Imperial Decline

We woke up this morning wondering how things could go so wrong.

Maybe it was something we ate. We were thinking of the economy and the war on terror, but one thought slipped into another like a bad dream. We probably began dreaming of being shipwrecked with buxom cheerleaders, and then it slid into a nightmare of globalization, serfdom and the decline and fall of empires.

The economy looks so healthy, so new, so high-tech, but people still get poor the old-fashioned way: by spending more than they make. Yet, for some reason not quite clear to us, they actually think they are getting rich by doing it. The post-war, post-modern generation has come to believe that it can get rich without effort, automatically. This is “progress,” and haven’t Americans always believed in progress? Only, today they can’t imagine any vision of progress that doesn’t include more money. So, why not spend today what they believe is guaranteed to them tomorrow?

But, across the broad, sunny Pacific, two billion people who have just entered the world economy, may put a twist into that comfortable story. The newcomers might still lack the skills and tools to be very competitive, but that is changing — and changing fast. The spending spree in America gives the foreigners piles of dollars to spend. The Middle Kingdom alone is expected to have more than $1 trillion in foreign reserves by the end of this year — and they spend it on new plants and equipment.

The new globalized capital markets are rapidly bringing both cash and technology to the place that will earn it the highest rate of return. Fifty years ago, that place was America. Now, it is Asia. So, the factories go up in Shanghai…not in Cincinnati. But still, in the Buckeye State, people hardly notice. They go about their business peacefully, even rather tickled not to have the factories. After all, that means they can now move up the socio-economic ladder. Let the Asians do the sweating. They will do the thinking! The only question is, what will they think about? Most likely, it will be about how they will refinance their house, borrowing from Asian savers, in order to continue buying gadgets and gizmos, manufactured by Asian producers.

As they borrow more and more, these poor Sons of Liberty chain themselves to more and more debt. Not just theirs, but the nation’s. Two and a half trillion dollars in debt has been added to the federal government’s burden during the George W. Bush years; no president in American history has ever done more damage to the nation’s finances. Nor is this the sort of debt that will be paid off by the debtors. It is debt that will be carried forward, refinanced, and refinanced again…so that generations not yet in the womb will be shackled to millions of dollars worth of it before they even begin to toddle.

We recall a passage from Exodus, sent to us recently by a friend:

“The Lord…who forgives iniquity, transgression and sin; yet He will by no means leave the guilty unpunished, visiting the iniquity of fathers on the children and on the grandchildren to the third and fourth generations.”

Oh, my…what kind of parents are we?

Even serfs in the Dark Ages were only required to labor one day in five for their lords and masters. But future citizens in the Land of the Free won’t have it so easy; they will have to work up to every other day just to pay their taxes — and service a debt incurred by strangers who died years before them. All of this laboring will be merely for cheap bread and expensive circuses. Thus, even to the third and fourth generations might our hapless heirs be punished.

And of all the expensive circuses staged by the Bush administration, one of the most expensive is the War on Terror. We say ‘circus’ because we are always looking on the bright side. And in so many ways, this war is one for the record books. It is already the longest war in U.S. history. Neither the American Revolution, nor World War I, nor America’s involvement in World War II went on for so long.

It is also the first war in American history to be financed almost exclusively with borrowed money. The federal budget was tight enough before the war was announced, but since then, the total of federal deficits roughly equals the cost of the war. The present generation may be fighting the war, but the generations to come will be paying for it.


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.