An American Decline - not a foregone conclusion

It has been my belief, reinforced by the global financial crisis, that the American Century is about to end and the decline of the American Empire about to begin. I have believed that America finds itself where Great Britain was at the end of WWII. Tired and exhausted after fighting multiple wars, its economy ravaged (by war for the British and by a debt fuelled consumption binge in the case of the Americans), its leadership new and untested and a deep malaise affecting all segments of society and popular culture - Pax Americana will end in the same manner that Pax Brittanica did.

I found this article on the Asia Times today:
http://www.atimes.com/atimes/Global_Economy/KB18Dj05.html

The author provides a contrary viewpoint, to paraphrase Mark Twain the rumors of the demise of America have been greatly exaggerated. The article's central premise is that the stable tax revenues that accrue from the world's greatest democracy buttress the US' natural position as an investment safe-haven, this provides a natural source of demand for the US$ and sovereign debt. This demand makes the greenback the world's reserve currency and is the fount of American power.

He argues that other economies such as Germany and Japan have demographic issues that will lead to a decline over time, and China on the other hand is a high risk proposition that may provide higher returns but at the cost of higher volatility - hardly the description of a safe-haven investment.

I don't disagree with his conclusions, but the central premise that American tax revenues are stable, is suspicious in my humble opinion. With a declining economy, falling asset prices, growing unemployment and rising societal acrimony I do not see how tax revenues can remain stable. In fact if you were to pursue the CBO's budgetary projections at: http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf you would see that they agree to a decline in tax revenues in 2009 and then an increase from 2010 onwards. I would wager that the coming global depression will push the rise in tax revenues out for a decade (at least).

With falling tax revenues and hence lower debt service capacity, I do not see how sovereign debt buyers will continue to believe in the credit capability of the US Treasury. Abraham Lincoln once said - You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time. And when you cannot fool the bond market into buying more treasuries - its game over!