America's
Glorious Empire of Debt
Bill Bonner
The
Daily Reckoning
March 6, 2006
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...
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
email: DR@dailyreckoning.com
website: The
Daily Reckoning
Bill Bonner
is the founder and editor of The Daily Reckoning.
Bill's book,
Mobs,
Messiahs and Markets: Surviving the Public Spectacle in Finance and
Politics, is a must-read.
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.
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