Little did we know, but 9/11 was the start of the West’s economic crisis

There is a strong sense of deja vu about Joe Biden’s pledge to hunt down the perpetrators of the Kabul airport attacks; it’s exactly what George W Bush said about those behind the World Trade Centre atrocities 20 years ago next month.

The difference is that for Biden the promise of a posse is part of America’s bungled retreat from the war on terror. For Bush it marked the very beginning. Things have turned full circle; it is as if 20 years of effort – and, according to some estimates, $US5 trillion ($6.8 trillion) of costs, taking into account both the Iraqi and Afghan campaigns – was all for nothing.

President George W. Bush and Secretary of Defence Donald Rumsfeld visit the Pentagon to view the damage the day after the September 11, 2001 terrorist attacks. The economic repercussions of the attacks continue to reverberate.Credit:Getty

As in TS Elliot’s Little Gidding, America’s fate after all that interventionism is “to arrive where we started, And know the place for the first time”. For the US and her allies, it has been a truly shattering experience.

It is hard to think of any geopolitical event of the 21st century quite as impactful as 9/11, tragically exposing as it did the complacency of the post-Cold War period, when US-led globalisation seemed destined to sweep all before it.

The fall of the Berlin Wall was supposed to be “the end of history”, the final triumph of democratic capitalism over rival, authoritarian political constructs. Events since 9/11 have disabused America of any such notion. But though the focus will inevitably be on the geopolitical consequences, the economic repercussions were in many respects just as big, setting in train a period of unbridled credit expansion that culminated in the global financial crisis (GFC), and the long hiatus in Western economic progress and living standards that followed.

Into that vacuum has stepped a rising and increasingly assertive China, capitalising on Western paralysis and ruthlessly exploiting the increased access to advanced economy markets gifted at around the same time through World Trade Organisation most favoured nation status.

“You were my teacher”, China’s vice president Wan Qishan reportedly told the US Treasury Secretary Hank Paulson at the time of the financial crisis. “But now I am in my teacher’s domain, and look at your system, Hank. We aren’t sure we should be learning from you anymore.”

Much of the economic rot that set in after 9/11 can be pinned squarely on the policy response to the atrocities. That’s not to say that the US Federal Reserve was wrong to slash interest rates and flood the system with liquidity, or that the Bush administration’s panicked reaction in promoting the mother of all consumer booms was misguided. At the time, these seemed like a reasonably practical response to an event that threatened mayhem in financial markets and a collapse in business and consumer confidence. Bin Laden was not to be given the satisfaction of bringing the economy crashing down alongside the twin towers.

As it was, the Dow Jones fell 7.1 per cent on the first day of trading after the attacks, the biggest daily decline ever at that time. It was even worse for the S&P 500, which lost 11.6 per cent, while the hi- tech Nasdaq shed a jaw dropping 17 per cent. There was genuine fear on the street.

But the dramatic easing in policy that followed, way in excess of anything justified by what had previously been happening to the economy and inflation, lit the fuse on a mindlessly reckless expansion in credit that was eventually to give us the sub-prime meltdown and the virtual collapse of the Western banking system. In the absence of real earnings growth, the politicians fed the masses with a diet of cheap debt instead.

9/11 was as much an economic turning point for the West as it was a geopolitical one. The economic faultlines it exposed were just as deep as the geopolitical ones, and it opened the doors to two decades of relative Chinese ascendancy.

The war on terror hardly helped; it was not just the expense of the whole thing, disobeying as it did the old rule already proven by the disaster of Vietnam that you can have either guns or butter, spending on war or the domestic economy, but not both. The invasion of Iraq also prompted another sell off, and another burst of exceptionally accommodative monetary policy in mitigation. Up to a point, it did the trick. The bear market that began with the crash at the turn of the century finally burnt itself out, but the hubristic overreach of it all sowed the seeds of the financial collapse to come.

Thus was established a pattern that has ruled ever since; any economic shock is met by another flood of money printing, so as to keep the pretence of perpetual growth going.

With the calamity of the GFC came the great experiment with zero interest rates and quantitative easing. Each subsequent correction – be it the eurozone debt crisis, Brexit or COVID, has brought a fresh round of money printing, such that in Britain the Bank of England is now the proud owner of nearly half the national debt. These actions have been very good for asset prices; whether also good for the long-term health of the economy is much more questionable.

It can of course be argued that the slow rates of economic and productivity growth we see in Western nations today, and the ultra-low interest rates that accompany them, might have happened anyway regardless of the traumas of 9/11. But it was the attacks that marked the beginning of and turbocharged the penchant for money printing. When Bin Laden later boasted that his actions would bring down the Great Satan just as effectively as he had destroyed the Soviet Union, he had something of a point, even if the manner of Western decline that has happened since bears no relation to what he had anticipated.

In any case, 9/11 was as much an economic turning point for the West as it was a geopolitical one. The economic faultlines it exposed were just as deep as the geopolitical ones, and it opened the doors to two decades of relative Chinese ascendancy. While the West has languished in economic torpor, China has forged ahead, gleefully seizing on every American weakness.

The September 11 attacks marked the beginning of and turbocharged the penchant for money printing to stave off economic crisis.Credit:Getty Images

What happens next? History marches relentlessly on; both 9/11 and the financial crisis have been superseded by a greater crisis still – the global COVID pandemic. Economies have been put on a wartime footing, ballooning deficits have been monetised and interest rates have plumbed new depths. But though on a much bigger scale, policy seamlessly matches the pattern set by 9/11. Only this time it seems much more likely to trigger enduring inflation, with wages already beginning to chase prices higher.

As for the geopolitics of it all, I’m not sure I go along with today’s prevailing narrative, with the bungled withdrawal from Afghanistan as a metaphor for Western decline and the ascent of rival, authoritarian forms of governance. The future belongs to neither the US, China, or Islamic fundamentalism, but to technology, which despite the governments’ efforts to bend it to their own geopolitical ends, is borderless in the rapid advances it is making, as well as agnostic about the political regimes it operates under. Governments and regulators have no chance of keeping up, and that includes even the political authoritarianism of China. That is one mega trend at least in which 9/11 played no part.

Telegraph, London

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