The end of an empire

The Dow stabilised yesterday. Gold rose $22.

A few years ago, we wrote a book with Addison Wiggin, entitled Empire of Debt. The idea of the book was the following:

Empires are not the result of conscious thought; they happen when a group is large enough and powerful enough to impose itself on others.

Empires are expensive, however. They are typically financed by theft and forced tribute. The imperial power conquers, steals and then requires that its subject people pay ‘taxes’ so that it can protect them.

The US, however, never got the hang of it. It conquers. But it loses money on each conquest. How does it sustain itself? With debt. It doesn’t take tribute from the rest of the world; it borrows from it. As far as we know, no other empire has ever tried to finance itself by borrowing.

But it is a special kind of debt. The US borrows in its own currency – which it can print as it chooses. If the burden of repayment is too high, in theory, the feds can just print up more dollars to satisfy their obligations. Here is further insight from Flynt Leverett and Hillary Mann Leverett:

“Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency. Economically, dollar primacy extracts “seignorage” — the difference between the cost of printing money and its value — from other countries, and minimizes U.S. firms’ exchange rate risk.

“Its real importance, though, is strategic: dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency — precisely how Washington has funded its hard power projection for over half a century.”

In the ’50s and ‘60s, this posed little risk to foreigners, because the US dollar was backed by gold. But in 1971 – on 15 August – Richard Nixon repudiated the greenback’s gold backing.


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Nevertheless, the dollar reigned supreme. Foreign nations needed to stock dollars in order to settle up on their overseas financial transactions. The US printed dollars, Americans spent them on foreign goods, foreign central banks bought them from their local merchants and manufacturers, and then used them to buy US Treasury bonds.

The dollars went out in exchange for valuable goods and services, and then they came back in exchange for – more pieces of paper!

Year after year, America ran a trade deficit. Year after year, US paper dollars and Treasury debt stacked up in foreign banks. We haven’t done a recent calculation, but the last time we looked, net cumulative deficits were approaching the $10trn mark.

When foreign central banks took in dollars, they had to print local currencies to give in exchange to their local customers. A manufacturer presented the dollars to the bank; he needed yuan or yen or zlotys to pay his bills.

This is how the US credit boom led to an explosion of cash and credit all over the world. Foreign banks had to increase their own money supplies in order to keep up with the rush of dollars. And this is what led Ben Bernanke et al to refer to a “glut of savings” worldwide.

Actually, these were not savings at all – but money created by central banks.

Our point is just that all empires end when they are defeated by a more vigorous empire, or when their financing runs out.

And now we are seeing the beginning of the end. The Leveretts:

“America is increasingly viewed as a hegemon in relative decline, China is seen as the preeminent rising power. Even for Gulf Arab states long reliant on Washington as their ultimate security guarantor, this makes closer ties to Beijing an imperative strategic hedge. For Russia, deteriorating relations with the United States impel deeper cooperation with China, against what both Moscow and Beijing consider a declining, yet still dangerously flailing and over-reactive, America.”

Telegraph columnist Liam Halligan elaborates:

“Beijing has struck numerous agreements with Brazil and India that bypass the dollar. China and Russia have also set up ruble-yuan swaps pushing America’s currency out of the picture. But if Beijing and Moscow – the world’s largest energy importer and producer respectively – drop dollar energy pricing, America’s reserve currency status could unravel. That would undermine the US Treasury market and seriously complicate Washington’s ability to finance its vast and still fast-growing $17,500bn of dollar-denominated debt.”

When the money runs out, so does the empire.

Perhaps with a whimper. Or maybe a bang.

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