A Superpower in Decline: Is the American Dream Over?

One feels the despondency and timidity of political America in Washington. Tim Adams is sitting in the Hotel Willard InterContinental, a stone's throw from the White House. He says that the term "lobbyist" was coined at the hotel, where supplicants used to wait in the lobby for the president. Adams, who served as undersecretary of the treasury for international affairs in the Bush administration, is now a consultant to hedge funds -- the big fish.

Adams talks about how America lived beyond its means, how the budget has spun out of control, and how imperative it is to start thinking about a new tax system. Adams is well aware that the subject isn't popular in Washington, and certainly not in his party. Adams is a Republican. "Debates about the issues are difficult right before the elections," he says, adding that the opposition has become too accustomed to instinctively opposing every Obama proposal. "But they might not be happening for another two years. Currently, the debate on economic policy is paralyzed."

And then he says something that could sum up the entire dilemma of the Obama presidency: "The Democrats refuse to talk about budget cuts. The Republicans refuse to discuss budget increases. So the debate has come to a standstill."

Back in Florida, the Petersons, in their little house not far from the beach, are packing boxes and unscrewing their flat-screen TV from the wall. They've been working on a short sale -- selling the house for less than the balance on their mortgage -- for months, and the bank that holds their primary mortgage has agreed. They also have a buyer. Axel Jakobeit, the German real estate agent, brokered the deal. Now everything depends on the bank that holds the second mortgage, which will be left with nothing but its minimum share of $2,500 if the sale goes through.

Maybe the Petersons will have to move out of their American dream tomorrow, or maybe in a week. They plan to rent in the future. "Owning a house today is not what it seemed to be," says Marc.

TOMORROW: AMERICA'S FUTURE, THE WORLD'S FUTURE

A creative country doesn't stop being creative because of a crisis. A society that has produced universities like Harvard, Yale, Stanford or MIT, companies like Apple and Microsoft on the West Coast, and institutions like the Metropolitan Opera, Carnegie Hall and the Museum of Modern Art in New York doesn't suddenly become stultified. There are always new projects, even in the United States of 2010. There are startups, new companies and, of course, great thinkers.

But once a decline has gotten underway, it isn't easy to change direction. Many young companies in Silicon Valley don't last very long because they are unable to secure financing or find customers. The country seems lethargic in a very un-American way -- or perhaps it's just the new American way. The demonization of political opponents, the end of debates, the condemnation of intellect -- these are all ominous signs.

Americans are saving again, for the first time in a long time. The rate of personal saving as a percentage of disposable income, negative only a few years ago, has reached 5.8 percent. It could be a good sign, but it may also be an indication of rampant uncertainty.

There is no easy way out of the debt crisis. Obama could raise taxes and reduce the federal budget, but according to Reagan's former budget director, David Stockman, the country has become "fiscally ungovernable." If Washington can't help America, who then can help Washington and America?

One of the last hopes is the US Federal Reserve, the same institution that helped maneuver the United States and the global economy into the crisis in the first place. Despite the Fed already having reduced the prime rate to between 0 and 0.25 percent, the credit business still hasn't picked up. The Fed then sought to influence the markets in a different way by buying US treasury bonds and securitized mortgage loans, injecting $1.75 trillion in freshly printed cash into the market. The policy, known as quantitative easing, was met with enthusiasm on Wall Street. A second round, worth hundreds of billions of dollars, is expected to take place after the mid-term elections.

Ineffectual Fiscal Policy

The leaders of the international financial world have come together twice in recent weeks. Central bankers and finance ministers met in October at the annual meeting of the International Monetary Fund (IMF) in Washington, and last weekend at the summit meeting of the G-20 finance ministers in South Korea. Both times, Greenspan's successor, Ben Bernanke, used somber language to describe the economic situation and to defend his monetary policy.

Unemployment remains stuck at record high levels, a second collapse in the real estate market is not unthinkable, and the classic tools of fiscal policy, tax cuts or economic stimulus packages, are hitting a wall, Bernanke said. The calls for structural reforms are correct, he added, but the problem is that fundamental reform takes time. In the end, the only path out of the crisis leads through monetary policy, the Fed chairman said.

This sounds as if the United States had found a convenient way out of the debt crisis. But it's also a risky solution, both for the United States and the entire world economy. It can trigger processes that could gain momentum and spin out of control. Nobel laureate Joseph Stiglitz warns of the consequences of a flood of liquidity. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world," he says.

More money means that the value of the dollar falls relative to other currencies. This is an advantage at first, because it makes exports cheaper and imports more expensive, making the US economy more competitive. But does US industry even make enough products anymore to allow it to increase sales to the global market? And what happens if the world loses confidence in its reserve currency and unloads its dollar reserves onto the market? The resulting dollar crash could plunge the global economy into the next abyss.

The Next Bonanza

More money also means more inflation, and the faster the money becomes devalued, the faster the debts are reduced. In early 2010, the IMF proposed that central banks commit themselves to a higher inflation goal of up to 4 percent.

No one knows how the experiment will end. "We are in the drug trial phase of monetary policy," says John Makin of the American Enterprise Institute. "We have some very nice ideas, but no experience to show whether they work." Former Labor Secretary Reich doesn't even think there are any good ideas at the moment. He believes that all the cheap money will flow into the next stock market bubble, and that companies, banks and hedge funds already sense the next bonanza coming.

Financial expert Tim Adams says that there is no alternative. "Nobody wants another stimulus package right now," he says. "It has been defined as a symbol of a state and government that overreaches. The Democrats are running away from it and the Republicans are condemning it. Everyone is talking about budget cuts now."

This, according to Adams, only leaves Fed Chairman Bernanke with the option of cheap money, knowing all too well that it won't be met with enthusiasm from politicians abroad. "The Europeans will probably have to carry a share of the adjustment costs at first, because their euro will gain value and their exports will become more expensive," says Adams. And once inflation spreads across the entire global economy, the assets of Germans will also decline.

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• Part 1: Is the American Dream Over?
• Part 2: The Ownership Fetish
• Part 3: America's 'Perfect Storm'
• Part 4: The New American Nightmare
• Part 5: A Brighter Future?
• Part 6: The Danger of Currency Warfare