The exploding empire

The empire and the credit bubble will probably come to an end at the same time. Each depends on the other.

If America were not so big and powerful, it could not impose its money as the world’s reserve currency. Without its reserve status (dollars instead of gold), the US wouldn’t be able to flood the world with its own cash. Without the dollars, the credit bubble couldn’t continue growing. And without the credit growth there would be no way to pay the expense of maintaining a worldwide empire.

This does not really explain the miracle of growth without savings that we discussed last week, but it gives us a hint of what will happen when the trick no longer works. All bubbles – and all empires – blow up. An empire that depends on a credit bubble is doubly explosive. All it takes is a turn in the credit cycle, and the fuse is lit.

From the invasion of the Philippines to the Vietnam War, the US empire was financed by the rich, productive power of the US economy. But as the Vietnam War was winding down, the source of imperial finance changed from current output to future output.

America switched to a purely paper money system, and turned to borrowing to finance its military adventures. Today’s blockhead puffs out his chest and enjoys feeling like a big shot. He passes the bill on to tomorrow’s taxpayer.

The argument for heavy security spending collapsed between 1979 (when China took the capitalist road) and 1989 (when Russia abandoned communism). But by then the “military industrial complex” that Eisenhower warned us about was already firmly in control of Washington.

Presidents – Democrat and Republican – came and went. Nothing nor nobody could keep resources from the security industry. One disastrous adventure merely led to another.

Each one provided a source of more funding, more status, more power, more generals, more security clearances, more clandestine, off-budget operations, and more jackass parasites pretending to protect Americans from unknown enemies.

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The return on investment from this spending was probably well below zero. That is, the foreign meddling probably created more enemies than it neutralised. But it didn’t matter. Besides, the same phenomenon was happening in other major industries.

In health, education and finance, more and more resources were commanded by political considerations even though these industries were still considered part of the private sector economy.

In education, for example, the number of teachers stagnated while the number of administrators and ‘educators’ soared. Freighted with zombies, there were few real gains in these sectors, while the manufacturing sector withered. Real wages stopped increasing. Growth slowed.

Meanwhile, social welfare spending increased. “Guns and butter” was LBJ’s promise. Both were greasy and slippery. And without the strong growth of the ‘50s and ‘60s it was not possible to pay for so much zombie lard. The empire turned to credit. It has not had a genuinely balanced budget since. Instead, since the end of the Carter administration, deficits have increased year after year.

When the Reagan team came into office in the early ‘80s there was a fierce internal battle about what to do with federal finances. The old conservatives – led by David Stockman, Reagan’s young budget director – felt the government had an obligation to balance its budget.

The new or ‘neo’ conservatives were more hip to the public mood, and to the miracle made possible by increasing credit. “Deficits don’t matter”, said Dick Cheney. The neos won.

Stockman left the administration and went to Wall Street. Deficits soared. And Stockman wrote a good book, The Great Deformation, explaining how the US economy had been corrupted by its leading industries – government, security, and finance.

By the ‘90s, the combination of a bull market on Wall Street, falling interest rates, the end of the Cold War, and a disillusionment with traditional old-style democratic spending left the Clinton administration in a rare sweet spot.

It found that it couldn’t spend money fast enough. Its revenues were high. Its spending opportunities were low. The result was what was called a ‘balanced budget’ – but the books only balanced if you ignored the cost of Social Security.

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