Fish Gotta Swim

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The Canadian ambassador says the Bush administration is “dysfunctional.”

And in today’s International Herald Tribune, columnist Bob Herbert says the war in Iraq is both un-winnable and deplorable. “Brave troops died for the mindless fantasies spun by a gang of dissembling, inept politicians,” he writes.

Even from the get-go, we thought the war in Iraq would turn into a mess. What we didn’t realize was that it was supposed to be a mess.

“Fish gotta swim,” we told our audience in London.

We gave a speech to the World Money Show group and described our view of the big picture.

Birds gotta fly. Dogs gotta bark. What do empires gotta do?

The answer came from a surprising source last night. We were reading a recent biography of one of the world’s greatest empire builders, Genghis Khan.

There is one thing all empires must do, the book tells us: Expand. We tried to think of a counter example; except for the very odd case of the Austro-Hungarian Empire…we could think of none. A nation-state has more or less fixed borders. Italy is Italy. Bulgaria is Bulgaria. The nation-state maintains an army to protect its borders. It does not, normally, seek to conquer neighboring states. It does not, normally, maintain foreign colonies, lackey governments in foreign countries, or vassal states and territories.

Empires expand…or contract…because that is what makes them empires. If they minded their own business and stayed within their own borders, they would not be empires. And once they take it upon themselves to have a ‘homeland’ as well as overseas possessions, territories and tributaries there is no natural limit. It is as though they had become an aggressive virus that spreads throughout the population — as far as it can go — and then goes away.

The other thing an empire must do is go broke. We read in the paper that spending under George W. Bush has increased more than under any president since Lyndon Johnson. Bush is a “Big Government conservative,” which is to say, he manages to combine the worst elements of two appalling creeds — military adventures overseas with bread and circuses at home.

But we’re not complaining. A true empire cannot help itself. It must engage in such extravagant “imperial overstretch” that it can no longer pay the costs. Even the primitive Mongol empire had to reward its troops and pay its administrators. It did so by stealing the wealth of conquered peoples and demanding tribute from them. This forced the Mongols to undertake ever more distant and more ambitions campaigns — because they had already robbed the cities under their control.

The Anglo-Saxon empire is a commercial enterprise, rather than a larcenous one. The Romans had their armies and engineers as the source of their hegemonic power. The Mongols had their horses and bowmen. The Anglo-Saxons had factories — originally, those in England and New England. But every imperial advantage is eventually dulled, worn out, emulated or rendered obsolete. Eventually, the empire expands until reaches beyond its limits…then, it either goes broke, is defeated, or both.

The Anglo-Saxon industrial advantage exhausted itself first in England and then in America. England’s economy reached its competitive peak before the end of the 19th century. Then, America took the lead, and was able to compete effectively for most of the next century, achieving a positive trade balance until the 1970s. It has been downhill since then, financed no longer by commerce, but by debt. American men earn hardly a penny more, in real terms, per hour, than they did in 1971. They feel richer, but only because they owe more, work longer hours, and put their wives to work.

America still has the world’s reserve currency. It can sell U.S. Treasury bonds to finance its imperial expenses, with the Fed holding rates conveniently low. The result of such easy credit has been a sharp increase in asset prices all over the world. Stocks all over Europe are rising strongly. Natural gas is hitting new records. Oil has risen seven times since 1997…17% in the last quarter alone. Unleaded gasoline rose 40% last quarter. And house prices in America — though no longer in Britain — continue to soar, with the average house in California selling for $569,000.

A quarter of a century ago, you could have bought the typical house in California for 200 ounces of gold. Today, you will need 1200 ounces. The real question is not what is ahead (every empire must decline…along with the price of its assets) but when and how it happens. Already, we notice ominous portents. In 2003, the amount of U.S. Treasury bonds in foreign hands rose by $175 billion. In 2004, the increase came to $295 billion. But during the first seven months of 2005, only $2 billion more has been added.

We do not know what will happen next, but we hope to enjoy the spectacle.

• Gold declined (Dec. contracts) to under $470. We’re moving our buying target up to $450, and hope to see a correction below that amount. As we said above, we don’t know what will happen, but we think we will enjoy the show more holding gold rather than holding California houses or Wall Street stocks.

• Some of the new taxis in London have television sets in them. Friday, while en route to Westminster, we watched an amazing show. A group of Indians in Mumbai were learning how to speak English with a Midwestern American accent. They held their chins down in order to get the ‘aahhh’ sound sufficiently broad and lazy. Then, they practiced moronic conversations:

“Aahh wuz down at the Wahllmart yestahday…”

“Oh yeeaah…whut did you buyyye?”

“Well…maah husband wanted a new fishin’ pole…but Aahh tol’ hiymm…”

The show was frightening. These poor people…they are working so hard to take jobs from Americans.

You don’t get what you want out of life, we keep saying; you get what you deserve. Surely, these people deserve whatever they get.

• We went home to the garage — ooops, the “coach house” — last night. We are still trying to understand how things get so out of whack that you have to spend $10,000 a month to live in such a place here in London, while in other cities, you could get a much better place for half the price. Everything regresses to the mean, but it can take a long time.

We recall visiting London in 1983. The dollar was nearly equal to the pound. The city seemed cheap back then, and a bit dowdy: Hotel rooms were shabby; apartments were simple, drafty, and poorly furnished; restaurants were few, simple and affordable.

Now, there is hardly a square meter of South Kensington that has not been fixed up and rented out. Restaurants overflow onto the sidewalk…ever so chic. Walking to the tube station, we pass one Ferrari dealership and another Lamborghini monger.

Times change. The world turns. Means are regressed to…and overshot.

Whence this cometh, we recalleth not. But it makes our point: The world turns.

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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