The Post-American World: Release 2.0 (6 page)

The fact that new powers are more strongly asserting their interests is the reality of the post-American world. It also raises the political conundrum of how to achieve international objectives in a world of many actors, state and nonstate. According to the old model of getting things done, the United States and a few Western allies directed the show while the Third World either played along or stayed outside the box and remained irrelevant as a result. Nongovernmental players were too few and too weak to worry about. Now, look at something like trade negotiations, and you see the developing world acting with greater and greater force. Where they might once have taken any deal offered by the West or ignored the process altogether, countries like Brazil and India play hardball until they get the deal of their choice. They have heard Western CEOs explain where the future lies. They have read the Goldman Sachs BRIC report. They know that the balance of power has shifted.

The Kyoto accord (now treated as sacred because of President George W. Bush’s cavalier rejection of it) is in fact a treaty marked by its adherence to the old worldview. Kyoto assumed that if the West came together and settled on a plan, the Third World would adopt the new framework and the problem would be solved. That may be the way things have been done in international affairs for decades, but it makes little sense today. China, India, Brazil, and other emerging powers will not follow along with a Western-led process in which they have not participated. What’s more, governments on their own can do only so much to tackle a problem like climate change. A real solution requires creating a much broader coalition that includes the private sector, nongovernmental groups, cities and localities, and the media. In a globalized, democratized, and decentralized world, we need to get to individuals to alter their behavior. Taxes, tariffs, and wars are the old ways to do this, but states now have less room to maneuver on these fronts. They need more subtle and sophisticated ways to effect change.

The traditional mechanisms of international cooperation are relics of another era. The United Nations system represents an outdated configuration of power. The permanent members of the UN Security Council are the victors of a war that ended sixty years ago. The body does not include Japan or Germany, the world’s third- and fourth-largest economies (at market exchange rates), or India, the world’s largest democracy, or any Latin American or African country. The Security Council exemplifies the antique structure of global governance more broadly. The G-8 does not include China, now the world’s second-largest economy, or India and South Korea, the eleventh and fifteenth. By tradition, the IMF is always headed by a European and the World Bank by an American. This “tradition,” like the customs of an old segregated country club, may be charming and amusing to insiders, but to outsiders it is bigoted and outrageous.

A further complication: when I write of the rise of nationalism, I am describing a broader phenomenon—the assertion of identity. The nation-state is a relatively new invention, often no more than a hundred years old. Much older are the religious, ethnic, and linguistic groups that live within nation-states. And these bonds have stayed strong, in fact grown, as economic interdependence has deepened. In Europe, the Flemish and French in Belgium remain as distinct as ever. In Britain, the Scots have elected a ruling party that proposes ending the three-hundred-year-old Acts of Union that created the United Kingdom of England, Scotland, and Wales. In India, national parties are losing ground to regional ones. In Kenya, tribal distinctions are becoming more important. In much of the world, these core identities—deeper than the nation-state—remain the defining features of life. It is why people vote, and what they die for. In an open world economy, these groups know that they need the central government less and less. And in a democratic age, they gain greater and greater power if they stay together as a group. This twin ascendancy of identity means that, when relating to the United States or the United Nations or the world at large, Chinese and Indian nationalism grows. But within their own countries, sub-nationalism is also growing. What is happening on the global stage—the rise of identity in the midst of economic growth—is also happening on the local stage. The bottom line: it makes purposeful national action far more difficult.

As power becomes diversified and diffuse, legitimacy becomes even more important—because it is the only way to appeal to all the disparate actors on the world stage. Today, no solution, no matter how sensible, is sustainable if it is seen as illegitimate. Imposing it will not work if it is seen as the product of one country’s power and preferences, no matter how powerful that country. The massacres in Darfur, for example, are horrific, and yet military intervention there—the most effective way of stopping it—would succeed only if sanctioned by the major powers as well as Sudan’s African neighbors. If the United States acted alone or with a small coalition—invading its third Muslim country in a decade—the attempt would almost certainly backfire, providing the Sudanese government with a fiery rallying cry against “U.S. imperialism.” The Bush administration’s foreign policy record offers a perfect illustration of the practical necessity of legitimacy. And yet, beyond Bush’s failures, the dilemma remains: if many countries need to cooperate to get things done, how to make this happen in a world with more players, many of them more powerful?

The Fastest Race Car in the World

Rising nationalism, environmental degradation, and commodity-rich parasite nations are problems the world will grapple with for decades to come. The Great Expansion has more immediate consequences, too. The aftermath of the global economic crisis is still with us.
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The crash of 2008 was the world’s worst financial collapse since 1929, and ushered in the worst economic slowdown since the Great Depression. While they have been chronicled elsewhere in great detail, it’s worth remembering how unprecedented the events of 2008 and 2009 were: the destruction of approximately $50 trillion in assets in the global economy; the nationalization of America’s largest mortgage lenders; the largest bankruptcy in history (Lehman Brothers); the disappearance of the investment bank; bailouts and stimulus packages around the world adding up to trillions of dollars. They were events that will be recounted and studied for generations.

The rupture of 2008 was, like rising nationalism, a side effect of the success described above. Low inflation, global growth, swift technological advancement: these trends, played out over decades, led to an enormous increase in liquid assets, the ever-growing piles of money moving around the world. That liquidity kept credit cheap and assets (including real estate, stocks, and bonds) expensive. At the same time, the boom in low-wage countries prevented inflation from rising too much. One way to think about India and China is as two great global deflation machines, pumping out goods (China) and services (India) for a fraction of what they would cost to produce in the West.
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This is one of the chief reasons that central banks haven’t had to worry much about inflation and have been able to maintain low interests for almost two decades, an unusually long stretch of time. That led to arrogance, or more technically, the death of risk.

The businessmen and financiers who cautiously prepared for political disruptions—unstable governments, terrorism—let their guard down when it came to economic risk. They assumed that the growth of complex financial products (remember the infamy of credit-default swaps, which brought down AIG?) actually reduced risk by spreading it around. They believed that levels of debt that were once considered dangerous were now manageable, given what they assumed were permanently changed conditions owing to the Great Moderation. As a result, investors piled into what would normally be considered dangerous investments, all for the promise of relatively little reward. Credit spreads—the difference in yield between a U.S. treasury bond, considered the world’s safest investment, and the bonds of companies with limited track records—hit historic lows. In 2006 and 2007, volatile countries like Ecuador and teetering companies like Chrysler could borrow almost as cheaply as the U.S. government. (By 2009, of course, Ecuador had defaulted on its debt and Chrysler was kept alive only by a last-minute government bailout.) And since debt was cheap, financiers and homeowners used it to excess, spending beyond their means. The banks and investors who supplied all the cheap cash were reassured by fat corporate coffers—with profits that rose at a double-digit clip for eighteen consecutive quarters between 2002 and 2006—and bankruptcy rates that were well below normal. The good times seemed never-ending.

The world economy became the equivalent of a race car—expensive, with incredible range, and capable of performing at breathtaking speed. In the decade before 2008, everyone rode it and experienced the adrenaline rush and the highs. There was only one problem: it turned out that nobody really knew how to drive a car like this one. Over the last ten years, the global economy had become something no one had ever seen—an integrated system of about 125 countries, all participating and all going at unheard-of speeds. It was as if that race car was being driven by 125 different drivers—and no one remembered to buy shock absorbers.

There were those who wanted shock absorbers. They were seen as naysayers during the boom years. They asked why packages of subprime mortgages should be rated as highly as bonds from General Electric. But each successive year ended with another eye-boggling earnings report or billion-dollar payday for the hedge fund manager of the moment, the much promised correction failed to materialize, and the naysayers grew quieter and quieter. A kind of reverse natural selection occurred on Wall Street. As Boykin Curry, a managing director at Eagle Capital, said, over the last twenty years “the DNA of nearly every financial institution had morphed dangerously. Each time someone at the table pressed for more leverage and more risk, the next few years proved them ‘right.’ These people were emboldened, they were promoted, and they gained control of ever more capital. Meanwhile, anyone in power who hesitated, who argued for caution, was proved ‘wrong.’ The cautious types were increasingly intimidated, passed over for promotion. They lost their hold on capital.”

Warren Buffett explained that the heart of the problem was ever-rising levels of leverage—the fancy Wall Street word for debt. It is “the only way a smart guy can go broke,” Buffett said. “You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it’s reinforcing when the people around you are doing it successfully, you’re doing it successfully, and it’s a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at a quarter to 12? I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.” And that, in a nutshell, is the story of how we arrived at the calamity of 2008.

At some level, debt is at the heart of the whole story. Since the early 1980s, developed countries in general and the United States in particular have consumed more than they have produced—and they have made up the difference by borrowing. This happened at every level of society. Household debt mushroomed from $680 billion in 1974 to $14 trillion in 2008. It doubled in just the seven years between 2001 and 2008. The average household now has thirteen credit cards and owes $120,000 on a mortgage. By some standards, however, households were the pinnacles of thrift. Politicians at the state and local level, eager to give their constituents new basketball stadiums and twelve-lane highways without raising taxes, started to borrow against the future. They issued bonds to pay for pet projects, bonds that were backed by future taxes or lottery earnings. But even those politicians were put to shame by the true king of borrowers: the federal government. In 1990, the national debt stood at $3 trillion. By the end of 2008, it had climbed into the eleven-digit realm, surpassing $10 trillion. The famous National Debt Clock in New York City ran out of space to display all the figures. (Its owners plan to install a new and expanded clock.) Thanks to the extraordinary bailouts and stimulus measures of recent years, the national debt was just shy of $14 trillion at the end of 2010.

The United States became a nation of debtors, in other words. And it wasn’t just the United States. Much of the financial news in 2010 was dominated by the near-bankruptcies of Greece, Ireland, and other industrialized European nations that had relied on loans to continue providing lavish benefits without raising taxes. There’s nothing wrong with debt—loans and leverage, used prudently, are the heartbeats of a modern economy—but taken to such extremes, it’s a killer. And both sides of the equation must balance—the United States and Europe never could have arrived at such positions had there not been nations willing to lend them the money. That’s where the economic and political empowerment of nations in the developing world—the rise of the rest—came in. Their swift growth allowed them to pile up savings, which they lent out to spendthrift societies in the Western world.

At some point, the magical accounting had to stop. At some point, consumers had to stop using their homes as banks and spending money that they didn’t have. At some point, the government had to confront its indebtedness. The United States—and other overleveraged societies—has now gotten the wake-up call from hell. If we can respond and change our behavior markedly, this might actually be a blessing in disguise. (Though, as Winston Churchill said when he lost the election of 1945, “at the moment it appears rather effectively disguised.”)