It is relatively easy to point to concrete causes of economic crises. For example, Canadian diplomats have been reminding Obama all week that The Great Depression was caused by protectionist trade wars. But that’s not really the root cause: why did those trade wars happen?

I came across this Wikipedia article the other day called Hegemonic stability theory. It says that a stable global economy can only be maintained by a hegemonic power. The Great Depression occurred because WW1 caused Britain to lose its hegemony over the world economy. The Depression lasted until the late 1940s when WW2 combined with The Cold War led Europe to elect the US as the capitalist world’s hegemon. The trade war in the early 1930s was the inevitable result of the power vacuum.

Interpreting the current financial situation in this lens says that things are falling apart because the US has lost its economic might. If, for example, China flushes its treasury holdings to reverse the trade imbalance or the US$ stops being used as a reserve currency (if this blog had archives you could learn more about these possibilities), these will just be corrections to the underlying power distribution.