The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (8 page)

A hundred years later, the city was again in the news. Emperor Galerius was defeated outside the city walls by an army of Persians. In 296, he sought a rematch and this time won the city, which he traded for Armenia. Much later, in 627, Heraclius, took the city. The Western Empire was already history, but Heraclius ruled briefly from Constantinople. He gave up the city soon after its capture. Ten years later, it fell to the Saracens and was soon in ruins. A British army was defeated by Ottoman forces in 1915, but regained title to the city in the Treaty of Versailles. Later, the British readily let go of Baghdad, after they realized how expensive it was to hold on to the place. It gained its independence along with other British imperial possessions in 1921. More recently, the city was once again taken by American forces.

WHERE HAVE ALL THE DEAD EMPIRES GONE?

Of all the silly things people said toward the end of the twentieth century, perhaps the silliest came out of the mouth of Francis Fukuyama. The man was so infatuated by the apparent success of the American imperium, he believed the “end of history” might have arrived.What is the history of this tattered ball but the record of the rise and fall of civilizations, of governments, of battles and heroes? But so perfect in Fukuyama’s eyes was the new American empire, he thought it had risen beyond the tug of gravity. So solidly launched was the rocket of democratic capitalism that he could not imagine that it would ever fall to earth. Nor could he fathom how anything could ever compete with it or take its place.
⁵

Fukuyama did not seem to appreciate how history works. Politics, like markets and love affairs, often throws up periods of relative contentment, as well as sour periods of despair and bubbles of temporary insanity. If they last for more than a generation, people think they are permanent. In the case of bubbles, people believe that some new era has arrived and that things will never be as they were before. Bubble markets—such as the tech bubble in the late 1990s or the residential property bubble in certain areas of the United States in 2004 and 2005—come along from time to time. People take leave of their senses. They are willing to buy things at twice, three times, ten times prices they would have judged too high just a few years before. In the famous Tulip Bubble in Holland from 1634 to 1637, people paid up to 5,000 guilders for a single tulip bulb. In the South Sea Bubble in England, in 1711, speculators paid up to 1,000 pounds for stocks that were reduced to nothing by the latter half of 1720. In the Japanese Bubble of the late 1980s, investors paid such high prices for real estate in downtown Tokyo that the grounds of the Imperial Palace were said to be worth more than the entire state of California.

Investors pay extravagant prices because they are convinced that something fundamental has changed and that they will never again have an opportunity to buy at current prices, no matter how high they have become. They believe the world will never be the same, that the rules that govern human activity have been altered or suspended.

Markets make opinions,
the old-timers say. It is an expression we return to several times in this book. As prices rise, people invent explanations for why they have gone up and they will continue. In the case of the tech bubble of the late 1990s, they told themselves that new developments in electronic communications had completely changed the ancient relationships.Thanks to computer-driven devices and the Internet, material progress was about to accelerate. Assets were about to get much more valuable. It did not bother them that the two propositions were contradictory. A society in which the future comes faster should logically depreciate the present more quickly. Factories, means of production, and capital assets should be expected to become obsolete sooner and thus should be worth less, not more. But no one thinks very hard when markets are rising.This is true of the real estate bubble on both coasts in 2004 and 2005. Houses in Southern California were increasing in value at four times the rate of gross domestic product (GDP) growth and an infinitely great multiple of real income growth—which was negative. It made no sense, but who mentioned it? Prices were rising; investors had no trouble coming up with reasons. It was a new era, they said; property would never again be worth what it used to be.

In politics, too, there are bubbles—times when the horizon is so clear and cloudless, people begin to think it will never rain again. The old principles—the wisdom of the dead and the virtues that brought them to where they are—no longer matter. It is a new era.They are the imperial power, the hegemon, the cock of the walk.They are on top of the world and are looking for reasons they will be there forever. But the reason comes to them readily. They look in the mirror, and there it is. Instead of their own faces, however, they see only the dull, puerile masks they have put on. It is as if they all have become candidates for president; they are “hollow dummies,” to use Orwell’s expression—vain imposters, pretending to be something even dimmer and less interesting than they actually are.They look in the mirror and think they see a race so clever, virtuous, sturdy, and industrious that they deserve to be on top of the world. Surely, they have created something that can never be matched. All of history has been marching toward this perfection.Time has stopped. History has come to an end; there is no need for any more of it. In 1989, American democratic imperialism triumphed unmistakably against its adversary—the Evil Empire. The Good Empire was the last one standing. God had shined his light on us and would never turn it off.

Many people said many dumb things in the twentieth century. Usually, they were only mistakes or lies.When Neville Chamberlain said we would have “peace in our time,” he was making a prediction. He was wrong. But if you hung everyone who guessed wrong about the future, the lampposts and traffic lights of Wall Street would be full of bodies. And when Adolph Hitler said Germany needed
lebensraum,
he was merely covering up his desire for conquest by putting on a mask. But when, after the Berlin Wall fell and Francis Fukuyama declared the end of history, he must have made the gods chuckle. Here was a reflection so vain and imbecilic, it practically cracked mirrors.

Table 2.1
Empires throughout History

Empires are living things with a logic of their own. They are born; they must die, too. No one conquers without eventually being conquered. No bubble expands without eventually blowing up. In history, there are no exceptions.

It was as if Fukuyama never actually read any history. Empires are living things. They are born; they must die, too. No one conquers without eventually being conquered. No bubble expands without eventually blowing up.There are no exceptions. All empires die. Here, for amusement, we look at the gravestones (see
Table 2.1
). Only one, and that one of relatively recent naissance, still lives. But the grave and the tombstone are there, waiting for it.

Fukuyama’s concept was that the desire for power, glory, conquest, revenge—all the dark forces of destruction and regression—had disappeared. They had been replaced by an evolving civilization of consensual, democratic government and market-driven material progress, led by an enlightened U.S. imperium. This is what America offered the world—peace and prosperity. But even a casual look at the historical record would show that neither empires nor democracy are any guarantee of peace or prosperity.

For proof that empires are hardly peaceful places, we turn to the history of Rome. And here we offer readers a history of the rise and fall of the world’s greatest empire as brief as the latest Italian underpants.

In the eighth century BC, Rome was nothing more than a collection of villages along the Tiber, inhabited by several tribes, principally Latin, Sabine, and Etruscan. Gradually, these Romans grew in numbers and power, and went to war with almost everyone. They were already constructing an empire before the fifth century BC. In a celebrated early incident, perhaps only legendary, they invited their neighbors, the Sabines, to a feast and then stole their women. The Sabine men were not happy; they took offense and nursed a grudge. But there was hardly a tribe, kingdom, or empire in Europe, North Africa, or the Middle East with whom the Romans did not pick a fight. After the Sabine war, there were wars against the Albii, Etruscans, Volcii, Carthaginians, Etruscans again, the Latin League (and this is only a partial list), the Volsquii, Equii,Veieii, Gauls, Samnites, more Gauls, Epirians, Carthaginians again, and more Gauls, Macedonians, Syrians, Macedonians again, slaves in Sicily, Parthians—and even Romans in the civil wars. And we have not even arrived at Caesar’s wars against the Gauls in 58 to 51 BC. Roman history has another 500 years of wars to go!

The civil wars in the first century BC put an end to the Republic. Then, Caesar crossed the Rubicon, and it was a new era in Rome. It was as if Tommy Franks had decided to move his army to Washington, DC, and make a regime change of his own. Some people would object, of course (the liberal papers would howl), but most people wouldn’t care.

In ancient Rome, as in modern Washington, people chose their ideas the same way they chose their clothes—they wanted something that not only did the job, but was also fashionable. And at the time, it was à la mode for emperors and individuals alike to pretend they lived in a free republic that honored citizens’ rights. But in practice, the government, and its leader, could get away with almost anything. And what they seemed to like doing was going out and making war against everyone they thought they could beat. That is what Empires do.

Back then, war was a paying proposition. When Emperor Trajan took Ctesiphon (near modern Baghdad), he captured 100,000 people who were sold into slavery.When Augustus took Egypt, he used the Nile’s wheat harvest to feed the growing population of rabble in Rome.

But while some people came out ahead, in the aggregate, wars then—as now—were negative gain enterprises. And as the empire grew, the costs also mounted, to the point where both became grotesque and insupportable.

Octavian, under the name Augustus, was installed in 27 BC. The Romans only used pure gold and silver coins, but Augustus needed more money to finance his wars and domestic improvements. There were no government printing presses capable of running off a batch of $100s in a few seconds. Nor was there a global bond market, from which he could raise billions in loans overnight. All he could do was to order the government-owned mines in Spain and France to work overtime. Around the clock, miners dug out the precious metals. The money supply rose. As the supply of something rises relative to the supply of something else, the value of the former declines relative to the latter. Thus, did prices rise in Rome as more money chased the same quantity of consumer goods. Between the day Augustus came to power and the day Jesus Christ was born—a period of 27 years—consumer prices nearly doubled. Augustus, or his advisors, realized the problem. They cut back the money supply and prices stabilized.

Rome wasn’t built in a day, nor was its money destroyed overnight. In AD 64, in Nero’s reign, the aureus was reduced by 10 percent of its weight. Thereafter, whenever the Romans needed more money to finance their wars, their public improvements, their social welfare services and circuses, and their trade deficits, they reduced the metal content of the coins. By the time Odoacer deposed the last emperor in 476, the silver denarius contained only 0.02 percent silver.

The impulse to build up an empire seems to be as strong as the impulse to tear one down. To the question, when does a country aim for empire, comes the answer: whenever it can.

Every country in Europe has at one time or another reached for the imperial purple. Portugal and Spain discovered and conquered vast jungles, swamps, and pampas, and built empires for themselves. For Spain, the conquests were extremely profitable after they found huge quantities of gold and silver. But nothing ruins a nation faster than easy money. The money supply grew larger with every ship’s return from the New World. People felt rich, but prices soon soared. Worse, the easy money from the new territories undermined honest industry. In the bubble economy of the early sixteenth century, Spain developed a trade deficit similar to that of the United States today. People took their money and bought goods from abroad. By the time the New World mines petered out, the Spanish were bankrupt. The Spanish government defaulted on its loans in 1557, 1575, 1607, 1627, and 1647. Not only was the damage severe, it was long-lasting. The Iberian Peninsula became the “sick man of Europe” and remained on bed rest until the 1980s.

If empires are to endure, they must pay. But if they pay too well, success ruins the homeland.

In the summer of 1588, the Invincible Armada of King Philip II of Spain headed toward the Low Countries. You and I, dear reader, can spot the error already. Philip would have done better to call his fleet the “Almost Invincible Armada,” or perhaps even better, the “Best Little Armada We Could Put Together at the Time.” Calling an armada
invincible
is like calling a WorldCom
unbeatable;
it is a challenge to the gods and an invitation to destruction.

The Armada’s mission was simple, but not easy—to pick up soldiers in the Netherlands and transport them to England. It had been 500 years since anyone had attempted an invasion of England. The last assault, led by William, Duke of Normandy, had been a big success. Philip was ready to have a go at it again.

The reasons for the campaign were not so simple. In the jargon of today, he might have labeled his effort a “War on Terror,” for English pirates had been terrorizing Spanish shipping for years. The pirates were not necessarily sponsored by the English crown. But they, literally, found safe harbor in English ports, similar to the way al-Qaida found Afghanistan hospitable.

Of course, there was more to it. Religion played a part. Just as George Bush’s War on Terror had a subtext of religion, so did Philip of Spain’s campaign against England. Henry VIII of England had rejected the authority of the pope and set himself up as head of the Church of England. When his daughter, Elizabeth, ordered the execution of her Catholic rival, Mary Queen of Scots, Philip (who had been king of England 30 years prior, when he was married to Mary I) thought the time had come for action.