Whatever happens on August 3rd, whether a full default or a spluttering decline, we are now at an historic turning point in the history of US hegemony. For the first time since the US ascended to the role of world leader in 1945, the leadership (and the people) of the US must deal with the implications of world leadership—and realize its accompanying costs just as they have enjoyed its benefits.
Despite the rhetoric on the right, the US government is not spendthrift, wasteful, or bloated. Rather, it has attempted through the decades to chart a course that balances domestic with international requirements in such a way that Americans avoid paying the costs of maintaining US leadership in the world. Initially, maintaing Pax Americana meant spreading a US military presence virtually everywhere around the globe that it would be tolerated, and even some places where it was not.
In exchange for fighting communism, American taxpayers would become the customers of the world, and to do so, their currency would be as good as gold. Unlike other countries, the hegemon is able to avoid the full costs of its expenditures by manipulating the value of its currency, something the US resorted to in 1971 at least in part to avoid paying for the Vietnam War. However, domestic and international roles still essentially coincided, since what was good for the US as a world leader was also generally good for US consumers.
As long as there was little real conflict between the domestic and international roles of the hegemon, the US could continue to spend with impunity. Relatively sheltered from global crises of inflation that damaged their trade partners, Americans could afford to keep buying, borrowing, and spending without having to worry about maintaining their export markets or competitiveness, as other countries had to. Consumers responded to this exceptional situation essentially rationally, by using their dollars to purchase cheap imports. The government responded by lowering taxes and interest rates to reflect the strength of consumer purchasing power relative to other countries, and hoped for continued growth and the goodwill of trade partners to make up the difference.
Eventually, the costs of hegemony must be borne—if not by Americans, then by someone else. As long as Americans kept buying, the emperor’s lack of clothes could be conveniently ignored. However, the conflict between the interests of Americans and the interests of the world is now apparent. If history is any judge, do not expect Americans to sacrifice to maintain US leadership. The US has little experience in being a normal country, and it seems unlikely that it will now take its place among the rest without a fight.