Empire of Debt
America has changed. From a nation running a surplus and minding its own business, America is now the world's biggest busybody, requiring the kindness of strangers to fund not only its overseas government follies, but also, the lifestyles of its over-indebted private citizens.
The story of when America turned its back on what had made it a rich nation, and why, is told by two of the world's best financial writers, Bill Bonner and Addison Wiggin, in their new book, Empire of Debt.
The pair teamed up a year ago to pen Financial Reckoning Day: Surviving the Soft Depression of the 21st Century. LRC readers are well acquainted with Bonner's Mencken-like wit mixed with keen market insights and the occasional dash of Dr. Freud.
The irreverent Bonner and Wiggin write that the purpose of Empire "is to show that the U.S. is headed for trouble." And that, "their burden is only to show that the people making important policy decisions are morons and frauds."
The authors have a penchant for old ideas, old rules and old investors like the soon-to-be 93-year-old Sir John Templeton who shares their view that stocks and houses are over priced, and contrary to what Dick Cheney says, that trade and federal deficits do matter.
Most new ideas fail, and the new economy idea that debt is good, stock valuations will forever remain high and that you can get something for nothing is just chimera.
Bonner and Wiggin explain that typically the imperial power provides the public good of security and order but expects to earn a profit in the form of tribute in return. However, America has turned this equation on its head. America doesn't take tribute from dependent territories. It borrows from them. "Living standards rise in the U.S.," the authors point out. "But they are rising on borrowed money, not on stolen money."
In 1952, the authors note, foreign sources provided just five percent of the Federal government's borrowings, but by 2005 that percentage had grown nine fold. History shows that central power weakens over time, while the subordinate states gain strength. Therefore, it's just a matter of time before they stop supporting the American empire with loans.
America's empire building began with Woodrow Wilson, a man the authors describe as "a self-satisfied, sanctimonious delusional bungler who practically single-handedly transformed the country into a mocking shell of what it was supposed to be."
Along with Wilson, "the revolution of 1913" set America on its destructive course. The federal income tax was instituted in 1913 with the 16th Amendment. The new tax seemed harmless enough starting at one percent and topping out at seven percent. But only five years later the top rate was 77 percent and by the end of WWII the bottom rate had grown to 23 percent.
With the 17th Amendment enacted in 1913, Senators were elected to office by a direct vote of the people. Prior to that, each state's legislature appointed Senators. "Essentially this amendment created a more centralized government than the Founding Fathers intended or envisioned," Bonner and Wiggin contend.
Also put in place in 1913 was the nation's central bank, the Federal Reserve. Presidents were given the right to appoint the Federal Reserve chairman and the central bank served to cartelize the banking system, determining interest rates and the supply of money. The empire could now be paid for directly by the income tax and indirectly through the tax of central bank inflation.
The New Deal brought the idea that government should make things better for people with programs such as Social Security, Aid to Dependent Children and a litany of others. Roosevelt pushed through this legislation after being stymied by the "nine old men" on the Supreme Court that initially ruled that the New Deal legislation was unconstitutional. Roosevelt proposed to add court seats for any members who were 70 years old that did not retire. The court saw the writing on the wall and acted accordingly.
Lyndon Baines Johnson and Richard Nixon continued the empire building with "guns and butter," "the great society," and the abandonment of what was left of the gold standard, which "launched a new era of paper money, a Pax Dollarum that continues to this day." The U.S. ran a trade deficit for the first time in 1975 and has never looked back. And as Bonner and Wiggin point out, the U.S. has added trillions to the world's supply of dollars and credit, since 1971, while "only about 58,000 metric tons of gold have been brought from the ground."
The authors correctly peg Ronald Reagan as "redefining conservatism as an activist, empire-building creed." Foreign policy was left to the neo-cons with domestic policy soon to follow. "Reagan thought he knew what was best for everyone."
The Reagan era ushered in the "Shareholder Nation." We were now a country of capitalists funding our own retirements with our 401k plans. Just blindly plunk some money every month in mutual funds and hang on until retirement. After all, stocks always go up in the long run. However, these new capitalists "had neither the time, the money, nor the training to be real capitalists; they were merely chumps for Wall Street."
By the mid-1980's America was a net debtor, after being the world's largest creditor when Eisenhower was in the White House. Now the nation is the largest debtor of all time, with George W. Bush adding more to the nation's debt than had built up in the first 200 years of its existence. As with their government, its citizens now have a negative savings rate. When Reagan took office, his constituents saved eight percent of their incomes.
The authors pick out New York Times columnist Thomas L. Friedman for considerable punishment. They describe Friedman as their "favorite imperial columnist" and then the reader is treated to half a dozen pages of delicious Friedman bashing. "His work has negative merit," write Bonner and Wiggin. "Every column subtracts from the sum of human knowledge in the way a broken pipe drains the town's water tower."
Bonner and Wiggin turn to the investment philosophy that they are famous for at the end of the book. They make the often-made point that progress in the financial industry is cyclical not cumulative. And contrary to what you hear from the talking financial heads on TV, most investors will lose money. "Not only is investing not a science, it is not even an art. It is more like holding up liquor stores. Sometimes you get away with it. Sometimes you don't. But you're generally better off if you don't; for there's nothing like success to set up failure."
The only way to make money, say the authors is to invest like an insider, on private information and personal experience, and be patient and faithful. Essential rules must be followed, such as "the traditions, the lessons of history, the distilled wisdom of generations of dead people." And finally: "Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold."
It is hard to know when the empire and its bubbles will collapse. Bill Bonner and Addison Wiggin don't pretend to know. But, Empire of Debt makes the wait more fun.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.