In a 2002 blog entry, Imperialists by necessity?, I wrote:
There is precedent [for civilizing barbarians by force]; the British did a pretty good job of civilizing India and we did a spectacularly effective one on Japan. And the U.S. would be well equipped to do it again; our economy is now so large that we could run a globe-spanning empire from the petty-cash drawer. Seriously. The U.S, a hyperpower so dominant that no imaginable coalition of other nations could defeat it at conventional warfare, spends a ridiculously low percentage of GNP (6%, if I recall correctly) on its military.â€
A commenter ask how the financial crisis in the U.S. (and elsewhere) changes this, and others brought up the possibility that the U.S. could be starved of critical resources . My answers are: it changes less than you might think, and a hearty guffaw. There are a couple of facts on the ground that it’s easy to lose sight of during the political panic of the week.
Fact #1: Finance is marks on paper chasing each other around. The U.S. has a combined stock of real wealth — physical capital, population, and talent — that is not far from parity with the rest of the world combined. It is often noted that if just one of our states (California) were counted separately, it would be the sixth largest national economy in the world.
Fact #2: The U.S.’s demographics are still improving, and will continue to improve until 2050, while the rest of the developed world is in demographic freefall. I described the situation in Europe in Demographics and the Dustbin of History; it has since become clear that Japan is in even more desperate shape, anticipating a population collapse so severe that they’re researching robot caregivers for the elderly because there won’t be enough younger people alive to do those jobs.
Fact #3: The U.S. still has an ability to project military power that cannot be matched by any even remotely conceivable coalition of opponents. How the marks on the paper change is not actually very relevant to that; we have the soldiers, and the tanks, and the warplanes, and the ships. We have the stuff, and the people to use it. The recent victory in Iraq is yet another demonstration that our military can cash just about any check our political class is capable of deciding to write.
These strengths are fundamental, and they constrain anything the U.S.’s rivals or opponents might like to do to it pretty seriously. Among other things, it means that resource blackmail of the U.S. on any level nearing an actual survival threat would be a Really Bad Idea for whatever J. Random Foreigner tried it, because we’d just send troops to kill J. Random Foreigner and take his stuff. That, after all, is what nation-states are for. There is no realistic prospect that anyone could prevent this, which (for example) has to be giving Hugo Chavez serious pause for thought. That is, on the optimistic assumption that he’s not already committably insane.
Is this the world I’d prefer to be living in? No, I’m an anarchist. So don’t tell me I’m advocating violence and warfare; I’m simply recognizing the brute facts of reality for what they are. The U.S.’s ability to kill you and take your stuff is barely affected, if at all, by marks on bankers’ papers.
Those marks have meaning only as long as no party with over 50% of the guns refuses to play the game. So let’s consider another possibility. What if the U.S. were to default on its debt? I actually think this is a fairly likely outcome at some point; as I’ve written in Timing the Entitlements Crash, the private-debt crisis is only a prologue to what’s going to happen when it becomes obvious that the U.S. government’s finances are fucked up beyond repair. At that point, hyperinflation or default will be the only options.
There is no doubt the consequences of default would be pretty ugly all around — millions of investors wiped out, widows and orphans in the streets, and so forth. But let’s consider what all that T-bond debt to people like the Communist Chinese actually means. It means they took marks on paper that were promises to be paid back in dollars at a future date in exchange for other pieces of paper which the U.S. Government used to buy stuff. If we default, they have the marks on paper and we still have the stuff.
So, however bad the consequences in the U.S., the geopolitical effect of a default would be to inflict a larger aggregate loss of wealth on the rest of the world. The net effect would probably be that the U.S. would re-emerge as an even more dominant hyperpower afterwards. First, because we’ve still got all that military we bought with borrowed money; and second, because, really, where else are investors going to take their money for stable returns? There’s only so much you can do with camel-futures markets in Uzbekistan.
Of course it would be more difficult for the U.S. government to borrow money after a default. Er, but, how exactly would that be a bad thing?