitalismthat will shape America's economic future.Which version of the bail out of American financial institutionscobbled up by Treasury Secretary Hank Paulson and Federal Reservechairman Ben Bernanke is finally adopted is less important than whatthe bail out means for America's position in the world. The populistrant about greedy banks that is being loudly ventilated in Congress isa distraction from the true causes of the crisis. The dire conditionof America's financial markets is the result of American banksoperating in a free-for-all environment that these same Americanlegislators created. It is America's political class that, byembracing the dangerously simplistic ideology of deregulation, hasresponsibility for the present mess.In present circumstances, an unprecedented expansion of government isthe only means of averting a market catastrophe. The consequence,however, will be that America will be even more starkly dependent onthe world's new rising powers. The federal government is racking upeven larger borrowings, which its creditors may rightly fear willnever be repaid. It may well be tempted to inflate these debts away ina surge of inflation that would leave foreign investors with heftylosses. In these circumstances, will the governments of countries thatbuy large quantities of American bonds, China, the Gulf States andRussia, for example, be ready to continue supporting the dollar's roleas the world's reserve currency? Or will these countries see this asan opportunity to tilt the balance of economic power further in theirfavour? Either way, the control of events is no longer in Americanhands.The fate of empires is very often sealed by the interaction of war anddebt. That was true of the British Empire, whose finances deterioratedfrom the First World War onwards, and of the Soviet Union. Defeat inAfghanistan and the economic burden of trying to respond to Reagan'stechnically flawed but politically extremely effective Star Warsprogramme were vital factors in triggering the Soviet collapse.Despite its insistent exceptionalism, America is no different. TheIraq War and the credit bubble have fatally undermined America'seconomic primacy. The US will continue to be the world's largesteconomy for a while longer, but it will be the new rising powers that,once the crisis is over, buy up what remains intact in the wreckage ofAmerica's financial system.There has been a good deal of talk in recent weeks about imminenteconomic armageddon. In fact, this is far from being the end ofcapitalism. The frantic scrambling that is going on in Washingtonmarks the passing of only one type of capitalism - the peculiar andhighly unstable variety that has existed in America over the last 20years. This experiment in financial laissez-faire has imploded.Whilethe impact of the collapse will be felt everywhere, the marketeconomies that resisted American-style deregulation will best weatherthe storm. Britain, which has turned itself into a gigantic hedgefund, but of a kind that lacks the ability to profit from a downturn,is likely to be especially badly hit.The irony of the post-Cold War period is that the fall of communismwas followed by the rise of another utopian ideology. In American andBritain, and to a lesser extent other Western countries, a type ofmarket fundamentalism became the guiding philosophy. The collapse ofAmerican power that is underway is the predictable upshot. Like theSoviet collapse, it will have large geopolitical repercussions. Anenfeebled economy cannot support America's over-extended militarycommitments for much longer. Retrenchment is inevitable and it isunlikely to be gradual or well planned.Meltdowns on the scale we are seeing are not slow-motion events. Theyare swift and chaotic, with rapidly spreading side-effects. ConsiderIraq. The success [sic] of the surge, which has been achieved bybribing the Sunnis, while acquiescing in ongoing ethnic cleansing, hasproduced a condition of relative peace in parts of the country. Howlong will this last, given that America's current level of expenditureon the war can no longer be sustained?An American retreat from Iraq will leave Iran the regional victor. Howwill Saudi Arabia respond? Will military action to forestall Iranacquiring nuclear weapons be less or more likely? China's rulers haveso far been silent during the unfolding crisis. Will America'sweakness embolden them to assert China's power or will China continueits cautious policy of 'peaceful rise'? At present, none of thesequestions can be answered with any confidence. What is evident is thatpower is leaking from the US at an accelerating rate. Georgia showedRussia redrawing the geopolitical map, with America an impotentspectator.Outside the US, most people have long accepted that the development ofnew economies that goes with globalisation will undermine America'scentral position in the world. They imagined that this would be achange in America's comparative standing, taking place incrementallyover several decades or generations. Today, that looks an increasinglyunrealistic assumption.Having created the conditions that produced history's biggest bubble,America's political leaders appear unable to grasp the magnitude ofthe dangers the country now faces. Mired in their rancorous culturewars and squabbling among themselves, they seem oblivious to the factthat American global leadership is fast ebbing away. A new world iscoming into being almost unnoticed, where America is only one ofseveral great powers, facing an uncertain future it can no longershape.• John Gray is the author of Black Mass: Apocalyptic Religion and theDeath of Utopia (Allen Lane)