The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (10 page)

America had no rivals, he said. Militarily, China was no real competition; it was just another country on America’s hit list.

Even after 227 years, America’s stock continued to rise. That it had gotten high enough to vex Nature worried no one. That it might decline troubled no one’s sleep.That being an empire is not necessarily an unadulterated blessing bothered neither the president nor his ministers.

The modest republic of 1776 had become the great power of 2005 with pretensions to empire that could no longer be denied.That its citizens will not be freer was understood and accepted. But would they be richer under an empire than they would have been under a humble republic? Would they be safer? Would they be happier?

If so, pity the poor Swiss. In their mountain fastnesses, they had only themselves to boss around; only their own pastures, lakes, and peaks to amuse their eyes; and only their own industries to provide employment and sustenance. And their poor armed forces! Imagine the boredom, the tedious waiting for someone to attack. What glory is there in defense? Oh, for a foreign adventure! Thanks to their colonial empire, the sun never set on the British. After the Napoleonic Wars, as many as a quarter of the world’s population lived under British rule. Meanwhile, the sun set every single day on the Swiss Federation. But that didn’t stop the Swiss franc from rising, almost daily, against the British pound. In 1815, a British pound could have been exchanged for 13 Swiss francs and a half-pound of cheese. Today, a pound brings you only 1.6 Swiss francs. And forget the cheese.

While the British economy grew sluggish in the twentieth century, the Swiss economy boomed. By the end of the century, gross domestic product (GDP) per person in Britain was only around $20,000. The Swiss, meanwhile, were producing $28,550 in GDP per capita.

But the poor yodelers never got the glory of empire.They never got to admire themselves on maps or in headlines. What Swiss president gets to send troops to remote hellholes, join a peace-keeping mission, or fight terrorists? How often do the Swiss get to cheer on their heroes and mourn their dead? Who even knows who the president of Switzerland is? Who cares? While Americans get to make a public spectacle of themselves, the Swiss have to make do with private life.

The Swiss have to mind their own business and watch the Sturm und Drang of the world pass them by. But would the Swiss really be better off if they, too, had an empire to run?

The available evidence from history is mixed and anecdotal. If the past is any guide, early military successes are inevitably followed by humiliating defeats. Financial progress is nearly always trailed by national bankruptcy and the destruction of the currency. And the good sense of a decent people is soon replaced by a malign megalomania that brings the whole population to complete ruin.

But who cares? It is not for us to know the future or to prescribe it. Instead, we get out our field glasses and prepare to watch the spectacle.

A great empire is to the world of geopolitics what a great bubble is to the world of economics. It is attractive at the outset, but a catastrophe eventually. We know of no exceptions.

After the battle of Pydna, Rome became the leading empire of the Western world. (We continue our simplified narrative to show how things worked out.)

Augustus died in AD 14, leaving the empire in the hands of his stepson, Tiberius, who had married Augustus’s free-and-easy daughter, Julia. Tiberius
clipped
the coinage (reduced the precious metal content). This, and other prudent policies, greatly increased the amount of money in the treasury. By the time he was assassinated in AD 37, there were 700 million denarii in the treasury—far more than there had been at the time of Augustus’s death.

Tiberius handed off the imperial purple to Caligula, who quickly spent all the savings and more. Rome suffered a series of mad and lavish rulers. To confiscate the money of wealthy Roman families, Caligula would falsely accuse them of plotting against him. He was succeeded by Claudius who, in turn, gave way to Nero. By this time, Rome was deeply in debt and running large trade deficits with its periphery states—similar to the condition of the United States today. Nero took the time-honored expedient of clipping the coins (taking out the gold and silver content) even more. In AD 64, he proclaimed that henceforth the aureus would be 10 percent lighter in weight. So, whereas in the past, 41 aurei had been minted from one pound of gold, the ratio now become 45 aurei to a pound.

Nero was deposed in AD 68. But the precedent was set. Maintaining order throughout the empire was expensive. Rome became dependent on imported capital, imported soldiers, and imported goods—just as America is today. But Rome had its own version of a central bank. Each new emergency was met with more phony cash just as it is today. By the time the barbarians sacked Rome, the currency, the denarius, still bore the ancient form with the images of dead emperors pressed on it. But the value had been taken out; the currency had lost 99.98 percent of its value.While this seems like a dreadful rate of inflation, it is not really as bad as the current U.S. example. In less than 100 years, the U.S. dollar has lost 95 percent of its value. If this rate continues for just another 150 years, the dollar will do in half the time what took the denarius almost 500 years.

Thomas Cahill describes the last days of Rome in his book,
How the Irish Saved Civilization:

. . . the changing character of the native population, brought about through unremarked pressures on porous borders; the creation of an increasingly unwieldy and rigid bureaucracy, whose own survival becomes its overriding goal; the despising of the military and the avoidance of its service by established families, while its offices present unprecedented opportunity for marginal men to whom its ranks had once been closed; the lip service paid to values long dead; the pretense that we still are what we once were; the increasing concentrations of the populace into richer and poorer by way of a corrupt tax system, and the desperation that inevitably follows; the aggrandizement of executive power at the expense of the legislature; ineffectual legislation promulgated with great show; the moral vocation of the man at the top to maintain order at all costs, while growing blind to the cruel dilemmas of ordinary life . . .

Cahill continues:

. . . these are all themes with which our world is familiar, nor are they the God-given property of any party or political point of view, even though we often act as if they were. At least, the emperor could not heap his economic burdens on posterity by creating long-term public debt, for floating capital had not yet been conceptualized.The only kinds of wealth worth speaking of were the fruits of the earth.
⁵

Finally, the cost so weakened the empire that the barbarians were at the gate.

“The thicker the grass, the more easily scythed,” said Alaric, king of the Visigoths from AD 395 to 410. He was speaking to the Roman envoys sent to shoo him away.

The Roman envoys had just told him that if he and his filthy band of barbarian buddies didn’t go away, they would unleash legions of Roman warriors to crush him. They then asked him what it would take for him to turn around and go. He replied that his men would like to comb the city, take all the gold and silver plus everything else valuable that could be moved, plus all the barbarian slaves.

And what, said the envoys, would that leave us Romans? Replied Alaric, “your lives.”
⁶

Empires, like bubble markets, end up where they began. Rome began as a town on the Tiber, with sheep grazing on the hills. A bull market in Roman property lasted about 1,000 years—from 700 BC to about AD 300, when temples, monuments, and villas crowded the Palatine. Then, a bear market began that lasted at least another 1,000 years.

As late as the eighteenth century, Rome was once again a city on the Tiber with sheep grazing on the hillsides, amid broken marble columns and immense brick walls.They had been built for a reason, but no one could recall why.

It is said that empires provide an expanse of law and order under which trade, commerce, investment, and profit taking can flourish. Here, we will spot the empire builders and their apologists a point or two. Even the Mongol reign of terror was said to have permitted an uptick in trade. And why not? The imperialists levied a tribute on output. They had an interest in economic growth.Why shouldn’t they make sure bills were paid and property was safe?

One of the leading proponents of the American empire is a man named Deepak Lal, who wrote a book entitled
In Praise of Empires.
“The Roman empire had through its Pax brought unprecedented prosperity to the inhabitants of the Mediterranean littoral for nearly a millennium,” Lal writes.
⁷
He believes that empires are good things, because people are materially better off under imperial rule than other forms of government.We have no intention of trying to prove him wrong.The economic record is not complete enough to prove anything. How fat and happy might the residents of the Mediterranean littoral have been if the Romans had stayed in Rome? We don’t know. Nor do we know much about the relative growth rates of groups not under Roman rule. So we cannot prove anything, except that Lal can’t either. And for that we need to call only one witness to the stand, Lal himself.

In the 500 years preceding World War II, when the economic picture is more visible, the Holy Roman Empire—which, as Voltaire remarked, was neither holy, nor Roman, nor a real empire—was extinguished. In its place rose various sovereign nation-states, often with imperial ambitions and bubble-like excesses, but none able to assert itself over much of Europe or for very long. Europe, in other words, was nonimperial. China, India, and Anatolia/the Middle East, by contrast, were still run by the vestiges of the Mongol Empire and its successors. Which civilization was most successful economically? We have no figures for the Ottoman Empire, but the 500 years in China produced a net decline in GDP per person. In India, the rate of increase was negligible according to the figures that Lal presents; all the growth that there was came after the Mogul Empire had been replaced by the British. It wasn’t imperial rule that gave the place a shot in the arm; it was British investment and know-how.

Lal makes the point decisively and then proceeds to ignore it:

By creating order over a large economic space, empires have inevitably generated Smithian [as in Adam Smith’s
Wealth of Nations
] growth. But given limited technological progress (except for the exceptional period under Sung China), Promethean intensive growth remains a European miracle of the anarchical system of nation-states established after the breakdown of the Roman empire.
⁸

Actually, there are other instances of Promethean growth (e.g., Japan, Hong Kong, and Singapore after World War II) . And as recently as 2007, China was said to be growing at 8 percent per year. Russia and India were growing at 7 percent. It could be argued that their growth was largely thanks to the shade provided by the Americans’ imperial protection. But then you have to wonder why other places, similarly protected, enjoyed no such growth. You also have to wonder how other places, such as Switzerland and the Scandinavian countries got to be the wealthiest places in the world when they enjoyed no more imperial benefits than anywhere else and were largely indifferent to the imperial system. You also have to wonder how it is possible for China to register such high growth rates in the 1990s and 2000s when it is the very thing from which the American imperium offers protection. Apparently, an empire may increase growth rates even for its enemies.

The logic of Lal’s “praise of empires” is no different from saying he likes chocolate cake. It is purely a matter of personal taste, nothing more. All we actually know about economic growth is that empire is neither a necessary nor a sufficient condition for it.

Empires come and go often, like stock markets. When they shoot up quickly, they generally fall sharply, too. And when they take centuries to build—as with the Romans—it takes centuries to take them back to where they began. By using carrier pigeons, the Mamelukes could have speedy news of all who come and go by sea or land, and thus escape surprise, since they live without defenses, and have neither walls nor fortresses.What finally destroyed the Mongols was the plague, which they picked up in the Far East, and gunpowder, which they also encountered in China. The first so reduced their numbers in the fourteenth and fifteenth centuries that they abandoned not only many of their conquests but also much of their own steppes; some of the best pastureland in Asia was effectively returned to nature. The second ended their attacks on more civilized people—who could now blow them out of the saddle. Their descendants in the Mogul Empire in India and the Ottoman Empire in Turkey were largely absorbed into the cultures where they had inserted themselves. And by the seventeenth and eighteenth centuries, the Mongols were once again tending herds of horses in the lonely and inhospitable wastes of Mongolia. By the nineteenth and twentieth centuries, they were paying their own tribute to Russian and Chinese empire builders.

Since the days of the great Khans, empires have become much more entertaining. This is not because they are less lethal. It is because they are much more delusional. They cannot bear the barbaric clarity of Genghis’s imperial ambitions.They cannot put on the purple without putting on the masks. After a while their faces take the shape of the mask itself. Rather than follow their atavistic urges and give honest voice to their primitive instincts, they feel obliged to provide reasons that are often fatal to the believer and his victim, but hilarious to the distant observer.

Modern imperialists, like their distant ancestors, lust after the usual things—prestige, power, money, status—all proxies, perhaps, for genetic dispersement. These were the same urges that enticed the Khans and the Caesars. But today’s imperialists feel ashamed to admit it. So, they pretend all manner of selfless and world-improving motives, everyone of which is either an obvious fraud or a monumental bamboozle. But that is what makes the whole thing so much more amusing and entertaining than either a modest republic or a primitive empire: Modern empire builders are such quacks and popinjays that they practically sprout tail feathers and grow webbed feet.