America's Glorious Empire of Debt

The Daily Reckoning PRESENTS: Take a moment to admire America’s magnificent empire…the bubbles, the debt, the deficits, and the fraud. Bill Bonner explores…

by Bill Bonner

Let us take a moment to stand back and gaze at America’s great Empire of Debt. It is the largest edifice of debt ever put up. It sustains the most magnificent world economy ever assembled. It brings more wealth to more people than any system ever before devised.

Not only is it incomparably effective, it is also immeasurably entertaining. For it has its burnished helmets and flying banners; its intellectuals and its gladiators; its Caesars, Antonys, Neros, and Caligulas. It has its temples, its forum, its Capitol, its senators; its praetorian guards; its via Appia; its proconsuls, centurions, and legions all over the world as well as its bread and its circuses in the homeland and its costly wars in periphery areas.

The Roman Empire rested on a classical model of imperial finance. Beneath a complex and nuanced pyramid of relationships was a foundation of tribute formed with the hard rock of brute force. America’s empire of debt, on the other hand, stands not as a solid pyramid of trust, authority, and power relationships, but as a rickety slum of delusion, fraud, and misapprehension.

“My tax guy has been bugging me…You know, real estate is where it is at.” In June 2005, NBC quoted a young woman who had bought a second home at a Colorado resort. According to the report, more than a third of the houses sold in the previous 12 months were not primary residences, but second homes or investments.

Down at the bottom of the pyramid are petty agents spreading deceit and misinformation – such as the aforementioned “tax guy.” You would think a young woman could trust her certified tax advisor to give her sound counsel. Instead, he urges her to get into the most bubbly property market in American history. Naturally, she went for it, aided no doubt by a whole industry of professional dissemblers. Press reports tell us that appraisers routinely stretch valuations to help close a deal. Mortgage lenders know perfectly well the appraisals are lies, but they wink at them with one eye while winking at the borrower’s phony income declaration with the other. Again, according to the press reports, lenders no longer verify income claims. They have gone blind!

In California, house prices have raced so far ahead of incomes that barely one in ten buyers can afford the median house. Yet thanks to “creative finance,” more houses are being sold than ever before. Thus the foundation of the debt pyramid is laid down in a bed of mutual deceit and cupidity, and covered with another level of fabrications. Lenders do not stick around to see how the loans work out. Instead, they pretend the credits are good, and package the mortgages into convenient units so that investors can buy them. The financiers know damned well that many buyers can’t really afford to pay for the houses they buy, but they see no point in mentioning it. Nor do the investors want to know.

They’re in on the scam, too. The smartest of them even have figured out how it works: The Fed holds down short-term rates below the inflation rate so that investors in long-term mortgage financing and buyers of U.S. Treasury obligations can make an easy profit.

Further up the steps of imperial debt are whole legions of analysts, economists, and full-time obfuscators whose role is to make us all believe six impossible things before breakfast and a dozen more before dinner. Quack economists at the Bureau of Labor Statistics do to numbers what guards at Guantanamo did to prisoners. They rough them up so badly, they are ready to say anything. This abuse of statistics is what allows Americans to deceive themselves about their own economy. It is healthy, they say. It is growing. It is stable. All these so-called facts are little more than elaborate prevarications.

Economists, commentators, and policymakers take up these distortions and add their own twists. It is obvious to anyone who bothers to think about it that an economy that spends more than it earns is in decline. But try to find an economist willing to say so! They’ve all become like rich notables in the time of Trajan, doing the emperor’s work whether they are on his payroll or not. They will tell you the economy is expanding, but it is an expansion similar to what happens when a compulsive eater escapes from a fat farm. The longer he is on the loose, the worse off he becomes.

On the issue of the trade deficit, they will say what the senators and consuls want to hear, as Levey and Brown did in Foreign Affairs magazine: “The United States’ current account deficit and foreign debt are not dire threats to its global position, as would-be Cassandras warn. U.S. power is firmly grounded on economic superiority and financial stability that will not end soon.” In fact, the story of international trade, circa 2005, is the most preposterous tale economists have ever heard. One nation buys things that it cannot afford and doesn’t need with money it doesn’t have. Another sells on credit to people who already cannot pay and builds more factories to increase output.

Every level colludes with every other level to keep the flimflam going. On the banks of the Potomac, people of all classes, rank, and station are pleased to believe that all is well. And there, at the Federal Reserve headquarters, is another caste of loyal liars. Alan Greenspan and his fellow connivers not only urge citizens to mortgage their houses, buy SUVs, and commit other acts of wanton recklessness, they also control the nation’s money and make sure that it plays along with the fraud. They do not even have to clip the precious metal out of the imperial coins; there is none in it.

From the center to the furthest garrisons on the periphery, from the lowest rank to the highest – everyone, everywhere willingly, happily, and proudly participates in one of the greatest deceits of all time. At the bottom of the empire are wage slaves squandering borrowed money on imported doodads. The plebes gamble on adjustable rate mortgages (ARMs). The patricians gamble on hedge funds that speculate on huge swaths of mortgage debt. Near the top are Fed economists urging them to do it! And at the very pinnacle is a chief executive, modeled after Augustus, who cuts taxes while increasing spending on bread, circuses, and peripheral wars. (It might be added that some of the biggest lies in the history of warfare were told to the American lumpen public to stir up support for the war against Iraq, but it hardly seems worth mentioning it.)

The spectacle is breathtaking. And endlessly entertaining. We are humbled by the majesty of it. Everywhere we look, we see an exquisite but precarious balance between things that are equally and oppositely absurd. On the one side of the globe – in the Anglo-Saxon countries in general, but the United States in particular – are the consumers. On the other side – principally in Asia – are the producers. One side makes, the other takes. One saves, the other borrows. One produces, the other consumes. This is not the way it was meant to be. When America first stooped to Empire, she was a rising, robust, energetic, innovative young economy. And for the first six decades of her imperium – roughly from 1913 until 1977 – she profited from her competitive position. Every country to which she was able to extend her pax dollarum became a customer. Her businesses made a profit.

But gradually, her commercial advantage faded and her industries aged. The very process of spreading the soft, warmth of her protection over the earth seemed to make it more fertile. Tough, weedy competitors sprouted all over the periphery of the empire – first in Europe, then in Japan, and later, throughout Asia, even are as she had never been able to dominate.

By the early 21st century, the costs of maintaining her role as the world’s only superpower, and its only imperial power, had risen in excess of five percent of her GDP, or $558 billion per year. Not only had she never figured out a good way to charge for providing the world with order, now order was working against her. The periphery economies grew faster. They had newer and better industries. They had higher savings levels and much lower labor rates. They had few of the costs of bread or circuses and none of the costs of policing the empire. They were freer, lighter, faster. Every day, the competitors took more of America’s business, assets, and money. If the empire were an operating business, accountants would say it was losing money.

The empire no longer pays because the entire Western world – including Japan – has lost its competitive edge. Globalization of the pax dollarum era served the United States well after World War II. The global economic system in the pax dollarium era was perfectly balanced. For every credit in Asia, there was an equal and opposite debit in the United States. And for every dollar’s worth of demand from the United States, there was a dollar’s worth of supply already waiting in a container in Hong Kong. But while the imperial finance system was flawless, its perfections were devastating.

For the moment, Americans salute their imperial standards. They gratefully paste the flag to their car windows, their jackets, their hats, their beer mugs, their shirts and even their underwear. Americans are proud of their empire – and should be. Without it, they could never have gotten so far in debt. What central banker would fill his vault with Argentine pesos or Zimbabwe dollars? What drug dealer or arms seller would want Polish zlotys in payment? What insurance company would want to buy Bolivian or Kyrgzstan bonds to cover its long-dated liabilities? The dollar has not been convertible into gold for 34 years.

Yet, people still take it as though it were as good as the yellow metal – only better. Ultimately, lending money to a foreign government is a bet that the government will put the squeeze on its own citizens to make sure you get paid. The United States doesn’t even have to squeeze. When one foreign loan comes due, other foreigners practically line up to refinance it; it is as if they were bringing pastries to an extremely fat man, just to gawk and wonder when he might explode.

Bill Bonner
The Daily Reckoning
Ouzilly, France
February 28, 2006

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:

“Now Perhaps Someone Will Listen!”

“There is a crack in every thing God has made,” said Emerson.

The truth is that the feds can control either the quantity of the nation’s money or the quality of it. At the heart of the world’s next – and probably greatest – financial crisis is the sad fact that they cannot do both at the same time. Alas, there is always some catch…some restraint…some skunk in the woodpile. We cannot grow wiser without growing older. We cannot grow richer in the future without forgoing the chance to enjoy our money in the present. We cannot make the Devil’s food cake of an expanding money supply without the gooey spoons and burnt pans of inflation hidden somewhere in the kitchen sink.

Next month, the feds will cease reporting the M3 figure. Thenceforth, it will be harder to figure out at what rate the U.S. money supply is expanding. That is to say, it will be harder to know how much money the feds are hoping to steal from the world’s savers.

Yes, dear reader, the great American Empire faces the future, not with grace and resolve, but denial, delusion, deceit, and more debt.

Will the Bernanke Fed protect the quality of the dollar, or will it tend to favor the quantity of it? We already know the answer. He has told us himself: he will hire helicopters to drop the green paper all over the country, if it comes to that, just to make sure the quality of the nation’s currency does not improve. In Bernanke’s big, black book of economic alchemy, there is no worse sin for a central banker than to allow deflation, otherwise known as an increase in the value of money.

And so, the feds deceive in order to continue their delusions of power, grandeur and mediocrity. Yes, they say that the current economy is nothing special. It is mediocre – just the way it ought to be.

What? Is the yield curve not upside down? Do Americans not spend more than they earn (the savings rate is net negative) for the first time since the Great Depression? Are house prices not at record levels, after more than $5 trillion in appreciation since 2001? Are inventories of unsold houses not also at record levels? Is the country not at war (for the first time ever) with an unnamed enemy? Will the feds not borrow half a trillion dollars in the next fiscal year, while the country buys $800 billion more from foreigners than it sells to them? Did gold not outperform all major asset classes last year? Are all these things not exceptional? Surely, they are anything but mediocre.

We suspect that increases in the money supply will also be exceptional in the years to come – even spectacular. We further suspect that it was to avoid noticing these exceptional increases in M3 that the government decided to stop reporting the figures.

Eventually, of course, the inflation news will get out.

“But how about the inflation-price statistics that are announced monthly?” asked Richard Russell yesterday. “For instance, the latest CPI figures show a rise of 0.7% in January or at an inflation rate of almost 9%. To hide this the Fed depends on the ridiculous ‘core inflation’ rate, which eliminates food and energy. How about this – the core rate has been lower than the overall gain in the CPI for 39 consecutive months. That’s the longest such stretch since the government started computing the core rate back in the 1950s.”

What a shock! Government quants created the “core” measure in order to eliminate the volatility of food and energy prices. This would give us a more accurate and consistent picture of inflation, they said. What it really does is persistently understate the actual inflation figure.

Lies, lies, lies…and more lies. But, what do you expect, dear reader? Yet, who doesn’t like lies…so long as they are flattering?

More news from our currency counselor…


Chuck Butler, reporting from the EverBank world currency trading desk:

“The Canadian dollar/loonie is moving higher and leaving the 86-cent handle in its rear view mirror! Traders and investors are trading the loonie as it should be traded, after Canada posted a wider current account surplus than last quarter.”

For the rest of this story, and for more insights into the world currency markets, see today’s issue of The Daily Pfennig


Bill Bonner with more views from Ouzilly…

*** Good news for our neighbors to the north who have been feeling left out because Addison hasn’t appeared on their television set, telling tales of consumer debt and imperial delusion, your wait is over. Tonight, Addison will be interviewed on Canada’s Report on Business Television’s program, Squeeze Play. The interview will air at 5:40 p.m., so if you are up that way, tune in!

*** Let’s say you agree. The five Big Es are reshaping the world: the Empire is peaking out; there’s an Exodus of money and power from West to East; the Economic cycle has turned against us; the Experimental money system – with no gold backing – is doomed; and the days of cheap Energy are over. So what? What do you do?

As we wrote a few days ago, we doubt that these big trends are easily tradable. You can’t buy stocks in China and relax. Nor can you be sure that energy stocks are not already overpriced. And as for the stock market itself, yes it is bound to turn down. But when? And how? It could be that stock prices remain nominally stable for the next 10 years, while inflation lowers real stock values.

Probably the surest trend is the rise of gold and yet, even gold is not guaranteed to follow any known time schedule. In fact, gold is in “correction” mode right now, or should be. The price could fall to $500, before beginning the next big move upward.

So what do you do?

First, lower expectations. Forget about trying to stay young forever…and forget about making money from your investments. The whole idea is a bit of a fraud anyway. Why should you get richer without working? The best you should hope for is to earn a reasonable amount for allowing someone else to use your savings. You are giving up something: current enjoyment. You deserve to get something in return. Over the last 200 years, the real return from lending savings has been between 3% and 6%. If you are able get that kind of return, you should take it happily.

The trouble is, government notes and bonds don’t give you that much. After inflation and taxes, the net return is negative – no matter how far out you go. What’s worse, the rising price of gold signals that the currency itself is in jeopardy. If gold were to go to $1,000 an ounce, you would lose more than half the value of your T-note (measured in gold). A fall in the dollar against other currencies could produce similar losses (though they might be more difficult to measure or understand).

Lower your expectations. Forget about building wealth. In these circumstances, the best you can hope for is that you will be able to prevent anything from knocking down the wealth you have already built. One way to do that is by buying things you like with value that is not subject to change. A house you enjoy, for example. Don’t worry about selling it. Don’t think about refinancing it. Don’t even ask how much the neighbors got for their house down the street. Just buy it; enjoy it. Let it go at that.

Likewise, a business – not a stock – can be a decent thing to own. You must understand it and like it. If you do, you can forget about going public…or about selling it. Upon being asked being asked about what a normal life consisted of, Freud allegedly purports: love and work. A business of your own can provide you with the work – and income – you need.

There are also many “assets” that bring pleasure to their owners beyond capital gains: paintings, boats, farms, jewelry, vacation houses, cars, collectibles. Just don’t expect to be able to resell at higher prices. On the other hand, many of these things are rare and irreproducible. If wealth really is migrating from West to East, it is possible that these things will migrate, too – at higher prices. We have heard of Chinese and Japanese entrepreneurs buying French châteaux, and then dismantling them, stone by stone, in order to rebuild them in Asia. Increasingly, great works of art are sold to bidders from the Orient. Indian billionaires are building fabulous collections of cars, planes…even locomotives.

Of course, you will need cash to pay expenses. Not knowing the future, all we can suggest is that you keep your cash as safe as possible, so that the future does not steal it from you. Put some in foreign currency CDs, for example, and put some in gold. If there is one big winner as the Big Es evolve, it is likely to be gold. The Big Es are big changes, and big changes come with big risks. When people feel threatened they tend to turn to God, guns and gold. All three might be useful, or even necessary. Gold is likely to be profitable, too.

*** Last night, we went to dinner in a medieval-era castle not far from home. The place was built in the 12th or 13th century, and scarcely touched since then. It is very cold in Europe, but the house had no heating – save a huge log burning in a magnificent fireplace, in front of which a banquet table had been set up.

We can now report, from experience, that there has been substantial technological progress in the world since the 13th century. Central heating is definitely an improvement. For while our faces were heated to a red glow by the flaming log in front of us, our backs were cold as ice.

The Daily Reckoning