An empire in decline as the world turns upside down

Evidence is accumulating that we have reached a civilisational turning point. The aftermath of the global financial crisis is showing strong signs it was the inflection point where the decline of the West accelerated and the rise of the great, new, poor powers became nearer and more assured.  History is quickening.

When the crisis broke out in 2008, the world already had a two-speed economy - the rich countries of the West were out for a gentle stroll while the rising poor countries were at a sprint. But both parts of that trend have sharpened now the acute phase of the crisis has passed, and both look set to sharpen yet further in the years ahead.

In the current issue of Foreign Affairs, the Harvard historian Niall Ferguson points out a common element in the collapse of eight mighty empires. Those of Rome, imperial China, Bourbon France, Hapsburg Austria-Hungary, Ottoman Turkey, Romanov Russia, Britain and the Soviet Union, came to abrupt ends at least in part because of debt overload.

"All the above cases were marked by sharp imbalances between revenues and expenditures, as well as difficulties with financing public debt," he writes, before drawing the obvious conclusion for America.

"Alarm bells should therefore be ringing very loudly, indeed, as the US contemplates a deficit for 2009 of more than $1.4 trillion - about 11.2 per cent of GDP, the biggest deficit in 60 years - and another for 2010 that will not be much smaller. Public debt, meanwhile is set to more than double in the coming decade … interest payments on that debt are forecast to leap from 8 per cent of federal revenues to 17 per cent."

The Obama healthcare plan approved yesterday, by the way, is not expected to make this problem worse in the medium term. Despite hysterical scaremongering from opponents, the non-partisan Congressional Budget Office, says it will actually have a helpful effect on the long-run US deficit.

While it creates some costs, it contains others, like Medicare. The Congressional Budget Office estimates the net effect will be to cut the deficit by $138 billion in the first 10 years and by $1.2 trillion over the second 10 years.

But while this helps at the margin, it does not solve the central problem. The US is at a tipping point where, without vigorous reform, its government debt and interest payments will continue to snowball. The other main powers of the Western bloc - Europe and Japan - have the same problem, only in a more virulent form.

The deputy managing director of the International Monetary Fund, John Lipsky, gave a deeply troubling speech at the weekend about the "deep scars" in government balance sheets in the rich countries. "We project that gross general government debt in the advanced economies will rise from an average of about 75 per cent of GDP at end-2007 to about 110 per cent of GDP at end-2014," he said.

And that is based on the happy assumption the temporary, crisis-related stimulus measures are all withdrawn in the next few years. Lipsky went on: "Indeed, we expect that all G7 countries except Canada and Germany will have debt-to-GDP ratios close to or exceeding 100 per cent by 2014."

That means the other five members of the G7 biggest developed economies - the US, Japan, Britain, France and Italy - will have government debt loads as big as their countries' entire national economies.

"Already in 2010, the average debt-to-GDP ratio in advanced economies is projected to reach the level prevailing in 1950, in the aftermath of World War II."

They were able to overcome their 1950 debt burdens pretty successfully. Can't they do it again? Lipsky makes this point: "This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up."

The main powers of the West not only have huge and unsustainable debt burdens but their people have unrealistic expectations. The voters expect their living standards will only improve and their entitlements are secure.

There are ageing populations in the main powers of Europe and Japan, though not in the US.

This coming demographic tsunami is "not a transitory wave like the baby boom many affluent countries experienced in the 1950s or the baby bust they experienced in the 1930s," says the Centre for Strategic and International Studies in its 2008 report, The Greying of the Great Powers. "It is, instead, a fundamental shift with no parallel in the history of humanity."

The last time public debt burdens were this heavy, not a single country in the world had a median age higher than 36.

Today, half of western Europe has one over 40. This means bigger health and welfare costs with a smaller base of taxpaying workers to pay for them.

But still, this is only half the story, the future of the West. What about the rising powers, China and India and Brazil in particular, but also potentially Indonesia? As Lipsky reported: "The average debt ratio in emerging economies is expected to decline next year, after rising in 2009 and 2010."

In the absence of serious reform, the West is looking at a long twilight of sclerotic growth, falling living standards and relative decline in global weight and power.

The rising powers - paradoxically becoming great powers as they remain home to most of the world's poor - are on a trajectory of fast growth, rising living standards and a preponderance of global power. Sooner than we thought.