Historically, international capitalism has tended to thrive more when one clear power has established its hegemony over the world economy. There have been at least two major phases when this was indisputably true: the period of the gold standard in the late nineteenth and early twentieth centuries, when Britain was the economic superpower; and the two decades after the Second World War in the mid-twentieth century of the Bretton Woods dollar standard, when the United States ruled the roost.

In both of these periods, the ability of the major power to control the broad pattern of international trade and capital flows was crucial to imparting some degree of stability to international balance of payments and to the progress of capitalism. In the more recent period, the past decade or more, the situation has been more ambiguous. Despite one clearly dominant superpower, the United States, the world economy has not had the benefit of similar stability or growth.

This is true even though the United States possesses not only much greater direct power as well as indirect power through the international institutions that it effectively controls, than the earlier such periods. This period of unipolar domination has been one of world economic slowdown, increased periodicity and intensity of financial and economic crises in different parts of the world, and generalized unemployment.

While unregulated financial capital mobility has certainly played a part in this, some blame must also lie at the door of the US economy, which has failed in its role as leader of the world capitalist system. It has failed to provide or to ensure adequate counter-cyclical or discounted lending to economies in distress. Even its role as an engine of world growth, providing a market for the exports of other countries, has been less evident in recent years, as its own economic slowdown has had effects on the rest of the world economy, which was already mostly in recession.

Now, of course, the situation is both more complicated and more uncertain, to the extent that both the international economy and the United States’ effective leadership of it seem more problematic.

Well before the Iraq war, the United States economy was not in good shape. While some analysts have attributed the slowdown in investment, the depression in consumer confidence and the continued growth of joblessness to uncertainty about the war itself, most observers agree that the problems of the US economy were evident from much earlier, even before 11 September  2001.

By March 2003, it was clear that even the massive fiscal boost offered by the Bush administration in the previous year—a combination of increased spending and very generous tax-cuts for the rich, amounting to a deficit as high as 7 per cent of GDP—was not sufficient to lift the economy out of its relatively depressed state. US manufacturing activity, measured by the Institute for Supply Management (ISM) purchasing managers' index, slumped to 46.2 points in March from 50.5 in February, its lowest level since November 2001. A reading below 50 points indicates an industry contraction.

While this broke four previous months of growth in the index, even that growth had been halting, coming after more than a year of straight recession. Consumer spending—which has been the main spur to US economic growth over the past decade, and which accounts for around two-thirds of US economic activity—slumped once again. Surveys on consumer confidence showed it to be at or close to ten-year lows.

US gross domestic product rose at an annual rate of 1.4 per cent in the last three months of 2002. For the year as a whole, the economy grew by a modest 2.4 per cent. While this was better than the near-stagnation (at 0.3 per cent) of the previous year, it was still not enough to generate new jobs. In fact, the US economy shed 308,000 non-farm jobs in February, the biggest slide since the aftermath of the 11 September attacks, and coming after a continuous series of net job losses over the last one-and-a-half years.

This weakness in the world’s largest and strongest economy must be seen in the context of slow growth, stagnation or even recession in the other major parts of the world. This is now so apparent that even international financiers and large capitalists are calling for concerted intervention to reflate the world economy.

The Institute for International Economics, a Washington-based private-sector body representing banks, fund managers and finance houses, advised that the world's top economic policy-makers should promise to take swift and concerted action—such as cutting interest rates. Unfortunately, it now seems that such merely monetary measures will not go far in lifting international economic activity in the present climate.

Meanwhile, there is a larger dilemma for both the world economy and for the United States. The world economy is now so structured that it relies on large external deficits of the US economy, to encourage growth elsewhere in the system. This, indeed, has been one of the historical roles of the ‘world leader’ in capitalism. But the persistence of such deficits calls for continuous capital inflows into the US economy, which must be sustained by confidence in it and its currency.

At the moment, the US runs a current account deficit of around 5 per cent of GDP, financed by capital inflows from the rest of the world. Two important contributors are Japan (with a current account surplus of more than 3 per cent of GDP) and the Eurozone countries (with a combined current account surplus of around 0.5 per cent of GDP). In addition, investors across the world, including in developing countries, contribute directly and indirectly to this huge inflow of resources into the US economy. The United States economy now absorbs 70 per cent of the world’s savings, amounting to more than $400 billion annually in the last two years.

The British economist Wynne Godley has estimated that over the medium term, if the United States economy is to achieve ‘normal’ growth rates, it must depend upon huge fiscal and external deficits, reaching levels as high as 9 per cent of GDP (Wynne Godley, ‘The US Economy: A Changing Strategic Predicament’, Levy Economics Institute, March 2003, available at www.levy.org or www.cerf.cam.ac.uk). Professor Godley’s reasoning is as follows. If the US grows at its trend rate of 3–4 per cent a year, in the current pattern, the US trade deficit will worsen further, reaching between 6 per cent and 7 per cent of GDP by 2008.

Meanwhile, the net foreign liability position of the US will also worsen steadily, from about 25 per cent of GDP today to something like 60 per cent of GDP in 2008. If US interest rates were to go back to normal from their current very low levels, the overall current account deficit could then be of the order of 8 to 9 per cent of GDP. Since the private sector has now moved back into balance after its historically high deficits during the phase of the stockmarket-led consumption boom, this means that the fiscal deficit must bear the burden of this imbalance.

This follows almost naturally from the requirement that the US economy has to be the engine of growth for the rest of the world and therefore must generate large deficits to shore up world demand, and the deficits themselves then have to be financed by the rest of the world. Professor Godley himself seems to believe that this outcome is unlikely, if only because the increasing current account deficit will make the US domestic economy much weaker than is currently anticipated.

The point is that the current system of economic interaction across major national economies suggests that the continued inflow of most of the world’s savings into the US will remain a requirement for the stability and even growth of the capitalist system as a whole in the near future. How likely is this?

The answer could depend upon not just the outcome of the war in Iraq, but also upon how it affects both the world’s perception of the viability of US imperialism and the possibility of growing inter-imperialist rivalry. This is why the war in Iraq is likely to have economic consequences for the US and the world, which go well beyond the more obvious ones of providing contracts to US companies in the short term, or allowing the US control over major Middle Eastern oilfields in the medium term.

In the short term, of course, there are the contracts. Already, the Wall Street Journal has claimed that more than $1.5 billion in contracts has been promised to favoured crony companies of the Bush administration. The need to rebuild all the infrastructure that the Anglo-American military is currently bombing will lead to additional spending of at least $40–50 billion—much of which can be conveniently be paid out from the oil money of Iraq which is being held in reserve at the UN, as well as future oil revenues.

The oil system of Iraq can itself be privatized—the plans are apparently first to privatize domestic distribution, then production, and finally exploration and discovery in a series of moves to benefit (mainly) US oil companies. But all this will still amount to not more than $60 billion or so in the first couple of years, much less even than the $75 billion that President Bush has requested immediately for increased military expenditure. Even the more than $110 billion spent last year, not to mention the huge planned tax-cuts of more than $670 billion proposed over a decade, have failed to provide the required stimulus to the US economy; so these are not likely to be enough either.

No, the intended impact of this war has to be greater—it has to be on the perceptions and expectations of the rest of the world. This aggressive and devastating show of military strength may be more than hubris—it may reflect the need of US imperialism to impress upon the rest of the world such a complete stamp of its own dominance that it can continue to rule the world economy (and access the rest of the world’s savings) unhindered in the foreseeable future.  In other words, this war is intended to put into place a hyper-imperialist system that has become indispensable for the US economy to survive in its present form.

Such hyper-imperialism would require more than control over crucial natural resources such as oil. It would also require moulding of the international financial and trade framework more completely in the image required by the US. Thus, the IMF would no longer be permitted even temporary deviations such as accepting that it was wrong in pushing for complete financial liberalization in developing countries. The WTO would have to be a multilateral framework without even minimal give-and-take across the major powers, a body completely subservient to US interests. And so on.

Can the US government pull it off? The hawks in the Bush administration and their (admittedly few) supporters in the rest of the world seem to think so. But such an outcome is not so obvious, or even likely.

Interestingly, a recent report by a financial research company for private institutional investors (‘Independent Strategy’, which delivers its analyses to financiers such as Goldman Sachs, etc.) also takes a more pessimistic view of the US plans. The report argues that the US shows many symptoms of an empire that is cresting. First, it sees deepening mistrust of the US across the world and predicts, like many others, a rise in terrorism in reaction to US unilateralism. It also notes that the US government is heading for record deficits, along the lines discussed earlier. Third, it believes that the ‘Washington consensus’, through which the US was able to push through neoliberal marketist reforms across the world, is breaking down, as more and more governments reject strategies that are known to deliver economic instability and crises. Finally, the weakening dollar is seen as a sign that the US can no longer depend upon the rest of the world to finance its deficits. The analysis, intended for international financiers, actually argues as follows: ‘The dollar will go on down because the good empire has the same faultlines as many other empires: unsustainable living standards at the core depend on flows of wealth from the periphery.The US no longer earns the return needed to sustain these flows. The costs of war and unilateralism will increase the thirst for capital, but reduce the return earned by it’ (Independent Strategy, quoted by Mark Tran, in the Guardian Unlimited, 26 March 2003).

This raises all sorts of possibilities for the global economy. There are serious doubts about the ability of the US to acquire and maintain the degree of overwhelming supremacy over the rest of the world that it seems to require to ensure economic hegemony. Nor can unilateralism be a feasible option for the US in supervising this hegemony, simply because international economic interdependence is now too far advanced. It is a moot point, the extent to which the US afford to ignore or bypass the various global multilateral institutions that have been set up over time, and which have served its own economic interests reasonably well. Unilateralism also ignites the possibility of growing inter-imperialist rivalry. All of this suggests that the period of hyper-imperialism is likely to be relatively short.