The Collapse of American Power

In his famous book, The Collapse of British Power
(1972), Correlli Barnett reports that in
the opening days of World War II Great Britain only had
enough gold and foreign exchange to finance war
expenditures for a few months. The British turned to the
Americans to finance their ability to wage war. Barnett
writes that this dependency signaled the end of British

From their inception, America`s
21st century wars against Afghanistan and Iraq have been
red ink wars financed by foreigners, principally the
Chinese and Japanese, who purchase the US Treasury bonds
that the US government issues to finance its red ink

The Bush administration forecasts a
$410 billion federal budget deficit for this year, an
indication that, as the US saving rate is approximately
zero, the US is not only dependent on foreigners to
finance its wars but also dependent on foreigners to
finance part of the US government`s domestic
expenditures. Foreign borrowing is paying US government
salaries–perhaps that of the President himself–or
funding the expenditures of the various cabinet
departments. Financially, the US is not an independent

The Bush administration`s $410
billion deficit forecast is based on the unrealistic
assumption of 2.7% GDP growth in 2008, whereas in actual
fact the US economy has fallen into a recession that
could be severe. There will be no 2.7% growth, and the
actual deficit will be substantially larger than $410

Just as the government`s budget is
in disarray, so is the US dollar which continues to

decline in value in relation to other currencies.

The dollar is under pressure not only from budget
deficits, but also from very large trade deficits and
from inflation expectations resulting from the Federal
Reserve`s effort to stabilize the very troubled
financial system with large injections of liquidity.

A troubled currency and financial
system and large budget and trade deficits do not
present an attractive face to creditors. Yet Washington
in its hubris seems to believe that the US can forever
rely on the Chinese, Japanese and Saudis to finance
America`s life beyond its means. Imagine the shock when
the day arrives that a US Treasury auction of new debt
instruments is not fully subscribed.

The US has squandered $500 billion
dollars on a war that serves no American purpose.
Moreover, the $500 billion is only the out-of-pocket
costs. It does not include the replacement cost of the
destroyed equipment, the future costs of care for
veterans, the cost of the interests on the loans that
have financed the war, or the lost US GDP from diverting
scarce resources to war. Experts who are not part of the
government`s spin machine estimate the cost of the Iraq
war to be as much as $3 trillion.

The Republican candidate for
President said he would be content to continue the war
for 100 years. With what resources? When America`s
creditors consider our behavior they see total fiscal
irresponsibility. They see a deluded country that acts
as if it is a privilege for foreigners to lend to it,
and a deluded country that believes that foreigners will
continue to accumulate US debt until the end of time.

The fact of the matter is that the
US is bankrupt. David M. Walker, Comptroller General of
the US and head of the Government Accountability Office,
in his December 17, 2007,
report to the US Congress
on the financial
statements of the US government noted that “the
federal government did not maintain effective internal
control over financial reporting (including safeguarding
assets) and compliance with significant laws and
regulations as of September 30, 2007.”
In everyday
language, the US government

cannot pass an audit.

Moreover, the GAO report pointed
out that the accrued liabilities of the federal
government “totaled approximately $53 trillion as of
September 30, 2007.”
No funds have been set aside
against this mind boggling liability.

Just so the reader understands, $53
trillion is $53,000 billion.

Frustrated by speaking to deaf
ears, Walker recently resigned as head of the Government
Accountability Office.

As of March 17, 2008, one Swiss
franc is worth more than $1 dollar. In 1970, the
exchange rate was 4.2 Swiss francs to the dollar. In
1970, $1 purchased 360 Japanese yen. Today $1 dollar
purchases less than 100 yen.

If you were a creditor, would you
want to hold debt in a currency that has such a poor
record against the currency of a small island country
that was nuked and defeated in WW II, or against a small
landlocked European country that clings to its
independence and is not a member of the EU?

Would you want to hold the debt of
a country whose imports exceed its industrial
production? According to the latest US statistics as
reported in the

February 28 issue of Manufacturing and Technology
, in 2007 imports were 14 percent of
US GDP and US manufacturing comprised 12% of US GDP. A
country whose imports exceed its industrial production
cannot close its trade deficit by exporting more.

The dollar has even collapsed in
value against the euro, the currency of a make-believe
country that does not exist: the European Union. France,
Germany, Italy, England and the other members of the EU
still exist as sovereign nations. England even retains
its own currency. Yet the euro hits new highs daily
against the dollar.

Noam Chomsky recently

that America thinks that it owns the world.
That is definitely the view of the

Bush administration. But the fact of the
matter is that the US owes the world. The US
cannot even finance its own domestic
operations, much less its gratuitous wars except via the
kindness of foreigners to lend it money that cannot be

The US will never repay the loans.
The American economy has been devastated by offshoring,
by foreign competition, and by the importation
of foreigners on work visas,
while it holds to a
free trade ideology that benefits corporate fat cats and
shareholders at the expense of American labor. The
dollar is failing in its role as reserve currency and
will soon be abandoned.

When the dollar ceases to be the
reserve currency, the US will no longer be able to pay
its bills by borrowing more from foreigners.

I sometimes wonder if the bankrupt
“superpower” will be able to scrape together the
resources to bring home the troops stationed in its
hundreds of bases overseas, or whether they will just be

Paul Craig Roberts [email
] was Assistant
Secretary of the Treasury during President Reagan`s
first term.  He was Associate Editor of the
Street Journal.  He has held numerous academic
appointments, including the William E. Simon Chair,
Center for Strategic and International Studies,
Georgetown University, and Senior Research Fellow,
Hoover Institution, Stanford University. He was awarded
the Legion of Honor by French President Francois
Mitterrand. He is the author of

Supply-Side Revolution : An Insider`s Account of
Policymaking in Washington
and the Soviet Economy

Meltdown: Inside the Soviet Economy
and is the co-author
with Lawrence M. Stratton of

The Tyranny of Good Intentions : How Prosecutors and
Bureaucrats Are Trampling the Constitution in the Name
of Justice
. Click

for Peter
Forbes Magazine interview with Roberts
about the recent epidemic of prosecutorial misconduct.