A Welcome From Bill Bonner

The Theme of the Empire of Debt in a Nutshell

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, “marketsmake 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.

Empire of Debt

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.

Empire of Debt: Capitalistic America

American businesses are still capitalistic. They operate, as everyone knows, in the most dynamic, 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 journalist proposed 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 10 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.

Empire of Debt: The Lessons of Rome

In the Daily Reckoning, we turn once again to the dusty pages of history. Wefind ourselves often tracing the footsteps of the West’s greatest empire—Rome—searching for clues. In Rome, too, the institutions evolved anddegraded faster than people’s ideas about them. Romans remembered theirOld Republic with its rules and customs. They still thought that was theway the system was supposed to work long after a new system of consuetudofraudium—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 10 percent ofoutput from its vassal states. There were few illusions about how the systemworked. Rome brought the benef its of Pax Romana, and subjectpeoples were expected to pay for it. Most paid without much prompting.In fact, the cost of running the empire was greatly reduced by the cooperationof citizens and subjects. Local notables, who benef ited from imperialrule, but who were not directly on the emperor’s payroll, performed many
costly functions. Many functions were “privatized,” says Ramsay MacMullen in his Corruption and the Decline of Rome.

This was accomplished in a variety of ways. Many off icials, and eventhe soldiers stationed in periphery areas, used their positions to extortmoney out of the locals. In this way, the cost of administration and protectionwas pushed more directly onto the private sector. Commoda wasthe word given to this practice, which apparently became more and morewidespread as the empire aged.

MacMullen recalls a typical event:

From Milan, a certain Palladius, tribune and notary, left for Carthagein 367. He was charged with investigating accusations of criminal negligence—“if you don’t pay me, I won’t help you”—brought againstRomanus, military commandant in Africa. Because of Romanus’s inaction,the area around Tripoli, had suffered attacks by local tribes, withoutdefense from the empire. But the accused was ready for theinquisitor, and when Palladius arrived unexpectedly at military headquartersin the African capital—carrying the off icers’ pay—he wasoffered . . . 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 chargesagainst Romanus were conf irmed. But the latter threatened to revealthe bribes he had accepted. So Palladius reported to the emperor thatthe accusations were pure inventions. Romanus was safe. The emperorordered that the two accusers’ tongues be torn out.

As time went on, the empire came to resemble less and less the Old Republicthat had given it birth. The old virtues were replaced with newvices. Gradually, the troops on the frontier had to depend more and moreon their own devices for their support. They had to take up agriculture.“The effectiveness of the troops was diminished as they became part-timefarmers,” says MacMullen.

Gradually, the empire had fewer and fewer reliable troops. In Trajan’stime, the emperor could count on hundreds of thousand of soldiers for hiscampaigns in Dacia. But by the fourth century, battles were fought withonly a few thousand. By the fifth century, these few troops could nolonger hold off the barbarians.

The corruption of the empire was complete.

Empire of Debt: America The New Empire

If you deny that the United States is now an empire, you are as big afool as we were. For a very long time we resisted the concept. We did notwant the United States to be an empire. We thought it was a politicalchoice. We liked the old republic of Jefferson, Washington, the U.S. Constitution. . . the humble nation of hard money and soft heads; we didn’twant to give it up. We thought that if the United States acted as though itwere an empire it was making an error.

What morons we were. We missed the point completely. It didn’tmatter what we wanted. There was no more choice in the matter than acaterpillar has a choice about whether to become a butterf ly.

This was an important insight for us. Until then, all of the blusteringand slapstick pratfalls on stage seemed like “mistakes.” Why would theUnited States run such huge trade def icits, we wondered. It was obviouslya bad idea, the nation was ruining itself. And why would it launch an invasionof Iraq or begin a war on terror—both of which were almost certainto be costly blunders. It was as if the United States wanted to destroyitself—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 whenthey need to believe it. America is an empire; its people must think likeimperialists. In order to fulf ill their mission, the homeland citizens had tobecome what George Orwell called “hollow dummies.” An imperial peoplemust believe that they deserve to be the imperial power—that is, theymust believe they have the right to tell other people what to do. In orderto 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 is so bright and so big it exercises a kind of gravitational
pull over the entire society. Soon, it has set in motion a wholesystem of shiny vanities and illusions as distant from the truth as Pluto andas bizarre as Saturn. Americans believe they can get rich by spendingsomeone else’s money. They believe that foreign countries actually wantto 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 iswhat makes the study of contemporary economics so entertaining. We sitat our telescopes and laugh like a divorce lawyer looking at photos of arich man in f lagrante delicto; we know there’s money to be made.

Things that are unusual usually return to normal. If they did not,there would be no “norma” to return to. That is why you can expectstocks to become more expensive when they are cheap and cheaper whenthey are expensive. Stocks today are expensive—they trade for an averageof about 20 times earnings. Usually, they trade for only 12 to 15 timesearnings, so you can expect them to get cheaper.

Houses are expensive too. They usually go up at a rate roughly equalto the rate of inf lation, income, or GDP growth—no more. For the past10 years, however, they’ve gone up three to five times as fast. Houseprices cannot grow faster than income for very long; people have to beable to pay the prices in order to live in them. So, you can expect housesto revert to their mean too. Prices will fall . . . or else stop rising.

These simple reversions to mean are hardly controversial. We don’tknow when they will happen or how, but that they will come about ispractically guaranteed.

More interesting to us are the reversions to other, bigger means. Anempire itself is a rare thing. It is normal, but unusual. Nature abhors amonopoly. An empire is a monopoly on force. Nature will tolerate it for awhile, but sooner or later, the imperial people must revert to being normalpeople, and the preposterous beliefs that the imperial people cherish,also must pass away. They must go up to a kind of humbug heaven, whereabsurd ideas and idle f latteries strut around while the gods point, snicker,and collapse into mirth, rolling around clutching their stomachs as if the
humor of it was going to kill them.

Empire of Debt: The Dollar

The dollar is an extraordinary thing too. Do you know what the longterm mean value of paper currency is? Well, it is zero. That is what the averagepaper currency is worth most of the time . . . and it is the black holeinto which all paper currencies in the past have gone. There could besomething magic about the dollar that makes it unlike any paper currencyin the past—that is, something that makes it non-mean reverting. But ifanyone knows what it is he is not working on this book. For the last hundredyears, the dollar has lost value faster than the decline of the romaneraDinarius after the reign of Nero. This is not surprising. Roman coinshad silver or gold in them. In order to make the coins less valuable, theyhad to reduce the precious metal content. People didn’t like it. The dollar,by contrast, contains no precious metal. Not even any base metal. It is justpaper. It has no inherent value. There is nothing to take out, because therewas never anything there in the f irst place. Over time, the dollar is almost
certain to revert to its real value—which is as empty as deep space.

In the big picture of things, it is also unusual for one civilized nationto earn far more per capita than another. In the thousands of years of history,some groups were poor . . . others were rich. But extreme differenceshad a way of working themselves out—by trade, war, pestilence, anddegeneracy. By the year 1700, a man in India, China, Arabie, or Europehad about the same standard of living, which was not very high anywhere.

But along came the industrial revolution, which threw incomes out of balanceand changed the way people think. Europe stole a march on the restof the world’s industries, with huge gains in output coming in a relativelyshort period of time. Soon, Europeans were the world’s leading imperialists,convinced that they had its best economic system, its finest scholars,its highest morals, and its most splendiferous armies.

But if the world works the way we think it does you can expect theincomes of Europeans—and their American cousins—to revert to theirhistoric means. The process could take several generations. It could stall.There could be countertrends. But there is no reason to think a man’slabor is inherently worth more in France than in Bangladesh, or that aplumber with stars and stripes on his overalls should earn more than onewith a crescent moon.

If there is a mean, things will regress to it. You can expect, relativelyspeaking, Asian incomes to rise and American incomes to fall. That is, ofcourse, just what is happening now. In India, for example, real incomeshave more than doubled in the last 10 years. In America there is some dispute about the numbers, but if there has been any income growth at all ithas been slight.

Empire of Debt: Tomorrow Always Comes

Just to introduce a gloomy remark, we note that we are personally andindividually regressing to the mean. The mean for a human being isdeath—or non-existence. A person walks the earth for only three-scoreand 10, as it says in the Bible. The rest of the time, he is only a potentialperson . . . or a former person. For millions of years, he is either in the future. . . or in the grave.

You, dear reader, are enjoying that ever-so-brief period of exaggeration. . . of hyperbole . . . of extraordinary, mean-busting usualness wecall “life.” It is not for us to know the time or place when it comes to anend. But like all mean-reverting phenomena, only a fool would bet againstit. (For our own part, we do not particularly care when or how we meetour end. We just wish to know where, so we can avoid the place.)But betting against the end is just what most Americans are doing.

They are borrowing and spending as if there were no tomorrow, and theyare investing as though there were no yesterday. All they would have to dowould be to look at the patterns of the past; they would see that it doesn’tmake sense to buy at high prices—you can’t make money that way. Theway people have always made money is by buying low and selling high.

Doing it the other way around doesn’t work. Nor does borrowing andspending make you rich. Tomorrow always comes—at least it always hasup until now—and you have to pay your debts.

Over time, prices go up and down. Many other things ebb and flowas well, boom and bust or bloom and wither. All of these phenomena gothrough predictable cycles that can be roughly modeled. Analysts study thecycles to try to f igure out where we are currently located in the habitualpattern. It is often frustrating work, because the patterns are rarely quiteas regular and well-def ined in the present as they appear to have been inthe past. Still, it is a question worth asking: Where in the cycle are we?
One of the ways you can tell where you are in the cycle is to look atwhat your friends and neighbors believe. Markets make opinions.

We recall that you can tell where the market really is by looking at theopinions people have. When people you know are all of the opinion thatstocks will rise 15 percent per year—for an indefinite amount of time—you can be sure you are nearer to a top than a bottom. When people believethe opposite—that stocks will never go up—most likely, you arenear a bottom.

Beliefs give us a clue to the larger cycles as well. People must play theroles that have been thrust upon them. They are bullish near the end of abull market; they are bearish near the end of the bear market. If it wereotherwise, the market could never fully express itself. If investors grewsuddenly cautious while nearing an epic bull market peak, they would selltheir stocks, and the peak would never be reached. Or suppose that afterseveral years of soaring house prices homeowners came to believe thathousing prices would fall? How could you have a proper housing bubble?

How can you have a rip-roaring party without anyone getting drunk, inother words?

How can people make fools of themselves if they are unwillingto get up on the tables and dance?

These are deep philosophical questions. But they help us recognizewhere we may be in the cycle. As prices reach a loony excess, peoples’ideas grow loony too. Ergo, the loonier the ideas the more likely it is thata turning point is near; the wilder the party, the more likely someone willcall the gendarmes.

We also suspect that attitudes evolve similarly in an imperial cycle,during which a country’s economic, financial, and military power runsup over several generations and then declines. At the peak, the imperialpeople come to believe that their system is superior, that their valuesare universal, and that their way of life will inevitably dominate the entireworld.

Readers will recognize these attitudes in a famous article by FrancisFukayama, written after the fall of the Soviet Union, in which he suggestedthat the world may have reached the “End of History.” It was theend of history because the American system had triumphed—no improvementseemed possible. Fukayama’s idea was not original. Hegel and Marxistintellectuals had proposed the same thing more than a hundred yearsearlier. With the victory of the proletariat, no further advance could bemade.

History had to stop.

Hegel stopped ticking. Marx died, too. History continued.

But when people feel they are on top of the world, they begin to takethings for granted that they previously thought absurd. As we mentionedearlier, Americans now depend on the savings of Communist China inorder to pay for their lifestyles . . . and their wars to make the world safefor democracy. They do so without thinking.

Subconsciously, they’vecome to believe what imperial people always seem to believe—that theirsociety is so superior, that the rest of the world longs to be just like themor is inevitably drawn to become like them, whether they like it or not.

Empire of Debt: Delusions Of An Imperial Cycle

That’s the premise behind the billions of dollars Americans are investingin China. A few years ago if someone had suggested that they invest in acommunist country they would have thought the person mad. China isstill run by veterans of various “great leaps forward,” but Americans areconvinced that they’re all leaping to become just like us—capitalists anddemocrats at heart! So vain are we that we can’t imagine anyone wantingto be anything else.

Likewise, we were recently in Nicaragua. We have a house downthere, and we buy more land whenever we get an opportunity. Prices havesoared in the past f ive years. Someone bought a beach-front lot recentlyfor $350,000, a price that would have been thought insane a few yearsago. Nicaragua is, after all, a third-world country. It is also a country thatwas run by communists until a few years ago. One of the communists isnow a leading candidate to become el presidente in the next election. Andright now, the nation’s politicians are debating a proposed law that woulddeclare all land within 200 meters of high tide “public.” In effect, we’d alllose our land, our houses, and the money we’ve invested down there. Butnone of us quite believe it will happen, because we’re convinced that theyall want to be just like us—and we’d never do such a thing.

And of course, the invasion of Iraq was based on the same sort of thinking:that even the grubby desert tribes want to be just like us. All we haveto do is to get the dictator off their backs and the men will start buildingshopping malls and the women will all start dressing like Britney Spears.

Those are the sort of delusions you get at the top of an imperial cycle.

But culture, political systems, and economies are never as universaland eternal as we think. Instead, everything evolves. Even in France, ourclosest cousins do not share our American attitudes. In the United States,we all seek to maximize our incomes. We work long hours. We start enterprises.We invest. In France, people do not seek to maximize their incomes.

Instead, what they want to maximize is their leisure, and thequality of their lives. They spend more time talking about how to cookthe bacon than they do about how to bring it home.

France once had a European Empire that reached from Spain toMoscow. Later, it had a worldwide empire, with subject countries andcolonies in Africa, the West Indies, and the South Pacif ic. From the timeof Richelieu to the time of Leon Blum, France had one of the most powerfularmies on earth. Even at the beginning of World War II, France hadthe largest army in Europe—on paper. But there never was a cycle that
didn’t want to turn. And the imperial cycle turns along with the rest ofthem. For many generations, the French believed they had the finest culture,the best schools, the most advanced scientists, and the most dynamicbuilders in the world. France saw its mission as bringing the benef its of itscivilization—of vin rouge and the Rights of Man—to the rest of theglobe. But now it’s our turn. It is we Americans who think we have thebest culture, the best economy, the best government, and the best armythe world has ever seen. Now, it is we who have the burden of the “missioncivilisatrice.” It is our duty to bring freedom and democracy to thistattered old ball; our president said so.

How did America become an empire?

We don’t recall the questionever coming up. There was never a debate on the subject. There was nevera national referendum. No presidential candidate ever suggested it.

Nobodyever said, “Hey, let’s be an empire!” People do not choose to have anempire; it chooses them. Gradually and unconsciously, their thoughts, beliefs,and institutions are refashioned to the imperial agenda.

While there has been no discussion of whether America should be anempire, there has been much public clucking on the specif ic points of theimperial agenda. Should we attack Iran or Iraq? Should we have nationalidentity cards? Should we suspend the Bill of Rights in order to combatterrorists more effectively?

Many people wondered, including your author, what was the point ofthe war against Iraq. The country had no part in terrorist attacks. Au contraire,Saddam’s Iraq was a bulwark of secular pragmatism in an area unsettledby religious fanaticism. It was the religious fanatics who posed adanger, said the papers, not the ruthless dictators who suppressed them.

Others wondered if an attack on Iraq would make the world safer or moredangerous. Or if the United States had committed enough troops to getthe job done.

But the big question had already been settled without ever havingbeen raised. Why should Americans care what happened in the mideast?

Or anywhere else? Did the Swiss wonder what kind of government Iraqshould have? Did the Swiss try to make the rest of the world more likeSwitzerland, or allow themselves the vain fantasy of imagining that everyoneon the planet secretly yearned to be more like the Swiss themselves?

While no one noticed, the imperial weed put down roots deep in thesoil of North America. By the early twenty-f irst century, hardly anythingelse grew; it had completely crowded out the delicate f lowers planted bythe Founding Fathers. The debate surrounding the invasion of Iraq was animperial debate—about means and methods, not about right and wrong ornational interest. No one from either major political party bothered tosuggest that the United States had no business nosing around in other peoples’business. Both parties recognized that Iraq was not a matter of nationalinterest—it was a matter of imperial interest. No business, nowhere, was too small or too remote not to be of interest to the empire.

From its military bases all over the globe, and its sensors orbiting theplanet, the American imperium watched everyone, everywhere, all thetime. In the year 2005, no sparrow falls anywhere in the world withouttriggering a monitoring device in the Pentagon.

This marks what may be the peak of a trend that began more than onehundred years ago. Just about the turn of the century, the United Statesbecame the world’s largest economy—and its fastest growing one. Nearthe same time, Theodore Roosevelt began riding rough over small, poornations. America’s fat proto-imperialist rarely saw a fight he didn’t wantto get into. It was at his urging (he had threatened to raise his own armyto do the job) that Wilson announced his readiness to join the war in Europein 1917. Wilson said he was doing it to “make the world safe fordemocracy.” This is the stated goal of nearly all U.S. foreign policy eversince: to improve the planet with more democracy. Of course, almost allempire builders think they are improving the planet. Even Alexander theGreat thought he was doing it a favor by spreading Greek culture.

But when Wilson sent troops to Europe, people wondered then whatthe real point was. America had no interest in the war and no particularreason to favor one side over the other. But there too, they missed thepoint. America was quickly becoming an empire. Empires are almost alwaysat war—for their role is to “make the world safe.”

President Truman clarified the imperial modus operandus when hesent the United States into battle in Korea with no declaration of war. Hedidn’t even tell Congress until after the army was engaged and Americanswere dying. Then, President Johnson followed up with another war in afar-off place that made no difference to Americans—Vietnam. What wasthe point?

The Swiss army was nowhere to be found. And where were theBelgians? Even the French had given up on Vietnam a decade before. Butmore than three million American soldiers went to Vietnam and manycame back flat. And for what? Just another war on the periphery of theempire. None of these engagements made any sense for a humble nationthat minded its own business. None would have made any sense for Americauntil the first Roosevelt administration; but once the nation had becomean empire—with a homeland and wide-ranging interests beyondit—almost all wars seemed appropriate.

Empire of Debt:America Is Its Own Worst Enemy

Another landmark in the history of the American empire came onAugust 15, 1971. That was the day that Richard Nixon severed the linkbetween the imperial currency and gold. Thitherto, empire or no, theUnited States had to settle its debts like other nations—in a currency itcouldn’t manufacture. Henceforth, the way was clear for a vast increase inempire spending . . . and debt.

Thus we arrive at the real problem for the American empire. It has byfar the strongest military in the world. It has no serious challengers beyondits borders. Hence, it had to become its own worst enemy. All empiresmust pass away. All must find a way to destroy themselves. Americafound debt.

The traditional method of empire finance is so simple even a Mongolbarbarian could master it. Nations are conquered and forced to pay tribute.The homeland is supposed to make a prof it; it is supposed to growricher compared to the vassal states. But here, America fell victim of itsown scam. Pretending to make the world a better place, the United Statescould not very well require the poor nations it conquered to pay up. Instead,it had to borrow from them.

This was not a problem in the early days. Until the mid-1980s, U.S.industries were so robust they were able to take advantage of the pax dollariumto expand sales, jobs, and prof its. But in the 1970s, the U.S. tradebalance turned negative. By the year Alan Greenspan took over at the Fed,foreigners owned more U.S. assets than Americans owned foreign ones.

American factories had grown old and expensive. American workers werepaid too much. American businessmen invested too little in training andnew capital equipment. The whole nation developed an attitude more inharmony with an empire on the decline than one that was still rising. Theimperial people chose to spend rather than to save, and to hallucinate,rather than think hard. They demanded bread and circuses at home; letthe Asians sweat abroad.

Empires are thought by many to be good things. They expand thearea in which trade can take place. In modern parlance, they allow for increased“globalization.” Generally, globalization is good for everyone. Itpermits people to specialize in what they do best, producing more andbetter things at lower costs. But it is more benef icial to some than to others.

And currently, the Asians are getting the most out of it. There arethree billion people in Asia. And almost every one of them is willing towork for a fraction of the average American wage. Not only that, theytend to save their money, rather than spend it. The savings rate in China,for example, is said to be nearly 25 percent. In America, it is near zero.

Globalization and artif icially low interest rates in America have allowedAsian industries to f lourish. But for every dollar earned by an Asianexporter, 6 cents in debt is added to America’s heavy balance sheet.

Things happen that no one particularly wants or especially encourages,and the average man goes along with whatever humbug is popular—with no real idea where it leads or why he favors it.

Each person plays the role given to him; everyone believes what heneeds to believe to play the part.

Alan Greenspan was famously against paper money that was notbacked by gold when he was a libertarian intellectual. When he became agovernment functionary, his views conveniently changed. He came to believewhat he had to believe in order to be the head of the American empire’scentral bank: the Federal Reserve. The empire needs almostunlimited amounts of credit to carry out its foreign wars, while making
bread and circuses available at home. Alan Greenspan makes sure it gets it.

Expensive foreign wars, expensive bread, expensive circuses—theseare, of course, what bankrupted almost every empire from Rome to London.But that is just the point: institutions play their roles, too. Onegrows; another decays. One is young and dynamic while another is oldand decrepit. One has to die to make way for the new one to take itsplace. One has to ruin itself so that another may flourish.

Americans could cut their military budget by 75 percent and stillhave the biggest, most advanced army in the world. They could trimtheir household spending by half, and still live well. They could drive lessin smaller cars, they could cease mortgaging their houses, they could“make do” with last year’s clothes and yesterday’s laptop, but how couldthey ruin themselves if they put on the brakes before getting to where
they are going?

Alan Greenspan’s easy money policies—the Fed has been lendingmoney at a rate at or below the level of consumer price inf lation for morethan two years—do not merely lure Americans to borrow and spend, theyalso grease the skids of history, permitting one empire to slip away whileanother slides in to take its place. The main benef iciaries of the presentgush of globalization are the Asians. As American consumers turn to Wal-Mart to buy more and more things at “Every-Day Low Prices,” they find
products from China and Malaysia on the shelves. Were it not forGreenspan’s low lending rates, they would not have found it so tempting toborrow. Were it not for Greenspans low rates, they would not have foundit so alluring to spend. Were it not for Greenspan’s low rates, they wouldnot have bought so much from Asian manufacturers, the Asians wouldhave made less money and would have built fewer new factories andtrained fewer new workers. Were it not for Greenspan’s lending policies, inother words, Asia would not have grown so quickly and would not now
pose such a competitive threat to the rest of the world’s industries. AndAmericans would not owe Asians so much money. In today’s paper for example,a headline tells the tale: “China joins global race for fastest computers:

Beijing and Tokyo aim at a new barrier to overtake U.S. lead.”4Asians now own enough U.S. dollar assets to buy a controlling interestin every company on the Dow. They have enough T-bonds to destroythe U.S. economy on a whim. Their economic power is growing at threeto f ive times the GDP rate of Western nations. So far, they have shownlittle interest in political power; that is for a later stage of the cycle, anotherrole for another time.

None of these insights are new or original. Most Americans have heardthese things. Longtime readers of our Daily Reckoning have heard them so often they look for exits
when they see your authors coming. But while people know these thingsto be true, they don’t really believe them. They believe what they need tobelieve in this late, degenerate stage of the empire. That is, they believe insloppy fantasies.

“The U.S. economy is still the most dynamic and f lexible in theworld,” they tell each other. “We’re the most creative, inventive peopleon the planet,” they congratulate themselves. “We’ll invent new businesses.We’ll think of something!”

These vague expressions of faith are probably typical for an advancedempire. The Romans, even to the time of the last emperor, Romulus,when the Barbarians appeared before the city walls, most likely told eachother: “We’ll beat them again this time; we always do!”

You never know where you are in the cycle until it is too late to doanything about it. For all we know, we could be facing merely a temporarypullback in what is still a long-term bullish period for the Americanempire.

We have mentioned how present American attitudes seem more inkeeping with the end of a great empire than the beginning of one. In additionto that, the math of it makes us think we are closer to the end thanthe debut. The United States pays the direct costs of globalization—a militarybudget greater than the combined military spending of all of the restof the world combined. Plus, it bears the indirect costs of its own consumeristexcesses—another $700 billion or so per year in trade def icit.

Together, they represent a cost of empire of more than 10 percent ofGDP . . . more than $1 trillion each year.Instead of collecting tribute, the United States finances these costs byborrowing. Here, Alan Greenspan and the paper dollar were immenselyhelpful. There is no theoretical limit to the amount of debt that can betaken on. The problem is a practical one. The dollar must maintain a reasonablevalue or lenders will be unwilling to lend. Dollar loans must alsopay a reasonable amount of interest. With $36 trillion in loans outstanding,even at 5 percent interest, that represents annual debt service paymentsof $1.8 trillion.

Who’s got that kind of money?

Not Americans;they’re already spending every penny. And the more they spend, the lessmoney they have left to pay interest. All they can do is to refinance—takingon new debt in order to pay the interest on the old debt. We will notdwell on this, as it is obvious even to an economist that it can’t go on forvery long. Sooner or later people cannot continue to borrow and cannotcontinue to make their payments.

This reminds us of one of the delusions that has been especiallyfetching lately. Alan Greenspan tells us that as long as house prices rise inparallel with household debt there should be no problem. He must knowthat it is not true. Relative to his assets, he says, the U.S. consumer is notover indebted. This is a little like telling a man not to worry aboutdrinking too much—as long as he is getting fatter at the same time!

Theprice of a house is only of interest if he is going to sell out and live in acave, or die. Otherwise, he has no way of realizing the inf lated value ofhis house—except by borrowing against it, which only makes the situationworse.Americans do not seem particularly concerned about their debts.

They, like the economists who advise them, come to believe what theymust. And just as they come to these beliefs as circumstances change—notby pure thinking—so do they give them up. They continue believing inthese fantasies and conceits until they are crushed out of them. Then, andonly then, do they take up new beliefs.

Currently, Americans still believe in stocks, even though they’vemade not a penny in them for more than six years. Based on past experience,the bear market that began in January 2000 will probably continuefor another 10 years, taking prices down to six to eight times earnings.

Then, their faith in stocks will finally be crushed out . . . at the very momentstocks are ready for another bull market.

Americans also believe that houses always go up in price. No cobwebsgrow over a real estate off ice door. No mortgage lender sits by the phonewaiting for it to ring. And yet, it is impossible for real estate prices to exceedthe rate of GDP growth for very long. This belief will also have tobe crushed out, by a long bear market in property.

Prices in Rome began adownturn in the year AD 300 or so (this we do not know for a fact, it is justa good guess). They did not stop going down until 1,000 years later . . . inthe Renaissance . . . or maybe later. Even as late as the eighteenth century,sheep were grazing where the Forum used to be.

The belief in the American empire—in American cultural, political,social, and economic superiority—must also be crushed out somehow.

That is the likely next phase . . . the degenerate stage of empire . . . which
could last one hundred years or more.

In summary, the theory we have been teasing out is that politics andmarkets follow similar cyclical patterns—boom, bust, bubble, and bamboozle.A handful of companies usually take a dominant position in themarket; sometimes a single one does. So do a few countries dominateworld politics . . . “empires” they are called. The difference between aregular nation and an empire is profound. A regular nation—such as Belgiumor Bulgaria—tends its own affairs. An empire looks outward, takingon its shoulders the fate of much of the world. An empire is like a bullmarket. It grows, it develops . . . often it passes into a bubble phase, whenpeople come to believe the most absurd things.

We don’t know what stage the American empire has reached . . . butwe look around and see so many degenerate and absurd things, we guess:

We must be nearer the end than the beginning.How will it end? What will happen next? We don’t know, but wenote that people do not give up their self-serving conceits and illusionsreadily. They hold on to them as long as possible. “America still has the
greatest, most dynamic economy on earth,” they tell themselves, even asthe nation loses money (its income is less than its expenses). This kind ofmadness is hard not to like; it is like an aging woman who thinks she becomesmore fetching with each passing year. The gap between perceptionand reality grows wider every day, until finally, the mirror cracks.

Empire of Debt: A Familiar Forecast

What will shatter America’s confidence is probably a combination offinancial crises. The dollar is vulnerable. So are Treasury bonds. So arestocks and house prices. Which one will crack the mirror is anyone’sguess. Our guess is that house prices will stop rising, causing a cutback inconsumer spending. This will send the U.S. economy into recession. . . probably a long, soft slump that will take down house prices and thestock market, but leave the dollar and bonds with little damage.

Long suffering readers will find this forecast familiar. It is the sameone we made two years ago in another book with Addison Wiggin calledFinancial Reckoning Day ( John Wiley, 2003). We thought then that thetech bubble would blow up, resulting in a long, soft slow slump, à la Japan.Whether we were wrong, or just early, only tomorrow’s newspapers willtell. Instead of a real slump, the United States has had a 9-month phonyrecession (in which consumer debt actually expanded) and a phony boom
since (in which consumer debt actually expanded). These two phonyacts, we believe, set the stage for a real one—a not-so-soft, maybe not-soslow,slump.

If we were sure of this forecast we would buy bonds. Since we are unsure,we buy gold. In the coming real slump, assets of all sorts are likely tobe marked down—especially those with a debtor on the other side of thetransaction. Gold is what people will buy when they start to wonder aboutthe empire . . . and its money. We guess that they will begin to wondermore and more.

“I read in the Figaro that the American economy has become completelydependent on China,” said a friend at a dinner party recently. “ButI guess the Chinese have no choice. They need Americans to continuebuying their products.”

We are alarmed. Even chemists and shoe clerks have taken up macroeconomics.
Everyone thinks he understands how the world economy works.

“Well, it is a little like that,” we began to explain. “The Chinese dosell to the U.S. and they do lend money back to the U.S. But there’s nolaw that says this has to continue.

“Imagine a shopkeeper whose biggest customer was having a hardtime paying his bills. He extends credit . . . hoping the man will get hisfinances in order. But the more credit he gives him, the worse the man’sfinances are. It would be very nice if that could work out. But it rarelydoes. Instead, it eventually blows up. The customer has to stop buying andthe shopkeeper has to stop lending. There’s going to be hell to pay, inother words.”

“What should an investor do to protect himself,” our friend asked.

“Buy gold.”

“Gold? What a strange idea. I haven’t heard anyone mention goldin many years. It seems so out-of-date. I didn’t think anyone boughtgold anymore.”

“That’s why you should buy it.”

The Daily Reckoning