The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (7 page)

America provides a
pax dollarium
for nearly the entire world. But the United States does not take direct tribute from its vassal states and dependent territories for providing this service. Instead, it borrows from them. Living standards rise in the United States. But they are rising on borrowed money, not on stolen money. The big difference is that America’s vassal states can stop lending at any time. If they care to, they can even dump their current loans on the open market destroying the U.S. dollar and forcing interest rates so high that a recession—or depression—is practically guaranteed. What is worse, the longer the present system continues, the worse off Americans are.

The closer you look at it, the larger the absurdity becomes. In the first half of 2005, Americans got poorer, not richer—at the rate of $80 million per hour. Their system of imperial finance was impoverishing them. Even that is not the worst of it, because it also reduced their ability to compete in the modern economic world.While they were providing a public good—at a loss—their competitors were saving money, building capital and expertise, setting up factories, and taking market share away from them. Each year, Asians produce more of what Americans buy, and Americans produce less of what anyone buys.

Products leave Asia for North America. Money leaves North America for Asia.The money comes back to America within days. America’s economists breathe easy. What is there to worry about, they ask, as long as it comes back to us. “It is a form of tribute,” they claim; the empire works. But it works in a perverse way.The money that comes back is not the same as the money that left. It has been transformed: It goes out as an asset and comes back as a liability.

THE HUNS ARE COMING!

For many centuries, Europeans had nightmares. Periodically, barbarian invaders from the East came in waves from the steppes of Eurasia. Celtic tribes pushed out or exterminated whoever was there before them. Then, new groups came after them. Mounted on horseback, they came fast and hard.They so terrified the more settled communities that the tribes picked up and pushed to the west. Germanic tribes eventually pushed the Celts to the far corners of Europe and later sacked Rome.

The Huns were barbarians. They were ruthless, cunning, fearless, and were reported to be invincible in battle. What chance was there against them?

In market terms, this was a good time to be “short” Europe. A fund manager might say that he chose to “underweight” the Old World. It was a time when the expansion of the previous period was likely to be corrected. There would be wailing women and gnashing of teeth. It was a time when fear and despair would likely dominate. It was a sell signal for the growth of civilization and commerce, which tend to go hand in hand like a prisoner with his police escort.

Politics and war are not zero-sum games. For every winner there is not a loser. Nor is a dollar gained for every dollar that is lost. Instead, the destruction of war and the costs of politics make them net losing propositions always. Most people lose. Wealth disappears. As a whole, people are poorer.

But, as in a bear market, some people gain from war. Those who win the war feel like winners, even though they may be poorer and many of their comrades may be dead. A few contractors and speculators actually make money on war.

The barbarian invasions of Europe had their bright side. The barbarians were in their expansion phase—their bull market stage—with rising expectations and positive, bullish hopes. They were getting something, not for nothing, but for next to nothing. What was the effort of killing a man compared with the wealth it brought the killer? A small investment. A trifle really, and an enjoyable one for many people. But conquest was not without risk. There are no completely free lunches, even for thieves and murderers. The Huns took a risk. On the upside were booty, women, slaves—and the pure exhilaration of battle and the prestige of conquest. On the downside, they might be defeated and killed.

The Hun might have been a sell signal for civilization, but he was a buy signal for his own fortunes, his status, his group, his empire, and his genes. It was a time to be “long” politics: There is a time to plant, to reap, and to trade with others peaceably. And there is a time for force, for taking what you want without paying for it and for killing anyone who gets in your way, for the Hunnish invasions meant rape, not for sweet talk and courtship.They meant theft, looting, and pillage, not further elaboration of property rights or the division of labor. Things got simpler, more brutal, mean, and nasty; lives were shortened. It was not a time to be in the insurance business.

What caused the periodic invasions no one knows. Perhaps good weather out on the plains produced population explosions that caused the nomads to expand. Perhaps bad weather caused famine that sent hungry mouths in search of someone else’s meat and grain. Historians don’t know. But fear of the barbarians from the steppes has been a chronic theme of Western history—particularly among the Teutonic tribes that were most exposed to them.

Perhaps the most successful empire builder of all time was a leader of one of these periods of barbarian expansion—Genghis Khan. Since the time of the Romans, it has been fashionable to put a civilized mask on your face when you put the imperial purple on your back. You are bringing religion to the heathen. You are bringing civilization to the indigenes. You are bringing culture, education, and technology. Even Alexander the Great thought he was doing the world a favor. Conquerors do not like to admit—even to themselves—that their instincts are no different from those of barbarians. They have better table manners. But they are subject to the same urges as Genghis or Attila. Bloodlust, prestige, power, status—who can deny that it would be a thrill to conquer a whole city or an entire nation? But empire builders typically put on the imperial purple like a set of angel’s wings, leap off the balcony, and come down with a thud.

Genghis Khan needed no mask.The man showed his face as it really was. He united the Mongolian tribes in about 1129 and beginning with a series of attacks on northern China, he embarked on a spectacular epic of mass slaughter and rapine from which two empires were derived. One of them, the Ottoman Empire, lasted until the end of World War I. The Mongol hordes overran northern China,Tibet, Persia, nearly all of central Asia and the Caucasus, Korea, Burma, Vietnam, Anatolia, and much of Russia. They attacked India and eventually, in 1526, Babar, one of Genghis Khan’s descendants, set himself up as emperor of the place. In China, too, Genghis’s descendants founded the Yuan dynasty, which ruled until nearly the fifteenth century.

All empires have to pay, in one way or another. The Mongols made theirs pay in the most elemental, and probably most satisfying, way. From an evolutionary point of view, all human activity has a single purpose—to propagate one’s genes. A man tries to get rich or get elected to demonstrate that he is the sort of fellow a woman would want to mate; he will produce offspring as capable as he is; and he has the resources to take care of them. In this sense, history records no more spectacular success than the great Genghis Khan.

At one point, Genghis was told by his generals that the sweetest pleasure in life was falconry. “No,” the empire builder is said to have replied, “You are mistaken. Man’s greatest good fortune is to chase and defeat his enemy, seize his total possessions, leave his married women weeping and wailing, ride his gelding and use the bodies of his women as a nightshirt and support.”
¹
Genghis was so successful that a recent DNA study of 2,123 men from across Asia permitted scientists to estimate that he may have as many as 16 million male descendants spread out from Manchuria to Afghanistan.

Genghis made the empire pay in another way, too. He imposed a rough income tax tribute on all his subject peoples. The rate was only 10 percent—considerably less barbaric than today’s rates.

Now that Mongolia is free from Soviet rule, its citizens are beginning to take a renewed interest in the man so many of them can trace as an ancestor. “Within this rapidly changing world, Genghis Khan, if we acknowledge him without bias, can serve as a moral anchor. He can be Mongolia’s root, its source of certainty at a time when many things are uncertain.”
²

We quote that passage from the
Harvard Asia Pacific Review
merely to embarrass Professor Tsetsenbileg, of the Mongolian Academy of Sciences, who said it. Genghis Khan may be popular in Mongolia, but it just raises questions about the Mongolians.

“All who surrender will be spared; whoever does not surrender but opposes with struggle and dissension, shall be annihilated,”
³
said Genghis before attacking the ancient cities of Bukhara and Samarkand. It has been estimated that his campaigns killed as many as 40 million people based on census data of the times:

Genghis Khan preferred to offer opponents the chance to submit to his rule without a fight, but was merciless if he encountered any resistance. Genghis Khan’s conquests were characterized by wholesale destruction on unprecedented scale and radically changed the demographics in Asia. According to the works of Iranian historian
Rashid al-Din,
Mongols killed over 70,000 people in
Merv
and more than a million in
Nishapur.
China suffered a drastic decline in population. Before the Mongol invasion, China had about 100 million inhabitants; after the complete conquest in 1279, the census in 1300 showed it to have roughly 60 million people. How many of these deaths were attributable directly to Genghis and his forces is unclear.
⁴

But those were also the days when a man lied to exaggerate his murders, rather than cover them up. Genghis Khan was proud of killing people. In a way, he should have been; he did it so well.

But how could so few have done so much to so many? The entire population of Mongolia could not have exceeded about 200,000 persons. Military historians argue that it was largely because the Mongols were so bloodthirsty, so merciless, so fanatical, so fast, and so lethal that they were hard to stop. They were superb horsemen, frequently without infantry support, who were able to move more quickly than their more sedentary enemies much like panzer divisions in World War II.Their
ghazi
was a forerunner of today’s
jihad.
Their composite bows were like today’s Kalashnikovs (a Russian-made rifle that can fire bullets continuously). And they had a sophisticated system of communications that included semaphore-like information exchange on the battlefield and a pony express relay of “arrow riders” shooting across the prairies. With these advantages, they took what they wanted and killed everyone who got in their way.

It was not a very polite way to run an empire, but it worked.

Genghis died in 1227. His son Ogedei was elected to succeed him. Those who think democracy deters state violence do not bother to talk to the dead: Mussolini, Hitler, and Ogedei Khan all won office, at least in part, thanks to the ballot box. After his election victory, Ogedei Khan continued his father’s expansion. He pushed farther into northeastern Asia and conquered Korea and northern China. By the time of his sudden death in 1241, his armies were on the frontier of Egypt and present-day Poland. But democracy cut them off. Mongol law required that the new Khan be chosen by a new vote of Genghis’s descendants. Were it not for this interruption, the Mongol armies might have pushed beyond the Rhine and thrown Europe into a new Dark Age. As it turned out, by the time the Mongols had chosen a new leader—Genghis’s grandson, Mongka—the momentum in Europe had been lost.

In 1257, the Mongols turned toward Baghdad. Hulagu, another grandson of Genghis, demanded that the caliph of Baghdad, al-Muta’sim, receive him as his sovereign, just as he had done with the Seljuk Turks when they swept over the area. But the caliph of Baghdad was the 37th of the Abbasid dynasty and leader of Muslims throughout the Middle East. He believed that his people would come to his aid against the infidel. They did not, and Hulagu marched on Baghdad with an army of hundreds of thousands of cavalry, wiping out the old Assassin fortress at Alamut on his way.

The caliph realized his mistake. He offered Hulagu the title of “Sultan.” Hulagu’s name would be given at Friday prayers in all the mosques of Baghdad, he added. Later, the caliph went in person to see Hulagu.This time, he said his citizens would lay down their arms if the Mongols would spare their lives. But as soon as their swords and bows had been collected, the Muslim fighters were exterminated. Then the Mongols went to work on the civilians. Eighty thousand men, women, and children were massacred. The caliph was strangled.

The only people not killed in Baghdad were the Christians. Mongka Khan’s mother was a Nestorian Christian. At one point, perhaps at her urging, the Mongols sent emissaries to the King of the Franks, who was then fighting their mutual enemies—the Muslims—in the Holy Lands. The Mongols offered to turn to Christ, but his suggestion seems to have been ignored so he turned East, instead of West. Mongka Khan died just as his armies were about to attack Cairo. The next Khan, Kublai, moved the Mongol court to Beijing and founded the Yuan dynasty.

Something about the Baghdad area must attract empire builders the way a beehive attracts bears. Only a few miles away is the site of ancient Ctesiphon—a city that was taken and retaken at least 36 times before it was finally destroyed after the Saracens took it in AD 637. The Romans took the place five times, three times in the second century alone. Before that, the Hittites,Akkadians, Persians, Parthians, Sassanids, Macedonians, and countless others had already left their sandalprints between the Tigris and Euphrates.

Emperor Trajan captured Ctesiphon in AD 116 and made it part of Rome. The next year, Hadrian gave it back to the Parthians in a peace settlement. In 164, it was again taken, by Roman general Avidius Cassius, but later abandoned. Then, Septimus Severus finally made the campaigns pay when he took the city in 197. He sold as many as 100,000 of the city’s citizens into slavery.