Gone Tomorrow?

Can a global empire like the U.S. fall overnight? According to Harvard historian Niall Ferguson, it's possible.

The challenges that face the United States are often represented as slow-burning. It is the steady march of demographics -- which is driving up the ratio of retirees to workers -- not bad policy that condemns the public finances of the United States to sink deeper into the red. It is the inexorable growth of China's economy, not American stagnation, that will make the gross domestic product of the People's Republic larger than that of the United States by 2027. . . .

But what if history is not cyclical and slow-moving but arrhythmic -- at times almost stationary but also capable of accelerating suddenly, like a sports car? What if collapse does not arrive over a number of centuries but comes suddenly, like a thief in the night?

Great powers are complex systems, made up of a very large number of interacting components that are asymmetrically organized . . . . All these complex systems share certain characteristics. A small input to such a system can produce huge, often unanticipated changes . . . .

There is no such thing as a typical or average forest fire, for example. To use the jargon of modern physics, a forest before a fire is in a state of "self-organized criticality": It is teetering on the verge of a breakdown, but the size of the breakdown is unknown. Will there be a small fire or a huge one? It is nearly impossible to predict. The key point is that in such systems, a relatively minor shock can cause a disproportionate disruption. . . .

The most recent and familiar example of precipitous decline is the collapse of the Soviet Union. . . . If ever an empire fell off a cliff, rather than gently declining, it was the one founded by Lenin. . . .

Over the last three years, the complex system of the global economy flipped from boom to bust -- all because a bunch of Americans started to default on their subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions. The next phase of the current crisis may begin when the public begins to reassess the credibility of the radical monetary and fiscal steps that were taken in response.

Neither interest rates at zero nor fiscal stimulus can achieve a sustainable recovery if people in the United States and abroad collectively decide, overnight, that such measures will ultimately lead to much higher inflation rates or outright default. Bond yields can shoot up if expectations change about future government solvency, intensifying an already bad fiscal crisis by driving up the cost of interest payments on new debt. Just ask Greece.