An important book -- as the US is taking Russia and China on, it should correctly evaluate its own economic foundations and see if its have enough resources and wherewithal for this fierce geopolitical fight. Prof. Oatley has many interesting insights. But after reading, I am not convinced – he argues that there is a link between economic crisis and military buildup in America (he has a lot of graphs), but he failed to give convincing theoretical explanation. Though he provided some statistics, which look plausible, if I learned one thing, this is: there is nothing more misleading than statistics. He chose to focus on the government debt, not private debt; and budget deficit, not trade deficit. To me this is wrong. Both, the trade deficit and high private debt are more dangerous for the US and more likely to cause crisis.
In my view, the military build-up is not a problem, but the total debt is. If anything military build up could be useful -- it causes an increase in total demand, at a time when household income stagnates. Persistent current account (trade) deficit has become a rather big problem, especially in conjunction with budget deficit. The status of US dollar allowed this twin deficit to occur. The US has to increase spending on capital account, selling out assets and the know-how, causing hollowing out of the economy and de-industrialization.
In 2011 historian H.W. Brands in “Greenback Planet” wrote: "The strength of the American economy has made the dollar's hegemony possible, but the dollar's hegemony had preserved and extended the economy's strength". I’d say that even America's geopolitical preeminence hinges on the dollar's role as reserve currency. So far so good. But the status of reserve currency is a curse: every nation except the U.S. has to earn a strong currency through a positive balance of trade and sound fiscal and monetary policy. For any country even a whiff of inflation in the floating exchange system sends the currency tumbling, as the foreign investors flee. The U.S. dollar, however, is unique: demand for dollars is not connected to the U.S. economy or its monetary policy. It means that the exchange rate value of the dollar is inflated. The dollar hegemony is crowding out productive industry and leaving behind mountains of debt.
U.S. "total" debt – today it (a combination of Businesses, Households, and Government debt of all levels) is $73 trillion, which is 360% of GDP. If you are you are an American strategist or national security professional you should be very concerned. The US position reminds today me a tightrope act where the tightrope walker must be extremely careful of any exogenous shock or a blow of wind.
I am not sure to whom the book is addressed. Is he addressing strategists and national security specialists who need to focus on US financial system, or to economists who should be concerned about fiscal deficits caused by military build-up? Sometimes he sounds like a historian who argues with other historians. Especially when he argues (page 159) that the “Imperial Overstretch Hypothesis” by Paul Kennedy “rests on incomplete and misleading conception of the economic consequences of deficit-financed military spending.”
Paul Kennedy analyzed historic Great Powers, like Great Brittan, and showed that all powers in decline shared the similar symptoms. They turn from creditors to debtors, they have persistent deficits and they borrow. US has a "twin deficit": current account deficit and a budget deficit for many years. Oatley argues that this hypothesis is no longer valid because of the power of global financial markets and the power of US dollar. Paul Kennedy argued that the U.S., UNLESS IT CHANGES, is doomed to repeat the pattern of hegemonic decline, because the excessive cost of military commitments abroad is eroding the foundations of American power, Oatley argues that right now its not a problem, because U.S. dollar is a global reserve currency and US can borrow quickly and cheaply from others and repay IN ITS OWN CURRENCY. It is immune from the type of crisis the other historic powers were susceptible to. The US is exempt from this history of hegemonic decline, so he thinks.
Part of me whats to agree - perhaps this is some truth in his statements. But the U.S. is not immune. The US is like the Great Brittan of the past, but on steroids. U.S. has enjoyed an incredible rise, unparalleled power and military buildup, but also has stratospheric heaps of Total Debt -- 3 or 3.5 times of annual GDP, let alone the persistent current account deficit. It is military safe (except from Russia and China), insulated by the two great oceans, but its economy becoming extremely vulnerable to geopolitical risks, mismanaged relations with China and Russia, trade war, oil price shocks, natural disasters, and especially next big asset bubble burst. Overall, a solid book, but unconvincing in the end, though it raises many interesting discussion topics.
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