News

Our gaze might be on the markets melting down, but the upheaval we are experiencing is more than a financial crisis, however large. Here is a historic geopolitical shift, in which the balance of power is being altered irrevocably. The era of U.S. global leadership, reaching back to the Second World War, is over.

You can see it in the way the United States' dominion has slipped away in its own backyard, with Venezuelan President Hugo Chavez taunting and ridiculing the superpower with impunity. Yet the setback of U.S. standing at the global level is even more striking. With the nationalization of crucial parts of the financial system, the U.S. free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.

Ever since the end of the Cold War, successive U.S. administrations have lectured other countries on the necessity of sound finance. Indonesia, Thailand, Argentina and several African states endured severe cuts in spending and deep recessions as the price of aid from the International Monetary Fund, which enforced the U.S. orthodoxy. China, in particular, was hectored relentlessly on the weakness of its banking system. But China's success has been based on its consistent contempt for Western advice and it is not Chinese banks that are currently going bust. How symbolic that Chinese astronauts should take a spacewalk while the U.S. Treasury Secretary is on his knees.

Despite incessantly urging other countries to adopt its way of doing business, the United States has always had one economic policy for itself and another for the rest of the world. Throughout the years in which the United States was punishing countries that departed from fiscal prudence, it was borrowing on a colossal scale to finance tax cuts and fund its overstretched military commitments. Now, with federal finances critically dependent on continuing large inflows of foreign capital, it will be the countries that spurned the U.S. model of capitalism that will shape the United States' economic future.

Whichever version of the bailout of U.S. financial institutions cobbled together by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke is finally adopted is less important than what the bailout means for the U.S. position in the world. The populist rant about greedy banks that is being loudly ventilated in Congress is a distraction from the true causes of the crisis. The dire condition of U.S. financial markets is the result of U.S. banks operating in a free-for-all environment that these same legislators created. It is the U.S. political class that, by embracing the dangerously simplistic ideology of deregulation, has responsibility for the present mess.

In present circumstances, an unprecedented expansion of government is the only means of averting a market catastrophe. The consequence, however, will be that the United States will be even more starkly dependent on the world's new rising powers. The federal government is racking up even larger borrowings, which its creditors may rightly fear will never be repaid. It may well be tempted to inflate these debts away in a surge of inflation that would leave foreign investors with hefty losses. In these circumstances, will the governments of countries that buy large quantities of U.S. bonds - China, the Gulf States and Russia, for example - be ready to continue supporting the dollar's role as the world's reserve currency? Or will these countries see this as an opportunity to tilt the balance of economic power further in their favour? Either way, the control of events is no longer in U.S. hands.

The fate of empires is very often sealed by the interaction of war and debt. That was true of the British empire, whose finances deteriorated from the First World War onward, and of the Soviet Union. Defeat in Afghanistan and the economic burden of trying to respond to Ronald Reagan's technically flawed but politically extremely effective Star Wars program were vital factors in triggering the Soviet collapse. Despite its insistent exceptionalism, the United States is no different. The Iraq war and the credit bubble have fatally undermined U.S. economic primacy. The United States will continue to be the world's largest economy for a while longer, but it will be the new rising powers that, once the crisis is over, buy up what remains intact in the wreckage of the U.S. financial system.

There has been a good deal of talk in recent weeks about imminent economic Armageddon. In fact, this is far from being the end of capitalism. The frantic scrambling that is going on in Washington marks the passing of only one type of capitalism - the peculiar and highly unstable variety that has existed in the United States over the past 20 years. This experiment in financial laissez-faire has imploded. While the impact of the collapse will be felt everywhere, the market economies that resisted U.S.-style deregulation will best weather the storm. Britain, which has turned itself into a gigantic hedge fund, but of a kind that lacks the ability to profit from a downturn, is likely to be especially badly hit.

The irony of the post-Cold War period is that the fall of communism was followed by the rise of another utopian ideology. In the United States and Britain, and to a lesser extent other Western countries, a type of market fundamentalism became the guiding philosophy. The collapse of U.S. power that is under way is the predictable upshot. Like the Soviet collapse, it will have large geopolitical repercussions. An enfeebled economy cannot support the United States' overextended military commitments for much longer. Retrenchment is inevitable and it is unlikely to be gradual or well planned.

Meltdowns on the scale we are seeing are not slow-motion events. They are swift and chaotic, with rapidly spreading side effects. Consider Iraq. The success of the surge, which has been achieved by bribing the Sunnis while acquiescing in ongoing ethnic cleansing, has produced a condition of relative peace in parts of the country. How long will this last, given that the United States' current level of expenditure on the war can no longer be sustained?

A U.S. retreat from Iraq will leave Iran the regional victor. How will Saudi Arabia respond? Will military action to forestall Iran acquiring nuclear weapons be less or more likely? China's rulers have so far been silent during the unfolding crisis. Will U.S. weakness embolden them to assert China's power, or will China continue its cautious policy of "peaceful rise"? At present, none of these questions can be answered with any confidence. What is evident is that power is leaking from the United States at an accelerating rate. Georgia showed Russia redrawing the geopolitical map, with the United States an impotent spectator.

Outside the United States, most people have long accepted that the development of new economies that goes with globalization will undermine the country's central position in the world. They imagined that this would be a change in the United States' comparative standing, taking place incrementally over several decades or generations. Today, that looks an increasingly unrealistic assumption.

Having created the conditions that produced history's biggest bubble, U.S. political leaders appear unable to grasp the magnitude of the dangers the country now faces. Mired in their rancorous culture wars and squabbling among themselves, they seem oblivious to the fact that U.S. global leadership is fast ebbing away. A new world is coming into being almost unnoticed, where the United States is only one of several great powers, facing an uncertain future it can no longer shape.

John Gray is emeritus professor of European Thought at the London School of Economics and author of Black Mass: Apocalyptic Religion and the Death of Utopia.