Decline and fall of the West
As appeared in TheStar.com.my
It needs to get a grip as it affects the rest of the world
THE decline of the West is not cause for celebration. It is a matter of concern. The diminution of global output, or the slowdown in growth of the global economy, affects every part of the world. How much better everyone would be if the West was not in decline.
There is also the matter of balance of power which could be disturbed if there were too rapid a decline, or even just a remorseless downward trend. However peaceful the intent of China’s economic rise, the decay of decline on the one side must lead to assertion by as well as attraction to the other pole.
Yet too many in the West are still in denial. They cling to erstwhile Western sense of superiority. Some have made intellectual investment of a lifetime in this and therefore have great difficulty getting out of the comfort zone. Others just have a common mentality that West is best.
Both insist the rise of the East, of China in particular, is not immutable. They point to inherent weaknesses, again especially in China, which will undermine if not dramatically upset the rise of the East. Many in wish and hope, some in purported serious analysis which eschews serious reflection on why the West is in decline.
Indeed they all accuse any celebration, even contention, of the rise of the East as hubris. Actually, the hubris is in the West, a prolonged one that becomes arrogance leading to neglect of the deep causes of the decline of the West. This is a serious problem, even an intellectual disease, which retards Western recovery.
Analysis upon analysis of the Western financial and economic crisis since 2008, the present installment of decline, avoid its underlying and fundamental causes. As in the World Capital Markets Symposium organised by the Securities Commission last month, we get brilliant expositions on leverage (i.e. lending and borrowing) exploding and getting out of control in a shadow banking system beyond the comprehension of policy-makers and regulators. When it bursts, the sky comes down, something Chicken Licken could have told us.
But what was the psychosis behind the splurge? Clearly a mentality of excess and entitlement, of borrowing and consuming well beyond production and output. This culture is endemic. Unless it is intoned you must work and produce to enjoy the good life, as is the case in much of the East, you will crash into a crisis.
Hubris? No, it is common sense and intellectual honesty. Keynesian revivalism has within it the seeds of future crises if this message does not come across. It is part of social change, of the kind in another dimension, Western intellectuals want of China. Politicians will of course obfuscate as reining in a 35-hour week or raising the pensionable age is not going to be popular. However academics and intellectuals are expected to have the objectivity to lead the charge. Are they? Alas, for all, change is not easy, except when it comes to telling others to do it.
Even in respect of the financial markets, the bad old ways are still with us, having a “Big Whale” of a time. Indeed Elizabeth Warren, a potential populist presidential candidate, who estimates the Wall Street crash has so far cost the US economy US$14 trillion, contends its top institutions are 30% larger than before, own half of America’s bank assets and are in receipt of an implicit taxpayer subsidy of US$83bil a year because they are deemed too big to fail.
To finance the real economy, the interminable issuance of debt papers cannot perpetually under-write future growth. As established by LSE research fellow Sandy Hager, US government bonds are now held 55% by foreigners from 5% in 1970 (US corporations hold 30% from 40% and US households 15% from 30%).
How much longer will foreigners flock to absorb such papers, not least following the debt ceiling stand-off last month which offered the prospect of default by the US. Unimaginable before, but now something the US flirts with, without a care in and for the world.
Of course it will be a long time before any other currency takes over the dollar’s central reserve currency role, but it is not inevitable that it will remain so unless there is greater propriety in the management of debt held by other nationals who, of course, have to believe in the health of the US economy.
As can be seen from the charts, the US economy continues to contribute a substantial proportion to world output even after the Western financial crisis, unlike the very significant drop in the EU’s share.
The American economy shows a robustness absent in most of the EU which is afflicted by welfare state dependencies, with economic growth in the US this year expected to be in the region of 2% to 2.3%.
The dynamism and innovation in the US are recognised attributes. The revving shale gas revolution is bringing back the American swagger. But it would do well for Americans to recognise they have not addressed the twin deficits, and much of the present growth is being powered by the Fed buying bonds to the tune of US$85bil a month, easy money being printed and distributed in a very low (near zero) interest rate environment, which could be stoking up future inflation if it goes on for too long.
Also, not insignificant American innovation, let us not forget, is often directed at non-productive ends, indeed sometimes socially destructive ones as in the financial engineering that nearly brought the world economy down.
But most of all, the American political system is not just dysfunctional but pernicious. It is not fully realised in the West the forced cancellation of President Obama’s visit to Asia last month very seriously undermined US credibility, the worth of both the American word and the American political system.
Obama is now coming next year to repair the damage. He may succeed to some extent, but Asians will continue to be concerned with the decline of the West as personified by America.
How credible are US commitments? Will the American economy recover fully and not be hobbled by no-holds-barred political infighting? Can the American President function effectively when his every major policy is countermanded by a rampant Congress, which links up with other states like Israel to undermine him?
The American political system, held up to Asians for Asians to aspire to have, is sick. A black American President elected twice in democratic election is made to eat fried chicken. Forces in American political society are able to nullify popular choice. So you want to elect a black President? We’ll make sure you’ll think again next time because we can ensure your choice will be of no real effect. Even if it harms American interests.
The upshot is other systems and associations become relatively more attractive. More real, less uncertain and inconsistent. Not politically hypocritical. These are serious outcomes and considerations which have huge negative impact on America and the West.