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, 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. So do 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 – which 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 U.S.A. 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.

Now, if you deny that the United States is an empire, you are as big a fool as we are. 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 U.S. acted as though it was 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 U.S. 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..and a war on terror – both of which were almost certain to be costly blunders. It was as if the U.S. wanted to destroy itself – first by bankrupting its economy, and second by creating enemies all over the globe.

Then, we realized; of course, that is exactly what must do.

People come to believe what they need to believe when they need to believe it, we repeat. 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 conceits 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 an astronomer looking at a planet with two heads…or a divorce lawyer looking at photos of a rich man in flagrante delicto.

But things that are unusual usually return to normal. If they did not there would be no ‘normal’ to return to. That is why you can expect stocks to become more expensive when they are cheap and cheaper when they are expensive. Stocks today are expensive. They trade for an average of about 20 times earnings. Usually, they trade for only 12 to 15 times earnings. So you can expect them to get cheaper.

Houses are expensive too. They usually go up at a rate roughly equal to the rate of inflation, income or GDP growth – no more. For the last 10 years, however, they’ve gone up at 3 to 5 times as fast. House prices cannot grow faster than income for very long; people have to be able to pay the prices in order to live in them. So, you can expect houses to revert to their mean too. Prices will fall…or else stop rising.

These simple reversions to mean are hardly controversial. We don’t know when they will happen or how…but that they will come about is practically guaranteed.

More interesting to us are the reversions to other, bigger means. An empire itself is a rare thing. It is normal, but unusual. Nature abhors a monopoly. An empire is a monopoly on force. Nature will tolerate it for a while…but sooner or later, the imperial people must revert to being normal people. And the preposterous beliefs that the imperial people cherish also must pass away. They must go up to a kind of humbug heaven – where absurd ideas and idle flatteries 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.

The dollar is an extraordinary thing too. Do you know what the long term mean value of paper currency is? Well, it is zero. That is what the average paper currency is worth…and it is the black hole into which all paper currencies in the past have gone to. There could be something magic about the dollar that makes it unlike any paper currency in the past – that is, something that makes it non-mean reverting. But if anyone knows what it is he doesn’t work at the Daily Reckoning. For the last hundred years, the dollar has lost value faster than the decline of the roman-era dinarius after the reign of Claudius. This is not surprising. Roman coins had silver or gold in them. In order to make the coins less valuable, they had 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 just paper. It has no inherent value. Over time, it is almost certain that its market price will 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 nation to earn far more than another. In the thousands of years of history, some groups were poor…others were rich. But extreme differences had a way of working themselves out – by trade, war, pestilence, and degeneracy. By the year 1700, a man in India, China, Arabie or Europe had about the same standard of living, which was not very high anywhere. But along came the industrial revolution, which threw incomes out of balance and changed the way people think. Europe stole a march on the rest of the world’s industries – with huge gains in output coming in a relatively short 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 the incomes of Europeans – and their American cousins — to revert to their historic means. The process could take several generations. It could stall. There could be countertrends. But there is no reason to think a man’s labor is inherently worth more in France than in Bengladesh or that a plumber with stars and stripes on his overalls should earn more than one with a crescent moon.

If there is a mean, things will regress to it. You can expect, relatively speaking, Asian incomes to rise and American incomes to fall. That is, of course, just what is happening now. In India, for example, real incomes have 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 it has been slight.

Just to introduce a gloomy remark, we note that we are personally and individually regressing to the mean. The mean for a human being is death…or non-existence. A person walks the earth for only 3-score and ten, as it says in the Bible. The rest of the time, he is only a potential person…or a former person. For millions of years, he is either in the future…or in the grave. All of us in this room, happily, are enjoying that ever-so-brief period of exaggeration…of hyperbole…of extraordinary, mean-busting usualness we call ‘life.’ It is not for us to know the time or place when it comes to an end. But like all mean-reverting phenomena, only a fool would bet that it would never end.

For our own part, we do not particularly care when or how we meet our 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 they are investing as though there were no yesterday. All they would have to do would be to look at the patterns of the past; they would see that it doesn’t make sense to buy at high prices – you can’t make money that way. The way people have always made money is by buying low and selling high. Doing it the other way around doesn’t work. Nor does borrowing and spending make you rich. Tomorrow always comes – at least it always has up until now – and you have to pay your debts.

Over time, prices go up and down. So do a lot of other things ebb and flow…boom and bust…bloom and wither. All of these phenomena go through predictable cycles that can be roughly modeled. Analysts study the cycles to try to figure out where in the habitual pattern we are currently. It is often frustrating work, because the patterns are rarely quite as regular and well defined in the present as they appear to have been in the 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 at what your friends and neighbors believe. Markets make opinions. When people you know are all of the opinion that stocks will rise 15% per year – indefinitely – you can be sure you are nearer to a top than a bottom. When people believe the opposite – that stocks will never go up – most likely, you are near a bottom.

Beliefs give us a clue to the larger cycles too. People play the comic roles that have been thrust upon them. They are bullish near the end of a bull market; they are bearish near the end of the bear market. If it were otherwise, the market could never fully express itself. If investors grew suddenly cautious while nearing an epic bull market peak, they would sell their stocks; the peak would never be reached. Or, suppose that after several years of soaring house prices homeowners came to believe that housing prices would fall? How could you have a proper housing bubble? How can you have a rip-roaring party without anyone getting drunk, in other words? How can people make fools of themselves if they are unwilling to take leave of their senses?

These are deep, philosophical questions, we understand. But they help us recognize where we may be in the cycle. As prices reach a loony excess, peoples’ ideas are loony too. Ergo, the loonier the ideas the more likely it is that a turning point is near; the wilder the party, the more likely someone will call the police.

The Daily Reckoning