Historian warns debt crisis will destroy American supremacy

America’s status as the world’s leading power will end for the same reasons as its predecessors: crushed by a mountain of debt that politicians find convenient to ignore, historians warn.

And America’s century at the top could be coming to an end more quickly than expected, with countries in Asia increasingly likely to withdraw.

Debt interest payments exceeded defense spending earlier this month, but it will not be force of arms that brings the country down, according to historian Professor Niall Ferguson.

“Any great power that spends more on debt servicing than on defense will not remain great for very long,” he said in an article he wrote for Bloomberg, explaining a theory he calls Ferguson’s law.

“It’s true for Habsburg Spain, it’s true for France under the ancien regime, it’s true for the Ottoman Empire, it’s true for the British Empire. This law is about to be tested by the United States this year.

The Congressional Budget Office (CBO) estimated this week that an additional $1.9 trillion would be added to the national debt this year alone, bringing it to $36 trillion.

This is equivalent to the total value of goods and services produced by the United States in a year.

The rising cost of health insurance and the discount rate hitting a 23-year high are among the factors likely to push it to $56 trillion over the next decade, according to the CBO. which would bring it to a record 122% of GDP.

And there appears to be little difference on that score between the two presidential candidates, with Joe Biden and Donald Trump both adding $7 billion to that figure during their terms in office, according to the WSJ.

JH Cullum Clark of the Bush Institute’s Economic Growth Initiative and Southern Methodist University has studied the history of previous superpowers and sees troubling parallels with America’s current plight.

He claims that this pattern was established as far back as the Roman Empire, when excessive spending prompted third-century emperors to begin devaluing the currency, triggering rampant inflation that ultimately destroyed its ability to defend itself.

The wealth flowing in from the New World blinded Spain to its reliance on foreign loans to maintain its overseas empire and end its rule in the 17th century.

Ultimately, it “managed to default seven times in the 19th century alone, after having defaulted six times in the previous three centuries,” write economists Carmen Reinhart and Kenneth Rogoff in their book This Time Is Different: Eight Centuries of Financial Folly.

It was France’s turn 100 years later, after a series of occasional defaults, before Britain lost its place to the United States in the 20th century, with debt exploding during and immediately after the Second World War.

The pound sterling had been the international reserve currency between the wars, allowing it to finance its vast empire, but it permanently lost this status to the American dollar in the aftermath of the war.

The US debt-to-GDP ratio fell during the prosperous 1990s, reaching a low of 32% in 2001.

But since then, this figure has risen to 99%, driven by the Great Recession of the 2010s and the impact of the Covid-19 pandemic.

“The largest contributor to the cumulative increase was the incorporation of recently enacted legislation that added $1.6 trillion to projected deficits,” the CBO wrote in its report.

“This legislation included emergency supplemental appropriations of $95 billion for aid to Ukraine, Israel and countries in the Indo-Pacific region.”

The global need to buy dollars used for international trade has protected the United States from its high debt levels, but there are growing signs that its status as the world’s reserve currency is under threat.

Ratings agency Fitch downgraded the US debt rating from AAA to AA+ in August last year, citing “steady deterioration in governance standards”.

And in November, Moody’s warned that it could remove the government’s AAA rating, while lowering its outlook from stable to negative.

“Even if a country issues the main reserve currency, even if a country is the dominant geopolitical power, that doesn’t save countries,” Cullum Clark told the WSJ.

“They lose that status.”

Yale historian Professor Paul Kennedy warns that Asian countries, including China, hold large amounts of U.S. debt in the form of Treasury bonds.

He said they now held the power to unleash a seismic threat to America’s status if they “simply decided, for whatever reason, to have a political feud with the United States, to get rid of large quantities of Treasury bills.

“I asked my economist friends about this conundrum… of a very, very large and, in some respects, overextended great power, capable of continuing to issue more and more foreign currency denominated bonds without there is, shall we say, punishment for that,’ he said.

His 1987 book, The Rise and Fall of Great Powers, helped focus politicians’ attention on the dangers posed by debt, which bore fruit in lowering the level of debt relative to GDP in the 1990s.

And other countries, including Denmark, Sweden, Finland and Canada, have also managed to reduce their debt spending in recent years, despite the impact of the pandemic.

But the nation’s debt has so far taken a back seat in the presidential race, with Republicans promising tax cuts and Biden vowing not to raise federal taxes on families earning less than $400,000 a year. .

Donald Trump’s 2017 tax cuts are set to expire next year, but Biden has said he will extend at least some of them for low- and middle-income earners.

Trump himself has said they would all be extended if he returns to the White House, which could cost an additional $5 trillion over 10 years.

“The harmful effects of rising interest rates, fueling higher interest costs on enormous existing debt, continue,” said Michael Peterson, chief executive of the budget think tank the Peter G Foundation. Peterson.

“This is the definition of unsustainable.”