The End of the American Empire

We can argue whether Trump is a symptom or the trigger but the demise of America as the undisputed power in the world looks to be near due to the choices made in America over the past 40/45 years which have come into focus in the past 10/15 years.

Manufacturing, energy and defence, the American decline

If I look at the broad view of the American economy since 1980, I can see several major trends: a drop in the manufacturing sector, so a decline in industrialization but also unionisation together with a decline in the quality of the associated products. Car makers may not be the companies with the largest market capitalisation anymore but GM’s and Google’s American revenues are still roughly the same. And car makers could be a source of exports if the quality were not so bad. America’s choice to forego electric car development looks like it will eventually destroy the local car industry as the pace of development will mean that in 10-15 years a battery powered car will simply be much better than the petrol/diesel equivalent. Similarly, Boeing used to be the undisputed king of the skies and is now being relegated to an also ran as the company’s focus has shifted away from providing an excellent product to buying back the stock before the approach led to two major programs going wrong (737 and 777X); In terms of energy, America is again being left behind in the shift to renewables. This is more due to the approach of the Trump government but, even without him, there are no major American producers leading the country into the next era of energy. It’s mainly China with Europe still having a competitive wind industry. Geothermal might just save America but the major trend of solar has been completely missed; and defence where America has led the field since the end of the 2nd World War, we now find the Gulf countries looking to Ukraine for protection and arms since America is showing itself unable to deal with the recent developments in strategic thinking and integrating drones into combat planning.

Software and financialisation, America ahead for now but at what cost

Where America undoubtedly leads is in the field of software. From Microsoft and Google down to software as a service companies which make planning a business so much simpler, America is the king. But the bet they are making on artificial intelligence is anything but a sure thing and could end up ruining the balance sheets of these companies as they take on hundreds of billions in debt to build data centres which are increasingly looking like a very bad investment. Trillions are being spent but even the sales so far seem yet to breach one hundred billion. The profits will come, we are told. There is no sign of them yet; in the meantime, these companies are relying on America’s other great driver of economic growth, financialization, to give them access to the debt and equity they need to build out AI. If it turns out the return on investment is lower than expected, we are going to see an immense destruction of capital. At a time when private credit funds are starting to show signs that they also lent too much to the wrong companies at the wrong rates and private equity companies and the associated industry around it is looking increasingly unable to manage the portfolio of companies they have bought at overly stretched valuations. With enough of the money having come from people’s (often underfunded) pension funds to make me worry that the mal-investment will come home to roost leaving a big hole in America’s ability to finance itself and provide for people’s current standard of living. To add to this, the Trump administration seems hell bent on weakening trust in American capital markets through the non-appointment of commissioners to either the CFTC or the SEC. Sure, this allows prediction markets/crypto to fleece people more effectively, on the other hand, not so great for long term capital formation.

America’s problem is not that it does not produce enough. It is that what it produces is not of a sufficient quality to compete internationally and consequently the country is hobbling along. It has been able to disguise this weakness up until thanks to the strength of its two favoured sectors. But that is coming to an end. To talk a little about one sector which I haven’t mentioned so far is perhaps emblematic of the situation. Healthcare. Healthcare in America is a dynamic sector producing many wonderful breakthroughs with a regulatory environment which encourages drug companies to first develop their medicines there due to the size of the market. And yet the country spends more as a % of GDP than any other for far worse outcomes in terms of length and quality of life. This is not a basis for long term success.

And America finds itself singularly unable to use the government’s balance sheet to dig itself out of this hole. Actually the opposite could be true. With Debt/GDP at over 120% and the budget deficit running at over 5%, it is more likely than not that the government will have to cut back into the face of any slowdown as tax revenues rather than being able to freely borrow to jump start the economy. Having to cut spending in the face of a recession is a rather nasty position for a government to find itself in, especially when it has enjoyed the privilege of being the world’s reserve currency.

What happens next – look to the ‘fall’ of the British Empire after the 2^nd World War for parallels

Britain didn’t cease to exist after the end of its empire but it did cease to be relevant in the way it was before. One of the events to precipitate this decline was the Suez crisis of 1956. Briefly, Egypt nationalised the Suez canal which had been controlled by British and French interests. The British and French invaded but then backed off when the United States refused to support them. Defeat against a secondary power over a body of water in the Middle East, history doesn’t repeat but I certainly rhymes. To show the extent of British decline in one simple figure, one pound was worth $ 4 during the 1940s and had declined to $ 2.50 during the 1970s and was under $ 2in the 1980s. Britain would do well in some years, be excellent in some smaller sectors but never again be the global powerhouse it had been during empire. America is larger so I would expect it to not suffer so much but I would expect the currency to be much weaker over the next couple of decades or so as it works through becoming probably a first amongst equals together with China and an enlarged European sphere of influence which may expand further east and further south depending on the extent to which the relative governments want to embrace the European style social democracy or come under the Chinese, authoritarian sphere of influence.