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The Mounting Debt of the US Empire Business

Not much was revealed in the markets yesterday. Everything went up. The Dow rose 38 points. The price of oil rose above $100. And gold rose too – up $3.

More evidence came in, showing that housing is weak. But no more evidence was needed.

Want to make some easy money? Buy a house! Get a DEEP discount on a distressed sale. Then mortgage the house for 30 years at a fixed rate. As big a mortgage as you can get.

The house will probably become even cheaper…but some time between today and 2041 your mortgage is sure to turn into a gift. The feds are trying to undermine the value of the dollar. Sooner or later, they’ll succeed…even beyond their wildest hopes.

Yesterday, the politicians debated proposals to stave off national bankruptcy – see below. All that was revealed was more evidence America is governed by fools and knaves; there too, no more evidence was needed.

But we have a proposal. A brave, bold proposal that will solve America’s dollar crisis and protect the integrity of America’s public finances in a single stroke.

To put it in perspective. We begin with a news item.

Robert Gates, America’s top military man, says the US will “lose influence” if budget cuts are made.

We suspect Mr. Gates is ‘talking his book.’ That is, he’s got a book the size of War & Peace with the names of people and companies that benefit from Pentagon spending. Cutting back would certainly be a bad thing from their perspective.

But would it be bad from the taxpayers’ point of view?

We will take the question in two parts. First, we wonder what, specifically, does America’s ‘influence’ do for it? We spend billions on garrisons in various remote and inconsequential parts of the world. We send troops to fight various ‘wars’ for no particular reason other than they are available to us. Presumably, we ‘influence’ people in direct proportion that we are able to give them money or spend money protecting them from rival groups.

But what good is this ‘influence?’ No explanation has ever been offered.

America’s empire has always been a catastrophe from a financial point of view. The business of empire is essentially a protection racket. The empire establishes its pax…and demands tribute in return. It makes war often…to extend its market share and loot the losers.

The US has never got the hang of it. It tortures a few people. It murders one or two. It invades. It occupies. It spends. But where is the payoff?

Some analysts claim that the imperial objective has always been the same – to keep the oil flowing at low prices. America’s civilization, such as it is, depends on it. But wait. Japan, Germany, and every other country on earth gets to buy oil too – on exactly the same terms. The US provides protection. But it gets no advantage from it.

Influence, schminfluence. This is a bad business model. The sooner the US abandons it, the better.

Now to the other part. Not only is ‘influence’ worthless…it can be maintained only so long as the US doesn’t go broke. That was bin Laden’s insight; he realized that he could reduce America’s influence by suckering it into spending money it didn’t have on a war it couldn’t win. He was right. If the US continues spending at the present rate, it will be soon out of business.

You can do the math yourself. Add a few more $1.5 trillion deficits to the national debt. In 5 years you add debt equal to 50% of GDP. Add that to the existing debt and round off at $20 trillion. Now figure an interest rate of 5%. Presto! You’ve wiped out two thirds of tax receipts on interest alone.

Even Members of Congress can see this train wreck coming. They’re talking about throwing some switches to move some of this debt to another track. Here’s the latest from The Wall Street Journal:

WASHINGTON – White House and congressional officials said Tuesday that they were moving closer to a budget deal that would make a “down payment” of more than $1 trillion in cuts to federal deficits over the next decade.

But Vice President Joe Biden said he told Republicans that they would have to back down from their position that the deal avoid tax increases.

“I made it clear today…revenues have to be in the deal,” Mr. Biden said after a Capitol meeting with congressional leaders trying to negotiate a deficit-reduction agreement. Members of both parties say such a deal is needed to win support for an increase in the federal- debt ceiling.

House Majority Leader Eric Cantor (R., Va.), a member of the bipartisan group, agreed that more than $1 trillion in cuts were within reach, but he said he remained at odds with the White House on taxes.

“This House will not support tax hikes,” Mr. Cantor told reporters after the meeting.

Hey, how do you like that? Talk. Talk. Talk. The feds claim to be getting serious about cutting spending, right?

But one trillion over 10 years? How serious is that? When you are running trillion-dollar plus deficits EVERY YEAR? If deficits were to continue at the rate of the last three years, this proposal would mean additional debt of only $14 trillion rather than $15 trillion.

Serious? Not at all.

And the most likely way the feds will finance these huge deficits will be with some version of “QE” – that is, by printing money. Which is why a 30-year, fixed-rate mortgage may be the best investment you can make.

And back to our proposal…

Switch to the euro! The US should abandon the dollar and take up the euro as its currency.

Sounds crazy? Un-American? But think of the advantages.

First, the euro is more colorful. It’s more fun to look at and use.

Second, the euro is worth more than the dollar; you don’t have to carry around so much currency.

Third, when you travel to Europe, you won’t have to convert your money.

Fourth, Europe is the world’s largest economic unit. Having a currency in common with it will make it easier for the US to trade.

Fifth, the Fed doesn’t control the value of the euro. Instead, it is controlled by European bankers who, generally, are made of sterner stuff than Bernanke et al.

Sixth, European bankers will not readily print euros just to help the US continue its program of reckless spending.

Seventh, unable to fiddle its own currency, and inflate away its debts, the US will have to cut spending.

Eighth, the whiners, chiselers and something-for-nothing crowd in the US can moan all they want; Jean Claude Trichet won’t give a damn.

Regards,

Bill Bonner
For Daily Reckoning Australia

8 Comments

  1. Dan says:

    The British Empire did not go bankrupt or collapse because, for all its faults, it acted in the interests of itself.

    The US Empire is bankrupt and will collapse because, unlike the British Empire, it does not act in its own national interest (despite the rhetoric) but for the interests of third parties. The are being used, and now they are used up.

  2. anonymous says:

    You would think that the writers of this web site would have more insight considering their backgrounds, then again, most people in the markets don’t know anything.

    While I agree with the assessment that the US is in trouble (it doesn’t take a genius to work this out), your proposal is laughable. Your proposal assumes that the Euro and the rest of the world is somehow isolated from the US. You would think that the GFC just a little under 3 years ago would have taught you about counter-party risk and the interconnected nature of world financial systems and world economies.

    There is a saying in Australia, that is when the US sneezes, we catch a cold. This applies to all economies.

    WIthout the US, the Euro and China would crash just as well. Who do you think buys all of those Euro/Chinese exports?

    Why else is it that every economy is still stagnate? Its because the US is down.

    Your proposal would be like saying, hey the shop across the street is in trouble, when they close down, we are going to do great business… despite the fact that the shop across the street buys half your stuff!

    While Australia is one of the few economies doing well, its only because of China, and China is fuelled by property bubble, construction making up more than 50-60% of GDP! Exports have never recovered, because guess what… the US where the ones buying it! hahahaha.

    So for your proposal to be valid, if the US collapsed, all the stuff they bought from Europe and China would have to be bought by someone, without that, they would collapse just as soon. Could they buy from each other? Well no, Europe is just as broke as the US. Can China be the only one left standing? No. With the US and Europe gone, 95% of their exports would disappear. So the only leg you have standing is if China could turn those exports into consumer purchases. This is wishful thinking. Remember that consumer spending as a % of GDP has been falling ever since the open door policy, its under 5-10% of GDP. And you don’t move that to 50% overnight! (50% is what you would need to keep the scam running). And remember, chinese people don’t spend, they save and store value in property. So by increasing consumer spending, less income for property speculation and hence a property crash, and considering 50% of GDP is construction… consumer spending would collapse.

    In short, the collapse of the US, would lead to a global depression for all countries, no one will be immune. Maybe some small country which has no connections to the outside would. Other than that, the ship goes down.

    You guys at the daily reckoning publish the same rubbish everyday calling for the collapse of the US and suggest silly ways of getting out of it such as moving to the Euro, China etc… laughable.

    One of the daily reckoning’s suggestion which does make sense is your position on gold. Gold after all is the only real currency is a global depression and the end of fiat money. Though, your evangelical promotion of gold is obviously a result of money interests. How much do you guys get paid by gold companies and traders to sell gold? Considering the links with articles, name dropping and banner ads next to gold articles, i’d imagine a fare amount of pretty gold coins, or euros?

    So please do some more insightful, informed, researched and considered articles without selling out to advertisers for a quick buck. And if you are going to sell out while presenting yourself as a news/opinion source, you should do full disclosures at the end of your articles.

    I think the readers would be interested in whether you practice what you preach and any conflicting interests.

  3. Dan says:

    to anonymous: When I find a new site with fresh opinion, such as here, or RT or wherever, at first it looks like for once there is someone out there who isn’t talking his book. But _every_ _single_ _time_ they are talking their book, especially when it comes to money and markets, but it’s true for any other field that involves the sale of products. After all, these people are doing little else than trying to make a buck. There’s no money in telling the world how to get by for free. Even Max Keiser is a shill, although for what it’s worth he’s very entertaining and generally more insightful than the competition.

  4. Lachlan says:

    “Though, your evangelical promotion of gold is obviously a result of money interests”
    Not so anonymous.
    Similarly someone could assume without any basis in fact that your opinion proves you a shill for banks or some such?
    Everybody has to make living by producing something or selling something. DRA is not hiding anything. No harm is being done where someone sells a product they have faith in.

  5. anonymous says:

    @Dan and @Lachlan: Its not good enough to say everyone needs to make money. There is a ethical and non-ethical way to make money. Read my comments properly, “And if you are going to sell out while presenting yourself as a news/opinion source, you should do full disclosures at the end of your articles.”, like any decent publisher, news or opinion source, disclosing any conflicts of interest is good practice. My objection with how the daily reckoning has changed is that the opinions of the same people don’t even remain consistent! They change depending on the product they wish to sell. The daily reckoning has become the Fox News of financial commentary and opinion. Who is the shill now?

    There is nothing wrong with making money, but there is a ethical way of doing it. Otherwise, your no better than the investment bankers that sold their clients ‘Shit’ assets while telling them they where AAA.

    The fact that this publisher has a AFSL, I expected a higher standard. In just a few short months, the daily reckoning has become nothing more than a sell out willing to dish out any unresearched rubbish to sell any product to the highest bidder. The charts, statistics and evidence has fallen to almost absent and most of the articles are simply copy and paste jobs of commentary while slipping in references to products and services to get advertising income hoping we don’t notice? HA.

  6. Dan says:

    “They change depending on the product they wish to sell. The daily reckoning has become the Fox News of financial commentary and opinion. Who is the shill now?” … they walk a fine line between obstinacy in error, indecision, opportunism and changing one’s opinion in light of new information. This is the big test for any public commentator.

    anonymous: I’m not disagreeing with you, but I think every publisher has its limitations, and in my view freedom of the press means freedom to say and not say _whatever_ you like, to the point of being truly anonymous if you choose. We are a long way off that anywhere on the planet, but for that reason I don’t care if ADR doesn’t want to tell us when they are spruiking or not (I wouldn’t necessarily trust them any more if they did). That’s what critical thinking is for.

    The problem I see is that we are in a transition period in the worldwide economy, with great uncertainty (and great opportunity) especially with regards to the future of currencies. What was once conspiracy theory is now fact, what was once reliable statistical data is now probably pink noise, so if you go on analysing trends, you run the risk of being completely wrong because many of those trends and statistics are fake or will later be revealed to have been manipulated by the corrupt. It’s not easy to navigate a storm!

    I have to say with regard to ethics, a society cannot expect people to abide by ethical principles in public unless there is direct accountability. The fact that there is room for commentary and that the ADR’s business model depends on pairs of eyes looking at its stuff is already pretty good. The future of ADR as a publishing house depends on that and as such it’s not certain for them either, because the blogosphere and forums provide some pretty hefty competition at times.

  7. Anne Freeman says:

    Confusion hides many evils.

    “The problem I see is that we are in a transition period in the worldwide economy, with great uncertainty (and great opportunity) especially with regards to the future of currencies. What was once conspiracy theory is now fact, what was once reliable statistical data is now probably pink noise, so if you go on analysing trends, you run the risk of being completely wrong because many of those trends and statistics are fake or will later be revealed to have been manipulated by the corrupt. It’s not easy to navigate a storm!

    I have to say with regard to ethics, a society cannot expect people to abide by ethical principles in public unless there is direct accountability. The fact that there is room for commentary and that the ADR’s business model depends on pairs of eyes looking at its stuff is already pretty good. The future of ADR as a publishing house depends on that and as such it’s not certain for them either, because the blogosphere and forums provide some pretty hefty competition at times.”

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