Net Assessment of the United States

This is a STRATFOR article posted on one of the forums I frequent. It's a very astute neo-realist assessment, far better than anything you'll hear through normal channels, although I think at times it tries to use realism beyond the limits of its usefulness. A good read, nevertheless.

Net Assessment: United States
Stratfor Today » December 31, 2007 | 2343 GMT

Brendan Smialowski

There are those who say that perception is reality. Geopolitics teaches the exact opposite: There is a fundamental reality to national power, and the passing passions of the public have only a transitory effect on things. In order to see the permanent things, it is important to tune out the noise and focus on the reality. That is always hard, but nowhere more so than in the United States, where the noise is incredibly loud, quite insistent, and profoundly contradictory and changeable. Long dissertations can and should be written on the dynamics of public opinion in the United States. For Stratfor, the root of these contradictions is in the dynamism of the United States. You can look at the United States and be awed by its dynamic power, and terrified by it at the same time.

All nations have complex psyches, but the American is particularly complex, contradictory and divisive. It is torn between two poles: dread and hubris. They alternate and compete and tear at each other. Neither dominates. They are both just there, tied to each other. The dread comes from a feeling of impending doom, the hubris from constantly overcoming it.

Hubris is built into American history. The American republic was founded to be an exemplary regime, one that should be emulated. This sense of exceptionality was buttressed by the doctrine of manifest destiny, the idea that the United States in due course would dominate the continent. Americans pushed inward to discover verdant horizons filled with riches one after another, indelibly impressing upon them that life was supposed to get better and that setbacks were somehow unnatural. It is hard not to be an economic superpower when you effectively have an entire continent to yourself, and it is especially hard not to be a global economic hegemon once you’ve tamed that continent and use it as a base from which to push out. But the greatest driver for American hubris was the extraordinary economic success of the United States, and in particular its extraordinary technological achievements. There is a sense that there is nothing that the United States cannot achieve — and no limits to American power.

But underlying this extraordinary self-confidence is a sense of dread. To understand the dread, we have to understand the 1930s. The 1920s were a time of apparent peace and prosperity: World War I was over, and the United States was secure and prosperous. The market crash of 1929, followed by the Great Depression, imprinted itself on the American psyche. There is a perpetual fear that underneath the apparent prosperity of our time, economic catastrophe lurks. It is a sense that well-being masks a deep economic sickness. Part of the American psyche is braced for disaster.

This dread also has roots in Pearl Harbor, and the belief that it and the war that followed for the United States was the result of complacency and inattentiveness. Some argued that the war was caused by America’s failure to join the League of Nations. Others claimed that the fault lay in the failure to act decisively to stop Hitler and Tojo before they accumulated too much power. In either case, the American psyche is filled with a dread of the world, that the smallest threat might blossom into world war, and that failure to act early and decisively will bring another catastrophe. At the same time, from Washington’s farewell address to failures in Vietnam or Iraq, there has been the fear that American entanglement with the world is not merely dangerous, but it is the path to catastrophe.

This fault line consistently polarizes American politics, dividing it between those who overestimate American power and those who underestimate it. In domestic politics, every boom brings claims that the United States has created a New Economy that has abolished the business cycle. Every shift in the business cycle brings out the faction that believes the collapse of the American economy is just over the horizon. Sometimes, the same people say both things within months of each other.

The purpose of a net assessment is not to measure such perceptions, but to try to benchmark military, economic and political reality, treating the United States as if it were a foreign country. We begin by “being stupid”: that is, by stating the obvious and building from it, rather than beginning with complex theories. In looking at the United States, two obvious facts come to light.

First, the United States controls all of the oceans in the world. No nation in human history has controlled the oceans so absolutely. That means the United States has the potential to control, if it wishes, the flow of goods through the world’s oceans — which is the majority of international trade. Since World War II, the United States has used this power selectively. In general, it has used its extraordinary naval superiority to guarantee free navigation, because international trade has been one of the foundations of American prosperity. But it has occasionally used its power as a tool to shape foreign affairs or to punish antagonistic powers. Control of the oceans also means that the United States can invade other countries, and that — unless Canada or Mexico became much more powerful than they are now — other countries cannot invade the United States.

Second, no economy in the world is as large as the American economy. In 2006, the gross domestic product (GDP) of the United States was about $13.2 trillion. That is 27.5 percent of all goods and services produced in the world for that year, and it is larger than the combined GDPs of the next four countries — Japan, Germany, China and the United Kingdom. In spite of de-industrialization, industrial production in the United States was $2.1 trillion, equal to Japan’s, China’s and Germany’s industrial production combined. You can argue with the numbers, and weight them any number of ways, but the fact is that the United States is economically huge, staggeringly so. Everything from trade deficits to subprime mortgage crises must be weighed against the sheer size of the American economy and the fact that it is and has been expanding.

If you begin by being stupid instead of sophisticated, you are immediately struck by the enormity of American military power, based particularly on its naval power and its economic power, which in turn is based on the size and relative balance of the economy. The United States is the 2,000-pound gorilla of the international system. That means blows that would demolish other nations are absorbed with relative ease by the United States, while at the same time drawing howls of anguish that would lead you to assume the United States is on the eve of destruction. That much military and economic power does not collapse very easily or quickly.

The United States has two simple strategic goals. The first is to protect itself physically from attack to ensure its economy continues to flourish. Attacks against the United States are unpleasant, but invasion by a foreign power is catastrophic. Therefore the second goal is to maintain control of the seas. So long as the oceans are controlled by the U.S. Navy — and barring nuclear attack — the physical protection of the United States is assured. Therefore the United States has two interests. The first is preventing other nations from challenging American naval hegemony. The second is preventing other nations from acquiring nuclear weapons, and intimidating those who already have them.

The best way to prevent a challenge by another fleet is to make certain the fleet is never built. The best way to do that is to prevent the rise of regional hegemons, particularly in Eurasia, that are secure enough to build navies. The American strategy in Eurasia is the same as Britain’s in Europe — maintain the balance of power so that no power or coalition of powers can rise up as a challenger. The United States, rhetoric aside, has no interest in Eurasia except for maintaining the balance of power — or failing that, creating chaos.

The United States intervenes periodically in Eurasia, and elsewhere. Its goals appear to be incoherent and its explanations make little sense, but its purpose is single-minded. The United States does not want to see any major, stable power emerge in Eurasia that could, in the long term, threaten American interests either by building a naval challenge or a nuclear one. As powers emerge, the United States follows a three-stage program. First, provide aid to weaker powers to contain and undermine emerging hegemons. Second, create more formal arrangements with these powers. Finally, if necessary, send relatively small numbers of U.S. troops to Eurasia to block major powers and destabilize regions.

The basic global situation can be described simply. The United States has overwhelming power. It is using that power to try to prevent the emergence of any competing powers. It is therefore constantly engaged in interventions on a political, economic and military level. The rest of the world is seeking to limit and control the United States. No nation can do it alone, and therefore there is a constant attempt to create coalitions to contain the United States. So far, these coalitions have tended to fail, because potential members can be leveraged out of the coalition by American threats or incentives. Nevertheless, between constant American intrusions and constant attempts to contain American power, the world appears to be disorderly and dangerous. It might well be dangerous, but it has far more logic and order than it might appear.

U.S. Foreign Policy
The latest American foreign policy actions began after 9/11. Al Qaeda posed two challenges to the United States. The first was the threat of follow-on attacks, potentially including limited nuclear attacks. The second and more strategic threat was al Qaeda’s overall goal, which was to recreate an Islamic caliphate. Put in an American context, al Qaeda wanted to create a transnational “Islamic” state that, by definition, would in the long run be able to threaten U.S. power. The American response was complex. Its immediate goal was the destruction of al Qaeda. Its longer-term goal was the disruption of the Islamic world. The two missions overlapped but were not identical. The first involved a direct assault against al Qaeda’s command-and-control facilities: the invasion of Afghanistan. The second was an intrusion into the Islamic world designed to disrupt it without interfering with the flow of oil from the region.

U.S. grand strategy has historically operated by splitting enemy coalitions and partnering with the weaker partner. Thus, in World War II, the United States sided with the Soviet Union against Nazi Germany after their alliance collapsed. During the Cold War, the United States sided with Communist China against the Soviet Union after the Sino-Soviet split. Following that basic strategy, the United States first sided with and then manipulated the Sunni-Shiite split. In all these cases the goal was to disrupt and prevent the formation of a coalition that could threaten the United States.

Looked at from 50,000 feet, that was the result of the invasion of Iraq. It set the Sunnis and Shia against each other. Whether this idea was subjectively in the minds of American planners at the time is not really relevant. That it played out the U.S. model in foreign policy is what matters. The invasion of Iraq resulted in chaos. About 3,000 American troops were killed, a small number compared to previous multiyear, multidivisional wars. Not only did the Islamic world fail to coalesce into a single entity, but its basic fault line, Sunnis versus Shia, erupted into a civil war in Iraq. That civil war disrupted the threats of coalition formation and of the emergence of regional hegemons. It did create chaos. That chaos provided a solution to American strategic problems, while U.S. intelligence dealt with the lesser issue of breaking up al Qaeda.

The U.S. interest in the Islamic world at the moment is to reduce military operations and use the existing internal tension among Muslims to achieve American military ends. The reason for reducing military operations is geopolitical, and it hinges on Russia.

The total number of U.S. casualties in Iraq is relatively small, but the level of effort, relative to available resources, has essentially consumed most of America’s ground capabilities. The United States has not substantially increased the size of its army since the invasion of Iraq. There were three reasons for this. First, the United States did not anticipate the level of resistance. Second, rhetoric aside, U.S. strategy was focused on disruption, not nation-building, and a larger force was not needed for that. Third, the global geopolitical situation did not appear to require U.S. forces elsewhere. Therefore, Washington chose not to pay the price for a larger force.

The geopolitical situation has changed. The U.S. absorption in the Islamic world has opened the door for a more assertive Russia, which is engaged in creating a regional sphere of influence in the former Soviet Union. Following the American grand strategy of preventing the emergence of Eurasian regional powers, the United States must now put itself in a position to disrupt and/or contain Russia. With U.S. forces tied down in the Islamic world, there are no reserves for this mission. The United States is therefore engaged in a process of attempting to reduce its presence in the Islamic world, while repositioning to deal with the Russians.

The process of disengagement is enormously complex. Having allied with the Shia (including Iran) to disrupt al Qaeda, the United States now has shifted its stance toward the Sunnis and against the Shia, and particularly Iran. The U.S. interest is to re-create the balance of power that was disrupted with the invasion of Iraq. To do this, the United States must simultaneously create a balance in Iraq and induce Iran not to disrupt it, but without making Iran too powerful. This is delicate surgery and it makes the United States appear inconsistent. The recent contretemps over the National Intelligence Estimate — and the resulting inevitable public uproar — is part of the process of the U.S. rebalancing its policy in the region.

The Iraqi situation is now less threatening than the situation to the east. In Afghanistan, the United States and NATO have about 50,000 troops facing a resurgent Taliban. No military solution is possible given the correlation of forces. Therefore a political solution is needed in which an accommodation is reached with the Taliban, or with parts of the Taliban. There are recent indications, including the expulsion of EU and U.N. diplomats from Afghanistan for negotiating with the Taliban, that this process is under way. For the United States, there is no problem with a Taliban government, or with Taliban participation in a coalition government, so long as al Qaeda is not provided sanctuary for training and planning. The United States is trying to shape the situation in Afghanistan so those parts of the Taliban that participate in government will have a vested interest in opposing al Qaeda.

Pakistan obviously plays a role in this, since Afghanistan is to some extent an extension of Pakistan. The United States has an interest in a stable Pakistan, but it can live with a chaotic Pakistan provided its nuclear weapons are safeguarded and the chaos is contained within Pakistan. Given the situation in Afghanistan, this cannot be guaranteed. Therefore, American strategy must be to support Pakistan’s military in stabilizing the country, while paying lip service to democratic reform.

The United States has achieved its two major goals in the Islamic world. First, al Qaeda has been sufficiently disrupted that it has not mounted a successful operation in the United States for six years. Second, any possibility of an integrated Islamic multinational state — always an unlikely scenario — has been made even more unlikely by disruptive and destabilizing American strategies. In the end, the United States did not need to create a stable nation in Iraq, it simply had to use Iraq to disrupt the Islamic world. The United States did not need to win, it needed the Islamic world to lose. When you look at the Islamic world six years after 9/11, it is sufficient to say that it is no closer to unity than it was then, at the cost of a fraction of the American lives that were spent in Vietnam or Korea.

Thus, the United States at the moment is transitioning its foreign policy from an obsessive focus on the Islamic world to a primary focus on Russia. The Russians, in turn, are engaged in two actions. First, they are doing what they can to keep the Americans locked into the Islamic world by encouraging Iran while carefully trying not to provoke the United States excessively. Second, they are trying to form coalitions with other major powers — Europe and China — to block the United States. The Russians are facing an uphill battle because no one wants to alienate a major economic power like the United States. But the longer the Americans remain focused on the Islamic world, the more opportunities there are. Therefore, for Washington, reducing U.S. involvement in the Islamic world will be acceptable so long as it leaves the Muslims divided and in relative balance. The goal is reduction, not exit — and pursuing this goal explains the complexities of U.S. foreign policy at this point, as well as the high level of noise in the public arena, where passions run high.

Behind the noise, however, is this fact: The global situation for the United States has not changed since before 9/11. America remains in control of the world’s oceans. The jihadist strategic threat has not solidified, although the possibility of terrorism cannot be discounted. The emerging Russian challenge is not trivial, but the Russians have a long way to go before they would pose a significant threat to American interests. Another potential threat, China, is contained by its own economic interests, while lesser powers are not of immediate significance. American global pre-eminence remains intact and the jihadist threat has been disrupted for now. This leaves residual threats to the United States, but no strategic threats.

Economics
Capitalism requires business cycles and business cycles require recessions. During the culmination of a business cycle, when interest rates are low and excess cash is looking for opportunities to invest, substantial inefficiencies creep into the economy. As these inefficiencies and irrationalities become more pronounced, the cost of money rises, liquidity problems occur and irrationalities are destroyed. This is a painful process, but one without which capitalism could not succeed. When recessions are systematically avoided by political means, as happened in Japan and the rest of East Asia, and as is happening in China now, inefficiencies and irrationalities tend to pyramid. The longer the business cycle is delayed, the more explosive the outcome.

Historically, the business cycle in the United States has tended to average about six years in length. The United States last had a recession in 2000, seven years ago — so, by historical standards, it is time for another recession. But the 2000 recession occurred eight years after the previous one, so the time between recessions might be expanding. Six years or nine years makes little difference. There will be recessions because they discipline the economy and we are entering a period in which a recession is possible. When or how a recession happens matters little, so long as the markets on occasion have discipline forced back upon them.

In the most recent case, the irrationality that entered the system had to do with subprime mortgages. Put differently, money lenders gave loans to people who could not pay them back, and sold those loans to third parties who were so attracted by the long-term return that they failed to consider whether they would ever realize that return. Large pools of money thrown off by a booming economy had to find investment vehicles, and so investors bought the loans. Some of the more optimistic among these investors not only bought the loans but also borrowed against them to buy more loans. This is the oldest story in the book.

The loans were backed by real assets: houses. This is the good news and the bad news. The good news is that, in the long run, the bad loans are mitigated by the sale of these homes. The bad news is that as these houses are sold, housing prices will go down as supply increases. Home prices frequently go down. During the mid-1990s, for example, California home prices dropped sharply. However, there is an odd folk belief that housing prices always rise and that declining prices are unnatural and devastating. They hurt, of course, but California survived the declines in the 1990s and so will the United States today.

In an economy that annually produces in excess of $13 trillion in wealth, neither the subprime crisis nor a decline in housing prices represents a substantial threat. Nevertheless, given the culture of dread that we have discussed, there is a sense that this is simply the beginning of a meltdown in the American economy. It is certainly devastating major financial institutions, although not nearly as badly as the tech crash of 2000 or the savings and loan crisis of the 1980s devastated their sectors. It is having some effect on the financial system, although not nearly as much as one might think, given the level of angst expressed. And it is having a limited effect on the economy.

A liquidity crisis means a shortage of money, in which demand outstrips supply and the cost of money rises. There are, of course, those who are frozen out of the market — the same people to whom money should not have been lent in the first place, plus some businesses on shaky ground. This is simply the financial system rebalancing itself. But neither the equity nor the money markets are behaving as if we are on the verge of a recession any time soon.

Indeed — and here sentiment does matter, at least in the short run — it would appear that a recession is unlikely in the immediate future. Normally, recessions occur when sentiment is irrationally optimistic (recall the New Economy craziness in the late 1990s). What we are seeing now is economic growth, stable interest rates and equity markets, and profound anxiety over the future of the financial system. That is not how an economy looks six months or a year before a depression. Those who believe that major economic disaster is just around the corner have acted on that belief and the markets have already discounted that belief. It would certainly be reasonable for there to be a recession shortly, but we do not see the signs for it.

To the contrary, we see a major stabilizing force, the inflow of money into the American economy from what we might call the dollar bloc. During the period of European imperialism, one of the characteristics was politically enforced currency blocs (sterling, franc, etc.) that tied colonial economies to the mother country. We are now seeing, at least temporarily, a variation on that theme with a dollar bloc, which goes beyond the dollar’s role as a reserve currency.

For a decade, China has been running massive trade surpluses with the United States. Much of that surplus remained as cash reserves because the Chinese economy was unable to absorb it. Partly in order to stabilize currencies and partly to control their own economy, the Chinese have pegged their currency against the dollar, varying the theme a bit lately but staying well within that paradigm. The linking of the Chinese economy to the American led to the linking of the two currencies. It also created a pool of excess money that was most conservatively invested in the United States.

With the run up in the price of oil, another pool of surplus money that cannot be absorbed in native economies has emerged among the oil producers of the Arabian Peninsula. This reserve also is linked to the dollar, since oil prices are dollar-denominated. Given long-term oil contracts and the structure of markets, shifting away from the dollar would be complex and time consuming. It will not happen — particularly because the Arabs, already having lost on the dollar’s decline, might get hit twice if it rises. They are protected by remaining in the dollar bloc.

Those two massive pools of money, tightly linked to the dollar in a number of ways, are stabilizing the American financial system — and American financial institutions — by taking advantage of the weakness to buy assets. Historically (that is, before World War I), the United States was a creditor nation and a net importer of capital. That did not represent weakness. Rather, it represented the global market’s sense that the United States presented major economic opportunities. The structure of the dollar bloc would indicate a partial and probably temporary return to this model.

One must always remember the U.S. GDP — $13.2 trillion — in measuring any number. Both the annual debt and the total national debt must be viewed against this number, as well as the more troubling trade deficit. The $13.2 trillion can absorb damage and imbalances that smaller economies could not handle. We would expect a recession in the next couple of years simply based on the time since the last period of negative growth, but we tend to think that it is not quite here yet. But, even if it were, it would simply be a normal part of the business cycle, of no significant concern.

Net Assessment
The operative term for the United States is “huge.” The size of its economy and the control of the world’s oceans are the two pillars of American power, and they are intimately connected. So long as the United States has more than 25 percent of the world’s GDP and dominates the oceans, what the world thinks of it, or what it thinks of itself, is of little consequence. Power is power and those two simple, obvious facts trump all sophisticated theorizing.

Nothing that has happened in the Middle East, or in Vietnam a generation ago or in Korea a generation before that, can change the objective foundations of American power. Indeed, on close examination, what appears to be irrational behavior by the United States makes a great deal of sense in this context. A nation this powerful can take extreme risks, suffer substantial failures, engage in irrational activity and get away with it. But, in fact, regardless of perception, American risks are calculated, the failures are more apparent than real and the irrational activity is more rational than it might appear. Presidents and pundits might not fully understand what they are doing or thinking, but in a nation of more than 300 million people, policy is shaped by impersonal forces more than by leaders or public opinion. Explaining how that works is for another time.

The magnitude of American power can only be seen by stepping back. Then the weaknesses are placed into context and diminish in significance. A net assessment is designed to do that. It is designed to consider the United States “on the whole.” And in considering the United States on the whole, we are struck by two facts: massive power and cultural bipolar disorder. But the essence of geopolitics is that culture follows power; as the United States matures, its cultural bipolarity will subside.

Some will say that this net assessment is an America-centric, chauvinistic evaluation of the United States, making it appear more powerful, more important and more clever than it is. But in our view, this is not an America-centric analysis. Rather, it is the recognition that the world itself is now, and has been since 1992, America-centric. The United States is, in fact, more powerful than it appears, more important to the international system than many appreciate and, if not clever, certainly not as stupid as some would think. It is not as powerful as some fantasize. Iraq has proved that. It is not nearly as weak as some would believe. Iraq has proved that as well.

The United States is a powerful, complex and in many ways tortured society. But it is the only global power — and, as such, it is the nation all others must reckon with.