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Sunday, May 7, 2006

Reading List: Empire of Debt

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.

Posted at May 7, 2006 00:35