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Authors: Fareed Zakaria
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society. Household debt mushroomed from $680 billion in 1974 to $14 trillion in 2008. It doubled in just the seven years between 2001 and 2008. The average household now has thirteen credit cards and owes $120,000 on a mortgage. By some standards, however, households were the pinnacles of thrift. Politicians at the state and local level, eager to give their constituents new basketball stadiums and twelve-lane highways without raising taxes, started to borrow against the future. They issued bonds to pay for pet projects, bonds that were backed by future taxes or lottery earnings. But even those politicians were put to shame by the true king of borrowers: the federal government. In 1990, the national debt stood at $3 trillion. By the end of 2008, it had climbed into the eleven-digit realm, surpassing $10 trillion. The famous National Debt Clock in New York City ran out of space to display all the figures. (Its owners plan to install a new and expanded clock.) Thanks to the extraordinary bailouts and stimulus measures of recent years, the national debt was just shy of $14 trillion at the end of 2010.
The United States became a nation of debtors, in other words. And it wasn’t just the United States. Much of the financial news in 2010 was dominated by the near-bankruptcies of Greece, Ireland, and other industrialized European nations that had relied on loans to continue providing lavish benefits without raising taxes. There’s nothing wrong with debt—loans and leverage, used prudently, are the heartbeats of a modern economy—but taken to such extremes, it’s a killer. And both sides of the equation must balance—the United States and Europe never could have arrived at such positions had there not been nations willing to lend them the money. That’s where the economic and political empowerment of nations in the developing world—the rise of the rest—came in. Their swift growth allowed them to pile up savings, which they lent out to spendthrift societies in the Western world.
At some point, the magical accounting had to stop. At some point, consumers had to stop using their homes as banks and spending money that they didn’t have. At some point, the government had to confront its indebtedness. The United States—and other overleveraged societies—has now gotten the wake-up call from hell. If we can respond and change our behavior markedly, this might actually be a blessing in disguise. (Though, as Winston Churchill said when he lost the election of 1945, “at the moment it appears rather effectively disguised.”)
In the meantime, the scale of the financial crisis has had the effect of delegitimizing America’s economic power. The crisis of 2008 was different precisely because it did not originate in some developing-world backwater; it emerged from the heart of global capitalism, the United States, and coursed its way through the arteries of international finance. It did not, despite the opinions of some pundits, signal the end of capitalism. But it does contribute to ending a certain kind of global dominance for the United States, and hastening the move to a post-American world.
Before 2008, whatever people thought of American foreign policy, they all agreed that the United States had the most modern, sophisticated, and productive economy in the world—with the most advanced capital markets. As a result, it held hegemony not just in military power and diplomacy but in the realm of ideas. Central bankers and treasury ministers around the world studied the basics of their profession at American schools. Politicians developed their economies by following the advice prescribed by the Washington consensus. The innovations of Silicon Valley were the envy of the world. New York’s deep, lucrative capital markets were admired and imitated on every continent except Antarctica.
As Brad Setser, a fellow at the Council on Foreign Relations, has noted, globalization after World War II was almost synonymous with
The United States became a nation of debtors, in other words. And it wasn’t just the United States. Much of the financial news in 2010 was dominated by the near-bankruptcies of Greece, Ireland, and other industrialized European nations that had relied on loans to continue providing lavish benefits without raising taxes. There’s nothing wrong with debt—loans and leverage, used prudently, are the heartbeats of a modern economy—but taken to such extremes, it’s a killer. And both sides of the equation must balance—the United States and Europe never could have arrived at such positions had there not been nations willing to lend them the money. That’s where the economic and political empowerment of nations in the developing world—the rise of the rest—came in. Their swift growth allowed them to pile up savings, which they lent out to spendthrift societies in the Western world.
At some point, the magical accounting had to stop. At some point, consumers had to stop using their homes as banks and spending money that they didn’t have. At some point, the government had to confront its indebtedness. The United States—and other overleveraged societies—has now gotten the wake-up call from hell. If we can respond and change our behavior markedly, this might actually be a blessing in disguise. (Though, as Winston Churchill said when he lost the election of 1945, “at the moment it appears rather effectively disguised.”)
In the meantime, the scale of the financial crisis has had the effect of delegitimizing America’s economic power. The crisis of 2008 was different precisely because it did not originate in some developing-world backwater; it emerged from the heart of global capitalism, the United States, and coursed its way through the arteries of international finance. It did not, despite the opinions of some pundits, signal the end of capitalism. But it does contribute to ending a certain kind of global dominance for the United States, and hastening the move to a post-American world.
Before 2008, whatever people thought of American foreign policy, they all agreed that the United States had the most modern, sophisticated, and productive economy in the world—with the most advanced capital markets. As a result, it held hegemony not just in military power and diplomacy but in the realm of ideas. Central bankers and treasury ministers around the world studied the basics of their profession at American schools. Politicians developed their economies by following the advice prescribed by the Washington consensus. The innovations of Silicon Valley were the envy of the world. New York’s deep, lucrative capital markets were admired and imitated on every continent except Antarctica.
As Brad Setser, a fellow at the Council on Foreign Relations, has noted, globalization after World War II was almost synonymous with
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