The following is extracted from Professor Radhika Desai's
Geopolitical Economy radically reinterprets the historical evolution of the world order, as a multi-polar world emerges from the dust of the financial and economic crisis.
Radhika Desai offers a radical critique of the theories of US hegemony, globalisation and empire which dominate academic international political economy and international relations, revealing their ideological origins in successive failed US attempts at world dominance through the dollar.
Desai revitalizes revolutionary intellectual traditions which combine class and national perspectives on ‘the relations of producing nations’. At a time of global upheavals and profound shifts in the distribution of world power, Geopolitical Economy forges a vivid and compelling account of the historical processes which are shaping the contemporary international order.
Published by Pluto Press (2013)
The events of September 11, 2001 appeared to define the twentyfirst century. The Bush administration invoked them to justify its unparalleled projection of US military power thereafter – in Afghanistan, Iraq and against ‘terrorism’ worldwide. The Fed and the administration also invoked 9/11 and the recession it allegedly caused to justify the economic policies, particularly the low interest rates, of the years that followed (ERP, 2002: 23, 30). Combined with the innovation of a financial sector now freed from the Glass-Steagall separation of commercial from investment banking, these policies attracted greater torrents of capital into the United States than even in the heyday of globalization, despite rock-bottom interest rates and a declining dollar. Capital from abroad flowed into the market for real-estate-backed securities, which swelled alongside real estate prices, seemingly unstoppably, opening a new phase of US- and dollarcentred financialization. It not only financed more gargantuan fiscal and current account deficits than ever before, but also sustained the liquidity the dollar needed for its status as a reserve currency despite its relentless slide. These military and economic responses to 9/11 were credited with repositioning the United States as the world’s leader, inaugurating the new American century that the Project for the New American Century (PNAC) had called for.
A new genre of writing about the United States’s ‘empire’ and ‘new imperialism’ emerged alongside obituaries of ‘globalization’(Economist, 2001a; Ferguson, 2005). Advocates enjoined imperialism on the ‘reluctant’ United States as a historic duty, and cast imperialism in a positive light – as characteristic of the peaks of human civilization – for the first time since the First World War (Boot, 2003; Ferguson, 2004; Maier, 2006; Mallaby, 2002; Ignatieff, 2003, 2004). The United States was a New Rome with ‘the classical architecture of its capital and the republican structure of its constitution’ (Ferguson, 2004: 14; see also Maier, 2006). Accompanying economic discourses extolled the resilience, stability and rising wealth of the US economy. Of course, the empire had many critics, but too many assumed that it was militarily and economically successful and sustainable (e.g. Panitch and Gindin, 2004). A minority of critics did, however, recall how imperium had unravelled the Roman republic, and warned that the Tigris and Euphrates could be the modern Rubicons (Johnson, 2004: 15–17). They exposed yawning gaps between the rhetoric of freedom and justice and the reality of power and interests, and pointed to the growth of unsustainable deficits and international imbalances (Mann, 2004, Johnson, 2004; Bacevich, 2002). But few predicted how soon the empire would unravel. Arrighi, whose prescient 2005 verdict was quoted at length in Chapter 1, was a brilliant exception. In the event, the project met its demise in the events of another September, a mere seven years later. The Fed began to raise interest rates in 2004 to counteract downward pressure on the dollar, and less than two years later, the US real estate bubble, which had relied on low interest rates, burst. As house prices declined, mortgage defaults and repossessions increased from those who had relied on continuing price increases rather than their incomes to pay their mortgages. Given the reliance of US growth on the consumption of those enjoying the wealth effects of the real estate bubble, a recession began in 2007. Eventually the credit bubble based on mortgage-backed securities (MBSs) burst too. The highly leveraged investment bank Bear Stearns collapsed in early 2008 and was bailed out by the government. But when another such bank, Lehman Brothers, was allowed to collapse in September, the US-centred international financial system, which funnelled capital into the US economy and undergirded the dollar’s world role, teetered on the brink. Contrary to official rhetoric, the US economy and its storied financial system turned out to have been powered by little more than credit-fuelled consumption and a housing bubble which was even more destructive than the stock market bubble. Worse, though capital inflows financed a military budget that rose, both relative to other countries and absolutely, to unprecedented levels (Stiglitz and Bilmes, 2008), as early as 2005 the US occupations of Iraq and Afghanistan were faltering.
History’s most massive bailout appeared to save the US-centred world financial system, but it would never be the same again. Dollardenominated international capital flows collapsed in 2008, with only a very modest recovery thereafter (Borio and Disyatat, 2011: 14). The crisis raised questions about which national financial authority was responsible for which international operation, and cautioned banks against reckless international activity. New webs of predominantly national regulations, including the United States’s own Dodd–Frank bill, made financial sectors even more national. The dollar resumed its decade-long decline after a brief and spectacular rally in the autumn of 2008, as panicked US international investors flew home to safety. Questions about its status as the world’s money (Zhou, 2009; UnitedNations, 2009; Subbachi and Driffill, 2010) that rose immediately after the crisis were put in abeyance by the Eurozone crisis that erupted in 2010. However, it is doubtful that they can remain there for very long. Around the world, especially among emerging economies, a host of alternatives to using the dollar were springing up (Grabel, 2011; Wade, 2011). And the United States remained mired in the Great Recession, or very weak recovery, for years.
Thus empire proved to be the United States’s final and most swaggering attempt to emulate British-style world dominance and it was, fittingly, brought down by defiant combined development elsewhere. Consequent increases in commodity prices, especially oil prices, put pressure on the already downward-sliding dollar and necessitated the monetary tightening that triggered the crisis. As financial crisis compounded recession, the ongoing shift in the world’s economic centre of gravity away from the United States, Western Europe and Japan accelerated. In post-crisis summitry, the G-20 replaced the G-7 as the relevant body for informal multilateral management of the world economy. Barack Obama, who won the US presidency only because the financial crisis moved enough white workers to vote for him (Davis, 2009), admitted that the United States was ‘living beyond its means’, began to scale down the wars in Iraq and Afghanistan, and hailed the ‘multipolar’ world. Some argued that US world power remained substantially undiminished because there was no successor ‘hegemon’ in sight. This was, however, beside the point if the ideas of hegemony generally, and of US hegemony, were merely never-realized US desires in theoretical drag, and the unfolding of uneven and combined development (UCD) had now closed the door on even attempts to realize them. The events of the two Septembers seven years apart bookend the final attempt at US world dominance, and this chapter retraces it. It begins by discussing how ‘empire’ differed from ‘globalization’, going on to place Bush Jr’s ‘imperial’ strategy in a historical perspective on postwar US security policy. The three sections that follow trace the intensifying contradiction between power projection and economic debility. As the unquestioned manager of the economy, the Fed kept interest rates low to keep the housing bubble inflating because the credit-fuelled consumption generated by its wealth effect was the only source of growth. At the same time, the housing bubble itself rested on another bubble, a credit bubble, which relied critically on international capital inflows. Keeping these up required the United States to generate a new series of tall tales to assure investors that its economy was a fitting destination for them, despite its feeble economic performance and low interest rates.
These sections also correct our understanding of the causes of the 2008 financial crisis in a critical manner. Analysts and policy makers have debated whether the banks or their regulators had erred. To be sure, without deregulation, which the commercial banks sought and the Greenspan Fed encouraged, the housing bubble and the accompanying inflation of the market in MBSs would not have been possible. But deregulation was merely the sufficient condition. The necessary condition was provided by the Fed when it systematically inflated the housing and credit bubbles as the only growth motor of the US economy, and in turn, the only support for the dollar’s international role. Indeed, the intensified competition that the Fed’s actions created in the financial sector turned financial institutions into its creatures. The culmination of these processes in the crisis, and the Bush and Obama administrations’ responses, are discussed in the final two sections.
The imperial economy
While Clinton’s ‘globalization’ presidency was hardly averse to unilateralist militarism, and many pointed to the continuities in the geopolitical economy of globalization and empire when the housing bubble replaced the stock market bubble, there were also important differences between the two. Clinton at least started out with a diagnosis of, and prescription for, US economic problems, even if he soon handed over the reins of economic policy to the Fed and bond markets. Whether Bush’s economic policies ever went beyond cutting taxes, which he did in spades, can be doubted. Certainly his economic reports were even more devoid of ambition or analysis than Reagan’s. Inclining to a sanguine view of economic prospects (‘The New Economy is alive and well’: ERP, 2002: 60), the Bush CE let the Fed and the financial markets get on with it. What they got on with was inflating a historic housing bubble which powered consumption and residential investment-led growth, with business investment bumping along the bottom, in contrast to the (albeit misdirected) investment boom of the previous decade’s stock market bubble. The administration and the Fed, while expressing the pious hope that increased consumption would eventually revive business investment, concentrated on ensuring the economy could do without it: and that meant keeping the housing bubble growing. While the stock market bubble had also increased employment, the housing boom created so little employment that economists wondered what happened to the so recently celebrated Great American Jobs Machine (Baily and Lawrence, 2004). With the misdirected investment boom having exacerbated overcapacity and overinvestment, and lowered profitability, manufacturing shrank further, import penetration increased, and the trade deficit widened despite relatively slow growth.
Finally, whereas the stock market bubble had swelled amid historically high interest rates, the housing bubble needed ever-lower interest rates to grow. Low interest rates were always justified in terms of getting productive growth going, but with the productive economy in no shape to respond to their stimulus, low rates could only inflate asset prices. Even as the administration and the Fed congratulated themselves that housing wealth was spread more widely than stock market wealth, as was the credit based on it, private dis-saving spread farther down the social scale. As the government’s pursuit of tax cuts and the war on terrorism widened the federal deficit, US savings rates dipped even lower than in the previous decade. Although consumption’s share of the US economy grew to historic heights, the economy had grown so weak that even under the Fed’s determined credit Keynesianism it grew more slowly than in earlier postwar decades.
This was the economy on whose back the Bush administration took the United States’s share of world military expenditure to over half, while cutting taxes. The resulting twin deficits were left to the rest of the world to finance. Whereas in the 1990s, Clinton had closed the fiscal deficit and the current account deficit was financed by private capital inflows into US equity markets, in the 2000s capital inflows took the form of investments in US Treasury and agency debt, and in housing-related securities. While the Clinton Administration had justified the current account deficit by pointing to the investment boom it generated, under Bush, net capital inflows mainly financed consumption and were part of gross inflows that swelled to between two and three times the current account deficit (Borio and Disyatat, 2011: 14).
These inflows rested on confidence, in the US securities market and in the US economy...
Radhika Desai is Professor of Political Studies at the University of Manitoba, Canada. She is the author ofSlouching Towards Ayodhya: From Congress to Hindutva in Indian Politics (2004), Intellectuals and Socialism: 'Social Democrats' and the Labour Party (1994), editor of Developmental and Cultural Nationalisms (2009) and co-editor of Revitalizing Marxist Theory for Today’s Capitalism(2011).