Rupert Cornwell: The world's lone superpower is on the wane

Even now, here in the US, if you turn off the radio or television blaring the latest news of financial apocalypse, you can pretend that it's still business as usual.

Incredibly, those unsolicited loan and credit card offers continue to pop through the letterbox, offering the American dream on the never-never. Do you feel it's time for that oft-postponed home improvement, or that richly deserved holiday you've been putting off? Or are you simply having trouble getting credit? Just call this number and within 15 minutes a qualified officer can approve a loan of $30,000 for you, interest free for the first three months.

Of course, what sounds to be too good to be true, is. But you used to have to wade through the fine print on the back to discover that. Now you just turn the TV back on.

To say so out loud would be an offence against American optimism, but the unspoken truth is that the good old days are gone, probably for a very long while. Like its predecessors, this particular financial meltdown has brought fear verging on panic. The difference, however, is that it is destroying not only wealth. It is also destroying illusions.

The US has long inhabited a world of make-believe – of a war that demands no sacrifice, of a consumer boom that demands no payment, of a power and prosperity that seemed America's birthright, whatever events in the real world. Now those fantasies are yielding to the truism coined by Herb Stein, a top White House economic adviser in the 1970s. If something can't go on for ever, it won't.

You have to be in your 80s to have a real memory of the 1929 crash and its devastating consequences. Today, however, the spectre of the Great Depression is everywhere – and not just because the housing market bust which provoked the current crisis is the most severe since the Depression. As for George W Bush, he now jostles at the bottom of the league table of American presidents, not only with Richard Nixon, but Herbert Hoover as well.

In a sense, Bush's misbegotten war in Iraq and today's financial earthquake complement each other. Both are evidence of how the world's lone superpower is losing its dominance. Iraq has shown the limits of American military power. The limits of US economic power are visible in the tumbling dollar (now looked on askance even in countries where it recently served as a second currency) and in the inflation to which the dollar's decline contributes.

Ultimately, great powers are brought down not by military defeat, but by economic weakness. Take, for example, Tibet. Once Washington might have kicked up a serious economic fuss – but not when China is the biggest US creditor, and when a major bond market sell order by Beijing could send US monetary policy reeling.

Paradoxically, if China did want to retaliate in that fashion, the most powerful argument for it not doing so is the Bear Stearns argument, that the ruin of USA Inc. would bring the ruin of the global economy, China included.

But even if the US is "too big to fail," this wrenching crisis will have huge consequences nonetheless. A backlash against the moguls of Wall Street – so greedy in good times, so quick to plead for the state's safety net in bad ones – is already starting. The tide of deregulation will be reversed, and government, so often branded the enemy, will again be regarded as a friend. Financial mayhem, in other words, will hasten the leftward shift in America's politics. But here, too, comforting illusions are being stripped away.

For a while at least, the gripping 2008 election campaign is a side-show, an exercise in make-believe. While politicians claim credit for economic prosperity, in reality, as everyone knows, they have scant influence on matters. Rarely, however, has the sham been as brutally exposed as now. Take the competing Clinton and Obama healthcare plans, costing $120bn (£59bn), or $150bn, depending on the expert you believe. But, assuming one of them is elected, where will the money come from? Either sum is dwarfed by the $200bn-plus line of credit the Federal Reserve has already extended to Wall Street, with goodness knows how much more to follow, courtesy ultimately of the US taxpayer.

On the Republican side, John McCain inhabits a similar fantasy land. In its current circumstances, can the US really continue to spend $12bn a month on a war that has already cost $600bn – when even that sum may pale beside the federal bailout of Wall Street and subprime mortgages? Engagingly, McCain admits that economics is not his strong suit. But even he understands that, just as with those loan offers still arriving on the doorstep, sooner or later the piper must be paid.