The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (3 page)

But if the world works the way we think it does, you can expect the incomes of Europeans—and their American cousins—to revert to their historic means. The process could take several generations. It could stall. There could be countertrends. But there is no reason to think a man’s labor is inherently worth more in France than in Bangladesh, or that a plumber with stars and stripes on his overalls should earn more than one with a crescent moon.

If there is a mean, things will regress to it. You can expect, relatively speaking, Asian incomes to rise and American incomes to fall. That is, of course, just what is happening now. In India, for example, real incomes have more than doubled in the last 10 years. In America there is some dispute about the numbers, but if there has been any income growth at all it has been slight.

Just to introduce a gloomy remark, we note that we are personally and individually regressing to the mean. The mean for a human being is death—or nonexistence. A person walks the earth for only three-score and ten, as it says in the Bible. The rest of the time, he is only a potential person . . . or a former person. For millions of years, he is either in the future . . . or in the grave.

You, dear reader, are enjoying that ever-so-brief period of exaggeration . . . of hyperbole . . . of extraordinary, mean-busting usualness we call “life.” It is not for us to know the time or place when it comes to an end. But like all mean-reverting phenomena, only a fool would bet against it. (For our own part, we do not particularly care when or how we meet our end.We just wish to know where, so we can avoid the place.)

But until recently betting against the end is just what most Americans were doing.They were borrowing and spending as if there were no tomorrow, and they were investing as though there were no yesterday. If they’d only looked at the patterns of the past, they would have seen that it doesn’t make sense to buy at high prices—you can’t make money that way. The way people have always made money is by buying low and selling high. Doing it the other way around doesn’t work. Nor does borrowing and spending make you rich.Tomorrow always comes—at least it always has up until now—and you have to pay your debts.

Over time, prices go up and down. Many other things ebb and flow as well, boom and bust or bloom and wither. All of these phenomena go through predictable cycles that can be roughly modeled. Analysts study the cycles to try to figure out where we are currently located in the habitual pattern. It is often frustrating work, because the patterns are rarely quite as regular and well-defined in the present as they appear to have been in the past. Still, it is a question worth asking:Where in the cycle are we?

One of the ways you can tell where you are in the cycle is to look at what your friends and neighbors believe. When people you know are all of the opinion that stocks will rise 15 percent per year—for an indefinite amount of time—you can be sure you are nearer to a top than a bottom. When people believe the opposite—that stocks will never go up—most likely, you are near a bottom.

Beliefs give us a clue to the larger cycles as well. People must play the roles that have been thrust upon them. They are bullish near the end of a bull market; they are bearish near the end of the bear market. If it were otherwise, the market could never fully express itself. If investors grew suddenly cautious while nearing an epic bull market peak, they would sell their stocks, and the peak would never be reached. Or suppose that after several years of soaring house prices homeowners came to believe that housing prices would fall? How could you have a proper housing bubble? How can you have a rip-roaring party without anyone getting drunk, in other words? How can people make fools of themselves if they are unwilling to get up on the tables and dance?

These are deep philosophical questions. But they help us recognize where we may be in the cycle. As prices reach a loony excess, peoples’ ideas grow loony too. Ergo, the loonier the ideas, the more likely it is that a turning point is near; the wilder the party, the more likely someone will call the gendarmes.

We also suspect that attitudes evolve similarly in an imperial cycle, during which a country’s economic, financial, and military power runs up over several generations and then declines. At the peak, the imperial people come to believe that their system is superior, that their values are universal, and that their way of life will inevitably dominate the entire world.

Readers will recognize these attitudes in a famous article by Francis Fukayama, written after the fall of the Soviet Union, in which he suggested that the world may have reached the “End of History.” It was the end of history because the American system had triumphed—no improvement seemed possible. Fukayama’s idea was not original. Hegel and Marxist intellectuals had proposed the same thing more than a hundred years earlier. With the victory of the proletariat, no further advance could be made. History had to stop.

Hegel stopped ticking. Marx died, too. History continued.

But when people feel they are on top of the world, they begin to take things for granted that they previously took for absurd. As we mentioned earlier, Americans came to depend on the savings of Communist China in order to pay for their lifestyles . . . and their wars to make the world safe for democracy. They did so without thinking. Subconsciously, they came to believe what imperial people always seem to believe—that their society is so superior, that the rest of the world longs to be just like them or is inevitably drawn to become like them, whether they like it or not.That was the premise behind the billions of dollars Americans were investing in China. A few years ago if someone had suggested that they invest in a communist country, they would have thought the person mad. China is still run by veterans of various “great leaps forward,” but Americans were convinced that they were all leaping to become just like us—capitalists and democrats at heart! So vain are we that we can’t imagine anyone wanting to be anything else.

And of course, the invasion of Iraq was based on the same sort of thinking : that even the grubby desert tribes want to be just like us. All we had to do was to get the dictator off their backs and the men would start building shopping malls and the women would all start dressing like Britney Spears.

Those are the sort of delusions you get at the top of an imperial cycle.

But culture, political systems, and economies are never as universal and eternal as we think. Instead, everything evolves. Even in France, our closest cousins do not share our American attitudes. In the United States, we all seek to maximize our incomes. We work long hours. We start enterprises. We invest. In France, people do not seek to maximize their incomes. Instead, what they want to maximize is their leisure, and the quality of their lives. They spend more time talking about how to cook the bacon than they do about how to bring it home.

France once had a European Empire that reached from Spain to Moscow. Later, it had a worldwide empire, with subject countries and colonies in Africa, the West Indies, and the South Pacific. From the time of Richelieu to the time of Leon Blum, France had one of the most powerful armies on earth. Even at the beginning of World War II, France had the largest army in Europe—on paper. But there never was a cycle that didn’t want to turn. And the imperial cycle turns along with the rest of them. For many generations, the French believed they had the finest culture, the best schools, the most advanced scientists, and the most dynamic builders in the world. France saw its mission as bringing the benefits of its civilization—of vin rouge and the Rights of Man—to the rest of the globe. But now it’s our turn. It is we Americans who think we have the best culture, the best economy, the best government, and the best army the world has ever seen. Now, it is we who have the burden of the “mission civilisatrice.” It is our duty to bring freedom and democracy to this tattered old ball; our president said so.

How did America become an empire? We don’t recall the question ever coming up. There was never a debate on the subject. There was never a national referendum. No presidential candidate ever suggested it. Nobody ever said,“Hey, let’s be an empire!” People do not choose to have an empire; it chooses them. Gradually and unconsciously, their thoughts, beliefs, and institutions are refashioned to the imperial agenda.

While there has been no discussion of whether America should be an empire, there has been much public clucking on the specific points of the imperial agenda. Should we attack Iran or Iraq? Should we have national identity cards? Should we suspend the Bill of Rights in order to combat terrorists more effectively?

Many people wondered, including your author, what was the point of the war against Iraq. The country had no part in terrorist attacks. Au contraire, Saddam’s Iraq was a bulwark of secular pragmatism in an area unsettled by religious fanaticism. It was the religious fanatics who posed a danger, said the papers, not the ruthless dictators who suppressed them. Others wondered if an attack on Iraq would make the world safer or more dangerous. Or if the United States had committed enough troops to get the job done.

But the big question had already been settled without ever having been raised.Why should Americans care what happened in the mideast? Or anywhere else? Did the Swiss wonder what kind of government Iraq should have? Did the Swiss try to make the rest of the world more like Switzerland, or allow themselves the vain fantasy of imagining that everyone on the planet secretly yearned to be more like the Swiss themselves?

While no one noticed, the imperial weed put down roots deep in the soil of North America. By the early twenty-first century, hardly anything else grew; it had completely crowded out the delicate flowers planted by the Founding Fathers. The debate surrounding the invasion of Iraq was an imperial debate—about means and methods, not about right and wrong or national interest. No one from either major political party bothered to suggest that the United States should not be nosing around in other peoples’ business. Both parties recognized that Iraq was not a matter of national interest—it was a matter of imperial interest. No business, no where, was too small or too remote not to be of interest to the empire. From its military bases all over the globe, and its sensors orbiting the planet, the American imperium watched everyone, everywhere, all the time. In the year 2005, no sparrow fell anywhere in the world without triggering a monitoring device in the Pentagon.

This marked what may be the peak of a trend that began more than one hundred years ago. Just about the turn of the century, the United States became the world’s largest economy—and its fastest growing one. Near the same time, Theodore Roosevelt began riding rough over small, poor nations. America’s fat proto-imperialist rarely saw a fight he didn’t want to get into. It was at his urging (he had threatened to raise his own army to do the job) that Wilson announced his readiness to join the war in Europe in 1917. Wilson said he was doing it to “make the world safe for democracy.” This is the stated goal of nearly all U.S. foreign policy ever since: to improve the planet with more democracy. Of course, almost all empire builders think they are improving the planet. Even Alexander the Great thought he was doing it a favor by spreading Greek culture.

But when Wilson sent troops to Europe, people wondered then what the real point was. America had no interest in the war and no particular reason to favor one side over the other. But there too, they missed the point. America was quickly becoming an empire. Empires are almost always at war—for their role is to “make the world safe.”

President Truman clarified the imperial modus operandus when he sent the United States into battle in Korea with no declaration of war. He didn’t even tell Congress until after the army was engaged and Americans were dying. Then, President Johnson followed up with another war in a far-off place that made no difference to Americans—Vietnam. What was the point? The Swiss army was nowhere to be found. And where were the Belgians? Even the French had given up onVietnam a decade before. But more than three million American soldiers went to Vietnam and many came back flat. And for what? Just another war on the periphery of the empire. None of these engagements made any sense for a humble nation that minded its own business. None would have made any sense for America until the first Roosevelt administration; but once the nation had become an empire—with a homeland and wide-ranging interests beyond it—almost all wars seemed appropriate.

Another landmark in the history of the American empire came on August 15, 1971. That was the day that Richard Nixon severed the link between the imperial currency and gold. Thitherto, empire or no, the United States had to settle its debts like other nations—in a currency it couldn’t manufacture. Henceforth, the way was clear for a vast increase in empire spending . . . and debt.

Thus we arrive at the real problem for the American empire. It has by far the strongest military in the world. It has no serious challengers beyond its borders. Hence, it had to become its own worst enemy. All empires must pass away. All must find a way to destroy themselves. America found debt.

The traditional method of empire finance is so simple even a Mongol barbarian could master it. Nations are conquered and forced to pay tribute. The homeland is supposed to make a profit; it is supposed to grow richer compared to the vassal states. But here, America fell victim of its own scam. Pretending to make the world a better place, the United States could not very well require the poor nations it conquered to pay up. Instead, it had to borrow from them.

This was not a problem in the early days. Until the mid-1980s, U.S. industries were so robust they were able to take advantage of the pax dollarium to expand sales, jobs, and profits. But in the 1970s, the U.S. trade balance turned negative. By the year Alan Greenspan took over at the Fed, foreigners owned more U.S. assets than Americans owned foreign ones. American factories had grown old and expensive. American workers were paid too much. American businessmen invested too little in training and new capital equipment. The whole nation developed an attitude more in harmony with an empire on the decline than one that was still rising. The imperial people chose to spend rather than to save, and to hallucinate, rather than think hard.They demanded bread and circuses at home; let the Asians sweat abroad.