Slouching Toward Empire

Slouching Toward Empire
by Bill Bonner
The Daily Reckoning
London, England
Wednesday, May 24, 2006

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• The white caps came out in the world's markets…sometimes, your only choice is to sink or swim…

• In the natural world, a man cannot stir up the wind…the candid examination of this culture's carbuncles…

• Slave to debt…secure your space for the Agora Financial Wealth Symposium in Vancouver July 25-28…and more!

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It has been raining in London every day since we got back from the United States. Not only that, the wind whips up so hard that you can barely make any headway. You'd hardly know it was May; it feels more like February.

Out in the Atlantic, the same storm played hell with the Volvo Ocean Race. They thought they had completed the hardest part of the program - the treacherous passage around the Cape Horn at the tip of Patagonia, and then up the Atlantic coast to the United States. After that, the trip from New York to Portsmouth, England, should have been a cakewalk. But when the waves rose, one sailor was washed overboard and drowned. He was pulled back on the boat, but couldn't be revived. Another boat sank in the high seas; its crew had to abandon ship and was rescued by the boat with the dead sailor still aboard. "The weather has been absolutely atrocious," said one of the sailors.

Remember all those dreary months when nothing happened in the financial markets? Week after week, prices barely moved, except for gold, which moved up steadily, but quietly.

And remember all those satisfied pundits, those confident investors, those self-sure economists? They thought they had figured out how to control the weather! They expected nothing but sunny skies and clear sailing.

Last week, the white caps came out in the world's markets as well as the North Atlantic. And now, everyone is watching the skies. How bad will it get? Is it over already? How will our little bark hold up against the high seas?

Yesterday, the sun came out for a while; the seas seemed to grow calm. Gold, knocked down below $660, went up $16. The Dow dropped a bit, as did the dollar…but neither very seriously.

At 78 years old, Henry Kaufman has seen plenty of bad weather, more than many investors. Recently, he warned an audience in London that the financial world may be more dangerous than they thought. According to the Times, he expressed concern about "the extraordinary build-up of derivatives…concentrated in the hands of relatively few financial institutions." These financial institutions are hedge funds and investment, which are manned by the smartest people in the world, or so they believe. In theory, they are hedged against disaster - one taking one position, another taking the opposite one. When the weather gets rough, some should flourish, while others sink.

But what actually happens is that the managers all come to see things in more or less the same way. They all follow the same procedures and make the same trades.

Not only are they vulnerable to tempests, they practically cause them. When the going is good, the money managers are all faced with the same incentives: to maximize performance. The youngish fund managers have little personal experience with financial storms. What's more, it's not their own money they are gambling with. Since they see no risk, they unfurl the spinnakers, letting every inch of canvas catch the wind. The idea is to win the race, not protect the boat.

In the natural world, a man cannot stir up the wind. He can whirl around his arms and huff and puff as much as he wants; nature will remain as indifferent as cake-pan to a lover's quarrel. But in the financial world, if he creates enough financial pressure, he can cause a hurricane. The Hunt brothers did it, almost single-handedly, back in the silver market of the '70s. Imagine if you had thousands of hedge-fund managers, with billions of dollars to spend, all trying to run up the same prices. Eventually, you'd get a swirl of some sort. And then, the whole system is at risk…even people who wouldn't know a derivative from a deconstructionist.

You will recall, one of the oft-mentioned strengths of the U.S. economy, in particular, and the world financial system, in general, is that they are flexible. This is thanks to the many sharp operators managing them and the many complex, sophisticated derivatives available. In fact, the complexity of these derivatives is a liability, not an asset.

"Organizations can be viewed as a form of network in which webs of people interact," writes Eric D. Beinhocker, in The Adaptable Corporation. "A very general phenomenon in networks, called a 'complexity catastrophe,' helps explain why large organizations often find it harder than small ones to adapt. Highly interdependent systems can sometimes become so complicated that they go into gridlock and change becomes impossible…As an organization's size and complexity grow, its degrees of freedom drop."

In other words, when the storms blow up, don't expect hedge-fund managers to quickly sell off their high-risk positions and batten down the hatches. Who will buy them? And who will buy America's houses at higher prices…once the real estate bubble finally bursts?

More below, but first the news from our currency counselor…

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Chuck Butler, reporting from the EverBank world-currency trading desk in St. Louis:

"The euro has recovered most of the late-afternoon sell off, after May's German business confidence saw a better outcome than the 'experts' had forecasted."

For the rest of this story, and for more insights into the happenings in the currency markets, see today's issue of

The Daily Pfennig

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Back to Bill Bonner with more views…

*** A reader writes from Monterey, CA:

"Send me the [Squanderville] sticker(s). I am a new reader of The Daily Reckoning and even though it scares me to the point of 'messing my shorts,' I think it is raising issues, and demanding dialogue, on aspects of our society that have to be given an honest inspection - unless we want to be ground up into bone meal, financially.

"I will be happy to receive a sticker; I would be even happier to receive several, so that I can give them to like-minded friends of mine.

"Keep up the candid examination of this culture's carbuncles; if we are ever going to recover, we first have to take an honest look at the malady!"

[Ed. Note: Whiskey and Gunpowder's Greg Grillot and The Rude Awakening's Aussie Joel are trekking across the nation, slapping Squanderville stickers on everything they see. Wanna know where they've made it to today? Check out our interactive map:

Road-Tripping Across the Empire

*** Isn't debt a remarkable thing? It reduces your freedom of action. A man who has a debt must service it; he must repay it. He is a slave to it until it is finally removed, written off, or paid. In the past, if he couldn't keep up with his debt, he would be put into debtor's prison, which even further restricted his freedom.

If you are locked in to a particular course, you don't have the ability to maneuver when the wind blows up. A nation of people in debt is like a whole fleet that can't change course…like the Spanish Armada, after the battle of Gravelines. It couldn't return through the English Channel, so it was forced into the North Sea, where it washed up on Scotland's rocks.

*** If you deny that the United States is now an empire, you are as big a fool as we were. For a very long time we resisted the concept. We did not want the United States to be an empire. We thought it was a political choice. We liked the old republic of Jefferson, Washington, the U.S. Constitution…the humble nation of hard money and soft heads; we didn't want to give it up. We thought that if the United States acted as though it were an empire it was making an error.

What morons we were. We missed the point completely. It didn't matter what we wanted. There was no more choice in the matter than a caterpillar has a choice about whether to become a butterfly. This was an important insight for us. Until then, all of the blustering and slapstick pratfalls on stage seemed like "mistakes." Why would the United States run such huge trade deficits, we wondered. It was obviously a bad idea; the nation was ruining itself. And why would it launch an invasion of Iraq…or begin a war on terror - both of which were almost certain to be costly blunders. It was as if the United States wanted to destroy itself - first by bankrupting its economy, and second by creating enemies all over the globe…

[Ed. Note: As it becomes clearer that America has all the traits of an empire on the decline, more and more people are wondering how to protect their finances. That's why this year's Agora Financial Wealth Symposium in Vancouver, B.C., is centered on "Investing in the Age of Empire."

You won't want to miss the speeches from not only your favorite Agora Financial columnists, but also EverBank's Chuck Butler, Steve Forbes…and many more. For a full description of the conference, and to secure your spot at the early-bird discounted price, click here:

The Agora Financial Wealth Symposium - The Fairmont Hotel, Vancouver, B.C.
July 25- July 28, 2006

*** Jules is back from his first year of college.

"How did you like it, Jules?" we asked.

"It was OK. Well, actually, it was horrible. No, I don't mean it was horrible. It was just OK. I mean, I don't think it would have been any better anywhere else. The people were OK. And some of the courses were good. Some weren't so good. I don't know. I didn't really like it. But I don't know if I'd like anything else any better."

Jules is not sure he is going back. He has applied to some other colleges just to give himself options. But he is also considering taking a year off.

"What will you do, if you take a year off?" we asked.

"I don't know. I probably should go out into the real world and get a job. A year of that would probably make me feel good about going back to school."

Yesterday, we took Jules to the office with us. We got up early. Got dressed. Rushed to the subway. The train was crowded, so we shoved our way into the car, along with hundreds of other commuters, all dressed the same, all reading their newspapers. And then, we got to the office and took our positions in our little cubicles. We became one with all the thousands and millions of office workers all over London…and all over the world. We were tap, tap, tapping on our keyboards and chat, chat, chatting with our colleagues, all day long, from eight in the morning until the office grew quiet after six.

At 7:00 pm, we grabbed our attaché cases, walked to the subway and took a train back to the South Kensington station. There were fewer people on the train, because we left work later than most office workers. But otherwise, the trip was the exact opposite of the one we had taken in the morning. Same suits. Same newspapers. Same subway stops. And so, we arrived back our little cottage…ordered a pizza (Elizabeth is still in America), and prepared for tomorrow.

"How did you like the workaday world?" we asked Jules.

"It sucks, " Jules responded.

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The Daily Reckoning PRESENTS:People come to believe whatever they must believe when they must believe it. All these conceits and illusions that we find so amusing in the Daily Reckoning, asserts Bill Bonner, come not from thinking, but from circumstances. Read on…

SLOUCHING TOWARD EMPIRE
by Bill Bonner

Watching the news is a bit like watching a bad opera. You can tell from all the shrieking that something very important is supposed to be happening, but you don't quite know what it is. What you're missing is the plot.

Let us begin by noticing that this is a comic opera that seems as though it might veer into tragedy at any moment. The characters on stage are familiar to us - consumers, economists, politicians, investors, and businessmen. They are the same hustlers, clowns, rubes, and dumbbells that we always see before us. But in today's performance they are doing something extraordinary, they are the richest people on the planet, but they have come to rely on the savings of the world's poorest people just to pay their bills. They routinely spend more than they make - and think they can continue doing so indefinitely.

They go deeper and deeper in debt, believing they will never have to settle up. They buy houses and then mortgage them out - room by room, until they have almost nothing left. They invade foreign countries in the belief that they are spreading freedom and democracy, and depend on lending from Communist China to pay for it.

But people come to believe whatever they must believe when they must believe it. All these conceits and illusions that we find so amusing in The Daily Reckoning, come not from thinking, but from circumstances. As they say on Wall Street, "markets make opinions," not the other way around. The circumstance that makes sense of this strange performance is that the United States is an empire - whether we like it or not. It must play a well-known role on the world stage, just as you and I must play our roles, not because we have thought our way to them, but simply because of who we are, where we are, and when we are. Primitive people play primitive roles. They are no less intelligent than the rest of us, but they would be out of character if they began doing calculus.

They have their parts to play just as we do. Sophisticated people play sophisticated roles. They are no smarter than anyone else, but you still don't expect them to wear bones through their noses. We, citizens of the last great empire, have our roles to play too, and the empire itself, must do what an empire must do.

Institutions have a way of evolving over time - after a few years, they no longer resemble the originals. Early in the twenty-first century, the United States is no more like the America of 1776 than the Vatican under the Borgia popes was like Christianity at the time of the Last Supper, or Microsoft in 2005 is like the company Bill Gates started in his garage.

Still, while the institutions evolve, the ideas and theories about them tend to remain fixed; it is as if people hadn't noticed. In America, all the restraints, inhibitions, and modesty of the Old Republic have been blown away by the prevailing winds of the new empire. In their place has emerged a vainglorious system of conceit, deceit, debt, and delusion.

The United States Constitution is almost exactly the same document with exactly the same words it had when it was written, but the words that used to bind and chaff have been turned into soft elastic. The government that couldn't tax, couldn't spend, and couldn't regulate, can now do anything it wants. The executive has all the power he needs to do practically anything. Congress goes along, like a simpleminded stooge, insisting only that the spoils be spread around. The whole process works so well that a member of Congress has to be found in bed "with a live boy or a dead girl" before he risks losing public office.

American businesses are still capitalistic. They operate, as everyone knows, in the most dynamic, however, free, and open economy in the world. A recent press item reports, that General Motors will never be able to compete unless it ditches its crushing health care costs. Why does it not just cut the costs? It seems to lack either the nerve or the right, but the author has a solution: Nationalize health care! Meanwhile, CEO pay has soared to the point where the average chief executive in 2000 earned compensation equal to 500 times the average hourly wage. Stockholders, whose money was being squandered, barely said a word. They were still under the illusion that the companies were working for them. They had not noticed that the whole capitalist institution had been trussed up with so many chains, wires, red tape, and complications, it no longer functioned like the freewheeling, moneymaking corporations of the nineteenth century. Meanwhile, corporations in China - a communist country - had their hands and feet free to eat our lunches and kick our derrieres.

The entire homeland economy now depends on the savings of poor people on the periphery to keep it from falling apart. Americans consume more than they earn. The difference is made up by the kindness of strangers - thrifty Asians whose savings glut is recycled into granite countertops and flat-screen TVs all over the United States.

But these ironies, contradictions, and paradoxes hardly disturb the sleep of the imperial race. They have permitted themselves to believe so many absurd things that they will now believe anything. In the fall of 2001, people in Des Moines and Duluth were buying duct tape to protect themselves from terrorist "sleeper cells ready to attack the Midwest." In the fall of 2004, they believed the Chinese were manipulating their currency by pegging it to the dollar for nearly ten years! Like Alice, they were expected to believe six impossible things before breakfast and another half dozen before tea: Real estate never goes down! You can get rich by spending! Savings don't matter! Deficits don't matter! Let them sweat, we'll think!

We can't help but wonder how it will turn out.

We find ourselves often tracing the footsteps of the West's greatest empire - Rome - searching for clues. In Rome, too, the institutions evolved and degraded faster than people's ideas about them. Romans remembered their Old Republic with its rules and customs. They still thought that was the way the system was supposed to work long after a new system of consuetude fraudium - habitual cheating - had taken hold. Rome's system of imperial finance was far more solid than America's. Rome made its empire pay by exacting a tribute of about ten percent of output from its vassal states. There were few illusions about how the system worked. Rome brought the benefits of Pax Romana, and subject peoples were expected to pay for it. Most paid without much prompting.

In fact, the cost of running the empire was greatly reduced by the cooperation of citizens and subjects. Local notables, who benefited from imperial rule, but who were not directly on the emperor's payroll, performed many costly functions. Many functions were "privatized," says Ramsay Mac- Mullen in his Corruption and the Decline of Rome.

This was accomplished in a variety of ways. Many officials, and even the soldiers stationed in periphery areas, used their positions to extort money out of the locals. In this way, the cost of administration and protection was pushed more directly onto the private sector. Commoda was the word given to this practice, which apparently became more and more widespread as the empire aged.

MacMullen recalls a typical event:

"From Milan, a certain Palladius, tribune and notary, left for Carthage in 367. He was charged with investigating accusations of criminal negligence - 'if you don't pay me, I won't help you' - brought against Romanus, military commandant in Africa. Because of Romanus's inaction, the area around Tripoli, had suffered attacks by local tribes, without defense from the empire. But the accused was ready for the inquisitor, and when Palladius arrived unexpectedly at military headquarters in the African capital - carrying the officers' pay - he was offered . . .under the table . . . a considerable bribe. Palladius… accepted it. But he continued his investigations, accompanied by two of the local notables whose complaints had launched the inquiry.

"He prepared his report to the emperor, telling him that the charges against Romanus were confirmed. But the latter threatened to reveal the bribes he had accepted. So Palladius reported to the emperor that the accusations were pure inventions. Romanus was safe. The emperor ordered that the two accusers' tongues be torn out. As time went on, the empire came to resemble less and less the Old Republic that had given it birth. The old virtues were replaced with new vices. Gradually, the troops on the frontier had to depend more and more on their own devices for their support. They had to take up agriculture.

"The effectiveness of the troops was diminished as they became part-time farmers," says MacMullen.

Gradually, the empire had fewer and fewer reliable troops. In Trajan's time, the emperor could count on hundreds of thousand of soldiers for his campaigns in Dacia. But by the fourth century, battles were fought with only a few thousand. By the fifth century, these few troops could no longer hold off the barbarians.

The corruption of the empire was complete.

If you deny that the United States is now an empire, you are as big a fool as we were. For a very long time we resisted the concept. We did not want the United States to be an empire. We thought it was a political choice. We liked the old republic of Jefferson, Washington, the U.S. Constitution…the humble nation of hard money and soft heads; we didn't want to give it up. We thought that if the United States acted as though it were an empire it was making an error.

What morons we were. We missed the point completely. It didn't matter what we wanted. There was no more choice in the matter than a caterpillar has a choice about whether to become a butterfly. This was an important insight for us. Until then, all of the blustering and slapstick pratfalls on stage seemed like "mistakes." Why would the United States run such huge trade deficits, we wondered. It was obviously a bad idea; the nation was ruining itself. And why would it launch an invasion of Iraq…or begin a war on terror - both of which were almost certain to be costly blunders. It was as if the United States wanted to destroy itself - first by bankrupting its economy, and second by creating enemies all over the globe.

Then, we realized, that of course, that is exactly what it must do. We repeat, people come to believe what they need to believe when they need to believe it. America is an empire; its people must think like imperialists. In order to fulfill their mission, the homeland citizens had to become what George Orwell called "hollow dummies." An imperial people must believe that they deserve to be the imperial power - that is, they must believe they have the right to tell other people what to do. In order to do so, they must believe what isn't true - that their own culture, society, economy, political system, or they themselves are superior to others.

It is a vain conceit, but it so bright and so big it exercises a kind of gravitational pull over the entire society. Soon, it has set in motion a whole system of shiny vanities and illusions as distant from the truth as Pluto and as bizarre as Saturn. Americans believe they can get rich by spending someone else's money. They believe that foreign countries actually want to be invaded and taken over. They believe they can run up debt forever, and that their debt-laden houses are as good as money in the bank. That is what makes the study of contemporary economics so entertaining. We sit at our telescopes and laugh like a divorce lawyer looking at photos of a rich man in flagrante delicto; we know there's money to be made.

Bill Bonner
The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount - just click on the link below:

The Most Feared Book in Washington

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