The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (13 page)

Like the Mafia, the United States runs a protection business. Under the protection of the imperial pax dollarium, trade and commerce can flourish. People get rich. They should be grateful and happy to pay for the service. The imperial power must charge for that service; otherwise, what would be the point?

But America has so cleverly deceived itself that it believes it gets its immediate tribute from global commerce and its thanks in Heaven.We have no way of knowing what awaits it in Heaven, but we look around and notice that the tribute America gets is so perverse that we’re glad she does not get more. Instead of getting paid for providing protection, the United States is on the receiving end of loans from its tributary states and trading partners. The whole idea is mad and preposterous. An imperial power is supposed to control lesser states and exploit them for its own selfish ends. Of course, it does not admit it.Truthfulness is as much a disappointment in politics as it is in marriage or poker.The idea is to pretend to do good, while you do well. In America’s absurd version, she does badly for herself and good for others. That is the theme of this book: to call America an imperial power is flattery. In her bizarre version of empire, it is the subordinate powers that control her.They can stop paying tribute whenever they want.

“Will China be setting U.S. rates?” asked an article in a May 2005 edition of the
International Herald Tribune.
¹⁹
The writer, Floyd Norris, had noticed the perverse logic of American imperial finance. What he hadn’t realized was that China was already setting U.S. interest rates. By the end of 2004, China owned $120 billion of U.S. Treasury obligations—or 10 percent of the total in foreign hands, which itself was 25 percent of the total outstanding.
²⁰
Had it not bought those bonds, or had it decided to sell them, there would have been significantly less demand for U.S. debt. Or, looked at from a more traditional perspective, there would have been fewer people willing to lend to the United States. Either way, the almost certain result of Chinese lending was to lower the price of lent money, that is, to lower interest rates.Thanks to Asian lending, the United States was able to drop its interest rates below the rate of inflation and keep them there for 22 months.
²¹

“The way things work now,” Norris explained, “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.”
²²

This put China in a commanding position. As Americans spent, China built its productive capacity. China got rich, selling gewgaws, electronic knickknacks, and assorted consumer goods.The imperial consumers, on the other hand, got poorer. In 2004, alone, wealth equivalent to 1 percent of the value of all the assets in the United States passed out of Americans’ hands.

The idea of imperial finance is that the central, imperial power gets rich at its vassals’ expense. America found a way to do it in reverse; it grew poorer, relatively and absolutely, every day. GDP growth during the five years—2000 to 2005—averaged only 4.4 percent per annum in nominal terms.
²³
Meanwhile, net operating losses—the difference between what she earned on overseas sales and what she spent on imports far outpaced GDP, growing in 2004 by 24 percent.
²⁴
And the cost of maintaining her imperial role—the military budget—was 3.3 percent of GDP.
²⁵
The whole thing was a losing proposition. America had found a way to make empire pay—but only for its rivals and enemies.

To make matters worse, the periphery powers, which were supposed to be subordinate, were capable of ruining the central imperium. If the Chinese and other major holders of U.S. Treasury bonds were to sell, there would be hell to pay in the United States. Interest rates would rise. The housing boom would turn into a housing bust.The imperium would have to beg its subordinate states for more credit.

“The U.S. suffers from . . . structural deficits that will limit the effectiveness and duration of its crypto-imperial role in the world,” explains Niall Ferguson. “The first is the nation’s growing dependence on foreign capital to finance excessive private and public consumption. It is difficult to recall any empire that has long endured after becoming so dependent on lending from abroad.”
²⁶

What kind of odd empire is this? We have had a long line of U.S. leaders strutting across the world stage—the buffoonish Theodore Roosevelt, the weaselly Wilson, the other Roosevelt, Truman, Kennedy, Johnson, Reagan, Bush (both of them)—but none of them seems to have understood how to make an empire pay.

One of the most riveting features is the remarkable way the masses rush not only to their own ruin, but to the elimination of the institutions they claim to cherish. In America, they claim to love freedom but at the first imperial trumpet blow—the war to make the world safe for democracy, the Cold War to contain the red menace, or the War on Terror—they line up to get registered, inspected, searched, probed, approved, and certified. There seems to be no violation of their liberty so great that they would protest nor any violation of anyone else’s that they wouldn’t applaud, and no expenditure of funds so extravagant that they would bother to ask questions. In 1989, America’s post-World War II rival empire—the Soviet Union—threw in the towel. Not only had it had enough of military competition with the United States, but in one of the great turnarounds of history, it simply renounced its whole ideology. It was almost as if the Jews had tossed aside the Torah, thrown off their yarmulkes, and decided to become Rosicrucians or Jehovah’s Witnesses. But even more astonishing was what happened next. For the first time in 16 centuries, and perhaps the first time in history, the world faced almost no serious military crisis. America had no military competition. No serious threats. There were no nations on earth who could do serious damage to the United States. That did not mean that Americans were guaranteed safe. In addition to the harm they did to each other, they might be kidnapped or killed by any number of freelance gangs or revolutionary groups. But the government of the United States had no reason to worry. No nation posed a worthy challenge. So what happened in America? Military expenditures rose!

The absurdity can be illustrated by the United States’ attack on Iraq. Like so many imperial powers before it, American forces took Baghdad. But where was the payoff? Were slaves sold? Was oil stolen? Were women carried off, or at least violated on location? Was Iraq made to pay tribute? No. America seems to have missed the whole point. It invaded Iraq and now pays tribute to the Iraqis! It sends in engineers, medical people, food, contractors, administrators—at a cost of $1 billion per week—to try to keep the Iraqis from disliking them. They would be a lot better off, financially, if the Iraqis had beaten them off. But Americans have worn the mask of their good intentions for so long, their faces have grown in to it. They look in the mirror and see an imperialist who wants only good things for the world—democracy, freedom, harmony.They are all set to ban cigarettes and require seat belts all over the world.

They think they can be a “good” empire—killing people neither for glory nor for money, but to make the world a better place.

We have to rub our eyes and shake our heads to believe it.

4

As We Go Marching

The Germans occupy a special place in recent world history.“Give a German a gun and he heads for France,” was a common expression in the past century. “The Hun is either at your throat or at your feet,” was another.

People wondered what it was about the Germans that had made them so ready to go to war and so willing to go along with ghastly deeds on a national scale. Was it something in their blood, in their culture, or in their water?

Now, of course, the Hun has been tamed and has become a pacifist. America urged him to join the war against Iraq, but he demurred; he has had his fill of war. And so the question is more puzzling than ever. Has his blood changed? His culture? Or his economy?

A marvelous little book by John T. Flynn,
As We Go Marching,
¹
was written during World War II and provides some insights. Flynn argues that fascism had no particular connection to the Germans themselves nor was there anything in the Teuton spirit that made them especially susceptible. Instead, he points out that the creed was largely developed by an Italian opportunist, Benito Mussolini. It was the hefty Italian who figured out the main parts—including the glorious theatrical elements. The Germans merely added their own corruptions and attached a peculiarly vicious policy of persecuting, and later exterminating, Jews.

But it is Flynn’s description of the economic circumstances in Italy in the late nineteenth and early twentieth centuries—the fertile soil in which fascism took root and flourished—that caught our attention. Italy went to war against Turkey in September 1911. The war was over 12 months later and soon forgotten by everyone. But the impulse that drove the Italians to war in the first place was the focus of Flynn’s attention:

The vengeance of the Italian spirit on Fate was not appeased. Instead, it whetted the appetite for glory. And once more glory did its work on the budget. But once more, peace—dreadful and realistic peace, the bill collector, heavy with her old problems—was back in Rome. The deficits were larger.The debt was greater, and the various economic planners were more relentless than ever in their determination to subject the capitalist system to control.
²

Perhaps they should have lowered interest rates. Or pressured China to raise its currency. Any policy initiative, no matter how pathetic, could be considered. As Flynn puts it: “Out of Italy [as out of America currently] had gone definitely any important party committed to the theory that the economic system should be free.”
³

Italy had dug herself into a deep hole of debt. Between 1859—when the centralized Italian state came into being—and 1925, the government ran deficits more than twice as often as it ran surpluses. Politicians, who depended on giving away other people’s money, found themselves with little left to give away.

“All the old evils were growing in malignance,” writes Flynn. “The national debt was rising ominously.The army, navy, and social services were absorbing half the revenues of the nation. Italy was the most heavily taxed nation in proportion to her wealth in Europe.”
⁴

Of course, there followed many episodes of financial
risorgimento
and many pledges to put the books in order. None of them stuck for long. Italian politicians were soon making promises again.

When grand promises must be fulfilled, debt creeps higher and so does the resistance of taxpayers and lenders, especially from conservative groups. “Hence it becomes increasingly difficult to go on spending in the presence of persisting deficits and rising debt,” writes Flynn. “Some form of spending must be found that will command the support of conservative groups. Political leaders, embarrassed by their subsidies to the poor, soon learned that one of the easiest ways to spend money is on military establishments and armaments, because it commands the support of the groups most opposed to spending.”
⁵

Military spending gives an economy the false impression of growth and prosperity. People are put to work building expensive military hardware. Assembly lines roll and smokestacks smoke. Plus, the spending goes into the domestic economy. Americans, for example, may buy their gewgaws from China, but their tanks are homemade.

Military adventures not only seem to stimulate the domestic economy; they also goose up popular support for government. Soon, “it was a time for greatness . . . ,” as Flynn describes the approach of war. War, Giovanni Papini raved, was “the great anvil of fire and blood on which strong peoples are hammered.”
⁶

There was a time when kings, princes, and emperors ruled the world. Back then, the people knew their place. But in this new, modern world, it became necessary for rulers to appease the masses with various programs designed to fool them into obedience. Armed with ballots, everything seemed possible.

Jose Ortega y Gasset describes the scene:

Whereas in past time life for the average man meant finding all around him difficulties, dangers, want, limitations of his destiny, dependence, the new world appears as a sphere of practically limitless possibilities, safe and independent of anyone . . . and if the traditional sentiment whispered:“To live is to feel oneself limited, and therefore to have to count with that which limits us,” the newest voice shouts: “To live is to meet with no limitation whatever and, consequently, nothing is impossible, nothing is dangerous. . . .”
⁷

He might have been describing the mind-set of the contemporary American investor, who sees no limit to stock prices and no risk anywhere. And so he was—70 years ahead of his time.

Voting cannot really increase the masses’ well-being. It brings no more hogs to market, builds no more gadgets, improves no meals, nor does it increase the efficiency of the internal combustion engine. But the masses will believe anything; and after Bismarck and Garibaldi came to believe that this new world of assemblies, parliaments, and election fraud offered a better world, it then became the job of politicians to find a way to appeal to these fantasies. This they did, in nineteenth-century Italy as in twenty-first century America, by borrowing money—thus creating the illusion of spending power out of thin air.