Like other observers, Niall Ferguson says maybe:
Could this be one of those great turning points in history, when the balance of power tilts decisively away from an established power and towards a rising challenger? It is possible. Financial crises often accelerate the gradual shifting of the geopolitical tectonic plates; they are to history what earthquakes are to geology.
It was inflation that undermined the foundations of Habsburg power and opened the way for the Dutch Republic. It was the disastrous Mississippi Bubble of 1718-19 that fatally weakened ancien régime France, while Britain survived the contemporaneous South Sea Bubble with its fiscal system intact. For most of the nineteenth century, financial crises in the United States had only marginal effects on the City of London. By 1907, however, a Wall Street crash could send a shockwave across the entire British Empire, a harbinger of a new era of American power.
Something similar may be happening as a consequence of the American financial crisis that began nearly two years ago. The flapping of a butterfly's wings may trigger a hurricane in the Home Counties; in much the same way, a crisis in the market for subprime mortgages could signal the waning of US hegemony and the advent of a Chinese century.
Ferguson is late to the party. Paul Kennedy wrote about this in 1988 (Rise & Fall of Great Powers). He argues military overstretch reduces growth.
ReplyDeleteAnd I think Ferguson is offbase with the claim inflation caused the collapse of the Habsburg empire. Inflation is always a symptom of a deeper political dysfunction.
ECB:
ReplyDeleteI have had that book for some years now and never got around to reading it. Maybe I should!
Great point about inflation being a symptom. In Ferguson's latest book The Ascent of Money, he makes some rather bold claims along the sames lines about finance and money being the key factors driving history. What is interesting is that in his earlier book The Cash Nexus he takes a more nuanced view, arguing economics/finance is not the sole driver of change.
Excellent points in these comments that the statistics economists like to dwell on--such as inflation, the money supply, and the current banking crisis--are primarily just symptoms "of a deeper political dysfunction."
ReplyDeleteAmerica prospered for centuries and grew to be #1 in spite of periodic panics, depressions, and financial crises. The turning point may well have been when governmental policy began to reward bad behavior, when populist politicians promised a free ride, and when corrupt bureaucrats encouraged their agencies to subsidize bad loans.
The Fall of Free Republics has always been more determined by national character, morality and governmental restraint, than by the intricacies of economic indicators.