I wonder, when World Bank chief Paul Wolfowitz visited Moscow last week, if he reflected on the turnaround in the US and Russia’s relative position in the last few years.

In 1998, for example, Russia was desperately dependent on US, IMF and World Bank money. The government had a debt to GDP ratio of around 75%. The US government, meanwhile, had a rare budget surplus, a booming economy, and an unrivalled geo-political position as global banker and global policeman.

This year, helped by huge oil revenues, Russia’s government became a net creditor, was made investment grade by all major rating agencies, and has built up a government surplus of around $10 billion.

The US’s fiscal situation, meanwhile, has deteriorated almost as quickly as Russia’s has improved. George Bush junior has increased defence spending by around 80% since 2000, mainly because of the War on Terror and the costly campaign in Iraq, orchestrated in part by Mr Wolfowitz in his previous incarnation as neo-conservative deputy defense secretary.

Meanwhile, following the advice of supply side economists, Bush has cut spending in a bid to encourage private consumption. It has worked – American consumers are spending like never before. The US consumer savings rate has fallen to -1%, which is the lowest it’s been since 1933. Americans are not putting any money in the bank, they are borrowing money on credit cards and particularly through mortgages, and spending the money at Wal-Mart and other malls, on imported goods often made in Asia.

This has led to the US’ current account deficit reaching a record 5.7% this year. Usually, the Federal Reserve would have to support that by raising interest rates, to attract foreign capital into US treasury bonds. However, the central banks in countries such as China, South Korea, Saudi Arabia and Russia are artificially supporting the US consumer boom by buying and holding huge amounts of US treasury bills even at low interest rates.

Why are they doing this? The reasons are various. Oil countries like Saudi Arabia and Russia have billions of petro-dollars which they need to put somewhere. They are choosing to save it at the moment rather than spend it, in part perhaps because of the memory of 1998 and a wariness as to future global economic growth. By building up large US treasury bond reserves, they are helping keep US interest rates low.

Asian countries, meanwhile, are doing best out of the US consumer boom. By putting their cash into US treasury bonds, Asian governments are keeping their currencies low, which is supporting their exports to the US consumer; and they’re keeping US rates low, which is keeping the highly-indebted US consumer happy. In effect, Asian countries are feeding the US consumer’s addiction to their own consumer products.

As a new Federal Reserve chairman, Ben Bernanke, prepares to take over from Alan Greenspan, a rising number of economists are worried that this state of global affairs is dangerous. Chief among them is Stephen Roach, chief economist at Morgan Stanley. Roach has been making increasingly alarmed noises about the imbalances in the global economy. He thinks the current expansion of the US’ global military role is in danger of being undercut by its bad book-keeping at home. In an article in the most recent edition of Foreign Policy magazine, he writes: “If we’re [the US] going to broaden our reach as a nation…and cut taxes, which is what these supply-siders want to do, we’re asking for a fiscal train wreck.”

Roach has repeatedly criticized Greenspan for encouraging the US consumer in its profligacy. He says that Bernanke will have to put up interest rates, to try and encourage US investors to save more. The US dollar will likely have to depreciate by say 20-40%, and other currencies – the Euro, the Yen, the Remnibi – will have to rise.

What Roach is talking about is the emergence of a truly multi-polar global economy, in which the dollar isn’t the sole currency of choice for the world’s central banks, and in which the American consumer isn’t the sole engine of global economic growth. Roach has for some time been looking for the emergence of a thriving eurozone and Asia-zone as alternate poles of growth, to take some of the pressure off the US.

People have been talking about the emergence of a multi-polar economy for 20 years. Paul Kennedy, in his classic work of history written in 1987, The Rise and Fall of the Great Powers, predicted it would already have occurred by 2005. He wrote: “by 1980, the World Bank’s figures of population, GNP per capita, and GNP itself, were very much pointing to a multi-polar distribution of the global economic balances.” He thought the poles would be the US, the EU (then the EEC), Japan, China and the USSR.

What happened, that instead a uni-polar global economy arose? Obviously, the USSR collapsed, and Russia’s economy fell behind Portugal’s in terms of GDP, in an unbelievably steep descent from Great Power status. At the same time, new poles of economic growth did not emerge as strongly as expected.

Japan in the 1990s slid into a decade of stagnation. The European power-houses of France and Germany have also foundered, through inflexible labour markets and bankruptcy-ridden banking systems. China has grown fast, but not fast enough to take the burden of global growth from the US. America stands alone, “the weary Titan [staggering] under the too vast weight of its fate”, as Joseph Chamberlain described Great Britain in the early twentieth century.

Asia and the EU could emerge as alternate poles of economic growth – but the level of personal savings in these zones is unusually high, just as the level of savings in the US is unusually low.

You might think the US government is keen to protect its position as sole economic superpower, but none of it. Government officials, like US treasury secretary John Snow, are only too aware that the present state of affairs puts too much pressure on the US consumer. They are trying to get the EU and Asian countries to allow their currencies to appreciate.

US consumers are also increasingly anxious about their over-leveraged positions, and anti-Chinese sentiment is on the rise – as if it’s purely China’s fault that the US consumer has put himself in so much debt.

And you might also think that other rising powers – the EU, China, Russia – should celebrate over this apparent decline in US economic power and the rise of a multi-polar economic system. But it’s all a question of how the decline occurs. If it happens too quickly, if the US has to raise interest rates too steeply, that could cause major problems for emerging markets like Russia and China. For China, its main customer would suddenly stop buying. Russia would be hit too. As Roach says, low US rates have caused a bubble in emerging market debt and equity. If the bubble burst, you would see Russian debt and equity diving, as it has in the last few weeks. The Russian government would be protected, but some banks and other private sector firms could well go under.

More generally, the world economy would slide into a several-year recession, until other economic poles emerged to start re-generating growth.

Roach, it should be said, is perhaps more pessimistic than most about how things are likely to turn out – he predicts a hard landing for the US economy, which means a hard landing for the rest of us too. But others think the Federal Reserve has the situation in hand, and they point to encouraging signs like the pick-up of the stock market in Japan, and the election of a more free market government in Germany, as omens of the re-emergence of other economic poles of growth.

There’s a broader point here, which is that just as the US is artificially – and unfairly – being left with all responsibility for global economic growth, so it is being unfairly left with all responsibility for global security too, which is partly why its economy is over-strained by defence spending. Whenever a new security issue emerges – Syria’s assassination of Lebanese politicians, Iran’s attempts to acquire nuclear weapons – the US is the only military superpower capable of seriously threatening force if the guilty country doesn’t comply with the wishes of the ‘international community’. The EU, meanwhile, threatens economic sanctions because it doesn’t have anything else to threaten with. So the US is always the bad cop to the EU’s good cop.

This is unfair. Just as a multi-polar global economy is evolving, so a multi-polar security network should emerge. The EU should no longer simply assume the military protection of the US, while at the same time carping about American ‘bullying’. It should build up its own military capabilities, and assume greater responsibility for its own and the world’s security. The EU needs to grow up.

Julian Evans is a British freelance journalist based in Moscow. The article is written specially for "Eurasian Home".

October 26, 2005