We know how it began — Mr. Greenspan and Mr. Bush conspired to create the biggest expansion of credit in history. We know also why it happened when it did — because both men hit the panic button after the events of 2001…the attack on Manhattan by a terrorist band and the recession that began that year. Bush cut taxes and increased spending; Greenspan pushed the Fed’s lending rate to negative territory and left it there for the next three years.
What we don’t know, of course, is what happens next. There is no analytical method to know. All we can do is look back at the phenomenological record of history. Has anyone pushed that button before, we ask ourselves? If so…what happened?
Every case is different. Input different circumstances and you get different outputs. The circumstance that has intrigued us lately is the fact that the United States bears a strikingly resemblance to an empire. The current state of the American economy also bears an odd resemblance to traditional imperial financial models. It is odd because it does not look like, say, the way Rome financed its empire…or the Mongols financed theirs…or even the way the English paid the bills when they were on top of the world. Still, we think a paternity test is in order. Perhaps the U.S. model is just missing a chromosome or something; it looks a bit like its ancestors; but a half-wit version.
America first stooped to empire in the late 19th century. She was able to straighten herself out for a few years…but the lure of it was there, which later became irresistible. Between 1917 and 1952, the country was transformed from a simple republic that mostly minded its own business, to a grandiose empire with imagined interests and real troops nearly everywhere.
In normal places at normal times people go about their normal lives earning a living the best they can and focusing their attention mostly on their private lives. But an empire changes the way people think. The common householder turns away from his own humble house and his own wretched wife and begins to think about the fair world beyond his own kith, kin and ken. He looks outward and sees how much better the world could be if he and his fellow citizens could run it their way. It makes them think they must play a greater role in global affairs…that they must walk upon the world stage, not as some bit player, but as the main character, the hero. They must play the role of the protagonist.
Instead of sticking to their looms, fields and factories, the imperial citizens begin to appreciate the financial logic of empire: they provide the world with a valuable service — order and protection. Surely the rest of the world should pay for it.
Gradually, they neglect their own commerce…and depend on their subordinates, lackeys, and loyal subjects to support them. While administrative commands, fashions, and proclamations flow from the center of the empire to the extremities, there is an important flow in the other direction, too. Rome brought in its wheat from Egypt…(Romans needed bread)…its gladiators from the Balkans (Romans wanted circuses)…its soldiers from Gaul and its money from foreign treasuries and tax collectors from Judea to Britannia.
What caught our eye this morning…and set us to thinking such big thoughts…was a chart showing the ownership of U.S. Treasury bonds. A modest republic pays its own way. In 1952, nearly 90% of the Federal government’s borrowings came from domestic investors. Americans saved their money and used some of it to support the programs of the Eisenhower administration. But the maturing empire of 2005 depends on a globalized debt market and the savings of foreigners. From below 5% of Treasury bonds in overseas hands in 1952, the total now approaches 45%, while the percentage of lending coming from domestic sources has been cut in half.
Reading the history of empires we learn that the central power — the imperium — tends to weaken, as the periphery states grow stronger. Eventually, the subordinate states get tired of supporting the imperium. They stop paying tribute…and show up at the gates of Rome.
As we say, we don’t know what will happen next. But we are on the edge of our imported chair…
• America’s real estate bubble threatens the real economy as well as the financial world. Richard Russell reports that 40% of new jobs created in San Diego last year were in the property sector. When the bubble pops, people will not lose only their “paper” profits — they will lose their homes and their jobs.
More than a third of the houses bought last year were not intended as primary residences. Nearly a quarter was for investment. Another 13% were vacation homes.
• In the “Jumbo” category, nearly 50% of new mortgages in the United States are “IO” — interest only. Nearly 90% are ARMs — adjustable rate mortgages. Everyone seems to be speculating in real estate. Everyone wants to own property, but no one wants to pay for it. And everyone seems to like the new abbreviations. There is even a rising trend towards “neg-am” mortgages — where the amortization schedule actually walks backward and the principal grows larger. Neg-Am mortgages are popular now…they will probably become even more popular — until the homeowner walks backward into a ditch.
• According to a report in today’s Daily Mail, no one in Europe much likes the French. They are too arrogant, say the Italians. They are too unruly, say the Swedes. They are obnoxious, say the English. They are cynical scofflaws, say the Germans. For their part, polls show that the French were much more gracious about their neighbors than the neighbors are towards them, with one major exception. The French dislike the British, whom they regard as pretentious, snobby, no-accounts.
We have lived amongst both groups — the cheeseheads and the limeys — and learned their ways. Both are disagreeable on occasion…but then, so are our own countrymen. The world’s nicest race, as near as we can determine, are the Lapps of Finland. We have never met one; so, we have no reason to think poorly of them. Yet.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century.