When the most destructive war in human history finally ended in 1945, a colossus bestrode the world: the colossus of the United States of America. For the next thirty years, US was the leading economic power of the planet. It had the largest, soundest economy, equipped with the most advanced technologies of the day. The US dollar was the world reserve currency, and US economic largesse helped to rebuild Western Europe and Japan. Its mass media ruled the world's airwaves. It had a vast middle class which enjoyed some of the highest living standards the human race had yet achieved. Its science, research and university networks set the pace for global innovation.

Alas, the overwhelming dominance of the US proved to be its undoing. It 1945, the US was devoid of geopolitical competitors (the USSR was a formidable local power, but never close to an economic challenger). Europe's colonial empires were crumbling into dust, and countless new nation-states were being born. As a former colony of Britain which fought awar for its independence, the US could have chosen to ally itself with these new nation-states, and to stand for the principles of democracy, multilateral development, and free, fair exchange.

To paraphrase a key moment in J.R.R. Tolkien's Lord of the Rings trilogy, the leaders of the US inherited the Ring of Power from the defunct British Empire in 1945. But like Tolkien's Isildur, US elites could not bring themselves to divest themselves of its irresistible power. Nay, the golden gift of global hegemony was a precious thing, far too precious to destroy. For America was the indispensable power, the very forge of democracy. We would act wisely, where Britain had fallen prey to national chauvinism and petty intrigue. Wouldn't we, precioussss? Yesss... preciousssss... bring democracy to all... gollum... gollum. 

And so it was that the US took on the mantle of Empire. US elites launched the Cold War, constructing a permanent military-industrial complex to enforce the Pax Americana. From their perspective, the newly independent nations were mere pawns on a global chessboard, sources of cheap labor and and even cheaper raw materials. To guarantee access to that labor and those raw materials, the US allied itself itself with the most regressive and retrograde elements in the postcolonial nations. Under the fiction of fighting Communism, it supported the most atrocious kleptocrats, dictators and thieving comprador elites. At home, it began to reverse the limited achievements of the New Deal, while purging US unions, social movements and civic society of radicals and Leftists, through McCarthyite witchhunts.

For thirty years, this combination of external predation and internal reaction seemed to work: US capitalism churned on, generating more and more prosperity for all. Yet beneath the surface, the US had condemned itself to long-term decline. US businesses became increasingly dependent on government contracts dispersed by the military-industrial complex (military spending would fluctuate between 8%-10% of total US GDP from 1950 until the present day); falling profits in industry meant that US capital increasingly flowed into speculation and financial services; while the US political class slowly but surely became the captive of the Imperial machinery it had once set into motion. At the same time, overseas countries had not only recovered from the ravages of the war, they were becoming increasingly formidable competitors to a US business class which had never had to face serious foreign competition since 1914. 

When world growth rates slowed down in the 1970s, US elites faced another choice. They could have responded by reducing military spending and investing heavily in research, education and science, reorienting the US economy as a producer of high technology and high-quality services. However, this would have meant an end to Pentagon boondoggles of all kinds; aerospace firms would have to find new markets, Kremlinologists would have had to find gainful employment, and the postcolonial nations would have to be treated as equals.

Instead, a Rightwing faction of US elites responded to impending Imperial decline with the aggressive ideology of market fundamentalism. In essence, the neoliberals began a thirty-year campaign to repeal the New Deal, arguing that excessive government regulation and a bloated welfare state were restricting the growth of US capitalism. With the election of Reagan to the US Presidency in 1980, the neoliberalization of the US began in earnest. Taxes on the rich were slashed, social services were cut to the bone. Education budgets were squeezed; military budgets exploded. Unions were busted, driving real wages for most Americans down, but neoliberal deregulation spawned a vast credit bubble, enabling middle class Americans to at least temporarily borrow their way into a semblance of prosperity.

None of this improved the competitiveness of the US economy. Quite the reverse: after running respectable trade and current account surpluses from 1945 until 1980, the US economy deindustrialized, and began to run increasingly large trade and current account deficits in the mid-1980s. By the early 1990s, these deficits had swollen to gargantuan proportions, to the point that the US had become the world's biggest debtor nation. At the time, mainstream pundits in the US told us there was no reason to worry, because most of the financing for our deficits came from Japan and Germany, our close allies. 

But two things happened which turned a problematic situation into something far more dire. First, over the course of the 1990s, an increasingly financialized, polarized US economy fell prey to increasingly catastrophic financial bubbles (the dotcom bubble, the housing bubble, and the securitization bubble). In mainstream economic theory, Wall Street was supposed to channel investments into productive long-term capacity; in reality, Wall Street became dominated by get-rich-quick schemers who wrangled their bonuses from increasingly opaque, unregulated and hare-brained forms of speculation. 

Second, and no less importantly, the largest postcolonial and developing nations  of the world went through a seismic transformation during the 1980s and 1990s. They democratized their societies, political systems and mass media. After decades of economic crisis and stagnation, they rejected the tenets of neoliberalism (the so-called Washington Consensus), choosing to construct developmental states in order to build their economies. As a result, the developing nations began to boom, growing faster than they ever had in their existence as independent states.

These two events had an unexpected outcome. At the same moment that the US was saddled with toxic bubbles and increasingly unable to finance its own economic growth, the emerging economies of the world -- spearheaded by the BRIC nations, Brazil, Russia, India and China -- were growing so fast, they had copious amounts of savings which they could bank for a rainy day. These savings took the form of foreign exchange reserves and sovereign wealth fund (SWF) assets. Since the US was still the wealthiest economy on the planet, the BRIC nations relied heavily on US Treasury bills as a storehouse of value for their reserves and SWFs.

The stage was set for the bubble and bust of the 2000s. This table shows the net international investment position of the US vis-a-vis the rest of the world since 2003 (data is current through March 2010, full data is available online from the Federal Reserve). In the 1990s, the biggest creditors of the US were its allies in Central Europe and East Asia. But since 2000, its largest creditors have come from the semi-periphery -- most notably the BRIC nations. Note further than the Wall Street Bubble did not, contrary to neoliberal ideology, boost investment spending. Investment averaged 21% of GDP in the 1980s and 20% in the 1990s, but only a paltry 19% in the bubblaceous 2000s.