The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (30 page)

Imagine an investor who bought a 30-year U.S. Treasury bond in 1970. Did he not have a right to expect to receive a dollar back for every dollar lent? And shouldn’t he have been able to expect that each of those dollars he received—in the year 2000—would be worth about as much as those he had given up?

We can measure the damage by looking at the price of gold. In 1970, each dollar would buy an investor 1/34 of an ounce of gold. Thirty-five years later, Mr. Market, sitting as judge and jury, tells us that a dollar is worth less than 1/425 of an ounce of gold.

Investors, taking the U.S. government at its word, have lost trillions. Still, so subtle was the theft that the victims have practically applauded the crime. For the past 20 years; they seemed to think it was making them rich!

Globalized commerce, as practiced by the United States since 1971, has a fraudulent side. The hegemonic power uses political means; even when it shops. During the last big boost in the division of labor, in the nineteenth century up until 1913, gold backed the money in which transactions were calibrated. No country—not even an imperial one—could cheat.

If a country consumed more than it produced, other countries found themselves with surpluses of the laggard nation’s currency. They then could ask for gold in settlement. Gold was real, ultimate money. No nation could manufacture it. No national assembly could undermine its value or pass a law that increased it. When a nation’s gold horde was in danger, it quickly adjusted its policies to correct the imbalance and protect its gold.The dollar, on the other hand, is merely a piece of paper, and since Nixon slammed the gold window shut it is backed by nothing more than the full faith and credit of the United States Treasury. How good a promise is that? No one knows for sure.

The government set up the Federal Reserve in the first place because it wanted a stooge currency. Gold is fine, they said, but it’s antisocial. It resists progress and drags its feet on financing new wars and social programs. When we face a war or a great national purpose, we need money that is more patriotic, they said. Gold malingers. Gold hesitates. Gold is reticent. Gold keeps to itself, offering neither advice nor encouragement. Gold has no party affiliation; it doesn’t vote.What we need, policymakers said themselves, is a more public-spirited money, a source of public funding, a flexible, expandable national currency, a
political
money that we can work with. We need a dollar that is not linked to gold.

In the many years since the Federal Reserve was set up in 1913, gold has remained as steadfast and immobile as ever. An ounce of it today buys about the same amount of goods and services as an ounce in 1913, and roughly the same amount as it did when Christ was born. But the dollar has gone along with every bit of political gimcrackery that has come along—the war in Europe, the New Deal, World War II, the Cold War, the Vietnam War, the war on poverty, the war on illiteracy, the New Frontier, the Great Society, Social Security, Medicare, Medicaid, the war in Iraq, the war on terror. As a result, guess how much a dollar is worth today in comparison to one in 1913? Five cents.

The Federal Reserve system was set up to provide the nation’s empire builders with a convenient, expandable, and compliant money. Whenever they felt they needed more of it, the dollar was right there, ready for duty.

There was a crack in that bell, too. The dollar was ready for service, but its very willingness to serve its masters in Washington made it unreliable to the rest of the world. If the Fed asked the dollar to jump off a cliff, it would do so, no questions asked. This might be a benefit to Washington, but to Tokyo or Peking, it was a risk. At the beginning of 2005, the two nations together held many U.S.Treasury notes that could take a dive at any time.

Since 1971, the United States has added trillions to the world’s supply of dollars and credit. During this same time, only about 58,000 metric tons of gold have been brought from the ground. Sooner or later, those extra dollars must be marked to an unforgiving market.

Of course, it hasn’t happened yet. Investors are tempted to look out their windows, see the sun shining, and think the dollar will last forever. They have no interest in the financial crimes of the Disco Age.

The borrower shall be a slave to the lender.

—Proverbs 22:7

9

Reagan’s Legacy

It is strange, I mean the way things work out,” said a guest at dinner one night. “It seems like a kind of madness wanders around the globe. While, here in Europe, we were trying to batter each others’ brains out you, in America, were smart.You were sitting back and taking orders. Now you’re the ones who have gone mad.”

Our guest had described the world of the nineteenth and twentieth centuries—the days when the idea of an American empire was still repugnant and absurd. While wars, revolutions, and pogroms, stormed over Europe—and much of the rest of the world—America kept to itself, reluctant to get involved. Attractive new ideas popped up all over Europe like poisonous mushrooms. But, for the most part, Americans kept their heads. Most went about their business, seeking happiness in their own private ways—trying to get rich. “The business of America is business,” Calvin Coolidge explained.

Money isn’t everything, we suddenly recalled. Lusting after wealth is not always becoming, not always rewarding, and rarely flattering or dignified. There is something vulgar about the hustle a real business needs . . . like sweat stains on a starched shirt or a cold cup of coffee and stubbed out cigarettes. A man who wants to make a real fortune usually has to grub for it; it’s hard to be elegant or refined when you’re scratching for cash or market share. But grubbing for money is still better than many other things men do.What follows is a reflection on what the lust for money is better than.

Grubbing for money might be fine for a modest nation working its way up in the world, but is it worthy of a great nation on a roll?

“The trouble with the emphasis in conservatism on the market,” William F. Buckley said, “is that it becomes rather boring.You hear it once, you master the idea. The notion of devoting your life to it is horrifying if only because it’s so repetitious. It’s like sex.”

Another old “conservative,” Irving Kristol said: “What’s the point of being the greatest, most powerful nation in the world, and not having an imperial role?”

“It’s too bad,” Kristol lamented about money-grubbing, “I think it would be natural for the United States . . . to play a far more dominant role in world affairs . . . to command and to give orders as to what is to be done. People need that.”

“When I think of all the crazy things that went on here in France during the last century,” continued our dinner guest, “Or maybe I should say in Europe.You know, we invented most of the awful ideas back then. Deconstructionism, Freudianism, Nazism, Conceptualism, Socialism, Syndicalism, Minimalism, Communism, Functionalism . . . come to think of it almost all the worst ideas came from Europe.And even in America, if I’m not mistaken, almost all the new developments in philosophy, art, and architecture came from immigrants . . . or maybe refugees . . . from Europe. Just about everything. Of course, most of it was harmless. Funny even . . . like Dadaism. But politics wasn’t so harmless. But now, the world has turned. Now you do what we did.You come up with the new ideas . . . and you try to force other people to accept them.You have that . . . what do they call it . . . neoconservatism.”

“We sense that we live in a time set apart,” said George W. Bush in his State of the Union, 2004, address. What made the time seem so set apart was that the United States had come to resemble a parody of itself; it had come to look like the country leftists had always criticized it for being, but that it had never been: a remarkable combination of self-delusion and self-satisfaction headed for self-destruction. The old conservatives, with their knee-jerk affection for limited government, balanced budgets, and fewer regulations—Republican principles from the Coolidge era—might have saved them, but the old conservatives were gone.

It is a shame about conservatism. Yes, the old sticks-in-the-mud were an impediment to progress. Yes, the old mossbacks were dull and predictable. Yes, their old knees jerked whenever they thought someone might be having fun. Still, we miss those fuddy-duddies. You could count on them to resist the tyranny of the here and now. When something new presented itself, they wouldn’t like it. They would resist it, not from any intellectual point of view, but the way a man resists a new pair of shoes or a dog resists a new collar.The new styles might be more fashionable, but that was reason enough to avoid them.

As a creed, conservatism has lost all its adherents, at least in the United States. As a philosophy, it has practically disappeared. As a political movement, it has dropped dead. Everyone likes new things now.

The essential quality of conservatism is not a specific agenda (neither to lower taxes nor to raise the flag), it is merely a way of looking at things—suspiciously ; and of reacting to new proposals—dragging one’s feet. Conservatives fight against new doctrines like they fight against sushi: Not only is it appalling, it looks as though it might be dangerous, too.

But now the geezers have dyed their hair and had their faces lifted. The codgers refinanced their houses, payed with credit cards, and voted for whoever promised them the most of someone else’s money. In politics, and in money, the grumps went along with whatever is popular—just like everyone else.

About the only thing you can still count on is vanity—it never seems to go out of style. In the here and now, every generation is the greatest one that ever lived. Every empire is permanent, and everyone who makes trouble for it is an evil subhuman.

In the early part of the twenty-first century, America’s neoconservative heirs to the Wilsons—Woodrow Wilson and Ronald Wilson Reagan—became the earth’s most dynamic and ambitious empire builders. “These Cold Warriors were mostly liberals of a special, ideologically zealous variety,” explained an article in the
American Conservative:

Many of them had come from the extreme Left.They had opposed communism because they had universalistic objectives of their own and did not want any competition.These proponents of a single model for all societies were able to form an alliance with putative conservatives, who had come to believe during the Cold War that to be conservative was always to be hawkish and assertive in foreign policy. Used to “standing up for America,” these nationalistic and saber-rattling conservatives found in the cause of a better world, a new outlet for their desire to exercise American power.
¹

The neocons preached a rousing sermon of “global democratic revolution,” to quote George W. Bush. There is nothing conservative about revolution, but who noticed?

According to former Secretary of the Treasury Paul O’Neill, the leader of the free world had a little trouble following the foreign policy discussions in the White House. But George W. Bush was a shrewd politician who knew a good slogan when someone gave it to him. He saw immediately the advantages of attacking Mesopotamia—it gave him cover to spend more than any president had ever spent, with hardly a peep of protest.Traditional conservatives were struck dumb by this hawkish audacity.

Alas, sometimes it is better to lose a war than to win one. Victory seems to lead to disgrace more often than glory, especially when you are on the road to building an empire.After the West won its Cold War with the Soviet Union, the neocons desperately longed for a new enemy. While they were searching, one found them.

In the opening years of the twenty-first century, the Huns were America’s friends. And the commies its new business partners. Then it was the Muslims of the world who must be defeated! The Muslim mind, according to neoconservative scholars, was locked in the past: it mistreated women, it was antidemocratic, antiprogress, nihilist, and profoundly, irretrievably stuck in a death struggle with the good guys in the enlightened, free, open-minded, fun-loving, capitalist West. Why this should be so was never clarified. Had not the Muslim mind been around for 1,000 years? Did it not evolve according to its own program, just like the Christian mind, the Confucian mind, or the muddled mind of a Democrat? Were there not many millions of Muslims? Are Muslims less smart than Christians or Jews? And yet, the new conservative thinkers could not imagine that the world would be safe unless Muslims were brought into the empire under their heel.

Ronald Reagan had been so successful with his attack on the Soviets’ Evil Empire, Republicans hoped for a sequel, never imagining that they might be capable of a little evil themselves. It would be hard, dangerous, and expensive work to transform Islamic civilization, but someone must do it, they said. And only the United States had the military might, the resolve, the courage, the money, and the will to do it. If only the old conservatives’ knees still jerked! How they would have harrumphed and gagged.

For here was a new idea—a grand, sweeping new idea—that seemed to call for the most aggressive and activist U.S. foreign policy in American history. Here was a chance for America to entangle itself in foreign military adventures from which it might never get free. Here was an opportunity for the United States to make the Islamic world safe for democracy. Here was a way to improve the world and an almost foolproof way for America to make a public spectacle of itself, go further into debt, and expand its empire!

The old-time conservatives would have been suspicious of such big ideas, especially when they were so flattering.When a man flatters you, it is almost certain that he means to take your business, pick your pocket, or sleep with your wife.When a man flatters himself, he might just as well put a revolver in his mouth and pull the trigger, for he has lost all touch with reality.