What an interesting week it’s been! I’m now seriously thinking that we are seeing the beginning of the end of American power. First of all, there was the prolonged Congressional battle over America’s colossal $14 trillion debt and the Eleventh Hour deal to raise the ceiling so that the Federal Government didn’t suddenly run out of money. The hope was that this would prevent an imminent default and, as we all know, it did. The problem, of course, was that this wasn’t enough to assuage the markets and, what with the twin fears over the continuing debt crisis in the Eurozone (and Spain and Italy now under threat), we’ve obviously seen some huge crashes across the world – enough to rival the sub-prime crisis of 2008.
Now we’ve had the news that – despite the deal – credit rating agencies such as Standard and Poor have now downgraded America’s status of AAA to AA+. This, in a nutshell, now makes it more difficult and expensive for the US Government to obtain credit. Naturally, this has not thrilled the Whitehouse and its likely to make things very uncomfortable for the US Economy. Just to add insult to injury, the Chinese (unsurprisingly, America’s major creditors) have decided to put the boot in. They’ve now suggested that another reserve currency (one which the entire world economy relies on as a back-up) should be utilised rather than the US dollar. The dollar as a reserve currency is something that has been the status quo since the Second World War. To see this being suggested is, in my view, truly momentous.
All of this is not very inspiring news. Surely a double-dip recession is on the horizon? Phew, the old saying about ‘When America catches a cold…’ seems to ring true. But for how much longer? America is losing it position. When a world superpower is driven almost to the brink where it might not be able to pay its troops currently serving in Afghanistan, then its time to start worrying. I think it’s truly instructive that NASA has had to recently mothball the Space Shuttle and abandon its manned spaceflight missions because it can’t afford it anymore. Meanwhile, China and India are forging ahead with their space programmes. It’s easy to conclude who is gaining the upper hand..
Of course, I wouldn’t like to say that the future course of either of these two nations is assured. Both are vulnerable to rising energy costs and the threat to resources from Climate Change. This could make China, with its huge population, particularly vulnerable. And rising energy costs are a symptom of increasing resource scarcity. It is this, in my opinion, that is the true Achilles Heel of the American Giant: rising oil prices. The country has built its entire empire on oil. Now, and if we are truly facing Peak Oil, this is starting to crumble.
The argument that spikes in oil prices has a knock on effect on world markets and economic growth (see my previous post) seems to hold water. Remember the last crisis in 2008? Before the October crash you may recall oil prices had reached $147 per barrel. This time around, we’ve seen prices hovering above $100 again. Coincidence? I don’t think so. The debt crises such as the credit crunch and the current situation are only really the symptoms, not the cause. Governments have been overspending and, for too long, we’ve been living beyond our means. When the main source of energy input that powers the economy starts to become more expensive than production is going to be affected. Demand will fall away and growth will be stunted. This will have a knock on effect on financial institutions and Governments saddled with a huge debt which they may find difficult to repay. A fairly basic argument, but all the same, a valid one. And America is the most vulnerable in all this.
This article, by Tom Whipple – former CIA analyst, illustrates the point about oil and the economy well. It explains how Peak Oil can affect GDP. It also illustrates the difference between the oil spikes of 2011 and 2008. Check it out here:
Until the next time…