Saturday, October 04, 2008

Sic Transit Gloria Americani

The 700 billion dollar financial bailout plan has been passed and the money will soon be available to the system to purge it of toxic assets. But is that going to be enough? And what effect will it have on the world at large? And even if it is, how long will it take for the world's financial system to recover? And what are the long term ramifications it will have on America's superpower status? It is time to take a look at the larger picture.

The cause of the current financial crisis lies in the US's lack of proper financial regulation and monetary policies which have driven up inflation and sent the price of commodities skyrocketing. The US will pay the price by going into an economic recession which has already started. But this will have a domino effect on the world at large. Poor folks around the world in pursuit of a better life are already feeling the pinch and will have their dreams shattered if the world plunges into recession.

The days of a unipolar world are over. Economic might is as much essential to being a superpower as is military might. Don't get me wrong. America is going to remain a superpower and the major player on the world stage for still some time. But what has transpired in the past few years has decided its fate of being relegated to a less prominent role in the family of nations.

The US has a lot of critics and enemies around the world. And that is expected since it took on the job of the world's policeman. What has made things worse is the current meltdown in the US financial system and its reverberations being felt throughout world economies. The financial rot has spread throughout the global financial system and people the world over are feeling the pain. Vladimir Putin and German Finance Minister Peer Steinbrueck have lashed out at the US for its greed and for its irresponsible policies which have led the world to the brink of a global recession.

The current bailout plan will lead to an increase in money supply and would be inflationary in nature. Which will in turn lead to an erosion in the value of the US currency. This would lead to a long term bull market in commodities and will perpetuate the inflationary cycle. Because a currency's value in today's economy is decided by the faith the foreign holders of that currency place in it, the USD will not face a drastic weakening but a gradual reduction panned out over a long period of time.

In the long run, this will lead to the USD being replaced by a basket of currencies in major financial transactions. The USD has been the world's reserve currency and the US having the power to print as many of those as it wishes, has enjoyed economic superpower status. When it no longer has that status, its financial regulatory regime and economic policies will have to be answerable to the world at large and this will mean an end to its superpower status in the military and political sphere as well. Instead of seating at the head of the table in the family of nations, the US will have to learn how to behave sitting at a round table, where all have an equal say.


Vinod_Sharma said...

Some years back, when the US had become a net 'debtor' nation for the first time, I had read somewhere an economist saying then itself that the 'reign' of the US as the world's premier super power had ended.

What has happened now, as you have bought out, is one defining step in that direction. The earth rotates, but we can't see that. The US is a declining power, and the descent is accelerating, but it is not discernible to laymen like me.

I don't know if any one in the India's state apparatus is even thinking of what India needs to do to occupy at least some of the space that will become available to India due to this development over the next few decades.

China seems to have got its crystal ball gazing right; that is why it seems to be the only nation in the world that is preparing itself consciously to occupy the seat that the US has occupied for seven decades or more.

Anonymous said...

What an excellent post!

It's often said America is a resilient country very much capable of reinventing itself. Yet, while that seems to have been true in the past, I don't know if we will have the leadership and other necessary conditions to do that this time around. It will be interesting to see what happens.

A few years ago, I didn't worry much about America being the world's only superpower. I naively thought that because we were more or less a democracy we would at least avoid the worse characteristics of imperialism. After all, on a personal level, I don't know too many Americans over the age of 12 who want to be imperialists. But after eight years of Bush, Cheney and the neoconservatives, I've begun to see how wrong I was to suppose we would behave any different than any other nation given a free reign.

Nowadays, I think we must question the wisdom of any nation having unbridled power.

Anrosh said...

won't that be good for a change.. a round table. two way streets, etc etc.

the bail out plan is a complete robbery. the so-called finanacially wise people have thrown their dirty clothese for the others to wash.