The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (52 page)

Banks, including those in USA and Britain are not now just talking of, but actually implement flexible and pragmatic central bank programs where these are deemed necessary in their national interests.

That is precisely the path that we began only four years ago in pursuit of our national interest and have not wavered from that critical path despite the untold misunderstandings, vilification and demonization we have endured from across the political divide.
³⁹

Most deserving of Gono’s praise is the Fed’s new policy of “quantitative easing” or “credit easing,” as Bernanke called it. These are code words for printing money. Rather than recapitalize the bankers, the central banks buy debt directly from the government. This permits the government to finance its stimulus plans without putting pressure on the debt market. It also acts like a gush of wind on a stack of dollar bills.

When central banks buy their own government’s debt, they create money out of thin air for the purchase.The money supply increases. If they do enough of this money creation, the quantity of money overwhelms the quantity of goods and services that it can buy. Result: inflation, sometimes modified by the prefix “hyper.”

That is the feds’ goal. If they can cause the value of the dollar to drop against consumer goods and investment assets, they will spur people to get rid of dollars quickly.This will, according to the theory, not only reduce the burden of debt for individuals and the government, it will increase economic activity. As of this writing, they have only begun this process, and not been very successful. But we have faith; in the end, they’ll get the hang of it.

When Ben Bernanke gave his speech to the London School of Economics on January 13, 2009, a friend was on scene.Terry Easton put a tough question to America’s central banker: Aren’t your interventions just making the situation worse, he wanted to know.

Amid the blah . . . blah . . . blah . . . of Bernanke’s response was this:

The tendency of financial systems to boom and bust . . . is a very longstanding problem . . . but I think it’s very important for us to try to put out the fire . . . then you think about the fire code.
⁴⁰

In his 1988 book,
The Collapse of Complex Societies
, Joseph Tainter argued that all societies, like all organisms, are doomed. Tainter studied ancient Rome as well as the Mayan civilization. He noticed that problems always blaze up. Each one—whether climatic, political, or economic—rings the firehall bell. And each solution—and readers may substitute the word “bailout” for solution—brings more challenges and takes more resources. Finally, the available resources are worn out.
⁴¹

Tainter observes that when the costs become high enough, people seem to give up. By the end of the Roman era, for example, the burdens of empire were so heavy that people sold themselves into slavery to get free of them. So many people did so at one point that the authorities had to come up with another solution; They outlawed the practice. Henceforth, Roman citizens were required by law to remain free!
⁴²

An earlier philosopher, Giambattista Vico, writing in the eighteenth century, put the beginning of the decline of Rome roughly at the time of the Great Fire during Nero’s reign. Nero, partly to pay for his post-fire reforms and reconstruction, began taking the gold and silver out of the coins. All civilizations go through three stages,Vico said: divine, heroic, and human. The divine period is ruled by the gods. The heroic period is marked by victories and statues. Then comes the human era. (Here, we permit ourselves to add a footnote to Vico’s oeuvre: The coin of the realm in early periods is the gods’ money: gold. Later, people switch to money of their own invention: the kind of money you make from trees.) This last stage, says Vico, is when popular democracy arises, along with rational thinking and what Vico delightfully calls the “barbarie della reflessione” [the barbarism of reflection]. In earlier eras, people do what their gods and leaders ask of them. In the final era, they ask, “what’s in it for me?”
⁴³

Even as late as the early ’60s, John F. Kennedy could still appeal to heroic urge without drawing a laugh. “Ask not what your country can do for you,” he said in his inaugural address, “ask what you can do for your country.”

But 11 years later, Richard Nixon, like Nero before him, began the process of debasing the money. That was a solution, too; the United States had spent too much. Nixon would worry about the fire code later. First he opened up with the firehose: He defaulted on America’s promise to exchange dollars for gold at the statutory rate.

Barack Obama tried a Kennedyesque appeal to civic high-mindedness in early 2009. We need to “insist that the first question each of us ask isn’t ‘what’s good for me?’ but ‘what’s good for the country my children will inherit?’” said the president-elect.
⁴⁴
But now, like Doric columns in a trailer park, the words are ornamental, not structural. They are the homage that one age pays to a better one.

We are in the twenty-first century now. Barbarous reflections rise up like swamp gas.The whole place stinks of them. Bernanke and Obama offer solutions. But their plans to save the world from a correction are little more than a swindle of the next generation.They offer to bail out the mistakes of one generation with debt laid onto the next.

“Regarding the current financial meltdown,” writes Rony Teitelbaum,“it is very clear that two main factors underlie the political reactions to the crisis, the first being pressure originating from ties between the financial and the political elect, manifested by taxpayer bailouts of large institutions that continue to deliver bonuses to the executives and donate to political campaigns. For those of us who are not blind, these are clear signs of political corruption which would have made the worst Roman emperor blush.The second factor is political pressure originating from the mass public. The kind of solutions offered so far, and I may add which were received with very warm enthusiasm, were tax rebates and gasoline tax holidays.These are actions aimed at a public who ‘impatiently expected quick and obvious results,’ to quote Cary’s description of Roman society in AD 300. [
A History of Rome
].”
⁴⁵

Circa 2009, there is hardly a soul in the entire world who has not been corrupted by the
barbarie della reflessionne
of the late imperial period. Both patricians and plebes are for bailouts. Both business and labor back stimulus programs. The taxpayers and the politicians who rule them are of one mind. Liberal, conservative, rich, poor, Republican, Democrat all speak with a single voice: ‘Screw the next generation!”

The Golden Age of American capitalism is over, in other words. In the space of half a century it passed from gold, to silver, to paper . . . and is now somewhere between plastic and navel lint.

THE TRIUMPH OF OSAMA BIN LADEN

Finally, we turn back to the dead. “Been there, done that,” the shades whisper again. “You think you’re so smart . . . ,” they continue, and then the spooks laugh so hard they can’t finish the sentence.

There are a number of theories of history. Hegel,Vico, Spengler; destiny, dialectic, the clash of civilizations. They are a penny a dozen, and still overpriced.

“The history of the world is but the biography of great men,”
⁴⁶
was Thomas Carlyle’s small-change addition to the genre. He thought individual men had a decisive effect. But not only do people come to think what they must think when then need to think it, they also do what they must do. Then, they imagine that it is they who control history, and not the other way around.

“Encourage your enemy to expend his energy in futile quests while you conserve your strength.When he is exhausted and confused, you attack with energy and purpose.”
⁴⁷

This is from an ancient Chinese text known as the
Thirty-Six Stratagems
or
36 Strategies
first published in the western world by Harro von Senger. Osama bin Laden must have read the book. In a report that appeared in the
Guardian
in November of 2004, the Al Qaida leader outlined his strategy:

“Bleeding America to the point of bankruptcy” was what he was up to, he said in a videotape. He even did the math. “Every dollar spent by al-Qaida in attacking the U.S. has cost Washington $1 million (£545,000) in economic fallout and military spending,” said the report.

“We, alongside the mujahideen, bled Russia for 10 years, [in Afghanistan] until it went bankrupt and was forced to withdraw in defeat . . . . So we are continuing this policy in bleeding America to the point of bankruptcy.”
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How many men can boast of bin Laden’s triumph? He brought down not just one empire, but two. His band of terrorists leeched the Soviets so well, they fainted. His campaign, with CIA support, put nearly a half-million Soviet soldiers out of service, mostly because of illness, and destroyed billions worth of irreplaceable military materiel.

It was no coincidence that the Soviets lost Afghanistan in the same year their empire disintegrated. Then, Osama turned on the world’s only surviving empire. The story of Osama’s attack on the United States of America will be more familiar to readers than it is to us. It succeeded beyond Osama’s wildest imagination.With a band of just 19 suicidal fanatics, he was not only able to bring down two of America’s iconic buildings, but panic the empire into slitting its own wrists.

In 2003, America’s war in Iraq and other expenses created a deficit of $377 billion. At the time, the total U.S. debt was $7.4 trillion. Now, the cost of the war in Iraq in itself is estimated to mount up to $2 trillion. Bin Laden—the son of a billionaire—had found the weakest section of the empire’s walls: its finances.The terrorist strikes could have been turned over to the usual gumshoes—the FBI and local gendarmes.The actual perpetrators were in cinders; still, good police work and the cooperation of foreign law enforcement agencies, might have brought more perps to justice, at negligible additional cost.

But the empire had George W. Bush in charge of its military and Alan Greenspan in charge of its money; these two exterminating angels were ready for the job ahead of them. Besides, it had been slapped in the face! America didn’t have $2 trillion to spend on a pointless war. But bin Laden had delivered a challenge to the empire’s amour proper. In effect, he suckered the fattest man on earth into having another éclair.

Two trillion was just the beginning.The attack on the World Trade center induced a hysteria. It followed the collapse of the Nasdaq and coincided with a cyclical downturn in the U.S. economy. In the general panic, the Bush administration believed that the U.S. economy needed to be goosed up, at all costs. Thus it was that the greatest stimulus package of all time was unleashed, as described in this book—a massive turnaround in public spending, from positive to negative—along with the most aggressive cuts in interest rates in many years. The bubble in the Nasdaq was soon replaced by much bigger bubbles: in housing, finance, derivative debt, art, private equity, student loans, and other forms of private debt.The explosion of those bubbles has now blown up the whole system of imperial finance.

Now, for the first time in 25 years, global trade is shrinking. The U.S. trade deficit is declining, along with China’s exports. Economies naturally expand and naturally contract. In an expansion, world trade increases. In a contraction, it diminishes. Typically, big increases in global trade correspond with the rise of imperial powers—armed forces large enough to protect trade routes guarantee the safety of merchants and enforce a uniform, reliable commercial code. Trade expanded greatly during the Roman Empire and then contracted sharply when it fell.The Mongol Empire, too, created a huge free trade area in Eurasia. Then, the British and other European powers expanded their sphere trade along the shipping lanes, throughout most of the world, until they were rolled back from much of Eurasia by the advance of other hostile empires—the Soviet Union and China.

The last major boom in world trade came with the Reagan Administration. The free-marketers in the ’80s—both in England and America—lowered taxes and reduced barriers to commerce.Then, a remarkable thing happened: The Soviet Union collapsed, leaving its member states and client countries free to enter into trade with the West. China also realized that its rice bowl would be fuller if it, too, began selling to the West, rather than threatening it.

That Golden Age of ebullient world trade is now over, too, because the empire that nurtured has peaked out. And now, Mr. bin Laden, holed up in his grim refuge, can cherish his own conceits: that he is the hero who slayed two empires . . . rather than just another lunkhead doing history’s dirty work.

“Kingdoms are of clay,” said Marc Antony, before killing himself.

16

What to Do When the Barbarians Arrive

“D
ere’s dem dat’s smart . . . an’dere’s dem dat’s good,”said Uncle Remus. Many young people today can’t even identify Uncle Remus. Some of their elders might want to arrest you for quoting him in the original dialect. But the man was a genius.

When we were young, we were a lot smarter. But as the years go by, many of the things we thought were smart don’t seem so smart anymore. And now we realize that no matter how smart we think we are, we are never quite smart enough. We think stocks are going up, we think we can build a better world in Mesopotamia, we think we can tell the fellow down the street how to discipline his children or decorate his house. But what do we know?