The Rise of an Epic Financial Crisis

Picture this. The President of the United States, during his administration, has added more to the national debt than all of the other presidents before him.

The Federal Reserve system has pushed short term interest rates to such a low level that, for several years, the rate of inflation in the United States was above that level.

The value of the United States dollar has declined by roughly 40% against most other currencies.

Sound familiar?

This comes from the book “Empire of Debt” written by William Bonner and Addison Wiggin in the summer and fall of 2005 and published in 2006. The book ends with these words:

We know the past tense — how America’s empire of debt was built. What we don’t know is the future tense — how and when it will end…

There is never a good time…for a crash or a slump. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.

I can’t do more credit to the book than to skim some of the main points. So hang on:

Empires come and empires go. It is a cyclical game. The United States empire evolved in the 20th century and is going to die … sometime.

When did the real American empire start? To Bonner and Wiggin, President Woodrow Wilson kicked off the effort. By 1912 the United States was in an enviable position, economically and technologically. Now being the leader of the world in these areas, Wilson, an idiot and a very, very vain man (as presented by the authors) sets out to save the world and impose American ideals on everyone else. Wilson didn’t need to get into the European war, but he saw this as his moment in history and then, after the United States saved everyone else, he saw that he could set up a utopian world through his famous (or infamous) 14 points.

This set the ball rolling. Even though Wilson was put down and totally embarrassed, he became the model of the future. Of course the United States did not follow his lead right away. First Americans elected Bonner and Wiggin’s personal favorite president, Warren G. Harding, and then Calvin Coolidge. But along came Franklin Roosevelt, John Kennedy and Lyndon Johnson, Richard Nixon, Ronald Reagan and George W. Bush and the imperial presidency, and they built the Empire of the United States.

I won’t go any further into how Bonner and Wiggin differentiate presidents other than to say that the presidents they list as failures are labeled “improvers” and their heroes are not. I have dealt with this distinction in a post on my blog Mase: Political Commentary on January 10, 2009.

The crucial element to the storyline built up by Bonner and Wiggin is how this empire was financed. In the past, in Rome, England, and other empires, tribute was collected from those peoples that came under the control of the empire. When Rome conquered, they imposed taxes, took over natural resources, and made slaves or soldiers of the captured peoples. This payment was seen as rightfully coming from the defeated.

The United States invented a new model. It created debt to finance its rise and sold this debt to other nations… especially poor nations. Americans learned to live using very little of their own income. They consumed all that they earned. Savings came from these other nations … Japan, China, India, Middle Eastern countries and others. So as the United States continued to live and show off its lifestyle, it became more and more dependent on others for finance.

Fed Chairman Ben Bernanke has even stated that the rest of the world should thank the United States for using up the savings of all these countries, for where else could they have invested in such sound investments and such a sound currency if America had not borrowed from them?

Why did the citizens of the United States buy into this? Enemies and circuses. All empires have lived off enemies and circuses. In the 1910s the enemies were the Germans, and in the 1940s they were the Germans and the Japanese. In the 1950s Russia and the communists became the enemy of the day but the empire was in real trouble when these foes collapsed in the 1990s. Thank goodness for 9/11, claim Bonner and Wiggin, for with the terrorist the United States now had an enemy it could fight forever at unlimited cost.

Then there was the circuses… paid entertainment for the masses. Here there were promises of full employment, health care for all, a home of one’s own for everyone, and so on and so on. Of course these had to be financed and, once again, the poorer countries of the world were there.

And, then there was the Fed led by Greenspan / Bernanke (or was it Bernanke / Greenspan?). From 1987 to the present, the Fed pumped out liquidity hand over fist and, for much of the time, kept short-term interest rates below the rate of inflation. No wonder bubbles occurred. People were getting paid to borrow money, and a home became an “investment” rather than a place to live and raise your children. In this scenario, Greenspan / Bernanke ably created the fraud of a sound currency that was allowed to take place once the “imperial” Richard Nixon took the United States off the gold standard on August 15, 1971.

The events that have taken place since the summer / fall of 2005 when this book was written only extend the storyline presented by Bonner and Wiggin.

The book is an interesting read, although one gets tired of some of the repetition. The recounting of events in the 20th century, starting with Wilson, is interesting and provocative. The discussion of bubbles, Fed actions, politicians, Presidents, and others are interesting even if one does not agree with all that is being presented. Reading this book is worthwhile but somewhat difficult: This is not a book one finishes in a single sitting.

All that I can conclude with is that the national debt has risen even faster since the book was written and will explode after the new administration takes its place. The Bernanke / Greenspan reign continues at the Fed with an expansion of Fed credit that is mind-boggling, to say the least. The dollar? I don’t see anyone with longterm confidence in its value.

If you accept the storyline of Bonner and Wiggin…

Say something nice to your mother. Offer to buy a bum a drink. And, buy gold.

This book is available from Agora Book Publishing.

Comments

[morph366:]

The US really came to the foreground in the aftermath of World War 2 when the European economies collapsed and paid the price for centuries of nationalistic squabbling and ideological lunacy.
Establishing the dollar as the global reserve currency as part of the Bretton Woods settlement and the development of the offshore dealing in dollars (the original meaning of the term eurodollars), primarily in London, enabled the Anglo Saxon mindset to carry on its imperial ambitions through financial engineering.
If we have now come to the end of that era a great vacuum for thought leadership is going to open up.
This could be good for human emancipation or it could be a fertile environment for some new psychopathology to emerge.
It would not be surprising to see the Anglo-Saxons doing their utmost to continue to control the global agenda.

Jan 18 10:06 AM

[ROLEX18K:]

I was subscriber to Bill Bonner's newsletter in the 1990's and then after few years I quit, why?
Bill Bonner is the biggest stock market bear I have ever seen, he don't cares if DJIA is 7000 points and can go to 14000 points in some years, meaning that many stocks during this 100% move in the biggest market index, many stocks in SP500, Wilshire5000, Russell 2000 can go up 10000% in the same time.
This maestro is always bearish to the core, if he would make a living not selling books and newsletters that promote all kind of rich quick schemes, he would be a million times broke investor, he would beg money on the street or work selling hot dogs, but he is lucky as many investors fear all kind of crashes and listen to Bill.
It only have sense to be a bear or bull, when timing is right, but being a bear indefinitely can only bring you nothing.
He is always bullish on Gold and Uranium and things like that, he don't cares about the prices, he is bullish that's it.
Ignore Bill and all others who say the end of the world is tomorrow.

Jan 18 10:36 AM

[bobomite:]

The debt-based economic model that we use today was evolved in the 1800s. The long-term effects of bringing money into existence as debt without creating the money to pay interest have taken many years to fully understand. There is nothing sacred about our system; it is just what we are used to.

Mathematically, our financial system will implode eventually. This will provide the opportunity to re-learn that these systems can be built however we choose.

The first crucial step is that enough people need to actually take an effort to understand what money is and how our financial systems actually work. The current downturn is certainly encouraging people to begin that education.

Jan 18 10:44 AM

[smiley1:]

Fiat money and trinkets from China don't get you very far when the chips are down and the loans come due...

Jan 18 10:44 AM

[famous:]

to Rolex 18K. I think you missed Bill's point. The stock market going from 7000 to 14000 is irrelevant. What Bill is trying to express is that the Market is a false gauge. The money that is created is from irresponsible lending practices and irresponsible borrowing. The 7000 point move was clearly not real. It was created by a short term bubble and if you think this is what an investment looks like then I guess a blackjack table looks like an investment too. Investments are suppose to be for the future so that people have something to look forward to but the Big brokers have turned every safe investment into a roulette table. There is no more sound money. The Fed notes are just paper because the full backing and trust of the Fed Government has gone away. Its going to get bad out there. Really Bad.

Jan 18 11:08 AM

[Sentinel:]

Bill Bonner may be an uber-bear for years. But's that only because he and I and other uber-bears have seen for some time what the stock market is...

A giant confidence game....in other words....a Ponzi Scheme.

Other than the companies that pay dividends on their shares, you only make money in stocks when other people have enough confidence that the stock you have in a company will go up. That means you only make money when other people throw more of THEIR money into that same stock.

Now I know unlike a Ponzie Scheme, stocks go up because hopefully there is a company behind it making something useful and valuable. But no one here can honestly look at a chart of the S&P, the Dow, NASDAQ, Wilshire 5000, Russell 2000, etc.... for the last 6 years and prove to me that the valuations you see were entirely real....if at all.

You mean to say that every company making up those indices were all producing such scads of valuable and useful stuff to justify all those run-ups in the indices?

Grow up! The authors are correct. The CorpGov cabal drove interest rates so low as to force savers to flee money markets and pass book savings accounts and to dump their money into industries and corporations to drive tax revenue to fund even more debt to sustain the American Lifestyle....the American Dream....and American Hegemony.

I'm not against any of those above things......I'm just against mortgaging my kids' and their kid's and their kid's future ad infinitum, ad nauseum.

Because when you use and MISUSE debt to buy yourself the future, that's exactly the thing you will lose.

And in the end your freedom as well.

Jan 18 11:15 AM

[msoori:]

Saying something nice to your mother and doing something nice to a stranger should be done in good times and bad... Offering to buy a bum a drink and buying gold... more questionable... You can't eat gold and when some one comes to pillage your food supply you need ammo to protect. Interesting article however.

Jan 18 11:19 AM

[Robert Wein...:]

The government is the ultimate losing trader. averaging losing trades in hopes that it can come out the other end of the mess.

The leaders that actually pass the laws have no clue what they are doing. They are only hoping that the advise they receive will save them from losing the next election with total disregard of the job they are paid to do.

Our economy is not that bad, surely not bad enough where the government is going so deep in debt when we don't even pay back our debt in good times. What are they going to do if this doesn't work and we slide into 15 or 20% (or even more) unemployment and all the bullets are used up and NO ONE will loan us money??

They are risking our democracy in the hopes that our economy will feel no pain ever. They fail to understand that in the long run downturns are good for an economy as they result in new efficiencies that will help us stay competitive with the rest of the world.

This is all done without even the consideration that they can fail because they think we can borrow money forever and live in a world financed by a credit card that the bill will never come.

Jan 18 11:34 AM

[stcler:]

Whatever the merits of the economic side, the history goes wrong starting at page one. For a start, here are Wilson's 14 points:

I. Open covenants of peace, openly arrived at....

II. Absolute freedom of navigation upon the seas....

III. The removal, so far as possible, of all economic barriers and the establishment of an equality of trade....

IV. Adequate guarantees given and taken that national armaments will be reduced....

V. A free, open-minded, and absolutely impartial adjustment of all colonial claims....

VI. The evacuation of all Russian territory and ... her an unhampered and unembarrassed opportunity for the independent determination of her own political development and national policy.....

VII. Belgium, the whole world will agree, must be evacuated and restored....

XIII. An independent Polish state should be erected which should include the territories inhabited by indisputably Polish....

XIV. A general association of nations must be formed....

Wilson wasn't about empire building. He was about dismantling empires and building the foundation for free trade.

Jan 18 12:35 PM

[ROLEX18K:]

I don't care and you should't why DJIA went from 7000 to 14000, the money you could make on it, when Bill Bonner was crying about the biggest bear market in history in 1990's then DJIA was even lower.
From the profits you made going against Bill's nightmares and fears, you could buy anything real and enjoy it, this is what I do when I transfer money from my futures brokers, I spend papers and plastic to buy gold watches for me, super vacations, cars, jewelry, organic food, designer shirts 200$ each, shoes for 800$ etc., I use this papers even if Bill calls it fake, they are accepted and Bills Gold Bars are not, go and try to sell 10oz of Gold Bars to a dealer, he will give you bid 5% below the Gold price, he will sell you for a premium.
If you say that we are in the crash, wonderful, go and sell short but stop complaining, yes the most investors only buy for them crash is a crash, but for daytraders it is day like any other day, with it's announcements,Madoff, daily range, volatility,expiration etc.

Jan 18 12:36 PM

[Gtarras:]

Listen, do you doubt that first Western Europe, then japan, nowdays China, Russia (not even mentioning Latin American countries) owe a lot of their prosperity to the USA? Please!! I am getting so annoyed by all this self-defeating rhetoric now!!! I came from Eastern Europe to the USA in mid 80s, and I remember how desperate they were... Look at them now.. Russia, Poland etc... Pulled themselves out only because of the prosperity of this country... sick and tired of you, self-whipping people...

Jan 18 01:32 PM

[Moon Kil Woong:]

Civilizations decline due to such a lack of stability no one can plan fore the future. That being said, Paulson, Cox, and Bernake have done as much as they could to destroy the US as they can.

They ran the interest rates to 0, even when 99% of economists said that was a bad idea, you get no major increase in productivity below 2%.

They encouraged banks not to lend by giving them free taxpayer money then asking them to deposit in the fed window at interest. This gives them not only free money but free income too).

They essentially nationalized all banks and now are complaining that if Congress gives instruction to banks it is bad. Iit is bad because it admits the fact that banks are nationalized and operate at the whim of the government and not market forces. Do you think any bank will buy up a failed bank without billions of guarantees and free $ to boot? They bought them out without regard to economic principals and more for kissing Fed ass. It is only bad because you already socialized them a long time. Read the cards you created and weep.

They are pumping guarantees for every asset class without any deposit or mechanism to pay for losses save the taxpayer paying them later on. This encourages people not to deposit to banks since higher yielding securities are government guaranteed the same as bank deposits. This makes banks uneasy so they hoard cash.

They have implemented 0% reforms aside from making power grabs like banks not needing to put funds as reserve requirements (why do they need to since the fed became almost a bank itself when it started paying interest on deposits). Now all they need is to be able to write their own debt instruments then the Fed has all the powers of the Congress to make money and all the powers of the bank to issue pay interests, make and issue debt instruments, and sell US Treasuries. Their power over all matters of money creation, expansion, and multipliers will be absolute without any real Congressional approval or Presidential declaration. This only makes Constitutionalists boiling mad.

They have done nothing to prevent massive fraud and hooliganism in the markets. Bernie Madoff is just the tip of the iceberg. Try looking at the $40+ trillion dollar CDS market. That's roughly all US assets if you are trying to get your head around that number. So far there has been 0 reforms.

They claim any reform will destroy the US economy. No reform will destroy the US economy because thanks to Base I accounting banks can hide all their losses off book so you can't trust their books. You can't trust hedge funds because they aren't regulated. You can't trust mutual funds because they might buy bad banks or hedge funds. You can trust businesses because banks may cut off credit at any momment and the credit ratings agencies rate based on their own interest in pleasing corporate debt issuance and about as accurate at Bush Jr. when on vacation.

So why is the US economy in a mess? No one can trust anyone and the system (regulators, Fed, Treasury) are undermining the system as well and can't be trusted. The Romans eventually decided anything was better than the corrupt, patricidal, government they paid exorbinant taxes to with no benefit and fought useless wars.

Is the US commiting financial patricide by spending every last dime of our children's future? Are you paying taxes and getting nothing in return? Is the financial system filled with corrupt individuals including those regulationg it? Are we fighting useless wars which we don't benefit from? If the we want to remain the last superpower we better be asking these questions and demanding change.

Jan 18 02:47 PM

[Shonkypom:]

I'm from New Zealand - we're completeley unconcerned about whether the United States is or isn't an Empire, and it has no real bearing on how we run our daily lives. In my opinion, the United States is simple the largest economy in a basket of very similar economies, as a result of it having the largest population of modern consumers. There has been give and take in the economic development of all the westernised economies. The United States tends to believe they have led or invented everything in the last 100 years but this is probably more as a result of self propoganda. As as an example, ask yourselves what the U.S has really invented in our modern economy: Banking - medieval Europeans, Insurance - Romans, TV - Brits, Telephones - Scots, Computers and Software - Brits, Freeways - Germans, Hamburgers - people from Hamburg, Pizza and Ice Cream - Italians, Human Flight - French, Spaceflight rocketry - Germans (kidnapped at the end of WW2, the US didn't even get to the moon first as popularly thought, the Russians did). Trade Unionism and workers rights - Brits, Democracy - Greeks, Nuclear power - Austrians, Brits and New Zealanders (not nook-ee-lar Bush, you dope), Radio - Italians, Genetics - Czechs, The motor car - Germans, Stock Markets - Venetians, shall I go on?
We love you Americans but for goodness sake, get over yourselves, and get back to work.

Jan 18 04:09 PM

[User 265729:]

I read somewhere that we invented Internet porn.

That should account for something!


On Jan 18 04:09 PM Shonkypom wrote:

> I'm from New Zealand - we're completeley unconcerned about whether
> the United States is or isn't an Empire, and it has no real bearing
> on how we run our daily lives. In my opinion, the United States is
> simple the largest economy in a basket of very similar economies,
> as a result of it having the largest population of modern consumers.
> There has been give and take in the economic development of all the
> westernised economies. The United States tends to believe they have
> led or invented everything in the last 100 years but this is probably
> more as a result of self propoganda. As as an example, ask yourselves
> what the U.S has really invented in our modern economy: Banking -
> medieval Europeans, Insurance - Romans, TV - Brits, Telephones -
> Scots, Computers and Software - Brits, Freeways - Germans, Hamburgers
> - people from Hamburg, Pizza and Ice Cream - Italians, Human Flight
> - French, Spaceflight rocketry - Germans (kidnapped at the end of
> WW2, the US didn't even get to the moon first as popularly thought,
> the Russians did). Trade Unionism and workers rights - Brits, Democracy
> - Greeks, Nuclear power - Austrians, Brits and New Zealanders (not
> nook-ee-lar Bush, you dope), Radio - Italians, Genetics - Czechs,
> The motor car - Germans, Stock Markets - Venetians, shall I go on?
>
> We love you Americans but for goodness sake, get over yourselves,
> and get back to work.

Jan 18 05:05 PM

[Rob Viglione:]

As the author states, the United States has been ingenious in convincing the rest of the world to subsidize our capital requirements. Unfortunately, with 70% of GDP comprised of consumer spending, it is difficult to rationalize our state of high leverage as productive. Rather, it seems as though we've duped the world into giving us lots of stuff for little in return.

Jan 18 07:39 PM

[HA65MPH:]

WAITING FOR THE CROWNING AND CANNONAZTION OF THE 'MESSIAH'..GAWD , WE ARE COOKED !..RETREAD CLINTONITES, ..SAME OL SAME OL , JUST MORE, YES MORE CORRUPTION , IE , SHEETCOGO''...WITH POLOSI THE HEAD WITCH , B.FRANKS,REID,FRANKIN ,...OH GIVE ME A BREAK !..NO BODY CAN FOLLOW IN CONDY RICES FOOT STEPS....BILLARY IS A JOKE ON THIS COUNTRY ,....AND BIDEN, OMG THAT IS A PIECE OF WHITE TRASH !...NOPE IT IS ALL ROLLING DOWN HILL , AND IT IS NOT SNOW !!AND YES DO BUY GOLD 1

Jan 18 08:39 PM

[User 265729:]

I understand how you feel. I'm a Democrat, but when both Obama and McCain voted for the TARP, I went with McCain due to his military and other experiences that I felt, would have served our country at this difficult time.

That said, I think Obama has made some bad choices on his economic team, but everyone should give him an opportunity to try to fix this mess. I think we should all give him at least a year to show some progress before we really feed him to the wolves.

His first test, in my opinion, will be if he forces the banks to put their cards on the table. If the government trusts the people they govern, then I think the people of this country will do the same in reciprocity. It really would be a turning point...

As I've said before, it may be jump off a cliff ugly when we find out the banks are insolvent and the toxic debt is in the $tens of trillions and we are stuck with it, the Dow could even drop to 1,000, but at least we would, at last, know that we really are at a bottom; then we could look upward again.


On Jan 18 08:39 PM HA65MPH wrote:

> WAITING FOR THE CROWNING AND CANNONAZTION OF THE 'MESSIAH'..GAWD
> , WE ARE COOKED !..RETREAD CLINTONITES, ..SAME OL SAME OL , JUST
> MORE, YES MORE CORRUPTION , IE , SHEETCOGO''...WITH POLOSI THE HEAD
> WITCH , B.FRANKS,REID,FRANKIN ,...OH GIVE ME A BREAK !..NO BODY CAN
> FOLLOW IN CONDY RICES FOOT STEPS....BILLARY IS A JOKE ON THIS COUNTRY
> ,....AND BIDEN, OMG THAT IS A PIECE OF WHITE TRASH !...NOPE IT IS
> ALL ROLLING DOWN HILL , AND IT IS NOT SNOW !!AND YES DO BUY GOLD
> 1

Jan 18 10:07 PM

[sixpackistan:]

I wouldn't worry about the end of america...but i would buy gold.

Jan 18 10:30 PM

[sbenard:]

I've read "Empire of Debt" cover to cover. It was a fascinating read in history. However, the entire book can be summed up by the last sentence of the book:

"And buy gold."

It's a little too simplistic for me.

Jan 18 11:24 PM

[SAF:]

Countries imitate people. They grow old and die. If a person lives long enough they are bound to get and die of cancer. In the US our cancers are corruption, mismanagement, greed, excess legal happenings etc. One can view our enemies and the terrorists as carcinogens which of course accelerate the cancer.

Eventually there will be a rebirth, painful though it may be

Jan 19 06:46 PM