The United States is slowly but surely being ravaged by demons of its own design. Unlike Britain at the height of its powers America does not export people or capital. It imports them. Driven by a deep sense of insularity Washington has attempted to shape the world to suit its interests without ever leaving home – unless fully armed.
The contradiction is that the United States has been a military hegemon without being a financial one. Since World War II the country has looked instead to others to carry the heavy burden of producing cheap goods and inexpensive services while it made profits.
First Europe was rebuilt by exporting to the US, then Japan, then South-east Asia, then China and more recently India. Although Chinese manufacturing workers have improved their lot in the last fifteen – real income was effectively transferred to American consumers. Indian software companies were the beneficiaries of the distribution of American outsourcing, but the American companies took home the real money.
The United States has been gobbling up the world's resources – be it labour, capital or minerals – so that Americans can live beyond their means. That these might run out has never bothered the United States. The unshakeable belief in the march of science to solve any problem no matter how big is an essential part of the American dream.
This is why the credit crunch is such a blow. The finance sector was at the heart of the United States’ economy – its profits accounted for 40 per cent of all private companies’ and top workers earned wages beyond the dreams of ordinary workers.
Yet all those high-powered PhDs could not say what their firms had been trading in, what their bankers were doing, what the risks were and how many bombs were ticking in the basement. The first went off in Bear Stearns. The rest have blown up most of Wall Street in a chain reaction that shows no sign of stopping.
The events of the last few weeks also calls into question the country’s financial sophistication – its ability to raise cash from taxpayers and borrow from investors. After all if the fact that Lehman Brothers was short by hundreds of billions of dollars slipped past regulators what else could they miss in the national accounts?
The perception that America remains an exceptional country has blinded many. For too long the world has seen America as the consumer of last resort. China has been its mirror image: the producer of first resort.
Beijing has done so by manipulating its currency so that its exports remain cheap – leading to a trillion-dollar cushion of dollar reserves. Others did the same: India has reserves of $300bn.
The consequence is that the world has allowed America to borrow egregiously and excessively in its own currency. Any other nation would have been put on bankruptcy alert by the international watchdogs such as the International Monetary Fund.
This runaway behaviour has fuelled American consumption well beyond reasonable levels. Americans need to stop buying so much and saving too little. There has to be some public acceptance that government borrowing today implies cuts in spending or increases in tax in the future.
What has not been fully recognised is that amidst the wreckage, growth in India and China has dropped but it remains high – at about 8 per cent a year. The centre of global economic gravity is still shifting away from the West to the East.
Percy Mistry, one of India’s best known investment bankers, points out that in little over a decade there are likely to be two new global currencies that will change the rules of the game: the Chinese yuan and the Indian rupee.
There is a difference in perception here between these two Asian giants, as Mr Mistry is quick to acknowledge. “China is seen by the world and treated by it as a majestic tiger; India is more like a Labrador intent more on scratching its itches than on going anywhere.”
Despite the contrasting image of and propaganda issued by the Himalayan neighbours, both are on a high-growth trajectory with prospects in India appearing even more rosy than in China.
Mr Mistry’s logic is compelling. If these two Himalayan neighbours become the biggest economies in the world then how long will developed countries allow them to gain from undervalued exchange rates?
With protectionist pressures building in the US – Clinton’s Labour secretary Robert Reich is already calling for an era of Angry Populism – it cannot be long before the yuan and rupee will be valued by the money markets. This will subject the policies of those ruling these vast populous countries where per capita incomes remain low to an unprecedented degree of scrutiny.
Should we not expect the same of the richest among us? The answer is certainly yes. Although the presidential candidates in the United States have talked about change, they have not spelt out what that change should be.
There is still a perception of prosperity round the corner. Even climate change is being sold, by none other than Thomas Friedman, as a great new way of exporting American technological breakthroughs to the rest of world. No one is being honest enough to say what is really required: to put the American way of life up for negotiation.