OPINION:
It is an astonishing phenomenon that as we move into a presidential election year, there are still those in denial about the scale of the economic problems faced in the Western world.
There are those on the high-spending left who are still unable to concede that their economic policies have contributed to today’s problems and promise merely more of the same. The financial illiterates who brought us to this point want to do it all over again if they are given the political space to do so.
But many other politicians who do understand the depth of the crisis still seem to believe that this is a cyclical correction that can be carried out with tolerable pain within the constraints of a political term. It is not. It is more likely to take a decade.
This is a structural correction to Western economies that are still living beyond their means, placing too little importance on sound money and failing to adjust to the ultracompetitive nature of the globalized economy. Amazingly, it is still possible to hear politicians in America and Europe talk about the “emerging economies” while those economies disappear over the economic horizon in front of us.
Both Congress and the White House frequently justify their actions as being based on the nation’s interest rather than party or sectional interest, although the American electoral system provides a built-in temptation and great opportunity to dress up pork as principle.
The national interest is served when governments provide the people they represent with security and create the conditions in which individuals can generate the prosperity that, ultimately, improves the common good.
It is in this context that the scale of debt in America, Britain and Europe needs to be seen, for the current level of debt (and the level of debt interest repayment required) is not only a major economic problem, but also a strategic one.
Debt is a strategic issue because economic strength is the wellspring of political and international influence. Economic failure will lead to the collapse of political fortunes and, with it, a collapse in prosperity.
History is littered with examples. Habsburg Spain defaulted on its debt 14 times between 1557 and 1696 and suffered rapid inflation as a result of an influx of New World silver. This economic weakness, coupled with the outcome of the Nine Years War and the death of Spain’s Charles II, saw the end of Habsburg Spain.
Another case is pre-revolutionary France. By 1788, Bourgogne France was spending 62 percent of royal revenues on servicing its debt. It is no coincidence that some historians claim 1788, not 1789, to be the true start of the French Revolution. It was on June 7 of that year that one of the first revolts occurred, over an attempt by the government to enact new taxes to deal with France’s unmanageable public debt.
More recently, we have the example of the Ottoman Empire. The Ottoman Empire was paying 50 percent of its budget in debt interest payments by 1875. In fact, the last payment on Ottoman debt finally was made by the Republic of Turkey in 1954 - even though the Ottoman Empire had been dissolved 36 years previously.
Britain’s own history is also instructive.
The contraction of European influence in the 20th century was driven as much by the economic exhaustion of European nations over two world wars as it was by political enlightenment in support of decolonization. As a result of World War I, in the 1920s and ’30s, Britain’s national debt was regularly higher than 150 percent of gross domestic product (GDP). After World War II, it peaked at around 250 percent of GDP.
Today’s Britain faces a debt mountain that has only been surpassed by the advent of total war, the true testament to the idiocy of socialist economics that believed the economic cycle had been broken and spending could continue irrespective of income.
The United States, with its huge burden of debt interest payments, not only overborrows and overtaxes the American people but is, of necessity, cutting its defense spending to help make ends meet. The irony seems to be lost on some that much of this debt interest will end up in Moscow and Beijing.
In other words, America has been more enfeebled by welfarism and big government than it ever was by the ideology or practice of communism. There no doubt is a wry smile or two inside the Kremlin.
Of course, today, although United States debt burden is horrendous, there is still space for the world’s largest economy to lead itself and others into a better economic space.
Whoever occupies the White House or controls Congress by the end of 2012 will have to face up to an unpalatable dilemma. The United States is at a crossroads. The next president will have to bite the bullet on debt because U.S. pre-eminence is at stake.
Friends and allies, especially in Asia, ask if America is a basket in which it is wise to put all their eggs. Many wonder whether the American political class will have the courage to push through the necessary austerity measures to ensure the country ends the decade with its economic primacy intact. It is a tremendous burden on American lawmakers but nonetheless a considerable opportunity, possibly historic in its consequences.
What happens in the United States will have a huge effect on Britain and Europe, as it will shape both the global economic pattern and, for Britain, the perceived strategic importance of our most important ally. It is fashionable in some quarters to write off the United States (not least among those elements of the American media and political establishment who constantly seem intent on apologizing for America). But with good political management and sound economic correction, the natural innovation and entrepreneurship of the American people - if set free from intrusive and warmer regulatory government - should see the nation through.
The eyes of the world, both friends and competitors, will be on the United States in 2012. How America deals with its debt and economic problems will have echoes in time and place far beyond the corridors of Washington.
Liam Fox is a member of Parliament and a former British secretary of state for defense.
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