America’s undefended flank

Jim Clemons put together a good post on an issue that has been in my mind but has never quite coalesced into a coherent post: America’s vulnerability on the economic front.

As Jim points out, a lot of folks have been concentrating on the notion that our quagmire in Iraq has unfortunately exposed the limits of our military power and has emboldened countries like North Korea and Iran.

There are some Americans, including myself, who see the Iraq War as already too costly in terms of casualties and financial costs but also in the damaging negative impact on the 'mystique of American power.' The Iraq escapade has shown the limits of American power, and that's not a good thing when most of the rest of the world is irritated with American behavior.But that’s not the half of it… the knock-out punch might be coming from a realm that is off the radar for a lot of people: the economy

In my view, we are about to be taught a lesson by a world that wants America to be tethered down. And the world is going to hit America where it has a serious blindspot at the moment -- on the economic front. We are on our way to becoming a much poorer, on relative terms, superpower with the Chinese, Japanese and Europeans using currency management and debt dependency to constrain our options.

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What is clear is that the Euro has become increasingly important in global transactions, and its vector is pointed up. The dollar's vector is pointed down. We need to take stock of what that means -- and what it may mean is that the bad behaviors America has been able to get away with for so long in terms of piling up debt and maintaining an irresponsibly high current account deficit may soon be impossible to maintain.

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America cannot afford what it is buying from the rest of the world -- it's as simple as
that. That is why the dollar is falling -- but with the Chinese yuan falling at a rate equal to the falling dollar, we can't but help keep buying from them, and the Chinese help financing our ability to buy their products. This can't continue -- and when it ends, the reality will be that Americans broadly will see their living standards fall.

It’s not a happy post… just like anyone who is on top, you can easily get enamored with your position and fall prey to your own hubris. Although I have always done well in school, I have always hated it when someone told me “Oh, you will do fine” when I am stressing out about a test or whatnot… just because it has always been that way is no guarantee in future situations. Our country is not doing a good job of recognizing that fact on neither the military nor the economic front.

The Democrats could take this issue and, similar to my thoughts on moral values, frame fiscal responsibility, etc. as a component of the War on Terror or Homeland Security, but I’m not holding my breath on that one… we’ll see.

Update: A timely post! Check out the Economist...