No matter what the cause of the eye-popping US deficit - tax cuts, recession, the war on Iraq, the inability of the US voter to be responsible - the long-term effect is clear. Getting access to funds will become more expensive. That is a problem for all countries in a globalised capital market, but it has critical implications for the United States. Underwriting the cost of the US empire will be increasingly difficult, perhaps impossible.
Imperial overstretch has been a hard sell since Paul Kennedy's The Rise and Fall of the Great Powers made its debut in 1987. Kennedy's theory of inevitable decline gained some traction amid the national angst of the late Reagan years, but it has been pretty much forgotten.
The US government deficit has refocused attention on the parlous state of America's finances. The possibility that the government will be more than US$2.4 trillion in debt in a decade is too
jaw-dropping a figure to ignore. Incredibly, economists warn that if you add in pensions, social security and other 'hidden' obligations, the net present value of unfunded liabilities over the next 75 years is more than US$50 trillion.
A good chunk of that debt is funded by non-US investors. Stephen Roach, of Morgan Stanley, has estimated that foreign investors hold 45 per cent of the outstanding volume of US Treasury debt, 35 per cent of US corporate debt and 12 per cent of US equities. By one estimate, central banks of East Asia hold about US$1.6 trillion in reserves and they put virtually all of that in US government securities. This has led some to speculate darkly about those governments holding America 'hostage'; they would threaten to dump the securities to punish Washington for decisions they do not like.
Don't count on it. Selling securities would trigger huge losses for them. In particular, it would cause the dollar to plunge in value and wreck havoc on currency markets. The rise in the selling countries' currencies would severely damage their exports.
But dismissing the paranoid scenarios does not mean the US position is sustainable. It is unlikely to get those funds because the global economy is changing and creating new investment opportunities. And rising interest rates spell real trouble for an empire that is already knee-deep in debt. Today, the US is the beneficiary of global investment because the currency is considered stable and the returns promising. The massive debt erodes thoughts about future stability - and