Bill Costello

    THE economic center of gravity is shifting from West to East as America faces economic problems and China remains the world’s fastest-growing major economy. Do these events signify the eventual end of U.S. predominance?

    While China continues its long march of uninterrupted economic ascent, America’s economy is faltering.

    Almost every year, the U.S. federal government spends more money than it collects in taxes. For the just-finished 2010 budget year, it spent roughly US$1.3 trillion more than it collected. That’s the second-largest deficit in American history. The largest was the US$1.4 trillion deficit in 2009.

    Except during World War II, the federal debt held by the public has never exceeded 50 percent of the nation’s annual economic output. Not even during the Civil War, World War I, or any other war. Never.

    That is until now.

    The federal debt currently held by the public, US$9 trillion, represents 62 percent of the nation’s annual economic output. And it’s headed even higher.

    The Congressional Budget Office (CBO) estimates it will reach 80 percent by 2035 if current laws prevail. However, if widely expected changes to current law are made, it will reach 90 percent by 2020, 110 percent by 2025, and 180 percent by 2035.

    Under either scenario, the federal debt held by the public will grow faster than the nation’s annual economic output.

    The more it grows, the more the government will have to borrow. Of course, the government has to pay interest on what it borrows. This added interest will make the debt even larger.

    According to the CBO, growing levels of debt relative to output increases the probability of a “sudden fiscal crisis.”

    If such a crisis occurred, lenders would lose confidence in America’s ability to repay its debt. As a result, it would sharply raise the interest rates on the debt. This would lead to spiraling interest payments that would consume a rising proportion of tax revenue and rapidly raise the debt to unsustainable levels.

    A large body of historical evidence supports the concept that empires rise or fall based on their economies. Take the British Empire, for example. Over a century ago, it expanded from economic to military to political power. At its height, the British Empire controlled roughly a quarter of the world’s land surface. However, Britain’s global dominance ended when its economy deteriorated.

    During a speech at the Brookings Institution, U.S. House Majority Leader Steny Hoyer said: “Spain under the Habsburgs, France under Louis XVI, the Ottoman Empire in the 19th century, the British Empire in the 20th — all of them were crippled by borrowing, by interest payments, by debt. We are not exempt.”

    American predominance is at debt’s door. That door will soon open if policies aren’t changed.

    (The author is the president of U.S.-based Making Minds Matter, LLC. He can be reached at www.makingmindsmatter.com.)