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Fracture zone: the rise of the East and the decline of the West

Asian problems remain and secular stagnation is slowly attaching to their economies but the continent’s liquidity, banking expansion, optimism and incrementing power occupies the West’s retreating void – writes Jim Johnson

The staggering transfer of wealth from the G7 countries to the developing and BRIC nations – Brazil, Russia, India and China – is the seismic transition of our time. The European Union and America, constituting the bulk of the diminishing economies, have endured the threat of imminent collapse since 2008 in various emergencies; and now without confidence find themselves in the unsettling condition of secular stagnation. At issue is how this economic predicament displays its weakness in public policy and ultimately shapes the future of the EU and its kindred offspring, the United States.

We create models and definitions to accurately account for past events, which apply to present policy alternatives and assist intelligent prediction of future goal attainment. Unfortunately, present popular models have disappointed and will continue to leave us all bewildered, arguing and experiencing shrinking horizons. Starting from an American perspective there is a clear pattern of repetitive economic bubbles, crashes, solutions fixed around credit-induced reflations, continuous and increasing government intervention – which extends backwards 30 years.

A ‘fracture zone’ is a prolonged period of weakness and volatility that leads to repetitive breakdowns of one or more of the components of national power that, if unchecked, leads to a cascading collapse. If America finds herself subject to an encompassing degenerate force, is the EU dragged into it by default? History supports this contention looking at the preeminent superpower England collapsing over 50 years from 1900 – unable to sufficiently project power so as to avoid wars, depressions and loss of economic dominance evidenced by settlement currency status, all of which intimately affected the princeling nation: America.

The metric of this new definition, national power, is not new, but deceptively broad including elements of economic strength, fiscal latitude, military capacity, other fixed and variable assets of sovereign concern – population, skills, strength of law, geography and the like – which is all then multiplied by so delicate an element as political will; and the ability of leadership to direct said latent powers.

Can this relationship explain the hesitancy of the EU in the 1990s to act decisively in the Balkans and the fortuitous American intervention to prevent genocide, but not the fracturing of the old Yugoslavian sovereign state? Does it predict the odd ‘lead from behind’ US/EU policy in Libya, which worked to dislodge the tyrant but leaves in its wake a dysfunctional balkanised state unable to pump and export a virtual fortune? Might further, continual erosion of power account for inaction or even the least wrong right answer in Syria – which has seen 130,000 lives lost and millions dislodged?

A lot could quietly be said of political effectiveness. We are incessantly assured economies are normalising because a few metrics are upturning or slowing their decent, although our greatest risk remains the exit strategy from the radical experimental policies of monetary expansion – which have refloated everything and everyone, the rich especially followed by the rest of us laggards. We cannot yet account for the blowback from gross monetisation or the unintended consequences of abandoning a reasonable risk-free rate of return on capital; you cannot call the winner by the score at halftime or the success of a party in midstream before the participants have weathered their hangovers.

We came uncomfortably close to economic ruin in 2008 with the Americans losing $16 trillion in net worth. We are all still training for the next round of this fight, passing rigorous new banking stress tests, demanding new banking capital requirements for all manner of overly-risky behavior, witnessing EU bank asset shrinkage; yet we stuff ‘un-reserved’ sovereign debt into every unused drawer of our banks. American Treasury issuance has quadrupled since 2001. How shall we judge when repetitive failures graduate to ‘cascading collapse’?

Asian problems remain and secular stagnation is slowly attaching to their economies but the continent’s liquidity, banking expansion, optimism and incrementing power occupies the West’s retreating void. Their optimism and monolithic momentum contrasts to our democratic bickering where declining median incomes, low employment participation and high unemployment tempt our voters into more polarising desperate choices. Even the best of bad alternatives leaves us with increasing tax burdens and an ever-increasing debt burden, both of which drag on economic growth.

Wherever the hope of this world resides, it is definitely not in hiding from the facts or denying their existence. A trend 30 years in the making is not easily reversed and the historic implications of sea changes in global political power are ominous. Our competitors are not immune, nor are boundaries or alliances so entrenched as they once were.

A developing world dominated by mega-cities of the poor – disenfranchised and weaponised yet intimately connected via globalization – is not inherently more efficient than the developed world. Inviting and encouraging competitive rounds of monetary debasement from powers around the world will not suddenly balance itself and so solutions of this sort will not accomplish our goal. Scrutiny of past policies of stability that encouraged job creation, individual responsibility and sound governance would not be a waste of time for any of us, no matter our orientation.

Jim Johnson is a real estate expert and banking professional, and author of Fracture zone 2015: a nation in denial, an empire adrift, a world at risk

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