Paying for the Purple

Did you ever wonder how America came to be the world’s superpower? Bill Bonner explores the self-deception, and the mad and preposterous ideas that led America to her first awkward steps as an empire…

America took its first awkward steps towards empire at the end of the 19th century, with Theodore Roosevelt intervening in various diarrhea countries for forgettable reasons and with regrettable results. Later, in April of 1917, Woodrow Wilson took off at a trot with the fat Rough Rider still breathing down his neck. He urged Congress to declare war on distant country with which it had no real beef and in which it had no genuine interest.

America had mixed and confusing sentiments about empire from the get-go. Its founders were schooled in the history of Rome and determined to avoid what they saw as her mistakes. But at the same time, they couldn’t help but lust for the grandeur of it themselves. The longed for the imperial purple, perhaps, from the very beginning.

William Drayton, chief justice of the highest court in South Carolina, wrote in 1776: "Empires have their zenith – and their declension and dissolution… The British period is from the year 1758, when they victoriously pursued their Enemies into every Quarter of the Globe… The Almighty…has made the choice of the present generation to erect the American Empire…and thus has suddenly arisen in the World, a new Empire, styled the United States of America. An Empire that as soon as started into Existence, attracts the attention of the Rest of the Universe; and bids fair by the blessing of God, to be the most glorious of any upon Record."

John Quincy Adams, however, cautioned that while "she might become the dictatress of the world: she would be no longer ruler of her own spirit." More than two centuries later, her spirit has run wild. She has soldiers garrisoned all over the world. She has "interests" in places few Americans have ever heard of, and even fewer still care about. There is no corner or dead-end street in the world that is not somehow patrolled by U.S. forces. The Pentagon has divided the entire globe into four regional military commands – each with its own commander-in-chief. The role of these, said General Anthony Zini is "like that of a proconsul of the Roman Empire." At the end of this year, America is scheduled to spend more in a single year on "defense" than all the rest of the world combined.

Future of the American Empire: No One Left to Defend Against

Already, Daily Reckoning readers must be asking themselves questions: America is the world’s only super power; since the capitulation of the Soviet Union, she has no enemies capable of inflicting serious damage; what is she defending herself against? But that is just the point. The imperial spirit has gotten the best of her. She no longer plays a role that she can understand and control. Now, she is an imperial power; she must play the role that has been thrust in her hands. She must provide "security" for the entire world. She must provide the "public good" of law and order. Someone has to do it. Who else could, but America? She is dictatress of the world, but no longer master of herself…or her own finances.

We stop a moment to reflect. The urge to empire is as irresistible as a free lunch. The male of the species can’t pass up a chance to strut around feeling superior, like the cock of the walk in the henyard. Scarlet tunics and ostrich feathers have gone out of style, but the men who wore them are the same as those who sacked Rome with Alaric, laid waste to Albi with the Duke de Montfort, and entered Baghdad with the U.S. Army 3rd Infantry Airborne. The uniforms change, but men are the same grasping, vaunting, humbugging schmucks they always have been.

That is what makes history so entertaining. And what makes the history of empires particularly entertaining is watching the great emperors…the Napoleons, Alexanders, Caesars, Attilas, and Adolfs of the world – with all their glorious pretensions and sordid butchery – put on the red tunics and burnished helmets…mount their white chargers…and ride right into a stone wall.

There is nothing quite so amusing as watching another man make a fool of himself. It makes you feel superior; that is why you grow taller and more good looking when you read the history of empires.

Evolutionary biologists reduce the whole impulse to empire to nothing more than genes and math. After a man has enough to eat, his genes – and by command, his thoughts and emotions – want nothing more than for him to spread his seed as widely as possible. Genes are only interested in replication, according to the hypothesis. All the trappings of wealth and power – including the urge to lord it over others – are merely proxies and substitutes for sexual attractiveness. A great ruler conquers a city much for the same reason a middle-aged lawyer buys an expensive sports car or a peacock spreads his tail feathers. It indicates to females that he has good genes. The entertainment comes in when the great ruler himself is defeated and hung from a meat hook…when the peacock is taken by a fox…and the red sports car gets the boot!

Future of the American Empire: The Difference Between Us and Genghis Khan

Genghis Khan’s empire was simple to understand, and hugely successful. His Mongols conquered cities from the Nile to the China Sea. He demanded that they pay a tribute of 10% of their revenues. If they resisted – and often even if they didn’t – he killed the men…and took the women for his own pleasure. A recent DNA study across Asia shows how successful he was. He has about 16 million descendants, researchers estimated.

Most imperial pretenders are neither so honest, nor so successful. They are reluctant to admit their own ambitions. Instead, they deceive others…and often themselves. These vanities and deceptions make the story of empires doubly entertaining. Not only is there sex and violence, but chicanery and tomfoolery, too. We see the mighty fall…and we also see that they are pathetic fools and liars. It makes the whole thing even more comically satisfying.

President Wilson got America’s self-deception off to a running start early in the 20th century:

"I believe that God planted in us visions of liberty," he said, seeking the Democratic nomination in 1912, "that we are chosen and prominently chosen to show the way to the nations of the world how they shall walk in the path of liberty."

There was the problem right there. So worthy was the mission there seemed no need to figure out how to pay for it. If God had set us on the trail of Empire, He could jolly well figure out to make it a paying proposition. Neither then, nor now, have Americans bothered to understand how the business of empire really works. They think they are doing the world a favor. That deception alone would not be so grave, but they totally miss the point: nearly every imperial power has claimed to act for the good of others, but every one of them found a way to make it pay. When it stops paying, they’re out of business.

The imperial power provides a useful service, according to the theory of it. Like the Mafia, it maintains order. Under the protection of the imperial pax dollarum, trade and commerce can flourish. People get rich. They should be grateful and happy to pay for the service. The imperial power, though, must charge for the service; otherwise, what would be the point?

But America has so cleverly deceived itself, that it believes it gets its "tribute" from globalized commerce itself, and from the loans given it by its tributary states and trading partners. The whole idea is mad and preposterous. The idea of empire is that the imperial power controls the lesser states. In America’s absurd version, it is the subordinate powers that control her. Not only can they stop paying ‘tribute’ whenever they want, they now have the power to destroy her economy completely.

"Will China be setting U.S. rates?" asks an article in today’s International Herald Tribune. Floyd Norris explains:

"The way things work now, China sells to the world most everything the world wants. China then uses the dollars it receives to buy Treasury securities. That helps to hold down U.S. interest rates and stimulates consumer spending, enabling Americans to buy more from China." It is the "largest vendor-financing program ever."

What it has done is put China in a commanding position. As Americans spend, China builds its productive capacity. China gets rich, selling geegaws and electronic paraphernalia…and assorted consumer goods…to Americans. The imperial consumers, on the other hand, grow poorer. Each day, about $2 billion net passes from American hands to stronger hands in Asia.

The idea of imperial finance is that the central, imperial power gets richer than its vassals. America has found a way to do it in reverse; its grows poorer, relatively.

And now the periphery powers, which are supposed to be subordinate, are actually capable of ruining the central imperium.

If the Chinese and other major holders of US Treasury bonds were to sell…there would be hell to pay in America. Interest rates would rise. The housing boom would turn into a housing bust. The imperium would have to beg is subordinate states for more credit.

What kind of odd empire is this? We have a long line of U.S. leaders strutting across the world stage like peafowl – the buffoonish Theodore Roosevelt, the weasely Wilson, the other Roosevelt…Truman…Kennedy…Johnson…Reagan…Bush – but none of them seems to have understood how to make an empire pay.

"The United States, even more than any other economically and militarily dominant powers in the recent past, has acquired an empire," writes Deepak Lal, "but is reluctant to face up to the resulting imperial responsibilities."

Au contraire, Americans have hoisted the imperial purple onto their backs. The spectacle is more exhilarating than any we’ve seen.

Regards,

Bill Bonner
The Daily Reckoning

May 13, 2005 — London, England

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).

We keep thinking. And the pieces keep coming together. The thoughts get bigger…they amalgamate when our back is turned, like pieces of a puzzle with a homing instinct. Suddenly, we think we see a "big picture."

The big picture we see coming together now is grotesque and absurdly comic.

Fed President of St. Louis, William Poole said yesterday, "economic conditions improved dramatically in April." He referred to a report on consumer spending. "U.S. Retail Sales Rise Most in 7 Months as Consumers Continue Spending," said the Bloomberg article on the subject.

How strange. Earlier this week we discovered that real wages in America were falling at the fastest rate in 14 years. Also in the news was Wal-Mart’s report – profits were down because of weak sales. The stock dipped to a new low – 30% below its high. Also, employment was weaker than expected in the latest reporting period. Even more astonishing was another report showing that there are actually fewer jobs today than there were when the recession began in 2001. The pieces of this puzzle weren’t fitting together, until we found this nuance to the retail sales report (from Bloomberg):

"The way the government adjusts its data to account for sales around holidays may have affected the way sales were calculated in March and April, some economists said. Sales typically increase around Easter.

"Because the Easter holiday occurred in March, the Commerce Department’s adjustment process may have depressed sales during that month and overemphasized the rebound in April, some economists said.

"The government ‘systematically over-adjusts around Easter sales,’ Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Connecticut, said before the report."

Knock off that phony little knob, and the pieces fit nicely: retail sales are going down because consumers don’t have any money; they don’t have money because they don’t have jobs and real wages are falling.

But why are jobs scarce and wages declining? Ah that…well, we described that piece of the puzzle yesterday. Today…we outline it again, looking at it from a different angle. In all the many attempts at imperial finance, America has come up with the most absurd – a system in which she practically puts a gun to her own head and invites her rivals to pull the trigger.

"Will China be setting U.S. interest rates?" asks Floyd Norris in today’s International Herald Tribune. (More on imperial finance…below…)

Meanwhile, more of the puzzle pieces were cast on the table by yesterday’s news. Commodities are falling. Bonds are going up. The dollar is going up – to $1.27 per euro. And the stock market seems to be looking ahead to a period of economic weakness…which is what we’ve been predicting…expecting…and hoping for. America badly needs a recession to reduce consumption and increase savings. We have no doubt she will get it. How and when are pieces to the puzzle too, but we don’t have them yet.

But as the pieces that we do have take their places…we see a very somber picture. It is the one we expected to see, we don’t deny it, a picture of a Japanese-style slump…with falling asset prices – including house prices, failing industries, and rising bankruptcies. We doubt it will last 15 years – as the Japanese slump has. Americans can’t afford it. And the imperial power won’t stand for it.

More news, from our friends at The Rude Awakening:

————–

Eric Fry, reporting from Manhattan…

"What is Man? Metaphysically, he is ‘but a breath,’ according to the writer of Psalms.
But Man is also a good indication that the market may be about to fall…"A

————–

Bill Bonner, with more things barely worth mentioning:

*** The price of gold has dropped to $422. It’s below our $425 buying target. Buy.

When the price rose over $400 for the first time – was it a year ago already? – we said we doubted that we would ever see it below $400 again in our lifetimes. About two weeks later, it was in the $390s. Then, it rose back above $400 and has remained there. But as the economic puzzle comes together, it looks more and more as though asset prices will be deflated. Stocks will go down. Real estate. Commodities. And gold? Yes, even gold could go down.

But we don’t buy the metal because we know it is going up. We buy it because we don’t know what is going to happen and gold is a good thing to own when you can’t foretell the future and don’t have much confidence in those people who think they can.

If we’re wrong about deflation, we’ll be very right about gold. Inflation will cause gold prices to go through the roof. And if we’re right about deflation – the stress and strain on the world financial system will be so great that you will want to hold gold as insurance.

You don’t regret having life insurance just because you don’t die. You won’t regret having gold either. As asset prices deflate, the risk of a fat tail event increases. A crash…"a liquidity black hole"…defaults…bankruptcies… We don’t know what the best asset to hold will be, but gold won’t be the worst.

*** Attention Hong Kong readers! The Asian Money Migration has forced us to consider the foundation of a new Daily Reckoning HQ in Hong Kong, and we’re sending over a scout to conduct reconnaissance in the first week of June. We’re looking for readers in Hong Kong and mainland China with their fingers on the business pulse…please contact Amber Garrison, at amberg@agora-eu.com, if you think you might be able to help us

*** Yesterday, Edward, 11, went with his mother to a shoe store in Paris to buy a pair of shoes. He saw a pair of "Sketchers" that he wanted. "Aren’t these made in America?" asked his mother of the shopkeeper. Almost indignant, the woman replied, "Oh, no…they’re French." But when the boy returned home his father inspected the new shoes. "Made in China," said the label. More below…

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