America’s status as the world’s greatest power will end for the same reasons as its predecessors — weighed down by a mountain of debt that politicians can’t ignore, historians warn.
And the century of the United States at the top could end sooner than expected with countries in Asia increasingly pulling the plug.
Interest payments on debt outstripped defense spending earlier this month, but they will not be the weapons power that weakens the country, according to historian Professor Niall Ferguson.
“A great power that spends more on debt service than on defense is not going to stay very good,” he said in a piece written for Bloomberg, explaining a theory called Ferguson’s Law.
‘True of Habsburg Spain, true of the ancien regime of France, true of the Ottoman Empire, true of the British Empire. This law will be tested by the US starting this year.’
Harvard history professor Niall Ferguson warns that the US is experiencing a decline in dominance similar to that of Spain, France and England before it.
America’s debt-to-GDP ratio fell during the 1990s to a low of 32 percent in 2001, but is expected to reach an all-time high of 122 percent in the next decade.
The Congressional Budget Office (CBO) estimated this week that another $1.9 trillion will be added to the national debt this year, for a total of $36 trillion.
That is equal to the total value of goods and services produced by the US in one year.
Rising medical care costs and bank rates rising to a 23-year high are among the factors that could push it up to $56 trillion over the next ten years, according to the CBO, a record 122 percent of GDP.
And there is some variation on this point between the two presidential contenders with Joe Biden and Donald Trump adding $7 billion to that figure during their tenures, according to the WSJ.
JH Cullum Clark, of the Bush Institute-Southern Methodist University Economic Growth Initiative, has studied the history of previous superpowers and sees unsettling parallels with America’s current situation.
He says the pattern was established in the Roman Empire when the third-century emperor’s overspending tempted him to start debasing the currency, causing endemic inflation that eventually undermined its power to defend itself.
The wealth flowing from the New World blinded Spain to its dependence on foreign debt to maintain its overseas empire and end its dominance in the 17th century.
In the end, it “succeeded in default seven times in the 19th century, after failing six times in the previous three centuries,” economists Carmen Reinhart and Kenneth Rogoff wrote in their book This Time Is Different: Eight Centuries of Financial Folly.
Yale Professor Paul Kennedy warned that China and other Asian countries now have enormous leverage over the US through their holdings of Treasury bonds.
Roman imperial hegemony was only the first to end in fiscal irresponsibility according to historian JH Cullum Clark, of the Bush Institute-Southern Methodist University Economic Growth Initiative.
America’s $34 trillion national debt equals $101,233 for every man, woman and child in the country, according to the Peter G. Peterson Foundation
It was the turn of France 100 years later after a series of casual defaults, before Britain lost its place to the US in the 20th century, with rocketing debt during and immediately after World War II.
The British pound had been the international reserve currency between the wars, allowing it to finance far-flung empires, but it decisively lost that status to the US dollar after the war.
America’s debt to GDP ratio fell during the 1990s, reaching 32 percent in 2001.
But it has risen to 99 percent since then, boosted by the great recession of the 2010s and the impact of the Covid-19 pandemic.
‘The largest contributor to the cumulative increase was the recently enacted consolidation of legislation that added $1.6 trillion to the projected deficit,’ the CBO wrote in the report.
‘The legislation includes additional emergency allocations that provide $95 billion in aid to Ukraine, Israel, and countries in the Indo-Pacific region.’
The world’s need to buy dollars used for international trade has protected the US from high debt levels, but there are growing signs that its status as the world’s reserve currency is under threat.
Credit rating agency Fitch downgraded the US’s debt rating from its top rating of AAA to AA+ in August last year, citing ‘sustained deterioration in governance standards’.
And in November, the Moody’s agency warned that it could remove the Government’s AAA rating, while reducing the outlook from stable to negative.
‘Even if a country issues a major reserve currency, even if a country is a dominant geopolitical power, it’s not going to issue a country,’ Cullum Clark told the WSJ.
‘He lost that status.’
Yale Historian Professor Paul Kennedy warns that Asian countries, including China owe the US a large amount in the form of Treasury bonds.
He said that he now has the power to trigger a seismic threat to the American status if he ‘just decides for some reason to have a political quarrel with the US to spend a lot of the Treasury’.
‘I have asked my fellow economists about this puzzle … of a very great power, very great and in some ways surpassing the great power that can continue to issue currency-denominated bonds without, shall we say, the penalty . ,’ he said.
His 1987 book, The Rise and Fall of Great Powers, helped politicians focus on the dangers posed by debt, which produced debt-to-GDP levels in the 1990s.
And other countries including Denmark, Sweden, Finland and Canada have also been able to reduce debt spending in recent years, despite the impact of the pandemic.
Joe Biden and Donald Trump have about $7 trillion in America’s national debt that increased during their time in office according to the WSJ.
The US national debt has reached a record high – reaching $34 trillion for the first time in history
But the national debt has taken a back seat in the presidential race so far with Republicans promising tax cuts and Biden promising no federal tax increase for families making less than $400,000 a year.
Donald Trump’s 2017 tax cuts are set to expire next year, but Biden has said he would extend at least some of them for low- and middle-income earners.
Trump himself has said that all will be extended if he returns to the White House, potentially worth $5 trillion over 10 years.
‘The harmful effects of higher interest rates fueling higher interest costs on a huge debt burden are continuing,’ said Michael Peterson, chief executive of the fiscal think tank Peter G. Peterson Foundation.
‘That’s the definition of unsustainable.’
