The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (4 page)

Empires are thought by many to be good things. They expand the area in which trade can take place. In modern parlance, they allow for increased “globalization.” Generally, globalization is good for everyone. It permits people to specialize in what they do best, producing more and better things at lower costs. But it is more beneficial to some than to others. There are three billion people in Asia. And almost every one of them is willing to work for a fraction of the average American wage.

Globalization and artificially low interest rates in America allowed Asian industries to flourish. But for every dollar in revenue to an Asian exporter, 6 cents in debt was added to America’s heavy balance sheet.

Things happen that no one particularly wants or especially encourages, and the average man goes along with whatever humbug is popular—with no real idea where it leads or why he favors it.

Each person plays the role given to him; everyone believes what he needs to believe to play the part.

Alan Greenspan was famously against paper money that was not backed by gold when he was a libertarian intellectual.When he became a government functionary, his views conveniently changed. He came to believe what he had to believe in order to be the head of the American empire’s central bank: the Federal Reserve. The empire needs almost unlimited amounts of credit to carry out its foreign wars, while making bread and circuses available at home. Alan Greenspan made sure it got it.

Expensive foreign wars, expensive bread, expensive circuses—these are, of course, what bankrupted almost every empire from Rome to London. But that is just the point: Institutions play their roles, too. One grows; another decays. One is young and dynamic while another is old and decrepit. One has to die to make way for the new one to take its place. One has to ruin itself so that another may flourish.

Americans could have cut their military budget by 75 percent and still have had the biggest, most advanced army in the world. They could have trimmed their household spending by half, and still lived well. They could have driven less in smaller cars, they could have ceased mortgaging their houses, they could have “made do” with last year’s clothes and yesterday’s laptop, but how could they ruin themselves if they put on the brakes before getting to where they are going?

But you never know where you are in the cycle until it is too late to do anything about it. For all we know, we could be facing merely a temporary pullback in what is still a long-term bullish period for the American empire. Not likely, but who knows?

The theory we have been teasing out is that politics and markets follow similar cyclical patterns—boom, bust, bubble, and bamboozle. A handful of companies usually take a dominant position in the market; sometimes a single one does. So do a few countries dominate world politics . . .“empires” they are called. The difference between a regular nation and an empire is profound. A regular nation—such as Belgium or Bulgaria—tends its own affairs. An empire looks outward, taking on its shoulders the fate of much of the world. An empire is like a bull market. It grows, it develops . . . often it passes into a bubble phase, when people come to believe the most absurd things.

We don’t know what stage the American empire has reached . . . but we look around and see so many degenerate and absurd things, we guess: We must be nearer the end than the beginning.

How will it end? What will happen next? We don’t know, but we note that people do not give up their self-serving conceits and illusions readily. They hold on to them as long as possible. “America still has the greatest, most dynamic economy on earth,” they tell themselves, even as the nation loses money (its income is less than its expenses). This kind of madness is hard not to like; it is like an aging woman who thinks she becomes more fetching with each passing year. The gap between perception and reality grows wider every day, until finally, the mirror cracks.

No question: The glass has fractured; the spell has been broken. In the last half of 2008, the Empire of Debt got the “margin call from Hell.” All of a sudden, its citizens were asked to pay up. And now, the U.S. economy enters a deep, dark passage.

Long suffering readers will find this forecast familiar. It is the same one we made years ago in another book with Addison Wiggin called
Financial Reckoning Day
(Wiley, 2003). We thought then that the tech bubble would blow up, resulting in a long, soft slow slump, à la Japan.Well we were not wrong. Just four years too early. Instead of a real slump, the United States had a nine-month phony recession (in which consumer debt actually expanded) and a phony boom since (in which consumer debt expanded). These two phony acts set the stage for a real one—a not-so-soft, not-so-slow, slump.

But don’t worry. The feds are on the case. As the bubble in private debt deflates, they are pumping up a new, even bigger, bubble—in public debt. And when that one blows up . . . well, we’ll just have to wait and see . . . .

Look back over the past with its changing empires that rose and fell and you can foresee the changing future, too.

—Marcus Aurelius

1

Dead Men Talking

Tradition . . . is the democracy of the dead.

—G. K. Chesterton

O
ne of the nicest things about Europe’s cities is that they are so full of dead people. In Paris, the cemeteries are so packed that the corpses are laid down like bricks, stacked one atop the other. Occasionally the bones are dug up and stored in underground ossuaries that are turned into tourist attractions. Thousands and thousands of skulls are on display in the catacombs; millions more must be spread all over the city.

In Venice, a dead man gets—or used to get—a send-off so gloriously sentimental he could hardly wait to die. There is barely room within the city walls for the living and none at all for the dead. Cadavers were loaded onto a magnificently morbid floating mariah—a richly decorated funeral gondola, painted in bright black with gold angels on her bow and stern. Then, as if crossing the river Styx, the boat was rowed across the lagoon to the island of San Michele by four gondoliers in black outfits with gold trim.

How American versifiers must have envied one of their own, Ezra Pound, when he took his last gondola ride in such fabulous style in 1972. And then, what luck! The former classical scholar, poet, and admirer of Benito Mussolini got one of the last empty holes on the cemetery island. Today, when Venetians reach room temperature, the best they can hope for is a damp spot on the mainland.

We do not hasten to join the dead, but we seek their counsel. When corpses whisper, we listen.

“Been there. Done that,” they often seem to say.

Reading Margaret Wilson Oliphant’s history of the dead dukes, or
doges,
in her classic book,
The Makers of Venice, Doges, Conquerors, Painters and Men of Letters,
¹
we felt as though someone should have sent a copy to George W. Bush.“Read this. Spare yourself some trouble,” the author might have written on the accompanying note. But who reads anything but newspapers in the Capital City? Who reads at all? In the United States if it isn’t on the evening news, it didn’t happen. Ancient history is something that happened last week.

Too bad. For practically all the most preposterous ideas that emanate from the feverish swamps of the Potomac were tried out in the feverish swamps of Venice, hundreds of years ago.

“Democracy! Empire! Freedom! Nation building!” The ideas are cast into the murky lagoon of human affairs as if the words were clarifying magic. Suddenly, wrong is as distinct from right, as day from night. Good from bad . . . success from failure . . . how clearly we see things in the crystal waters of our own delusions!

The United States congratulates itself as being the finest democracy the world has ever seen, but the system for ruling Venice eight centuries ago was also democratic. People voted for people who voted for other people, who then voted for yet more people who elected the doge. The whole idea was to allow ordinary people to believe that they ran the nation, while real authority remained in the hands of a few families—the Bushes, Kennedys, Gores, and Rockefellers of thirteenth-century Venice.

“So easy is it to deceive the multitude,” says Mrs. Oliphant. “The sovereignty of Venice, under whatever system carried on, had always been in the hands of a certain number of families, who kept their place with almost dynastic regularity undisturbed by any intruders from below—the system of the
Consiglio Maggiore
was still professed to be a representative system of the widest kind; and it would seem at the first glance as if all honest men who were
da bene
and respected by their fellows must one time or other have been secure of gaining admission to that popular parliament.”
²

To Mrs. Oliphant’s dictum on the multitude, we add a corollary: It is even easier to deceive oneself. Today, rare are the Americans who are not victims of their own scams.They mortgaged their homes and thought they were getting richer. They bought Wall Street’s products as though they were gambling in Las Vegas and believed they were as clever as Warren Buffett. They went to the polling stations in November 2004 and believed they were selecting the government they wanted, when the choice had already been reduced to two men of the same class, same age, same schooling, same wealth, same secret club, same society, with more or less the same ideas about how things should be run.

In Washington, DC, the United States Senate met in the same solemn deceit as the Consiglio Maggiore—pretending to do the public’s business. While down the street, America’s own doge, George W. Bush, took up where the Michieli and the Dandolos left off: trying to hustle the East.

Making a very long story short, at the beginning of the thirteenth century, as at the beginning of the twenty-first, many people saw a clash of civilizations coming and sharpened their swords. They were, then as now, the same civilizations, clashing in about the same part of the world—the Middle East.

What was different back then was that the effort to make the world a better place (at least in this episode) was being prodded forward by the French, who were then an expanding, imperial power. St. Louis (King Louis IX) went on two crusades with a French army and failed both times.

Mrs. Oliphant’s history tells of the arrival of six French knights in shining armor, who strode into San Marcos Piazza to ask the doge for help. They were putting together an alliance of civilized Western armies to reconquer Jerusalem, they explained—in the same spirit as King Louis centuries before.

They brought out all the usual arguments. But the Venetians were not so much convinced by the French as they convinced themselves. They were, they said to themselves (just as Madeleine Albright would repeat centuries later), the “indispensable nation.”Without them, the effort would fail; therefore they must act. Yes, they could still fail, they acknowledged, but look what they had to gain! For not only would they being doing good, but they stood to do well, too—implanting trading posts and ports along the way.

And so a fleet of 50 galleys was assembled and set off, the old doge leading the way. Finding their French allies a bit worse for wear and tear, the Venetians proposed a new deal: Instead of attacking the infidels forthwith, they would warm up with an assault on Zara, a town on the Dalmatian coast that had recently rebelled against its Venetian masters.

The French protested.They had come to make war against the enemies of Christ, not against other Christians. But since they needed the Venetians’ support, they had no choice.

In five days, the city of Zara surrendered; its defenses were no match for the armies in front of them. And so the city was sacked and the booty divided up. Soon after came a letter from Pope Innocent III, who wondered why they were killing fellow Christians; it was the pagans they were meant to be killing, he reminded them. He commanded them to leave Zara and proceed to Syria, “neither turning to the right hand nor to the left.”

The pope’s letters greatly troubled the pious French, but the Venetians seemed undisturbed.They ignored the letters and remained in Zara until a new comic opportunity presented itself.

This time Constantinople was the unfortunate target. A young prince from that city had come to them, asking support for a mission at once as audacious as it was absurd. His father had been blinded and thrown in a dungeon; the capital of Eastern Christendom was in the hands of men who must have been ancestors of Saddam Hussein—evil usurpers, dictators whom the people detested. If the Venetians would come to his aid, he promised, they would be rewarded generously. More than that, he and his father would return the entire Eastern Empire back to the one true church of St. Peter in Rome.

The Venetians couldn’t resist. In April 1204, they set sail for Bosporus Strait. And in a great battle that must have been an undertaker’s dream, they took the city. Historian Edward Gibbon describes the scene:

The soldiers who leaped from the galleys on shore immediately ascended their scaling ladders, while the large ships, advancing more slowly in the intervals and lowering a drawbridge, opened a way through the air from their masts to the rampart. In the midst of the conflict the doge’s venerable and conspicuous form stood aloft in complete armor on the prow of his galley. The great standard of St. Mark was displayed before him; his threats, promises and exhortations urged the diligence of the rowers; this vessel was the first that struck; and Dandolo [the doge] was the first warrior on shore. The nations admired the magnanimity of the blind old man . . .
³