Jan. 12, 2023

Pax Americana Fades

At the beginning of the first millennia AD, the Roman Empire ruled the world. For nearly 200 years, Rome dominated the area surrounding the Mediterranean and was able to provide peace and prosperity for its citizens.

Today, early in the Third Millennium, we are watching another Great Nation lose its grip on World Order as Pax American fades. The United States was the unquestioned World Super Power after its victory in World War II. Dominant in virtually every economic measure. "Smoke Stack America" was the global industry leader. Industry leaders like US and Bethlehem Steel, General Motors and Ford, DuPont, and others dominated their respective markets.

The US was a production economy based on the classic economics of Adam Smith and David Ricardo.

Over the decades, America began to change. Economic production moved to other countries. By the 1980s, Japan, Inc produced many goods that American consumers purchased, including Toyota and Honda automobiles and Sony Televisions. Electronics manufacturing left American shores and headed across the Pacific. Finding an American-made radio, television, or smartphone is nearly impossible.

With the change in production came a corresponding change in economic influence and power. It was now essential that the United States establish commodious relations with those countries that made the items we consumed.

Thifitsit well with the new philosophy of the American elites. Increasingly academics, power brokers, and politicians began to see the "Global Community" as the optimal way the world should work. Whether this was because it fit their vision or was just an acceptance of the new reality, we'll likely never know.

But the reality is America increasingly relied on other countries to make the goods and components we need to function. Japan, as we noted, was the first country we relied upon. But soon, China became our dominant supplier. Today trade between the United States and the People's Republic of China is the most significant worldwide. With the vast majority of goods flowing from China to America. The current trade deficit with China averages $30 to $50 Billion per month.

Over time, the United States' economic self-sufficiency has declined, and so has its global influence. If cutting off Russian Oil Supply sends your Economy into an inflationary tailspin or when a shut-down in the Asian supply chain closes American factories. You are probably not the dominant Economy you think you are.

But for 30 or 40 years, that has been the status quo. America maintained a dominant worldwide position because it managed its global relationships well. The US could keep any rivals isolated through a series of diplomatic and military maneuvers. Economically the US used its vast consumer markets to keep other countries focused on the US. China didn't want to lose access to its most significant customer, nor did OPEC, and even Russia catered to the American oil buyers.

All that changed when a fiery Irishman named Joe Biden assumed the Presidency. Suddenly the world was in for a fight. Ukraine was the flash point, but this is a President who never hesitates to pursue a confrontation. And once he's picked his argument, there's no turning back.

For example, after Russia's Special Military Operation In Ukraine, Biden summarily cut off all Russian oil supplies to the United States. Simply put, Biden saw red and charged. There needed to be more consideration of the effect on our Economy. It was the trigger that accelerated this inflation.

Even more relevant, another President would have seen US oil purchases as a bargaining chip. A way to bring Russia to a negotiating table, an opportunity to promote peace. But not, as my Irish Grand Mother would say, for the "fighting Irishman."

Today just two years into Biden's term, America's role in the world has changed dramatically.

Far from being isolated from each other, America's most important rivals, China and Russia, seem destined to form a lasting alliance. It will become a vast combination of resources and population like nothing else. When America cut off Russian oil markets, China was happy to take our place. When Biden blocked Russia from our international transaction system (SWIFT), China stepped up with its version(CIPS).

Russia and China are just some of the ones to look elsewhere for markets to replace the Americans. With its vast oil wealth, the Middle East is likely pursuing an alternative to the US Dollar. Petro-Yuan, anyone?

Recently, China has negotiated with Argentina to provide agricultural goods and replace the American farmer as principal Chinese suppliers.

From point to point around the globe, the US is challenged like never before. Countries are finding other markets with those they find more compatible. In many ways, this is the opposite of where America was following the War. Back then, we were the manufacturing hub for the world. Today, we are just one among many customers. And today's producers increasingly have alternatives.



To flourish in this new environment, the US needs an adept negotiator, a diplomatic type, able to cut the best deal.

Instead, we have the fighting Irishman.

 

Econ Briefs

 

The big news this morning, the Consumer Price Index reports at 6 1/2%. No real surprise here, this is precisely what Wall Street expected.

 

This sets up the Federal Reserve to raise interest rates in less than three weeks. The Fed Open Market Committee's next meeting concludes on February 1st. Wall Street believes that the Fed will likely raise rates by ¼ % at that meeting on their way to a 5% Fed Funds rate in the next couple of months.

 

So to recap, The Consumer Price Index Reported this morning at 6 1/2%, down from 7.1% and the lowest level since October 2021.