Orn March 6, 1991, President George H.W.Bush spoke before Congress of “a new world order”, in which the resurgent American superpower (having just defeated Iraq in the Gulf War), would help remake the world in the image of America’s free market democratic capitalism. Yesterday, Bush’s son showed up at the United Nations like the chastened football captain of a win-less team.
With a pillar of American power — its financial leadership — so badly shaken, there was a certain satisfaction among some of the attendees that the Bush administration, which had long lectured other nations about the benefits of unfettered markets, was now rejecting its own medicine by proposing a major bailout of financial firms.
“What you are seeing here is the letting off of some political steam,” said Mark Malloch Brown, a British cabinet minister and former senior United Nations official. “They are all remembering the very hard, unforgiving advice that they got from American financial institutions” to “deflate your economy, let your banks go to the wall,” he said. “There is a resentment at what they would see as a further evidence of double standards.”
As the esteemed James Grant pointed out this morning, America’s financial fate hangs on the votes of foreign dollar holders.
And it is on the world’s opinion of the dollar that the Treasury’s plan ultimately hangs.It hangs by a thread, if Monday’s steep drop of the greenback against the euro is any indication. We Americans, constitutionally inattentive to developments in the foreign exchange markets, should be grateful for what we have. That a piece of paper of no intrinsic value should pass for good money the world over is nothing less than a secular miracle. Every year but one since 1982, this country has consumed much more than it has produced, and it has managed to discharge its debts with the money that it alone can lawfully print.
If we continue to run the dollar printing presses 24/7 to pay for the trillion dollar bailout, there is no reason to believe that the foreign holders of $9.4 trillion of dollar denominated securities will continue to sit on these holdings as their value depreciates. The schadenfreude of foreign leaders towards Bush at the UN is the least of our problems. The world stopped regarding the British Pound as the reserve currency at just that moment when its empire was fading. The end of American Hegemony is here. We live from this day forward in a multi-polar world. There will be lots of time to figure out how this set of circumstances arrived on our shores, but in Beyond Tragedy, Reinhold Niebuhr argued that this was as inevitable as the sunrise in the East.
One of the most pathetic aspects of human history is that every civilization expresses itself most pretentiously, compounds its partial and universal values most convincingly, and claims immortality for its finite existence at the very moment when the decay which leads to death has already begun.
But like Niebuhr I also believe in the rebirth that the creative destuction of the business cycle brings forth. The country that the next President leads will be a different and more humble America. She will trim her imperial overstretch and begin the task of getting our own house in order.