http://www.guardian.co.uk/Iraq/Story/0,2763,922217,00.html

Bush fiddles with economy while Baghdad burns

Could a faltering dollar and global rebellion against its values presage the decline, and eventual fall, of the American empire, asks Mark Tran

Wednesday March 26, 2003

The war in Iraq is not going as smoothly as the Bush administration would like and the conflict is looking less and less like a walkover by the day.

Yet there can be little doubt that the US, backed by Britain, its loyal junior ally, will eventually prevail. The conflict will bring the US little glory, pitting the world's most powerful military machine against a dilapidated army, but when American and British troops enter Baghdad, the US will surely cement its status as a hyperpower.

But does the US colossus have feet of clay? It takes a brave soul to argue that America, the world's largest economy and by far its most potent military power, is about to go into decline, when it is widely perceived as a hyperpower. But Independent Strategy, a financial research company for institutional investors, has made the case in a paper that is making the rounds of big investment banks such as Goldman Sachs.

Independent Strategy believes that the US shows many symptoms of an empire that is cresting. First, it sees deepening mistrust of the US and predicts a rise in terrorism in reaction to US unilateralism.

That is certainly the case with the Bush administration, which has made a habit of tearing up international treaties from Kyoto to the anti-ballistic missile treaty. Iraq is the culmination of the Bush administration's unilateralist streak, as the White House plunges into an unpopular war in disregard of the UN security council.

Second, Independent Strategy sees trouble ahead for US economic policy. It notes that Mr Bush has boosted discretionary government spending more than at any time since the Vietnam war. Inheriting big budgetary surpluses from the Clinton administration, the Bush White House is heading for record deficits.

True, budget deficits were probably unavoidable as a 10-year economic expansion ran out of steam. But Mr Bush is not helping matters with a $726bn (#462bn) tax cut that, even though reduced by the senate to $350bn, benefits mostly the rich and a war that will add at least $74bn to the books, and probably considerably more.

Third, what was known as the Washington consensus - free market economics and deregulation - has broken down. As Bob McKee, chief economist with Independent Strategy, notes, a populist reaction has taken hold in Latin America, while in Asia, Malaysia has gone its own way economically. Moreover, South Korea and Taiwan never really bought into supply side reform.

"Empires work best when they project power through the successful export of a social model or ideology," argues Independent Strategy. "The rot started when the US failed to project its economic ideology and social model globally. Japan and Europe have long rejected both, at least implicitly, as inimical to their culture and alien to their social contract."

Independent Strategy sees the weakening dollar as the fourth strand in the decline of empire.

"The dollar will go on down because the good empire has the same faultlines as many other empires: unsustainable living standards at the core depend on flows of wealth from the periphery," says Independent Strategy in terms that would not be out of a place in a Marxist textbook. "The US no longer earns the return needed to sustain these flows. The costs of war and unilateralism will increase the thirst for capital, but reduce the return earned by it."

In plain English, America relies on the rest of the world to finance its deficits. The rest of the world was happy to do so when the US economy was strong and returns were high, but investors will put their cash elsewhere if America looks weak economically. America borrows hundreds of millions of dollars from the rest of the world each day to cover its savings gap and, under George Bush, US dependence on foreign capital is set to increase.

The decline of empire thesis is not exactly new. Paul Kennedy, the British historian, wrote the best-selling The Rise and Fall of the Great Powers back in 1988, where he coined the phrase "imperial overstretch". It was a great read, but then the US embarked on a record-breaking expansion that lasted 10 years and saw Wall Street shoot up to over 11,000 points.

But that great economic expansion turned out not to be so great after all, culminating in a wave of financial misreporting and outright fraud at Enron and WorldCom. The twilight of empires can last a long time, but judging from his reckless unilateralism and his economic vandalism, George Bush seems to be determined to do his level best to hasten that decline.

7 Mark Tran is business editor of Guardian Unlimited