The View

Donald Trump’s next challenge is rebuilding a superpower in decline

America’s new president comes to the White House amid civil division, faltering hope among the middle class and a dollar standard that has peaked

PUBLISHED : Thursday, 10 November, 2016, 11:47pm
UPDATED : Friday, 11 November, 2016, 12:34am

“It’s morning in America!” The special episode of Donald Trump’s The Apprentice climaxed as the ultimate reality show in television history. The ratings were fantastic. He was elected President. Now for the real reality show.

Tell tale signs show an economy and nation facing irreversible decline. We’ve heard these statistics before: 13 million more Americans surviving on food stamps; 8 million more in poverty; lowest labour participation rate since the 1970s; and 95 million outside of the labour force. Despite the nation’s lowest unemployment rate in eight years, the number of Americans on food stamps hovers at a record high.

Today, consumers sustain their lifestyle by the prospect of borrowing more money to be able to pay back what they borrowed in the past

The American people have voted and said this is immoral. It has to stop. So there will be a healthy level of fear and uncertainty for America and the world as it rebuilds itself. But “making America great again” really means managing permanently diminished socio-economic expectations and declining superpower status.

America’s stubbornly high level of private and consumer debt is borne by millions in jobs that barely pay subsistence wages with few or no benefits; consumer spending can only fall. And this is perilous for an economy where spending accounts for 70 per cent of GDP.

The reality of the US economy is that its performance has been abysmal for years. According to the Federal Reserve figures, consumer debt in America has gone up more than 50 per cent since 2008, ex-mortgages. So the American people have survived on consumer debt. Today, consumers sustain their lifestyle by the prospect of borrowing more money to be able to pay back what they borrowed in the past.

If and when interest rates start to rise all that debt will get much more expensive to service and living standards will fall. Donald Trump wants to renegotiate international trade deals and bring back jobs to America. But so much manufacturing infrastructure has been dismantled over the decades that it is uncertain if it can be rebuilt. Moreover, America cannot produce many items as cheaply as many other countries.

According to the US Debt Clock, the current national debt is US$19.81 trillion. Every 0.5 per cent increase in the interest rate on government bonds requires the Federal Reserve to pay an additional US$100 billion dollar per year in interest expenses. This is a critical issue for Trump as higher interest rates will push the country to the brink of insolvency. The US is no longer the economic superpower it used to be or hopes it can be.

Despite a debased US dollar, there appear to be few alternatives to the deep market offered by US dollar financial products. China is supportive of the US dollar because it holds about US$2 trillion in US dollar denominated assets. But China doesn’t trust US policy because throughout history, the US has inflated its way out of debt.

The balance of geopolitical and financial power has been shifting and not in Washington’s favour. China’s new silk road, Asian Infrastructure Investment Bank, China’s outpost in the South China Sea are starting to push the US out of the world’s balance of power.

American strategic pivots have failed. Bilateral discussions and negotiations have stalled. Sanctions have backfired. International trade has slowed. The influence of the dollar system has peaked and started to erode. The dollar dominated financial system is under threat. It represents the beginning of end of the debt super cycle and the petrodollar. This decline needs to be managed carefully by the US government to avoid military conflict and international monetary collapse.

President-elect Trump’s domestic challenges include smoothing social divisions after a bitter campaign. Photo: AFP

China must consider the possibility of a breakdown in the US and international monetary system. Any global reform might use the International Monetary Fund’s Special Drawing Right as a global reserve currency, which is the political motivation for China’s entry into the basket. Thus, a reincarnation of Bretton Woods would give China a key negotiation position in the world’s new economic order.

President Trump must also decide how to relate to Russia. Vestiges of obsolete Cold War containment theories still afflicts US policy making as it manoeuvres for position in Syria. Rival Shiia (Russia backed, Iran through Iraq) and Sunni (US backed, Saudi, Qatar) gas pipelines into Europe are central issues in the invasion and defence of Syria.

But the pipeline war theory only represents part of the underlying problem facing US policy in the Middle East. Its determined military posture in the region is a source of potential conflict. Overthrowing or controlling Syria has long been a goal of the US to allow the Saudis a means of cheaply transporting their oil through Syria and into Europe. President Trump will need to forge mutually beneficial, realpolitik relationships out of this landscape so he can focus on his domestic agenda.

Peter Guy is a financial writer and former international banker