- Bonner, William and Addison Wiggin.
Empire of Debt.
Hoboken, NJ: John Wiley & Sons, 2006.
ISBN 0-471-73902-2.
-
To make any sense in the long term, an investment strategy needs
to be informed by a “macro macro” view of the
global economic landscape and the grand-scale trends which
shape it, as well as a fine sense for nonsense: the
bubbles, manias, and unsustainable situations which seduce
otherwise sane investors into doing crazy things which will inevitably
end badly, although nobody can ever be sure precisely when.
This is the perspective the authors provide in this wise, entertaining,
and often laugh-out-loud funny book. If you're looking for
tips on what stocks or funds to buy or sell, look elsewhere;
the focus here is on the emergence in the twentieth century of
the United States as a global economic and military hegemon,
and the bizarre economic foundations of this most curious
empire. The analysis of the current scene is grounded in a
historical survey of empires and a recounting of how the
United States became one.
The business of empire has been conducted more or less the same way
all around the globe over millennia. An imperial power provides a
more or less peaceful zone to vassal states, a large, reasonably open
market in which they can buy and sell their goods, safe transport for
goods and people within the imperial limes, and a common currency, system of weights and
measures, and other lubricants of efficient commerce. In return,
vassal states finance the empire through tribute: either explicit, or
indirectly through taxes, tariffs, troop levies, and other imperial
exactions. Now, history is littered with the wreckage of empires (more
than fifty are listed on p. 49), which have failed in the
time-proven ways, but this kind of traditional empire at least has the
advantage that it is profitable—the imperial power is
compensated for its services (whether welcome or appreciated by the
subjects or not) by the tribute it collects from them, which may be
invested in further expanding the empire.
The American empire, however, is unique in all of human history for being
funded not by tribute but by debt. The emergence of the
U.S. dollar as the global reserve currency, severed from the gold
standard or any other measure of actual value, has permitted
the U.S. to build a global military presence and domestic consumer
society by borrowing the funds from other countries
(notably, at the present time, China and Japan), who benefit (at
least in the commercial sense) from the empire. Unlike tribute, the
debt remains on the balance sheet as an exponentially growing
liability which must eventually either be repaid or repudiated.
In this environment, international trade has become
a system in which (p. 221) “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 then builds more factories to increase output.” Nobody
knows how long the game can go on, but when it ends, it is certain
to end badly.
An empire which has largely ceased to produce stuff for its
citizens, whose principal export has become paper money (to the tune
of about two billion dollars per day at this writing), will
inevitably succumb to speculative binges. No sooner had the dot.com
mania of the late 1990s collapsed than the residential real estate
bubble began to inflate, with houses bought with interest-only mortgages
considered “investments” which are “flipped”
in a matter of months, and equity extracted by further assumption
of debt used to fund current consumption. This contemporary collective
delusion is well documented, with perspectives on how it may end.
The entire book is written in an “always on” ironic style,
with a fine sense for the absurdities which are taken for wisdom
and the charlatans and nincompoops who peddle them to the
general public in the legacy media. Some may consider the authors'
approach as insufficiently serious for a discussion of an
oncoming global financial train wreck but, as they note on
p. 76, “There is nothing quite so amusing as watching
another man make a fool of himself. That is what makes history
so entertaining.” Once you get your head out of the
24 hour news cycle and the political blogs and take the
long view, the economic and geopolitical folly chronicled here
is intensely entertaining, and the understanding of it
imparted in this book is valuable in developing a strategy to
avoid its inevitable tragic consequences.
May 2006 