The Leader Falls
At first glance, the markets’ plunge is puzzling. The extortionists didn’t shoot the hostage, did they? Isn’t that reason for another burst of irrational exuberance?
As is turns out, no. There’s not much irrational exuberance left, anywhere in the world, even in the thriving BRIC nations. There are only confusion and fear.
One thing “quants” never seem to ken is that markets are as psychological as they are logical. At the end of the day, they are just big collections of people.
Unlike machines or mathematics, people internalize self-evident changes at their own individual rates. But once their collective realizations reach critical mass, watch out! That’s what causes revolutions.
So what’s the change that’s now self-evident to a critical mass of global investors? It’s simple to say but profoundly important. The global leader for the last century is beginning to disappear, retreating into a shell of isolation, self-righteousness and madness.
The best evidence came in a marvelous graphic that the New York Times had on its online “front page” early yesterday but apparently since took down. It showed the day’s progress on all the world’s major stock markets in a single interactive plot. Click on tabs, and you could see the three-percent-plus plunge on every one.
What the graphic didn’t show—comparative timing—should be obvious. The sun rises in the East. So the market collapse started in Asia and the Pacific, migrated to Europe and got here only last. The collapse was the rest of the world looking at us.
And what did it see? It didn’t just see a nation about to enter a double dip.
The world saw a nation that had arrogantly started a war on false pretenses and then let it drag on for most of a decade for failure of commitment. It saw a nation that had declared war on a noun (“terror” or “terrorism”) without knowing who its enemy was, and so had gotten bogged down in the graveyard of empires. It saw a nation that had developed the idea of an all-volunteer army and then exploited that idea to abuse its troops and to fight two wars with no real plan. It saw a nation that, from a late start, had dominated the space race and put men on the Moon, but then meekly folded its extraterrestrial tent and ceded discovery to rising powers.
But most of all, the world saw a nation that no longer seemed a sound investment.
“Those whom the gods wish to destroy they first make mad.” Ignorant Americans may not have heard that ancient proverb, but Europeans have. They and other foreigners looked at us from a bemused and disinterested perspective. They were not under the evil spell of Fox. And they just didn’t like what they saw.
Here was a nation that had led the push for the World Bank and International Monetary Fund but wouldn’t follow the same advice that it and those institutions always gave others: lower your debt. While our politicians were heaving sighs of relief for avoiding self-inflicted economic Armageddon, foreigners were busy noticing that the $2.4 trillion of “agreed” debt reduction amounted to less than two-thirds of the interest on our national debt and anyway wasn’t really “agreed” at all.
The hypocrisy was bad enough. But the madness was even worse. Why couldn’t we get our debt under control as we have insisted others—including Europe—do for the last several decades? Because a lunatic fringe led by a bearded guru refused to raise taxes or close tax loopholes, even those that are self-evidently obsolete or counterproductive. Any why did this fringe and that guru find low taxes so important? Because they wanted to starve government and “drown it in a bathtub.”
Now it may come as a surprise to many Americans, but most foreigners like and respect their own governments. Certainly our most important trading partners do. The gods have spared them the spells that Saint Ronald and the Devil Murdoch cast upon our people. They want their governments to be strong because they conclude (rightly in most cases) that a strong government means a strong economy and a strong nation.
So, looking at us from abroad, foreigners simply concluded that we have gone nuts, and that they will have to seek a saner global leader and a better safe haven for their hard-earned cash.
That wasn’t all, of course. There was much, much more. The nation that had invented the light bulb, the phonograph, controllable aircraft, television, atomic weapons, nuclear power, high-altitude flight, cabin pressurization, the transistor, the digital computer, the laser, polio vaccine, lunar travel, AIDS drugs, the global positioning systems (GPS) and the Internet now thinks that Facebook and Twitter are the acme of innovation. The nation that had amazed the world with its manned and unmanned space exploits, its lunar landings, and the Shuttle was shutting up shop and walking away from the greatest-ever exploration of our species, which it had pioneered. And the nation that, from Kitty Hawk to GPS, had created this was stopping construction at all its airports to quibble about petty ideology. (I know, that problem has been solved, temporarily, but the fact that it happened at all is a sign of madness.)
This was the nation that had started and supported the League of Nations and the United Nations. This was the nation the had been instrumental in wiping smallpox off the face of the globe. This was the nation that supplied the weapons and materiel to win World War II and, without overreacting, had stood a 45-year vigil against the menace of Soviet Communism until the Russians came to their senses. This was the nation that rational foreigners always felt they could rely on as a safe haven for investment and a calm, reasoned hand in a storm.
No more. Perhaps the world could have excused one or more of these failings. Perhaps it could have excused several. But coming all together, all at the same time, these defects made us look like a geezer who has suffered a stroke or senile dementia. We are simply not the same America that foreigners once looked up to—sometimes with hope, sometimes with fear, and often with resentment—to solve the world’s problems when no one else could.
Now we can’t even solve our own. More than that, we can’t even approach our own problems with sober realism and reason.
So now it has become self-evident that we are no longer a suitable global leader. Yet no other nation has yet stepped up. China has the economic power, but it is self-centered and diffident, as always. It is at best a reluctant leader. And its recently-exposed program of massive cyberspying on governments and corporations worldwide makes people wonder whether it has the globe’s best interests at heart, even as a matter of enlightened self-interest.
Maybe you, like me, have an abiding fascination with ancient Rome. Maybe you sometimes wonder what the world felt like when its empire was falling apart. If so, don’t worry. You’re about to find out. The result might not be pretty.
Today Europe and the BRIC nations can advance the causes of science and technology and keep a lid on the more sinister aspects of religion. So what follows probably won’t resemble the millennium of Western stagnation during the Dark Ages. But it will be a time of great global uncertainty and doubt. And this plunge in the markets is just the beginning.
Footnote: The interest on our national debt this year will be $413 billion, or $4.13 trillion projected over ten years. [Erratum: an earlier version of this sentence omitted the words “The interest on.”]