AFTER THE OBAMA HICCUP, THE 21ST CENTURY IS AMERICA’S

Anyone here old enough to remember the 1929 crash on Wall Street and the 1933 US exit from the Gold Standard under Franklin Roosevelt?  If so, you’ll recall the pervading sense that America had already peaked, its capitalist model overtaken by history.

In 1933, the Russian trade agency Amtorg in New York famously advertised for 6,000 skilled plumbers, chemists, electricians, and dentists, and suchlike, to work in the Soviet Union, then deemed the El Dorado of mankind, or the "moral top of the world where the light never really goes out" in the words of Edmund Wilson (America’s most famous literary critic at the time). It is said that 100,000 showed up at Amtorg’s Manhattan office.

The commentariat went into overdrive, more or less writing off the United States. The Yale Review, Harpers, and the Atlantic all ran pieces debating the risk of imminent revolution.

Just 12 years later the US accounted for half of all global economic output and was military master of the West, literally running Japan and Germany as administrative regions.

Those a little younger – like me – who remember the impeachment of Richard Nixon in 1974 and the last American citizens being lifted by helicopter from the roof of the US embassy in Saigon in 1975, will recall the ubiquitous claims that the US could never fully recover from what looked like a crushing defeat.

The Carter Malaise, the Sandinista Revolution in Nicaragua, the Soviet invasion of Afghanistan, Iran hostage humiliation all followed in quick succession, and seemed to seal the argument.

As we all know now, it was instead the nadir before the second yet greater episode of US global domination. By 1990 Ronald Reagan had seen the Soviet Union into the dustbin. America was well on its way to becoming the world’s undisputed hegemon in all fields at last.

Within another decade my old nemesis Bill Clinton, with the help of Silicon Valley and a Republican Congress, had restored American economic ascendancy as well, while Europe slipped further behind and Japan slipped out of the picture altogether.

Taken in the stride of 20th century history, the latest bleatings about America’s demise seem more than a little overdone. Is Washington really rendered unfit for world leadership by an acrimonious dispute over the debt ceiling, or the passions of the Tea Party?

Now, I certainly agree that the spectacle on Capitol Hill has been self-indulgent and that the polarization of US electoral districts into redoubts of tax revolt rebels on the one side and Scando-Leviathan tax-consuming welfare takers  on the other is a new feature on the American landscape, and a potential threat to the republic.

Nor do I see how anybody can conclude that this showdown is safely over, since we have to walk the gauntlet three more times for deadlines in January, February, and March. There is a risk that four more months of perma-conflict will cause the US economy to fall below stall speed, with very nasty knock-on implications for deflationary Europe.

However, let me say in defense of the GOP in Congress that the size and role of the US government are matters of great political weight. This epic battle in Washington is evidence of a vibrant democracy wrestling with issues that are not easily solved. The parties are bitterly divided because the people are bitterly divided. As before in US history, rifts are overcome peacefully or… otherwise.

The White House, on the other hand, committed an unforgivable error by threatening to default if the ceiling was not raised, and by rabbiting on about the risk of a second Lehman "or worse", and spraying the word "catastrophe" so promiscuously. Presidents should not threaten default. This was never the real issue anyway.

The danger from the debt ceiling impasse was – and remains – a violent fiscal shock from a sudden attempt to balance the books in order to avert default. Could this have slipped control and led to a selective default? Yes, perhaps, and this would have caused much excitement for the CDS market, but it is far cry from a genuine default by the US.

We can all agree that this is no way for an AAA country to run its affairs, but looking around the world I cannot see a single country of global importance that runs its affairs well.

(In case you cite Germany, let me say that Germany is being rather badly run, for reasons that will become clear within a decade, when the verdict is delivered on its failure to fashion a coherent energy policy, and on its handling of Europe North-South currency crisis, and indeed on its chronic inability to balance its external accounts, and its abysmal real wage growth for the last decade.)

Returning to those days of yesteryear when the Soviets or the Japanese will triumph, this time it is supposed to be China and the emerging powers – armed with $9 trillion of combined reserves – who will humble America, pulling the plug on the dollar and the US Treasury market, and ending the era of "exorbitant privilege."

As for China and the chorus of voices from BRICS-land venting indignation at the US over the debt, it is largely humbug.

Most of these countries accumulate reserves because they have been holding down their currencies to safeguard exports in a mercantilist abuse of the global trading system, and an abuse of America’s open market. Whenever I see a chronic structural current account surplus (unless it be commodity state like Norway), I always suspect villainy. They are gaming the system. But they are also storing up future troubles for themselves.

Yes, these nations, China in particular, can sell their US debt if they wish. But the side effect is that their currencies will soar, unless they can find some other liquid foreign asset in short order, and there are fewer candidates than you might think. They will suffer a deflationary trade shock. Large parts of their export base will go bust. They will have banking crises.

In any case, the evidence is that those shrieking loudest about the US debt are still buying US bonds at a fair clip. China purchased $70 billion of foreign bonds in September, and the data flow indicates that a lot were dollar instruments.

What is true is that these countries certainly have much to fear from US policies. When the Fed starts to tighten in earnest, it will drain the vast lake of dollar liquidity that has flooded asset markets in Asia and Latin America. At least some of the $4 trillion in foreign funds that has flowed into emerging markets since 2009 will flow back out, perhaps a lot faster than it went in.

The dollar will climb and climb, until the half the world screams with pain. The US 10-year bond rate – the global benchmark price of money – will climb and climb, and again the world will scream.

Besides, we will in due course find that China’s own debt problems offer just as juicy a narrative for the pessimists. New data from the IMF shows that China’s combined local and central budget deficit is 9.3% of GDP (stripping out land sales), among the worst in the world. China’s credit has soared by 75 percentage points of GDP in five years to 200%, a faster pace of growth than in major country in any blow-off boom since the Second World War.

China has both the fiscal and the credit pedal to the metal, yet the economy is still losing altitude anyway. Beijing can cut the RRR (reserve ratio requirement) many times if need be, so the game is not up yet. But here we do indeed have an interesting subject for the commentariat to sink its teeth into.

I am, in fact, a cautious China bull (unlike my utterly bearish long-term view of Russia, and skepticism about Brazil). Premier Li Keqiang is a first-rate mandarin. He knows what has to be done to stop China languishing in the middle-income trap where it is destined under current policies. He may succeed in taming the giant state behemoths and defeating the Maoist revivalists. Let us allow that he will achieve at least some of his objectives.

But China’s workforce contracted by three million last year and is now going into secular decline. The reserve army of cheap labor in the country peaked at 150 million in 2010. It will have dried up altogether by 2020.

The IMF says in its seminal paper – "Chronicle of a Decline Foretold: Has China Reached the Lewis Turning Point?" – that China will face a labor shortage of almost 140m workers by the early 2030s, the greatest jobs crunch ever seen.

We can overemphasize that demographics is destiny, yet it is the great salient fact of our times that the United States is the only major economic power with a fertility rate and age structure healthy enough to sustain its economic dynamism for the next two generations. 

The US and Chinese GDP growth rates are converging much faster than almost anybody expected five years ago. The likelihood is that the Chinese economy will not in fact overtake the US economy any time this century, even in absolute dollar terms. Once this current hiccup of Obama is over, the 21st century may prove to be the American Century, just like the last.

Ambrose Evans-Pritchard is the International Business Editor of the London Telegraph.