America must learn to govern itself

With rare exceptions, politics has become a discredited profession in the West. Next week prevails over next year, with no-one seeking to secure the long-term future. Now the West is paying the price.

US president Barack Obama’s instincts may be an exception here, but he is fighting powerful hidebound forces in America.

America’s friends around the world watched with dismay the recent brawl in over raising the federal government’s debt ceiling, and Congress’s inability to come to anything like a balanced and forward-looking compromise. On the contrary, the outcome represents a victory for the Tea Party’s minions, whose purpose seems to be to reduce government obligations and expenditures to a bare minimum and maintain president George W Bush’s tax breaks for the wealthy.

America’s current fiscal problems are rooted in a long period of unfunded spending. Mr Bush’s wars in Afghanistan and Iraq, and the manner in which he conducted the “War on Terror” made matters worse.

It has become increasingly clear that good government might be impossible in the US. In these circumstances, it is not surprising that financial markets have returned to extreme volatility.

The expenditure cuts mandated by the outcome of the debt-ceiling debate will reduce economic activity, thereby undermining growth and making debt reduction even more difficult.

Providing further fiscal stimulus to boost economic growth would carry its own risks: America is already overly indebted, and there are signs that major holders of US government securities are finally tired of being repaid in depreciated currency.

Most importantly, China’s call for the introduction of a new reserve currency stems from its frustration with the failure of major governments to govern their economic affairs with realism and good sense.

America’s leadership in world affairs began to weaken with the unilateralism of Bush, and today’s economic problems are reinforcing this. To reverse America’s decline, Mr Obama needs bipartisan support for his policies, but so far Congress has shown no stomach for a principled approach to its legislative duties.

If Germany’s half-hearted efforts to stabilise Europe turn out to be successful, America’s position will be further eroded, and central banks around the world will begin to regard the euro once again as a reliable alternative to the dollar as a reserve currency.

These realities represent a power shift of a kind that we have not experienced in our lifetimes. China’s economic power over the US is now substantial, and will limit not only America’s influence in the financial markets, but also its capacity to use military power.

If this forces America back towards what international relations scholar Joseph Nye calls “soft power and multilateral diplomacy” it may well be a good thing. But such approaches are anathema to the Republican Party, and might unnerve the many Asians who are nervous at China’s growing military might.

The counter-argument – that any sell-off or failure by China to continue to buy US government securities would hurt China as much as America – is not valid. As each year passes, China’s markets expand worldwide, and its domestic market comes to represent a greater percentage of its own GDP. As a result, China will not need a strong dollar in the long term. Americans need to get their economic house in order before China loses its incentive to support the dollar.

l Malcolm Fraser is a former prime minister of Australia