Cracks in the Empire

by Michael S. Rozeff
by Michael S. Rozeff

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Building an empire is one thing. Preserving it is quite another.

"If the U.S. government allows Fannie and Freddie to fail and international investors are not compensated adequately, the consequences will be catastrophic. If it is not the end of the world, it is the end of the current international financial system. The seriousness of such failures could be beyond the stretch of people's imagination." These are the words of Yu Yongding, who is a Professor in Beijing and a former advisor to China’s central bank (August 22, 2008, in Bloomberg news).

We should listen to Prof. Yongding. The Bloomberg article reports: "Yu is ‘influential’ among government officials and investors and has discussed economic issues with Premier Wen Jiabao this year, said Shen Minggao, a former Citigroup Inc. economist in Beijing, now an economist at business magazine Caijing."

China has loaned Fannie Mae and Freddie Mac huge amounts of money: "China's $376 billion of long-term U.S. agency debt is mostly in Fannie and Freddie assets, according to James McCormack, head of Asian sovereign ratings at Fitch Ratings Ltd. in Hong Kong. The Chinese government probably holds the bulk of that amount, according to McCormack."

Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that have invested in and supported the U.S. housing market these many years, have essentially already failed. The equity of stockholders is 95 percent gone, due to the bad loans these companies made and the prospects of further losses.

Professor Yongding is notifying everyone that China has first priority at the "bankruptcy" table. Even if there is no formal bankruptcy procedure, China, as the foremost creditor, does not want to absorb default losses on its loans to Fannie and Freddie. China is pressuring the U.S. to make good on its implicit guarantee to support the GSEs.

The U.S. taxpayer is the ultimate bagholder in this process. U.S. citizens borrowed heavily from the GSEs and thus from China to build and buy houses. They are being asked to pay off these loans and not stiff their creditors. If they do not pay, China will hasten to wind down its loans to U.S. institutions, and that includes the U.S. government. This process has already begun.

To have reached this phase in which creditors line up to see who is first means that the GSEs have already failed. This is not surprising. The entire enterprise of Government, in the bloated and intrusive form we know it as, is destined to fail. The failure of any and every coercive monopoly Government is assured by its own dynamics. Unaccountable monopolies blunder, fragment, lose direction, lose momentum, and fail. It is only a matter of time.

Government is like a great glacier. At first, the glacier grows and builds up, drawing mass from the cold and snow and strength from the compressed ice. These lead to movement of the river of ice. It slowly flows, grinding everything in its path. The old landscape gives way and a new one appears. But the motion creates fissures and crevasses. The glacier reaches lower and warmer climes and begins melting away. Cracks in the ice field appear. Huge chunks break off as icebergs form and float away. The glacier dissipates.

Fannie and Freddie have broken off. Their values have melted away. The Government is trying to hold them in place. The more that it tries, the more that these GSEs will dislodge further pieces of the Government and weaken it.

The current international financial system is already at an ending phase, if by that is meant the dominance of the U.S. The signs of this are plain. The Fed has a weak balance sheet that is growing weaker as the U.S. government is forced to take on such obligations as Fannie and Freddie. These chew up taxes while adding nothing to the country’s productive potential.

A second sign is that the U.S. people have built a mountain of debt. A third sign is that the era of U.S. world control using financial institutions like IMF and World Bank has passed its prime. A fourth sign is the bubble in central banks, which are instruments of monetary repression. There are 159 central banks in the world (including such notable places as Tonga and the Solomon Islands), each in place to control a country’s money and support the government’s policies of control over the people. Root and branch, central banks are anti-liberty and anti-monetary freedom. This bubble is bound to burst, as the negatives of central banks become recognized.

Central banks are well-paid homes and sinecures for intelligent men and women who have gotten doctorates and other advanced degrees and who in comfort imagine themselves as building up the financial system of their nation. For example, the Central Bank of Sudan sounds like our Federal Reserve. It has four "pillars." These are monetary and financial policy, foreign exchange, currency, and bank supervision, with other mentions of price stability and the bank’s titular independence. In time, the world will recognize that central banks are the antithesis of basic human rights and that they cannot help but fail at their publicly announced goals.

When will this worldwide phase of monetary suppression, now led by the U.S., climax and begin to reverse? Is it now? No one knows. Maybe it will take years more, maybe decades, maybe centuries. The Roman Empire went on in altered form for a very long time. No one knows how long this will go on. Adam Smith is supposed to have said "There’s a lot of ruin in a country." There is a lot of ruin in the world.

But when a great country like the U.S. finds itself in hock to another nation and being warned that it must pay up or else, then the game has already been lost. The handwriting is on the wall. The chickens have come home to roost. Choose the cliché you prefer.

What game? The game of empire is the game that is being lost, and that is a game that it is good to lose. Great Britain survived the loss of its empire. So did Spain, Germany, Russia, and countless others. So will we. Let us make the best of it.

The financial side of the American Empire is cracking open. The powers-that-be will tax us and patch it up. But that is not the only fissure. Our would-be emperors are no better, no wiser, and no more capable than those who have ruled all the other failed empires. We have a succession of good, bad, and mediocre Presidents, Congressmen, and Judges. In this, which is our final phase, we are encountering more and more of those in the category of bad, which includes those who are stupid, venal, arrogant, boastful, greedy, inept, and ignorant. Choose your own failings. They display them.

The final phase of empire must of necessity be such as to include more idiotic, foolish, short-sighted, blind, and mis-calculating rulers. Of necessity, the follies must multiply as the empire self-destructs.

Would anything but an empire in its final phase behave so foolishly as this one is behaving with respect to Russia, Georgia, and Eastern Europe? Or with respect to Iraq, Iran, Central Asia, and Afghanistan? It is as if our rulers were on drugs and could not think or see straight. It is as if they had a death wish.

This sort of ruinous behavior of rulers has occurred in every empire on its downward path, whether Roman, Ottoman, British, or American. Why does this happen, and why must it happen?

An empire is a criminal organization that thrives on taking, not creating, wealth and property, domestically and internationally. As in a pond, the scum rises to the top. The scum are the best criminals, those who are best equipped to lead the far-flung criminal enterprise. Hoppe has put it well: "That is, open political competition favors aggressive, hence dangerous, rather than defensive, hence harmless, political talents and will thus lead to the cultivation and perfection of the peculiar skills of demagoguery, deception, lying, opportunism, corruption, and bribery. Therefore, entrance into and success within government will become increasingly impossible for anyone hampered by moral scruples against lying and stealing."

But if the best and most clever criminals rise to the top, why do they fail to hold the empire together and extend it? Why do they eventually make decisions that bring it to ruin and failure? Why does good management of the empire outrun their capabilities? Why do they begin to behave so stupidly? Why does folly begin to prevail? Why do large cracks in the empire appear? Why are they incapable of altering course? Why do they fiddle while Rome burns? Why does the glacier grind to a halt and begin to break up?

Why do we all blunder? Why are all mortals foolish? The same reasons hold for our rulers, only more so, in an exaggerated and enlarged fashion, because they are rulers. And that means they wield power, and that means that they have an easier way out when they make mistakes (as compared with those of us who lack power.) They can force those whom they rule to pay for their mistakes. And this easy way out, in turn, means that they are more apt to blunder and act foolishly in the first place. And because they have a great scope of rule, over whole peoples and nations and regions, over all sorts of laws and edicts, in short, over every aspect of human life, their blunders will necessarily be large blunders that impact very many of us in very many ways. But, being powerful and possessed of inordinate belief in their own capacities and rightness, they will not recognize their blunders as such. They will not own up to them or take responsibility for them for fear of weakening their own power. They will attribute them to their enemies, because that is one method by which they gain our approval of their rule. He who lives by deception will die by deception.

Building an empire takes force, cunning, aggressiveness, and the wile to integrate disparate peoples into one while allowing them their differences. It takes the skill to allow those different peoples to accumulate the wealth that the empire needs to live on and extend itself.

Preserving an empire requires preventing the inroads of foreign peoples (and internal dissent) for that means war, and war is very costly. The ruler of an existing empire should be attempting to avoid these wars while augmenting his treasure chest (and thus the public’s wealth). But since the rulers come to power by means of their aggressiveness, they lack both the restraint that is needed and the favorable attitude toward public wealth accumulation. They are ill-suited to merely preserving the empire. Not only do they encourage the taking of wealth internally (rather than its production), but, sooner or later, one of them stimulates a foreign war that empties the treasury and weakens the empire. The empire needs a firm and strong economic base, and if it is weakened domestically as well as by costly warfare, it will go downhill. France was weakened by wars in Vietnam and Algeria and socialism at home. Great Britain followed that course and so is the U.S. The U.S.S.R. made war on its own people and dramatically weakened its domestic economy.

It is a near certainty that the next emperor (President), no matter who he is, will behave just as foolishly, if not more so, than his predecessors in office. He will surround himself with associates who are sycophants, and they will do nothing to puncture the myths he believes in, which include his own greatness and perspicacity. He will believe himself the unique man of the hour who is sent to make good the ills of his society. He will live in the bubble of his own court and entourage. He will be immersed in his own media and their myths. Any new ideas that come his way will be distorted and broken into pieces that fit his own preoccupations and biases. Whatever psychological weaknesses he may have will be amplified and realized in the form of his policy decisions and priorities.

He may play golf, touch football, bed a woman a day in or near the Oval Office, take naps, ride horseback, eat Big Macs, or have barbecues. He may even be a policy wonk and study every option in sight, from wearing sweaters to turning down thermostats. But, in the end, he has only 24 hours a day, he is a limited man, and he will be unable to manage the empire. He will leave most of that to others, and they will not be under his control. The empire’s power will be fractionated and dispersed in unaccountable ways, to be misused and mishandled. The greater the empire is, the larger it is, the more things it attempts to control, the more wealthy it is, the more powerful it is – the more that it will spin out of control, the more that diverse motives of petty and greedy men and women will prevail, and the more rotten and decadent the empire will become.

An empire is a complex piece of organizational machinery. Bureaucracies unaccountable to almost anyone will prevail. Machinations behind the curtains of power will prevail. Money and influence will prevail. Presidents will put in place their own palace bureaucracies in order to attempt to bypass the existing ones. The complexity will multiply, assuring its own eventual demise.

The rise of the power and preeminence of the American Empire contained the seeds of its own fall. They are now maturing.

August 28, 2008

Michael S. Rozeff [send him mail] is a retired Professor of Finance living in East Amherst, New York.

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