[Infowarrior] - America, the fragile empire

[Richard Forno]

America, the fragile empire

Here today, gone tomorrow -- could the United States fall that fast?
By Niall Ferguson
February 28, 2010

http://www.latimes.com/news/opinion/la-oe-ferguson28-2010feb28,0,2697391.story

For centuries, historians, political theorists, anthropologists and  
the public have tended to think about the political process in  
seasonal, cyclical terms. From Polybius to Paul Kennedy, from ancient  
Rome to imperial Britain, we discern a rhythm to history. Great  
powers, like great men, are born, rise, reign and then gradually wane.  
No matter whether civilizations decline culturally, economically or  
ecologically, their downfalls are protracted.

In the same way, 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.

As for climate change, the day of reckoning could be as much as a  
century away. These threats seem very remote compared with the time  
frame for the deployment of U.S. soldiers to Afghanistan, in which the  
unit of account is months, not years, much less decades.

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, which means  
their construction more resembles a termite hill than an Egyptian  
pyramid. They operate somewhere between order and disorder. Such  
systems can appear to operate quite stably for some time; they seem to  
be in equilibrium but are, in fact, constantly adapting. But there  
comes a moment when complex systems "go critical." A very small  
trigger can set off a "phase transition" from a benign equilibrium to  
a crisis -- a single grain of sand causes a whole pile to collapse.

Not long after such crises happen, historians arrive on the scene.  
They are the scholars who specialize in the study of "fat tail" events  
-- the low-frequency, high-impact historical moments, the ones that  
are by definition outside the norm and that therefore inhabit the  
"tails" of probability distributions -- such as wars, revolutions,  
financial crashes and imperial collapses. But historians often  
misunderstand complexity in decoding these events. They are trained to  
explain calamity in terms of long-term causes, often dating back  
decades. This is what Nassim Taleb rightly condemned in "The Black  
Swan" as "the narrative fallacy."

In reality, most of the fat-tail phenomena that historians study are  
not the climaxes of prolonged and deterministic story lines; instead,  
they represent perturbations, and sometimes the complete breakdowns,  
of complex systems.

To understand complexity, it is helpful to examine how natural  
scientists use the concept. Think of the spontaneous organization of  
termites, which allows them to construct complex hills and nests, or  
the fractal geometry of water molecules as they form intricate  
snowflakes. Human intelligence itself is a complex system, a product  
of the interaction of billions of neurons in the central nervous system.

All these complex systems share certain characteristics. A small input  
to such a system can produce huge, often unanticipated changes -- what  
scientists call "the amplifier effect." Causal relationships are often  
nonlinear, which means that traditional methods of generalizing  
through observation are of little use. Thus, when things go wrong in a  
complex system, the scale of disruption is nearly impossible to  
anticipate.

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.

Any large-scale political unit is a complex system. Most great empires  
have a nominal central authority -- either a hereditary emperor or an  
elected president -- but in practice the power of any individual ruler  
is a function of the network of economic, social and political  
relations over which he or she presides. As such, empires exhibit many  
of the characteristics of other complex adaptive systems -- including  
the tendency to move from stability to instability quite suddenly.

The most recent and familiar example of precipitous decline is the  
collapse of the Soviet Union. With the benefit of hindsight,  
historians have traced all kinds of rot within the Soviet system back  
to the Brezhnev era and beyond. Perhaps, as the historian and  
political scientist Stephen Kotkin has argued, it was only the high  
oil prices of the 1970s that "averted Armageddon." But this did not  
seem to be the case at the time. The Soviet nuclear arsenal was larger  
than the U.S. stockpile. And governments in what was then called the  
Third World, from Vietnam to Nicaragua, had been tilting in the  
Soviets' favor for most of the previous 20 years.

Yet, less than five years after Mikhail Gorbachev took power, the  
Soviet imperium in central and Eastern Europe had fallen apart,  
followed by the Soviet Union itself in 1991. If ever an empire fell  
off a cliff, rather than gently declining, it was the one founded by  
Lenin.

If empires are complex systems that sooner or later succumb to sudden  
and catastrophic malfunctions, what are the implications for the  
United States today? First, debating the stages of decline may be a  
waste of time -- it is a precipitous and unexpected fall that should  
most concern policymakers and citizens. Second, most imperial falls  
are associated with fiscal crises. Alarm bells should therefore be  
ringing very loudly indeed as the United States contemplates a deficit  
for 2010 of more than $1.5 trillion -- about 11% of GDP, the biggest  
since World War II.

These numbers are bad, but in the realm of political entities, the  
role of perception is just as crucial. In imperial crises, it is not  
the material underpinnings of power that really matter but  
expectations about future power. The fiscal numbers cited above cannot  
erode U.S. strength on their own, but they can work to weaken a long- 
assumed faith in the United States' ability to weather any crisis.

One day, a seemingly random piece of bad news -- perhaps a negative  
report by a rating agency -- will make the headlines during an  
otherwise quiet news cycle. Suddenly, it will be not just a few policy  
wonks who worry about the sustainability of U.S. fiscal policy but the  
public at large, not to mention investors abroad. It is this shift  
that is crucial: A complex adaptive system is in big trouble when its  
component parts lose faith in its viability.

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.

Ask Russia too. Fighting a losing battle in the mountains of the Hindu  
Kush has long been a harbinger of imperial fall. What happened 20  
years ago is a reminder that empires do not in fact appear, rise,  
reign, decline and fall according to some recurrent and predictable  
life cycle. It is historians who retrospectively portray the process  
of imperial dissolution as slow-acting. Rather, empires behave like  
all complex adaptive systems. They function in apparent equilibrium  
for some unknowable period. And then, quite abruptly, they collapse.

Washington, you have been warned.

Niall Ferguson is a professor at Harvard University and Harvard  
Business School, and a fellow of Jesus College, Oxford. His latest  
book is "The Ascent of Money: A Financial History of the World." A  
longer version of this essay appears in the March/April issue of  
Foreign Affairs. foreign.affairs.com

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