Book Review: The New Empire of Debt

by: Power Hedge

I enjoyed reading "The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble," by Bill Bonner and Addison Wiggin. The authors are perhaps best known for being the minds behind The Daily Reckoning Newsletter, an economic publication that is greatly concerned with the level of debt in the United States and providing advice for how investors can protect their wealth.

The book tells the chilling story of how the United States of America has evolved from a republic into an empire much in the same vein as ancient Rome. The authors show a number of similarities between the modern United States and the Roman Empire including a "bread and circuses" mentality and a desire to "improve" the world. They also express concern that our society ignores the lessons of history and, indeed, repeats many of the mistakes that others have in the past.

This is a large book (my copy is 328 pages not including the Notes/Appendix) but it is a very easy read. While the authors did helpfully include financial data and evidence to back up their conclusions, the whole book reads much more like a novel than a text book. The authors are clearly well-versed on financial and economic theory and reality and the book is written in a way that should be appreciated by both the expert and the layman.

The book is divided into four sections each with a different theme. These all fit together into a cohesive whole and work well to make the authors’ point that something is coming that is going to be very bad for average Americans. The authors do not say exactly what that bad thing could be, however. I got the feeling that they aren’t expecting hyperinflation but they do recommend that investors take steps to protect themselves. They specifically recommend buying gold as one way to accomplish this.

The first section is entitled, "Imperia Absurdum." In this section, the authors quite convincingly make the case for the United States being an empire in the classic sense of the word. However, it is an empire unlike all that have come before. They particularly point out the system of imperial finance. All the empires of the past - the Romans, the Mongols, the British – essentially forced their vassal states and territories to pay tribute to the homeland. The United States does no such thing. Instead, the United States sends money to all the vassal states in exchange for their products, collects no tribute, and then borrows the money back from these external states in order to finance glory in the motherland. The authors call this glory Pax Americana, clearly a reference to Pax Romana.

The second section is titled, "Woodrow Crosses the Rubicon." The authors begin telling how the United States turned from a republic to an empire, beginning with the nation getting involved in World War I under President Woodrow Wilson. One of the telltale signs of an empire is when a nation begins enforcing its will on others under the guise of improving the foreign nation. World War I was the first time that the United States ever involved itself in a foreign war in this way. There was no threat to the USA from the war that was going on over in Europe. Why did the nation see the need to get involved? The authors believe that Wilson’s vanity drove him to believe that he thought that the American president knew better than the Europeans how the Europeans should conduct their own affairs.

In 1971, the Nixon Administration took the United States off of the gold standard. While the dollar had been depreciating and there had been inflation prior to this event, the dollar debasement greatly accelerated after the U.S. dropped the gold standard in favor of a fiat dollar currency. This was a direct result of the expenses from the Vietnam War and other government policies driving up costs beyond the empire’s ability to pay. The only solution was a hidden tax – inflation. Gold has but one flaw to the world improvers, explain the authors, there is a limited supply of it and so it imposes true financial limits on your actions. Paper, fiat currency, does not have this flaw. It can be debased indefinitely even to the point where the currency is worth less than the paper that it is printed on. Indeed, this has already happened with both pennies and nickels. The metals that these coins are printed from are worth more than the coins themselves. While this fiat currency may benefit those in power, it hurts the common man who sees his purchasing power eroded over time.

The final two sections of the book are entitled, "Evening in America," and "Fin De Bubble," respectively. These two sections deal with more recent events and go into detail on much history from the Reagan Administration and up through the housing bubble and to the present day. The authors focus relatively little on the Obama Administration, but they are quite critical of the Greenspan-led Federal Reserve during the last decade. They avoid painting his policies as being the sole cause of the housing boom and bust but clearly believe that the housing bubble would not have been allowed to get to the point that it did without the easy money policies that characterized the era.

Bonner and Wiggin are apolitical throughout the whole book. They paint both major political parties as being fiscally irresponsible and arrogant throughout the past century. It was quite refreshing to read a book that made no political judgments. The authors do directly state that the Federal Reserve has been a poor steward of the nation’s monetary policy, but since the dollar has lost 95% of its value under the watchful eye of the Fed, I doubt that there will be any arguments on that point.

My sole criticism of the book is that the authors do not offer any ways for the investor to get protection against the debasement of the dollar (and possible collapse of the debt bubble) other than to buy gold. Nevertheless, the book is a fascinating read and one that I would recommend to anyone that has an interest in history or is concerned about current fiscal and monetary policy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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