A look at the new world – after the downturn

Summary:  We can only guess at the outlines of the new world that lies beyond the post-WWII geopolitical regime whose death-throes dominate the headlines.  This post explains why we can only guess, and gives a list of my guesses.
The end of this downturn will be like a singularity in astrophysics, where the rules break down.  We cannot see beyond it because we do not understand the choices that will determine our fate – let alone how we will choose.  It also resembles a singularity in that what lies on the other side is unimportant until (or unless) one survives the passage through it.Here are some guesses about the new world order — and America.  Each of these is described in detail in one or more posts.  This is just a brief review (1200 words), nothing coherent or integrated.
Contents

  1. Far less risk-taking in America
  2. Our financial system swings from disintermediation to re-intermediation
  3. The government becomes obviously insolvent
  4. Government controls not just the risk-free rate of interest, but also risk premia
  5. The end of the US dollar as the reserve currency
  6. The end of the US empire
  7. The US dollar declines in value so that our trade deficit goes away, and we can pay our foreign debts
  8. Afterword and where to go for more information

(1)  Far less risk-taking in America

After this downturn a majority of Americans will see the government as the ideal employer.  Usually with pay equal to that of private sector equivalents (except for the top tier), usually with superior benefits, and — most important – always far better job security.

People in America (us) were fools not to realize that job security is the key to building wealth for most workers.   There are few people laid off in the private sector.  Most are fired, never to be re-hired at that firm.  To be fired in one’s late 50’s is involuntary retirement for most people, at a time when civil servants are accruing retirement pay at their peak wages.  Hence for most Americans civil service offers both greater security and superior income, looking at the results of a lifetime of work.

This downturn might lead to greater understanding of this harsh fact.  Sirens like Daniel Gross will write articles like “Jump! – If the economy is going to recover, Americans need to start taking risks again” (Slate, 14 March 2009), but increasingly Americans will realize that for most of us the risk-reward odds favor civil service.

The effect of this on our society will be large, in many dimensions.  It will be a big change in our culture, with effects difficult to foresee.

(2)  Our financial system swings from disintermediation to re-intermediation

The “ownership society” was the last gasp of the post-WWII order, an adaptation to a stable regime that was even then fading away.  In a period of unpredictable change, direct ownership of financial assets is to risk for any but the rich.  People will return to guaranteed investments, where stable business act as intermediaries who absorb the risk of direct ownership.  For more on this see

(3)  The government becomes obviously insolvent

Our government is already broke.  We are like the coyote in the Road Runner cartoons, running off the cliff for several yards before looking down.  The debt — the bill from past spending — is six trillion, That’s roughly $60,000 per household (not including state and local debt).  The liability (past spending plus promises of future benefits) is aprox $54 trillion,  over a half million per household.  That’s in addition to the already crushing household debt of Americans, with the bottom 60% de facto insolvent.

At some point we will wake from our dreamtime to confront this reality.  Then the world will learn about the nature of America.

For more on this see:

(4)  Government controls not just the risk-free rate of interest, but also risk premias

Today we can only guess at the shape of the post-recession world.  Prof Delong said that the 1930’s led to government control of riskless rate of interest (the price of money), and the current crisis will result in government regulation of the risk premium (the price of risk).   A long global recession will drive changes in beliefs, behavior, and capital structure that we can only imagine today.

(5)  The end of the US dollar as the reserve currency

It’s a trust and responsibility which we have ruthlessly exploited in order to borrow vast sums we probably can never repay.  We cannot see what will replace the US dollar as a medium of exchange for trade and as a storehouse of value.  But when the need is realized something will be found, as it is hardly an insurmountable problem.  Perhaps a basket of currencies.

(6)  The end of the US empire

The transition from American hegemony to a multi-polar world is perhaps the most obvious — and most widely forecast — result of this downturn.  For more on this see:

  1. Prof Nouriel Roubini describes “The Decline of the American Empire”, 18 August 2008
  2. The foundation of America’s empire: our chain of bases around the world, 8 September 2008
  3. “A shattering moment in America’s fall from power”, 19 November 2008
  4. “End of Empire” by David Roche, 29 November 2008
  5. The transition between Imperial reigns: what will it mean for America?, 16 December 2008
  6. To understand the Imperial Unconscious, Tom provides the Dictionary of American Empire-Speak, 6 March 2009

(7)  The US dollar declines in value so that our trade deficit goes away, and we can pay our foreign debts

How will this recession end? My guess: with re-balancing of the global economy and a decline of the US dollar so that the our goods and services are again competitive. No more trade deficit, we can pay our debts, and there will be no serious outflow of jobs.

(8a)  Afterword

Please share your comments by posting below.  Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post.  Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).

For information about this site see the About page, at the top of the right-side menu bar.

(8b)  For more information from the FM site

To read other articles about these things, see the FM reference page on the right side menu bar.  Of esp interest are:

Posts about the Implications for the future, about structural changes to America and the world:

  1. Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
  2. Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
  3. Another voice warning about the nationalization of AIG, 18 September 2008
  4. Another step away from our Constitutional system, with applause, 19 September 2008
  5. America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
  6. Legal experts discuss if the Paulson Plan is legal, 21 September 2008
  7. German Finance Minister Peer Steinbrück explains how the world is changing, 30 September 2008
  8. America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
  9. America is changing. Read some chillling words from a liberal economist, 2 October 2008
  10. Does this economic crisis make the State stronger – or is it another step in the decline of the state?, 16 January 2009
  11. This financial crisis is the transition to a new world; like birth, it is painful, 11 February 2009
  12. Everything written about the economic crisis overlooks its true nature, 24 February 2009

Originally published at Fabius Maximus and reproduced here with the author’s permission.

3 Responses to "A look at the new world – after the downturn"

  1. Guest   March 21, 2009 at 1:31 am

    Sadly,much of the Academic theory and quantification of economic data is based upon what we USED TO KNOW. No signposts ahead now! Nor mileage markers.I believe I have an Academic right to forecast on that basis(Scientist, Historian, ex-Accountant)! We may be stuck just like the Byzantines-mired in moral and social decay but still burdened with the trappings of empire. Even if the dollar drops harder and further, I cannot believe the Yuan/Rupee/Mark basket actually has any potential either. Just look at how functionally questionable the EURO is. The EU is close to implosion.No, a Roman death is better than we are likely to get. Constantinople was unable to die for 1,000 years(!!!) after the sack of Rome. WHY??? It was a necessary fiction propped up by still less capable societies surrounding it. 1,000 years, is a long time in purgatory. Mercifully, America won’t take that long, it will just seem like it. R I PGeorge HarterBaghdadontheHudson, USA

  2. CHRIS DAVIS   March 22, 2009 at 1:30 am

    Government insolvency comment betrays a failure to discriminate between govt debt, $9.2tn in 2007 and total govt liabilities including debt, which were $67.3tn in 2007,$34.1tn of which was future Medicare expenditures alone. Social Security $6.7tn.OK, let’s look at Medicare for a moment. What would Bismarck do? Institute rationing of surgical procedures for seniors, of course. Every other country in the OECD has already addressed this issue, but the American left keeps pretending it doesn’t exist.(Just because Obama can’t and won’t say no to the AARP, doesn’t mean that rationing isn’t coming: like the MBS crash, it’s a foregone conclusion)Death of the American Empire thesis, again, off the mark: America is the first vitual empire, an empire of markets, not of colonies, whose priorty has been to keep markets open, not to occupy territory, and to say this imperative will not survive the downturn is naive at best.Less risk taking comment typical bottom of the cycle analysis which perhaps more apt for Japan than U.S. whose companies have shed labor more ruthlessly; whose central bank has expanded its balance sheet more rapidly; whose govt has implemented fiscal stimulus more quickly than Japan did in similar crisis.Fabius Maximus is sui generis if he really thinks the average American will, post-crisis, want to work for the government. While this may be the dream of every community organizer, it is far from the dream of the average America, who, just because he is muddling through the crisis, isn’t in a rush to work for a bloated union controlled French public sector bureaucracy. Sorry. No dice.Economies which face the greatest challenge in this crisis, ironically are not the consumer/spender ones, eg, USA, UK, Ireland, but the saver/exporters like Japan/Germany/China who will suffer most from their refusal to create domestic demand to replace foreign.

  3. George Harter   March 28, 2009 at 3:01 am

    Dear Sir,Please remember that the decrepit, decaying, degenerate Empire that was Byzantium survived the fall of Rome by 1,000 years. Not really by accident either.Surrounding states had need of this “Empire in Name”, they lacked alternatives!!!We should BE SO LUCKY that we are dropped as a reserve currency-We could then freely manipulate ALL debts. As of now we have to be fairly honorable, a thoroughly unchained criminal America would easily return to power sheerly by force of skilled fraud!(This is sadly NOT a humorous comment)Who else will keep the Chinese under control militarily?? Only the US navy, the VietNamese and other SE Asian are rightly worried about China’s posturing. Finally, most likely, China will have to be reassembled after severe social unrest, ca, 2012 or so. The Euros will do that???The currency basket has a political will??? Coherence as a Political entity?? The USA is stuck. Whether or not Roubini likes the idea, America is now Byzantium, a slowly, very slowly decaying Empire that in the future will beg for release from worldly cares.Well,…..India?? The former CCCP? Poland? Brazil??? The IMF mind force?? America needs to be trashed, but really, who will fall into Reserve Currency Nation status???? Personally I wish the pound sterling was again king.I remember the awful day when Sterling was devalued from $2.80 to $2.40, we even had a school assembly at that time in which we were instructed “Not TO Worry” the world would survive. Hell, dislike or hate America, no nation is really able to or wants to play the role we play. Global abdication of Sovereignty. The fate of Byzantium, zombie Empire.George HarterBaghdadontheHudson, USA