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EMPIRE DEBT OF

The Rise of an Epic Financial Crisis William Bonner and

Addison Wiggin

John Wiley & Sons, Inc.

EMPIRE DEBT OF

The Rise of an Epic Financial Crisis William Bonner and

Addison Wiggin

John Wiley & Sons, Inc.

Copyright © 2006 by William Bonner. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specif ically disclaim any implied warranties of merchantability or f itness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of prof it or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Bonner, William, 1948– Empire of debt : the rise of an epic f inancial crisis / Bill Bonner and Addison Wiggin. p. cm. Includes index. ISBN-13: 978-0-471-73902-9 (cloth) ISBN-10: 0-471-73902-2 (cloth) 1. Financial crises—United States. 2. Debt—United States. 3. United States—Economic conditions—2001– I. Wiggin, Addison. II. Title. HB3722.B658 2006 336.3′4′0973—dc22 2005023682 Printed in the United States of America. 10

Contents

Introduction: Slouching toward Empire I.

Imperia Absurdum

1. Dead Men Talking

2. Empires of Dirt

3. How Empires Work

4. As We Go Marching

II.

Woodrow Crosses the Rubicon

5. The Road to Hell

6. The Revolution of 1913 and the Great Depression

131

7. MacNamara’s War

149

8. Nixon’s the One

177 III.

Evening in America

9. Reagan’s Legacy

191

10. America’s Glorious Empire of Debt

219

11. Modern Imperial Finance

247

12. Something Wicked This Way Comes

261

CONT ENT S

IV.

The Essential Investor

13. Welcome to Squanderville

275

14. Still Turning Japanese

297

15. The Wall Street Fandango

305

16. Subversive Investing

317

Appendix: The Essentialist Glossary

335

Notes

341

Index

351

EMPIRE DEBT OF

Introduction: Slouching toward Empire The will of Zeus is moving toward its end. —The Illiad

ne day in early spring 2005, we traveled by train from Poitiers to Paris and found ourselves seated next to Robert Hue, head of the French Communist Party and a senator representing Val d’Oise. He sat down and pulled out a travel magazine, just as any other traveler would. Aside from one Bolshevik manqué who stopped by to say hello, no one paid any attention. A friend reports that he was on the same train a few months ago with then Prime Minister, Jean-Pierre Raffarin, who was accompanied by only a single aide. Many years ago, when the United States was still a modest republic, American presidents were likewise available to almost anyone who wanted to shoot them. Thomas Jefferson went for a walk down Pennsylvania Avenue, alone, and spoke to anyone who came up to him. John Adams used to swim naked in the Potomac. A woman reporter got him to talk to her by sitting on his clothes and refusing to budge. But now anyone who wants to see the president must have a background check and pass through a metal detector. The White House staff must approve reporters before they are allowed into press conferences. And when the U.S. head of state travels, he does so in imperial style; he moves around protected by hundreds of praetorian guards, sharpshooters on rooftops, and thousands of local centurions. When President Clinton went to China in 1998, he took with him his family, plus “5 Cabinet secretaries, 6 members of Congress, 86 senior aides, 150 civilian staff (doctors, lawyers, secretaries, valets, hairdressers, and so on), 150 military staff

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(drivers, baggage handlers, snipers, and so on), 150 security personnel, several bomb-sniffing dogs, and many tons of equipment, including 10 armored limousines and the ‘blue goose,’ Clinton’s bulletproof lectern.” Getting the presidential entourage and its armada of equipment to China and back, the Air Force f lew 36 airlift missions on Boeing 747, C-141, and C-5 aircraft. The Pentagon’s cost of the China trip was $14 million. Operating Air Force One alone costs over $34,000 an hour. Today, the president cavalcades around Washington in an armored Cadillac. The limousine is fitted with bullet-proof windows, equally sturdy tires, and a self-contained ventilation system to ward off a biological or chemical attack. The Secret Service—the agency charged with preserving the president among the living—employs over 5,000 people: 2,100 special agents, 1,200 Uniformed Division employees, and 1,700 technical and administrative wonks. Everywhere the president goes, his security is handled—by thousands of guards and aides, secure compounds, and carefully orchestrated movements. Security was so tight during a visit to Ottawa, Canada, in 2004 that some members of Parliament were refused entry into the building for lack of a special one-time security pass, an act apparently contradictory to the laws of Canada. In late 2003, when Bush deigned to visit the British Isles, an additional 5,000 British police officers were deployed to the streets of London to protect him. Parks and streets were shut down. Snipers were visible on the royal rooftop.1 After Bush’s stay at Buckingham Palace in London, the Queen was horrified by the damage done to the Palace grounds. They were left looking like the parking lot at a Wal-Mart two-for-one sale.2

THE THEME OF THIS BOOK IN A NUTSHELL Watching the news is a bit like watching a bad opera. You can tell from all the shrieking that something very important is supposed to be happening, but you don’t quite know what it is. What you’re missing is the plot. Let us begin by noticing that this is a comic opera that seems as though it might veer into tragedy at any moment. The characters on stage are familiar to us—consumers, economists, politicians, investors, and businessmen. They are the same hustlers, clowns, rubes, and dumbbells that we always see before us. But in today’s performance they are doing something

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extraordinary, they are the richest people on the planet, but they have come to rely on the savings of the world’s poorest people just to pay their bills. They routinely spend more than they make—and think they can continue doing so indefinitely. They go deeper and deeper in debt, believing they will never have to settle up. They buy houses and then mortgage them out—room by room, until they have almost nothing left. They invade foreign countries in the belief that they are spreading freedom and democracy, and depend on lending from Communist China to pay for it. But people come to believe whatever they must believe when they must believe it. All these conceits and illusions that we find so amusing in the Daily Reckoning (www.dailyreckoning.com), come not from thinking, but from circumstances. As they say on Wall Street, “markets make opinions,” not the other way around. The circumstance that makes sense of this strange performance is that the United States is an empire— whether we like it or not. It must play a well-known role on the world stage, just as you and I must play our roles, not because we have thought our way to them, but simply because of who we are, where we are, and when we are. Primitive people play primitive roles. They are no less intelligent than the rest of us, but they would be out of character if they began doing calculus. They have their parts to play just as we do. Sophisticated people play sophisticated roles. They are no smarter than anyone else, but you still don’t expect them to wear bones through their noses. We, citizens of the last great empire, have our roles to play too, and the empire itself, must do what an empire must do. Institutions have a way of evolving over time—after a few years, they no longer resemble the originals. Early in the twenty-first century, the United States is no more like the America of 1776 than the Vatican under the Borgia popes was like Christianity at the time of the Last Supper, or Microsoft in 2005 is like the company Bill Gates started in his garage. Still, while the institutions evolve, the ideas and theories about them tend to remain fixed; it is as if people hadn’t noticed. In America, all the restraints, inhibitions, and modesty of the Old Republic have been blown away by the prevailing winds of the new empire. In their place has emerged a vainglorious system of conceit, deceit, debt, and delusion. The United States Constitution is almost exactly the same document with exactly the same words it had when it was written, but the words that used to bind and chaff have been turned into soft elastic. The government that couldn’t tax, couldn’t spend, and couldn’t regulate, can

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now do anything it wants. The executive has all the power he needs to do practically anything. Congress goes along, like a simpleminded stooge, insisting only that the spoils be spread around. The whole process works so well that a member of Congress has to be found in bed “with a live boy or a dead girl” before he risks losing public office. American businesses are still capitalistic. They operate, as everyone knows, in the most dynamic, free, and open economy in the world. A recent press item reports, that General Motors will never be able to compete unless it ditches its crushing health care costs. Why does it not just cut the costs? It seems to lack either the nerve or the right, but the journalist proposed a solution: Nationalize health care! Meanwhile, CEO pay has soared to the point where the average chief executive in 2000 earned compensation equal to 500 times the average hourly wage. Stockholders, whose money was being squandered, barely said a word. They were still under the illusion that the companies were working for them. They had not noticed that the whole capitalist institution had been trussed up with so many chains, wires, red tape, and complications, it no longer functioned like the freewheeling, moneymaking corporations of the nineteenth century. Meanwhile, corporations in China—a communist country—had their hands and feet free to eat our lunches and kick our derrieres. The entire homeland economy now depends on the savings of poor people on the periphery to keep it from falling apart. Americans consume more than they earn. The difference is made up by the kindness of strangers—thrifty Asians whose savings glut is recycled into granite countertops and f lat-screen TVs all over the United States. But these ironies, contradictions, and paradoxes hardly disturb the sleep of the imperial race. They have permitted themselves to believe so many absurd things that they will now believe anything. In the fall of 2001, people in Des Moines and Duluth were buying duct tape to protect themselves from terrorist “sleeper cells ready to attack the Midwest.” In the fall of 2004, they believed the Chinese were manipulating their currency by pegging it to the dollar for nearly 10 years! Like Alice, they were expected to believe six impossible things before breakfast and another half dozen before tea: Real estate never goes down! You can get rich by spending! Savings don’t matter! Deficits don’t matter! Let them sweat, we ’ll think! We can’t help but wonder how it will turn out.

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In this book, we turn once again to the dusty pages of history. We find ourselves often tracing the footsteps of the West’s greatest empire— Rome—searching for clues. In Rome, too, the institutions evolved and degraded faster than people’s ideas about them. Romans remembered their Old Republic with its rules and customs. They still thought that was the way the system was supposed to work long after a new system of consuetudo fraudium—habitual cheating—had taken hold. Rome’s system of imperial finance was far more solid than America’s. Rome made its empire pay by exacting a tribute of about 10 percent of output from its vassal states. There were few illusions about how the system worked. Rome brought the benefits of Pax Romana, and subject peoples were expected to pay for it. Most paid without much prompting. In fact, the cost of running the empire was greatly reduced by the cooperation of citizens and subjects. Local notables, who benefited from imperial rule, but who were not directly on the emperor’s payroll, performed many costly functions. Many functions were “privatized,” says Ramsay MacMullen in his Corruption and the Decline of Rome. This was accomplished in a variety of ways. Many officials, and even the soldiers stationed in periphery areas, used their positions to extort money out of the locals. In this way, the cost of administration and protection was pushed more directly onto the private sector. Commoda was the word given to this practice, which apparently became more and more widespread as the empire aged. MacMullen recalls a typical event: From Milan, a certain Palladius, tribune and notary, left for Carthage in 367. He was charged with investigating accusations of criminal negligence—“if you don’t pay me, I won’t help you”—brought against Romanus, military commandant in Africa. Because of Romanus’s inaction, the area around Tripoli, had suffered attacks by local tribes, without defense from the empire. But the accused was ready for the inquisitor, and when Palladius arrived unexpectedly at military headquarters in the African capital—carrying the off icers’ pay—he was offered . . . under the table . . . a considerable bribe. Palladius . . . accepted it. But he continued his investigations, accompanied by two of the local notables whose complaints had launched the inquiry. He prepared his report to the emperor, telling him that the charges against Romanus were conf irmed. But the latter threatened to reveal the bribes he had accepted. So Palladius reported to the emperor that

S L O U C H I N G T OWA R D E M P I R E the accusations were pure inventions. Romanus was safe. The emperor ordered that the two accusers’ tongues be torn out.3

As time went on, the empire came to resemble less and less the Old Republic that had given it birth. The old virtues were replaced with new vices. Gradually, the troops on the frontier had to depend more and more on their own devices for their support. They had to take up agriculture. “The effectiveness of the troops was diminished as they became part-time farmers,” says MacMullen. Gradually, the empire had fewer and fewer reliable troops. In Trajan’s time, the emperor could count on hundreds of thousand of soldiers for his campaigns in Dacia. But by the fourth century, battles were fought with only a few thousand. By the fifth century, these few troops could no longer hold off the barbarians. The corruption of the empire was complete. If you deny that the United States is now an empire, you are as big a fool as we were. For a very long time we resisted the concept. We did not want the United States to be an empire. We thought it was a political choice. We liked the old republic of Jefferson, Washington, the U.S. Constitution . . . the humble nation of hard money and soft heads; we didn’t want to give it up. We thought that if the United States acted as though it were an empire it was making an error. What morons we were. We missed the point completely. It didn’t matter what we wanted. There was no more choice in the matter than a caterpillar has a choice about whether to become a butterf ly. This was an important insight for us. Until then, all of the blustering and slapstick pratfalls on stage seemed like “mistakes.” Why would the United States run such huge trade deficits, we wondered. It was obviously a bad idea, the nation was ruining itself. And why would it launch an invasion of Iraq or begin a war on terror—both of which were almost certain to be costly blunders. It was as if the United States wanted to destroy itself—first by bankrupting its economy, and second by creating enemies all over the globe. Then, we realized, that of course, that is exactly what it must do. We repeat, people come to believe what they need to believe when they need to believe it. America is an empire; its people must think like imperialists. In order to fulfill their mission, the homeland citizens had to become what George Orwell called “hollow dummies.” An imperial people

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must believe that they deserve to be the imperial power—that is, they must believe they have the right to tell other people what to do. In order to do so, they must believe what isn’t true—that their own culture, society, economy, political system, or they themselves are superior to others. It is a vain conceit, but it is so bright and so big it exercises a kind of gravitational pull over the entire society. Soon, it has set in motion a whole system of shiny vanities and illusions as distant from the truth as Pluto and as bizarre as Saturn. Americans believe they can get rich by spending someone else’s money. They believe that foreign countries actually want to be invaded and taken over. They believe they can run up debt forever, and that their debt-laden houses are as good as money in the bank. That is what makes the study of contemporary economics so entertaining. We sit at our telescopes and laugh like a divorce lawyer looking at photos of a rich man in f lagrante delicto; we know there’s money to be made. Things that are unusual usually return to normal. If they did not, there would be no “norma” to return to. That is why you can expect stocks to become more expensive when they are cheap and cheaper when they are expensive. Stocks today are expensive—they trade for an average of about 20 times earnings. Usually, they trade for only 12 to 15 times earnings, so you can expect them to get cheaper. Houses are expensive too. They usually go up at a rate roughly equal to the rate of inf lation, income, or GDP growth—no more. For the past 10 years, however, they’ve gone up three to five times as fast. House prices cannot grow faster than income for very long; people have to be able to pay the prices in order to live in them. So, you can expect houses to revert to their mean too. Prices will fall . . . or else stop rising. These simple reversions to mean are hardly controversial. We don’t know when they will happen or how, but that they will come about is practically guaranteed. More interesting to us are the reversions to other, bigger means. An empire itself is a rare thing. It is normal, but unusual. Nature abhors a monopoly. An empire is a monopoly on force. Nature will tolerate it for a while, but sooner or later, the imperial people must revert to being normal people, and the preposterous beliefs that the imperial people cherish, also must pass away. They must go up to a kind of humbug heaven, where absurd ideas and idle f latteries strut around while the gods point, snicker, and collapse into mirth, rolling around clutching their stomachs as if the humor of it was going to kill them.

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The dollar is an extraordinary thing too. Do you know what the long term mean value of paper currency is? Well, it is zero. That is what the average paper currency is worth most of the time . . . and it is the black hole into which all paper currencies in the past have gone. There could be something magic about the dollar that makes it unlike any paper currency in the past—that is, something that makes it non-mean reverting. But if anyone knows what it is he is not working on this book. For the last hundred years, the dollar has lost value faster than the decline of the romanera Dinarius after the reign of Nero. This is not surprising. Roman coins had silver or gold in them. In order to make the coins less valuable, they had to reduce the precious metal content. People didn’t like it. The dollar, by contrast, contains no precious metal. Not even any base metal. It is just paper. It has no inherent value. There is nothing to take out, because there was never anything there in the first place. Over time, the dollar is almost certain to revert to its real value—which is as empty as deep space. In the big picture of things, it is also unusual for one civilized nation to earn far more per capita than another. In the thousands of years of history, some groups were poor . . . others were rich. But extreme differences had a way of working themselves out—by trade, war, pestilence, and degeneracy. By the year 1700, a man in India, China, Arabie, or Europe had about the same standard of living, which was not very high anywhere. But along came the industrial revolution, which threw incomes out of balance and changed the way people think. Europe stole a march on the rest of the world’s industries, with huge gains in output coming in a relatively short period of time. Soon, Europeans were the world’s leading imperialists, convinced that they had its best economic system, its finest scholars, its highest morals, and its most splendiferous armies. But if the world works the way we think it does you can expect the incomes of Europeans—and their American cousins—to revert to their historic means. The process could take several generations. It could stall. There could be countertrends. But there is no reason to think a man’s labor is inherently worth more in France than in Bangladesh, or that a plumber with stars and stripes on his overalls should earn more than one with a crescent moon. If there is a mean, things will regress to it. You can expect, relatively speaking, Asian incomes to rise and American incomes to fall. That is, of course, just what is happening now. In India, for example, real incomes have more than doubled in the last 10 years. In America there is some dis-

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pute about the numbers, but if there has been any income growth at all it has been slight. Just to introduce a gloomy remark, we note that we are personally and individually regressing to the mean. The mean for a human being is death—or non-existence. A person walks the earth for only three-score and 10, as it says in the Bible. The rest of the time, he is only a potential person . . . or a former person. For millions of years, he is either in the future . . . or in the grave. You, dear reader, are enjoying that ever-so-brief period of exaggeration . . . of hyperbole . . . of extraordinary, mean-busting usualness we call “life.” It is not for us to know the time or place when it comes to an end. But like all mean-reverting phenomena, only a fool would bet against it. (For our own part, we do not particularly care when or how we meet our end. We just wish to know where, so we can avoid the place.) But betting against the end is just what most Americans are doing. They are borrowing and spending as if there were no tomorrow, and they are investing as though there were no yesterday. All they would have to do would be to look at the patterns of the past; they would see that it doesn’t make sense to buy at high prices—you can’t make money that way. The way people have always made money is by buying low and selling high. Doing it the other way around doesn’t work. Nor does borrowing and spending make you rich. Tomorrow always comes—at least it always has up until now—and you have to pay your debts. Over time, prices go up and down. Many other things ebb and f low as well, boom and bust or bloom and wither. All of these phenomena go through predictable cycles that can be roughly modeled. Analysts study the cycles to try to figure out where we are currently located in the habitual pattern. It is often frustrating work, because the patterns are rarely quite as regular and well-defined in the present as they appear to have been in the past. Still, it is a question worth asking: Where in the cycle are we? One of the ways you can tell where you are in the cycle is to look at what your friends and neighbors believe. Markets make opinions. We recall that you can tell where the market really is by looking at the opinions people have. When people you know are all of the opinion that stocks will rise 15 percent per year—for an indefinite amount of time— you can be sure you are nearer to a top than a bottom. When people believe the opposite—that stocks will never go up—most likely, you are near a bottom.

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Beliefs give us a clue to the larger cycles as well. People must play the roles that have been thrust upon them. They are bullish near the end of a bull market; they are bearish near the end of the bear market. If it were otherwise, the market could never fully express itself. If investors grew suddenly cautious while nearing an epic bull market peak, they would sell their stocks, and the peak would never be reached. Or suppose that after several years of soaring house prices homeowners came to believe that housing prices would fall? How could you have a proper housing bubble? How can you have a rip-roaring party without anyone getting drunk, in other words? How can people make fools of themselves if they are unwilling to get up on the tables and dance? These are deep philosophical questions. But they help us recognize where we may be in the cycle. As prices reach a loony excess, peoples’ ideas grow loony too. Ergo, the loonier the ideas the more likely it is that a turning point is near; the wilder the party, the more likely someone will call the gendarmes. We also suspect that attitudes evolve similarly in an imperial cycle, during which a country’s economic, f inancial, and military power runs up over several generations and then declines. At the peak, the imperial people come to believe that their system is superior, that their values are universal, and that their way of life will inevitably dominate the entire world. Readers will recognize these attitudes in a famous article by Francis Fukayama, written after the fall of the Soviet Union, in which he suggested that the world may have reached the “End of History.” It was the end of history because the American system had triumphed—no improvement seemed possible. Fukayama’s idea was not original. Hegel and Marxist intellectuals had proposed the same thing more than a hundred years earlier. With the victory of the proletariat, no further advance could be made. History had to stop. Hegel stopped ticking. Marx died, too. History continued. But when people feel they are on top of the world, they begin to take things for granted that they previously thought absurd. As we mentioned earlier, Americans now depend on the savings of Communist China in order to pay for their lifestyles . . . and their wars to make the world safe for democracy. They do so without thinking. Subconsciously, they’ve come to believe what imperial people always seem to believe—that their society is so superior, that the rest of the world longs to be just like them

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or is inevitably drawn to become like them, whether they like it or not. That’s the premise behind the billions of dollars Americans are investing in China. A few years ago if someone had suggested that they invest in a communist country they would have thought the person mad. China is still run by veterans of various “great leaps forward,” but Americans are convinced that they’re all leaping to become just like us—capitalists and democrats at heart! So vain are we that we can’t imagine anyone wanting to be anything else. Likewise, we were recently in Nicaragua. We have a house down there, and we buy more land whenever we get an opportunity. Prices have soared in the past five years. Someone bought a beach-front lot recently for $350,000, a price that would have been thought insane a few years ago. Nicaragua is, after all, a third-world country. It is also a country that was run by communists until a few years ago. One of the communists is now a leading candidate to become el presidente in the next election. And right now, the nation’s politicians are debating a proposed law that would declare all land within 200 meters of high tide “public.” In effect, we’d all lose our land, our houses, and the money we’ve invested down there. But none of us quite believe it will happen, because we’re convinced that they all want to be just like us—and we ’d never do such a thing. And of course, the invasion of Iraq was based on the same sort of thinking: that even the grubby desert tribes want to be just like us. All we have to do is to get the dictator off their backs and the men will start building shopping malls and the women will all start dressing like Britney Spears. Those are the sort of delusions you get at the top of an imperial cycle. But culture, political systems, and economies are never as universal and eternal as we think. Instead, everything evolves. Even in France, our closest cousins do not share our American attitudes. In the United States, we all seek to maximize our incomes. We work long hours. We start enterprises. We invest. In France, people do not seek to maximize their incomes. Instead, what they want to maximize is their leisure, and the quality of their lives. They spend more time talking about how to cook the bacon than they do about how to bring it home. France once had a European Empire that reached from Spain to Moscow. Later, it had a worldwide empire, with subject countries and colonies in Africa, the West Indies, and the South Pacific. From the time of Richelieu to the time of Leon Blum, France had one of the most powerful armies on earth. Even at the beginning of World War II, France had

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the largest army in Europe—on paper. But there never was a cycle that didn’t want to turn. And the imperial cycle turns along with the rest of them. For many generations, the French believed they had the finest culture, the best schools, the most advanced scientists, and the most dynamic builders in the world. France saw its mission as bringing the benefits of its civilization—of vin rouge and the Rights of Man—to the rest of the globe. But now it’s our turn. It is we Americans who think we have the best culture, the best economy, the best government, and the best army the world has ever seen. Now, it is we who have the burden of the “mission civilisatrice.” It is our duty to bring freedom and democracy to this tattered old ball; our president said so. How did America become an empire? We don’t recall the question ever coming up. There was never a debate on the subject. There was never a national referendum. No presidential candidate ever suggested it. Nobody ever said, “Hey, let’s be an empire!” People do not choose to have an empire; it chooses them. Gradually and unconsciously, their thoughts, beliefs, and institutions are refashioned to the imperial agenda. While there has been no discussion of whether America should be an empire, there has been much public clucking on the specific points of the imperial agenda. Should we attack Iran or Iraq? Should we have national identity cards? Should we suspend the Bill of Rights in order to combat terrorists more effectively? Many people wondered, including your author, what was the point of the war against Iraq. The country had no part in terrorist attacks. Au contraire, Saddam’s Iraq was a bulwark of secular pragmatism in an area unsettled by religious fanaticism. It was the religious fanatics who posed a danger, said the papers, not the ruthless dictators who suppressed them. Others wondered if an attack on Iraq would make the world safer or more dangerous. Or if the United States had committed enough troops to get the job done. But the big question had already been settled without ever having been raised. Why should Americans care what happened in the mideast? Or anywhere else? Did the Swiss wonder what kind of government Iraq should have? Did the Swiss try to make the rest of the world more like Switzerland, or allow themselves the vain fantasy of imagining that everyone on the planet secretly yearned to be more like the Swiss themselves? While no one noticed, the imperial weed put down roots deep in the soil of North America. By the early twenty-first century, hardly anything

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else grew; it had completely crowded out the delicate f lowers planted by the Founding Fathers. The debate surrounding the invasion of Iraq was an imperial debate—about means and methods, not about right and wrong or national interest. No one from either major political party bothered to suggest that the United States had no business nosing around in other peoples’ business. Both parties recognized that Iraq was not a matter of national interest—it was a matter of imperial interest. No business, no where, was too small or too remote not to be of interest to the empire. From its military bases all over the globe, and its sensors orbiting the planet, the American imperium watched everyone, everywhere, all the time. In the year 2005, no sparrow falls anywhere in the world without triggering a monitoring device in the Pentagon. This marks what may be the peak of a trend that began more than one hundred years ago. Just about the turn of the century, the United States became the world’s largest economy—and its fastest growing one. Near the same time, Theodore Roosevelt began riding rough over small, poor nations. America’s fat proto-imperialist rarely saw a fight he didn’t want to get into. It was at his urging (he had threatened to raise his own army to do the job) that Wilson announced his readiness to join the war in Europe in 1917. Wilson said he was doing it to “make the world safe for democracy.” This is the stated goal of nearly all U.S. foreign policy ever since: to improve the planet with more democracy. Of course, almost all empire builders think they are improving the planet. Even Alexander the Great thought he was doing it a favor by spreading Greek culture. But when Wilson sent troops to Europe, people wondered then what the real point was. America had no interest in the war and no particular reason to favor one side over the other. But there too, they missed the point. America was quickly becoming an empire. Empires are almost always at war—for their role is to “make the world safe.” President Truman clarified the imperial modus operandus when he sent the United States into battle in Korea with no declaration of war. He didn’t even tell Congress until after the army was engaged and Americans were dying. Then, President Johnson followed up with another war in a far-off place that made no difference to Americans—Vietnam. What was the point? The Swiss army was nowhere to be found. And where were the Belgians? Even the French had given up on Vietnam a decade before. But more than three million American soldiers went to Vietnam and many came back f lat. And for what? Just another war on the periphery of the

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empire. None of these engagements made any sense for a humble nation that minded its own business. None would have made any sense for America until the first Roosevelt administration; but once the nation had become an empire—with a homeland and wide-ranging interests beyond it—almost all wars seemed appropriate. Another landmark in the history of the American empire came on August 15, 1971. That was the day that Richard Nixon severed the link between the imperial currency and gold. Thitherto, empire or no, the United States had to settle its debts like other nations—in a currency it couldn’t manufacture. Henceforth, the way was clear for a vast increase in empire spending . . . and debt. Thus we arrive at the real problem for the American empire. It has by far the strongest military in the world. It has no serious challengers beyond its borders. Hence, it had to become its own worst enemy. All empires must pass away. All must find a way to destroy themselves. America found debt. The traditional method of empire finance is so simple even a Mongol barbarian could master it. Nations are conquered and forced to pay tribute. The homeland is supposed to make a profit; it is supposed to grow richer compared to the vassal states. But here, America fell victim of its own scam. Pretending to make the world a better place, the United States could not very well require the poor nations it conquered to pay up. Instead, it had to borrow from them. This was not a problem in the early days. Until the mid-1980s, U.S. industries were so robust they were able to take advantage of the pax dollarium to expand sales, jobs, and profits. But in the 1970s, the U.S. trade balance turned negative. By the year Alan Greenspan took over at the Fed, foreigners owned more U.S. assets than Americans owned foreign ones. American factories had grown old and expensive. American workers were paid too much. American businessmen invested too little in training and new capital equipment. The whole nation developed an attitude more in harmony with an empire on the decline than one that was still rising. The imperial people chose to spend rather than to save, and to hallucinate, rather than think hard. They demanded bread and circuses at home; let the Asians sweat abroad. Empires are thought by many to be good things. They expand the area in which trade can take place. In modern parlance, they allow for increased “globalization.” Generally, globalization is good for everyone. It

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permits people to specialize in what they do best, producing more and better things at lower costs. But it is more beneficial to some than to others. And currently, the Asians are getting the most out of it. There are three billion people in Asia. And almost every one of them is willing to work for a fraction of the average American wage. Not only that, they tend to save their money, rather than spend it. The savings rate in China, for example, is said to be nearly 25 percent. In America, it is near zero. Globalization and artificially low interest rates in America have allowed Asian industries to f lourish. But for every dollar earned by an Asian exporter, 6 cents in debt is added to America’s heavy balance sheet. Things happen that no one particularly wants or especially encourages, and the average man goes along with whatever humbug is popular— with no real idea where it leads or why he favors it. Each person plays the role given to him; everyone believes what he needs to believe to play the part. Alan Greenspan was famously against paper money that was not backed by gold when he was a libertarian intellectual. When he became a government functionary, his views conveniently changed. He came to believe what he had to believe in order to be the head of the American empire’s central bank: the Federal Reserve. The empire needs almost unlimited amounts of credit to carry out its foreign wars, while making bread and circuses available at home. Alan Greenspan makes sure it gets it. Expensive foreign wars, expensive bread, expensive circuses—these are, of course, what bankrupted almost every empire from Rome to London. But that is just the point: institutions play their roles, too. One grows; another decays. One is young and dynamic while another is old and decrepit. One has to die to make way for the new one to take its place. One has to ruin itself so that another may f lourish. Americans could cut their military budget by 75 percent and still have the biggest, most advanced army in the world. They could trim their household spending by half, and still live well. They could drive less in smaller cars, they could cease mortgaging their houses, they could “make do” with last year’s clothes and yesterday’s laptop, but how could they ruin themselves if they put on the brakes before getting to where they are going? Alan Greenspan’s easy money policies—the Fed has been lending money at a rate at or below the level of consumer price inf lation for more than two years—do not merely lure Americans to borrow and spend, they

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also grease the skids of history, permitting one empire to slip away while another slides in to take its place. The main beneficiaries of the present gush of globalization are the Asians. As American consumers turn to WalMart to buy more and more things at “Every-Day Low Prices,” they find products from China and Malaysia on the shelves. Were it not for Greenspan’s low lending rates, they would not have found it so tempting to borrow. Were it not for Greenspans low rates, they would not have found it so alluring to spend. Were it not for Greenspan’s low rates, they would not have bought so much from Asian manufacturers, the Asians would have made less money and would have built fewer new factories and trained fewer new workers. Were it not for Greenspan’s lending policies, in other words, Asia would not have grown so quickly and would not now pose such a competitive threat to the rest of the world’s industries. And Americans would not owe Asians so much money. In today’s paper for example, a headline tells the tale: “China joins global race for fastest computers: Beijing and Tokyo aim at a new barrier to overtake U.S. lead.”4 Asians now own enough U.S. dollar assets to buy a controlling interest in every company on the Dow. They have enough T-bonds to destroy the U.S. economy on a whim. Their economic power is growing at three to five times the GDP rate of Western nations. So far, they have shown little interest in political power; that is for a later stage of the cycle, another role for another time. None of these insights are new or original. Most Americans have heard these things. Longtime readers of our “Daily Reckoning” newsletter (www.dailyreckoning.com) have heard them so often they look for exits when they see your authors coming. But while people know these things to be true, they don’t really believe them. They believe what they need to believe in this late, degenerate stage of the empire. That is, they believe in sloppy fantasies. “The U.S. economy is still the most dynamic and f lexible in the world,” they tell each other. “We’re the most creative, inventive people on the planet,” they congratulate themselves. “We’ll invent new businesses. We’ll think of something!” These vague expressions of faith are probably typical for an advanced empire. The Romans, even to the time of the last emperor, Romulus, when the Barbarians appeared before the city walls, most likely told each other: “We’ll beat them again this time; we always do!”

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You never know where you are in the cycle until it is too late to do anything about it. For all we know, we could be facing merely a temporary pullback in what is still a long-term bullish period for the American empire. We have mentioned how present American attitudes seem more in keeping with the end of a great empire than the beginning of one. In addition to that, the math of it makes us think we are closer to the end than the debut. The United States pays the direct costs of globalization—a military budget greater than the combined military spending of all of the rest of the world combined. Plus, it bears the indirect costs of its own consumerist excesses—another $700 billion or so per year in trade deficit. Together, they represent a cost of empire of more than 10 percent of GDP . . . more than $1 trillion each year. Instead of collecting tribute, the United States finances these costs by borrowing. Here, Alan Greenspan and the paper dollar were immensely helpful. There is no theoretical limit to the amount of debt that can be taken on. The problem is a practical one. The dollar must maintain a reasonable value or lenders will be unwilling to lend. Dollar loans must also pay a reasonable amount of interest. With $36 trillion in loans outstanding, even at 5 percent interest, that represents annual debt service payments of $1.8 trillion. Who’s got that kind of money? Not Americans; they’re already spending every penny. And the more they spend, the less money they have left to pay interest. All they can do is to refinance—taking on new debt in order to pay the interest on the old debt. We will not dwell on this, as it is obvious even to an economist that it can’t go on for very long. Sooner or later people cannot continue to borrow and cannot continue to make their payments. This reminds us of one of the delusions that has been especially fetching lately. Alan Greenspan tells us that as long as house prices rise in parallel with household debt there should be no problem. He must know that it is not true. Relative to his assets, he says, the U.S. consumer is not over indebted. This is a little like telling a man not to worry about drinking too much—as long as he is getting fatter at the same time! The price of a house is only of interest if he is going to sell out and live in a cave, or die. Otherwise, he has no way of realizing the inf lated value of his house—except by borrowing against it, which only makes the situation worse.

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Americans do not seem particularly concerned about their debts. They, like the economists who advise them, come to believe what they must. And just as they come to these beliefs as circumstances change—not by pure thinking—so do they give them up. They continue believing in these fantasies and conceits until they are crushed out of them. Then, and only then, do they take up new beliefs. Currently, Americans still believe in stocks, even though they’ve made not a penny in them for more than six years. Based on past experience, the bear market that began in January 2000 will probably continue for another 10 years, taking prices down to six to eight times earnings. Then, their faith in stocks will finally be crushed out . . . at the very moment stocks are ready for another bull market. Americans also believe that houses always go up in price. No cobwebs grow over a real estate office door. No mortgage lender sits by the phone waiting for it to ring. And yet, it is impossible for real estate prices to exceed the rate of GDP growth for very long. This belief will also have to be crushed out, by a long bear market in property. Prices in Rome began a downturn in the year AD 300 or so (this we do not know for a fact, it is just a good guess). They did not stop going down until 1,000 years later . . . in the Renaissance . . . or maybe later. Even as late as the eighteenth century, sheep were grazing where the Forum used to be. The belief in the American empire—in American cultural, political, social, and economic superiority—must also be crushed out somehow. That is the likely next phase . . . the degenerate stage of empire . . . which could last one hundred years or more. In summary, the theory we have been teasing out is that politics and markets follow similar cyclical patterns—boom, bust, bubble, and bamboozle. A handful of companies usually take a dominant position in the market; sometimes a single one does. So do a few countries dominate world politics . . . “empires” they are called. The difference between a regular nation and an empire is profound. A regular nation—such as Belgium or Bulgaria—tends its own affairs. An empire looks outward, taking on its shoulders the fate of much of the world. An empire is like a bull market. It grows, it develops . . . often it passes into a bubble phase, when people come to believe the most absurd things. We don’t know what stage the American empire has reached . . . but we look around and see so many degenerate and absurd things, we guess: We must be nearer the end than the beginning.

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How will it end? What will happen next? We don’t know, but we note that people do not give up their self-serving conceits and illusions readily. They hold on to them as long as possible. “America still has the greatest, most dynamic economy on earth,” they tell themselves, even as the nation loses money (its income is less than its expenses). This kind of madness is hard not to like; it is like an aging woman who thinks she becomes more fetching with each passing year. The gap between perception and reality grows wider every day, until finally, the mirror cracks. What will shatter America’s confidence is probably a combination of financial crises. The dollar is vulnerable. So are Treasury bonds. So are stocks and house prices. Which one will crack the mirror is anyone’s guess. Our guess is that house prices will stop rising, causing a cutback in consumer spending. This will send the U.S. economy into recession . . . probably a long, soft slump that will take down house prices and the stock market, but leave the dollar and bonds with little damage. Long suffering readers will find this forecast familiar. It is the same one we made two years ago in another book with Addison Wiggin called Financial Reckoning Day ( John Wiley, 2003). We thought then that the tech bubble would blow up, resulting in a long, soft slow slump, à la Japan. Whether we were wrong, or just early, only tomorrow’s newspapers will tell. Instead of a real slump, the United States has had a 9-month phony recession (in which consumer debt actually expanded) and a phony boom since (in which consumer debt actually expanded). These two phony acts, we believe, set the stage for a real one—a not-so-soft, maybe not-soslow, slump. If we were sure of this forecast we would buy bonds. Since we are unsure, we buy gold. In the coming real slump, assets of all sorts are likely to be marked down—especially those with a debtor on the other side of the transaction. Gold is what people will buy when they start to wonder about the empire . . . and its money. We guess that they will begin to wonder more and more. “I read in the Figaro that the American economy has become completely dependent on China,” said a friend at a dinner party recently. “But I guess the Chinese have no choice. They need Americans to continue buying their products.” We are alarmed. Even chemists and shoe clerks have taken up macroeconomics. Everyone thinks he understands how the world economy works.

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“Well, it is a little like that,” we began to explain. “The Chinese do sell to the U.S. and they do lend money back to the U.S. But there’s no law that says this has to continue. “Imagine a shopkeeper whose biggest customer was having a hard time paying his bills. He extends credit . . . hoping the man will get his finances in order. But the more credit he gives him, the worse the man’s finances are. It would be very nice if that could work out. But it rarely does. Instead, it eventually blows up. The customer has to stop buying and the shopkeeper has to stop lending. There’s going to be hell to pay, in other words.” “What should an investor do to protect himself,” our friend asked. “Buy gold.” “Gold? What a strange idea. I haven’t heard anyone mention gold in many years. It seems so out-of-date. I didn’t think anyone bought gold anymore.” “That’s why you should buy it.”

I IMPERIA ABSURDUM Look back over the past with its changing empires that rose and fell and you can foresee the changing future, too. —Marcus Aurelius

1 Dead Men Talking Tradition is the democracy of the dead. —G. K. Chesterton

ne of the nicest things about Europe’s cities is that they are so full of dead people. In Paris, the cemeteries are so packed that the corpses are laid down like bricks, stacked one atop the other. Occasionally the bones are dug up and stored in underground ossuaries that are turned into tourist attractions. Thousands and thousands of skulls are on display in the catacombs; millions more must be spread all over the city. In Venice, a dead man gets—or used to get—a send-off so gloriously sentimental he could hardly wait to die. There is barely room within the city walls for the living and none at all for the dead. Cadavers were loaded onto a magnificently morbid f loating mariah—a richly decorated funeral gondola, painted in bright black with gold angels on her bow and stern. Then, as if crossing the river Styx, the boat was rowed across the lagoon to the island of San Michele by four gondoliers in black outfits with gold trim. How American versifiers must have envied one of their own, Ezra Pound, when he took his last gondola ride in such fabulous style in 1972. And then, what luck! The former classical scholar, poet, and admirer of Benito Mussolini got one of the last empty holes on the cemetery island. Today, when Venetians reach room temperature, the best they can hope for is a damp spot on the mainland.

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We do not hasten to join the dead, but we seek their counsel. When corpses whisper, we listen. “Been there. Done that,” they often seem to say. Reading Margaret Wilson Oliphant’s history of the dead dukes, or doges, in her classic book, The Makers of Venice, Doges, Conquerors, Painters and Men of Letters, 1 we felt as though someone should have sent a copy to George W. Bush. “Read this. Spare yourself some trouble,” the author might have written on the accompanying note. But who reads anything but newspapers in the Capital City? Who reads at all? In the United States if it isn’t on the evening news, it didn’t happen. Ancient history is something that happened last week. Too bad. For practically all the most preposterous ideas that emanate from the feverish swamps of the Potomac were tried out in the feverish swamps of Venice, hundreds of years ago.

LESSONS OF THE FOURTH CRUSADE “Democracy! Empire! Freedom! Nation building!” The ideas are cast into the murky lagoon of human affairs as if the words were clarifying magic. Suddenly, wrong is as distinct from right, as day from night. Good from bad . . . success from failure . . . how clearly we see things in the crystal waters of our own delusions! The United States congratulates itself as being the finest democracy the world has ever seen, but the system for ruling Venice eight centuries ago was also democratic. People voted for people who voted for other people, who then voted for yet more people who elected the doge. The whole idea was to allow ordinary people to believe that they ran the nation, while real authority remained in the hands of a few families—the Bushes, Kennedys, Gores, and Rockefellers of thirteenth-century Venice. “So easy is it to deceive the multitude,” says Mrs. Oliphant. “The sovereignty of Venice, under whatever system carried on, had always been in the hands of a certain number of families, who kept their place with almost dynastic regularity undisturbed by any intruders from below—the system of the Consiglio Maggiore was still professed to be a representative system of the widest kind; and it would seem at the first glance as if all honest men who were da bene and respected by their fellows must one time or other have been secure of gaining admission to that popular parliament.”2

Dead Men Talking

To Mrs. Oliphant’s dictum on the multitude, we add a corollary: It is even easier to deceive oneself. Today, rare are the Americans who are not victims of their own scams. They mortgage their homes and think they are getting richer. They buy Wall Street’s products as though they were gambling in Las Vegas and believe they are as clever as Warren Buffett. They went to the polling stations in November 2004 and believed they were selecting the government they wanted, when the choice had already been reduced to two men of the same class, same age, same schooling, same wealth, same secret club, same society, with more or less the same ideas about how things should be run. In Washington, DC, the United States Senate meets in the same solemn deceit as the Consiglio Maggiore—pretending to do the public’s business. While down the street, America’s own doge, George W. Bush, takes up where the Michieli and the Dandolos left off: trying to hustle the East. Making a very long story short, at the beginning of the thirteenth century, as at the beginning of the twenty-first, many people saw a clash of civilizations coming and sharpened their swords. They were, then as now, the same civilizations, clashing in about the same part of the world—the Middle East. What was different back then was that the effort to make the world a better place (at least in this episode) was being prodded forward by the French, who were then an expanding, imperial power. St. Louis (King Louis IX) went on two crusades with a French army and failed both times. Mrs. Oliphant’s history tells of the arrival of six French knights in shining armor, who strode into San Marcos Piazza to ask the doge for help. They were putting together an alliance of civilized Western armies to reconquer Jerusalem, they explained—in the same spirit as King Louis centuries before. They brought out all the usual arguments. But the Venetians were not so much convinced by the French as they convinced themselves. They were, they said to themselves ( just as Madeleine Albright would repeat centuries later), the “indispensable nation.” Without them, the effort would fail; therefore they must act. Yes, they could still fail, they acknowledged, but look what they had to gain! For not only would they being doing good, but they stood to do well, too—implanting trading posts and ports along the way. And so a f leet of 50 galleys was assembled and set off, the old doge leading the way. Finding their French allies a bit worse for wear and tear,

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the Venetians proposed a new deal: Instead of attacking the infidels forthwith, they would warm up with an assault on Zara, a town on the Dalmatian coast that had recently rebelled against its Venetian masters. The French protested. They had come to make war against the enemies of Christ, not against other Christians. But since they needed the Venetians’ support, they had no choice. In five days, the city of Zara surrendered; its defenses were no match for the armies in front of them. And so the city was sacked and the booty divided up. Soon after came a letter from Pope Innocent III, who wondered why they were killing fellow Christians; it was the pagans they were meant to be killing, he reminded them. He commanded them to leave Zara and proceed to Syria, “neither turning to the right hand nor to the left.” The pope’s letters greatly troubled the pious French, but the Venetians seemed undisturbed. They ignored the letters and remained in Zara until a new comic opportunity presented itself. This time Constantinople was the unfortunate target. A young prince from that city had come to them, asking support for a mission at once as audacious as it was absurd. His father had been blinded and thrown in a dungeon; the capital of Eastern Christendom was in the hands of men who must have been ancestors of Saddam Hussein—evil usurpers, dictators whom the people detested. If the Venetians would come to his aid, he promised, they would be rewarded generously. More than that, he and his father would return the entire Eastern Empire back to the one true church of St. Peter in Rome. The Venetians couldn’t resist. In April 1204, they set sail for Bosporus Strait. And in a great battle that must have been an undertaker’s dream, they took the city. Historian Edward Gibbon describes the scene: The soldiers who leaped from the galleys on shore immediately ascended their scaling ladders, while the large ships, advancing more slowing in the intervals and lowering a drawbridge, opened a way through the air from their masts to the rampart. In the midst of the conf lict the doge’s venerable and conspicuous form stood aloft in complete armor on the prow of his galley. The great standard of St. Mark was displayed before him; his threats, promises and exhortations urged the diligence of the rowers; this vessel was the f irst that struck; and Dandolo [the doge] was the f irst warrior on shore. The nations admired the magnanimity of the blind old man . . .3

Dead Men Talking

It proved, however, that the young prince on whose stories and promises the campaign was launched had been a bit frugal with the truth. Like the intelligence services’ warnings of weapons of mass destruction in Iraq, his depiction of the circumstances prevailing in Constantinople at the time was inaccurate. Much of it seemed fanciful. Though the initial conquest was fairly easy and glorious, subsequent events were less so. The local population rose up against the invaders. The city had to be retaken; this time, the battle was bloodier, and thousands of innocent citizens were put to the sword. As near as historians can tell, the Venetians earned no lasting gain or benefit. Dandolo died in 1205, never having set foot in his homeland again. As for his compatriots, what was left of them eventually returned to Venice. “But there still remains in Venice,” adds Mrs. Oliphant, “one striking evidence of the splendid, disastrous expedition, the unexampled conquests and victories yet dismal end, of what is called the Fourth Crusade. And that is the four great bronze horses, curious, inappropriate bizarre ornaments that stand above the doorways of San Marco. This was the blind doge’s lasting piece of spoil.”4 “Been there. Done that,” whispers the old doge.

THE TYRANNY OF THE LIVING Who cares? Each generation needs to be there to do that, too. Though happy to turn on an electric light invented by a dead man, the living—in love, war, and finance—believe nothing they haven’t seen with their own eyes, except when they want to. “Avoid foreign entanglements,” cautioned the father of the country. But corpses have no voice and no vote, neither in markets nor in politics. George W. Bush is undoubtedly better informed than George Washington. He may have neither the wisdom of a Washington nor the brain, but at least he has a pulse. Few people complain about this tyranny of the living. Most accept it as a fact of life. They would not want people to be excluded from the pleasures of life because of an accident of birth. But they are perfectly happy to have the oldest and wisest of our citizens systematically barred from the polling stations and the trading f loors by the accident of death. The departed shut up forever, leaving behind them their car keys, their

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stocks, and their voter registrations—that is all there is to it. Goodbye and good riddance. It is as if they had learned nothing useful, noticed nothing, and had no ideas that might be worth preserving; as if each generation were smarter than the one that preceded it and every son’s thoughts improved on those of his father. Oh, progress! Thou art forever making things better, aren’t thou? Throw out the sacred books—what are they, but the thoughts of dead imbeciles? Forget the old rules, old wives’ tales, old traditions and habits of old generations, old-timers’ superstitions, the old fuddy-duddies’ doubts! We are the cleverest humans who have ever lived, right? Maybe. But if we could convene a council from the spirit world and invite the dead to have their say, what would the corpses tell us? Veni et vidi. Gaze on the dead, and learn their secrets. No one seems to care about dead people. No stockbrokers ask for their business. No politicians pander for their votes. No one cares what they think or what they may have learned before they shucked their mortal shell. They get no respect, just a quick send-off, and then they are on their own. What did the old-timers know of war? Of politics? Of love? Of money? If only we could ask! Years ago, investors wanted more from a stock than just the hope that someone might come along who was willing to pay more for it. They wanted a stock that paid a dividend out of earnings. When heard about a stock, they asked: “How much does it pay?” That was what investing was all about. But by the 1990s, the old-timers on Wall Street had almost all died off. Stock buyers no longer cared how much the company earned or how large a dividend it paid. All they cared about was that some greater fool would come along and take the stock off their hands at a higher price. And the fools rushed in. And now the market is full of greater and greater fools who think the stock market is there to make them rich. What would the old-timers think of them? And what would our dead ancestors think of our mortgages? Most of them had small mortgages, if any at all, on their homes. And if they had them, they couldn’t wait to get rid of them. (Even our own parents held little parties to celebrate finally paying off the mortgage on the family home.) What would our forebears think if they were to learn that the richest generation in American history has mortgaged a greater share of its homes than any in history? What would they think of no-money-down mortgages, minimum payment plans, and negative amortization schedules?

Dead Men Talking

And what would the old-timers think of our government debt? The unpaid liabilities and obligations, expressed as though they had to be paid today, come to about $44 trillion, depending on the source you choose to believe. And what do the generations of Republicans, now in their graves, who believed so strongly in balanced budgets for so many years, think of the republicano in the White House, who has proposed the most unbalanced budgets in history? And what about the millions of dead Americans who immigrated to the United States to find freedom; what do they think of the country now? They came believing that if they minded their own business, they would be left alone to do what they wanted. But now, every pettifogging Pecksniff with a government service (GS) rating is on their grandchildren’s case. And what about those millions of dead people who scrimped and saved—who got by on almost nothing—so their children and grandchildren might live free, prosperous, and independent lives? What would they think of their descendants, so deep in debt and so dependent on Asian lenders that they can barely pass a Chinese restaurant without bending over and kissing the pavement? Each generation seems to think they are the first to stand upright, that their mothers and fathers walked on four legs and howled at the moon! Even when the living feign admiration for same fallen forebear, it is usually without paying of the least attention to what the poor schmuck actually said or knew. The dead leave us their memoirs, their gospels, their histories, and their constitutions—for what is a constitution but a pact with the dead?—and we ignore them. We seem to believe that all that they suffered, all they went through, all the mistakes they made, hold no more interest for us than a comment by a sunstruck contestant in a TV survival show: “This is . . . like . . . weird . . .”

WISDOM OF THE FOUNDING FATHERS A dead man, Edmund Randolph of Virginia, attended the Constitutional Convention in Philadelphia in 1789. He explained why America needed a constitution: “The general object was to produce a cure for the evils under which the United States labored; that in tracing these evils to their origins, every man had found it in the turbulence and follies of democracy.”5

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Another dead man, James Madison, made it even clearer: “Democracies,” he wrote, “have ever been spectacles of turbulence and contention; have ever been found incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their death.”6 So, we leave you “a Republic, if you can keep it,” added Ben Franklin. Well, we couldn’t keep it. Now, we have a curious empire, with a constitution as f lexible as its money. Everybody gets a vote in this new democratic Valhalla. Every halfwit’s ballot is worth as much as George W. Bush’s. Every fool and miscreant gets to have an opinion. Only the dead, are left out. Excluded. Ignored. Forgotten. It is as if only the living had opinions worth hearing, as if only the here and now counted for anything; as if the small, arrogant oligarchy of those who happen to be walking around had all the answers; as if the present generation had found the ultimate truth and reached the end of history. Your authors have never killed anyone, but we read the obituaries with approval and interest. We look for the distilled wisdom of saint and sinner alike. (The editorial pages, by contrast, we read only for entertainment.) The trouble with the news is that it is impossible to know what is important when you must rely solely on the judgment of people who happen to be breathing. The living can imagine no problems more urgent than the ones they confront right now, and no opportunities greater than the ones right in front of them. We prefer the obituaries.

THE SECOND REICH Germany’s Third Reich is infamous. But what happened to the Second Reich? History never repeats itself perfectly. But what else can we study but history? The past may be imperfectly understood, but it is the only reference we have. Why not take a look at it? Why not shake the dust off a dead man and get his opinion? Why not venture into the land of the dead to ask some questions? “The state’s need of money increased rapidly,” writes a dead man, Bresciani-Turoni, describing the scene in Germany 80 years ago. “Private banks, besieged by their clients, found it impossible to meet the demand for money.”7

Dead Men Talking

As the situation heated up in the summer of 1923, there were some old-timers who gave advice: “Less,” they said. But officials were in roughly the same situation as Ben Bernanke, Alan Greenspan, and George Bush today. “More,” said they. They feared the economy might fall into trouble unless they made more cash and credit available. One, named Helferrich, the finance minister in Germany’s Weimar Republic, explained: To follow the good counsel of stopping the printing of notes would mean—as long as the causes which are upsetting the German exchange continue to operate—refusing to give economic life to the circulating medium necessary for transactions, payments of salaries and wages, and so on, it would mean that in a very short time the entire public, and above all the Reich, could no longer pay merchants, employees, or workers. In a few weeks, besides the printing of notes, factories, mines, railways and post off ice, national and local governments, in short, all national and economic life would be stopped.8

When an economy comes to depend on more and more credit, it must get more and more of it or that economy will come to a stop. A man who has borrowed heavily to finance a lifestyle he cannot afford must continue borrowing to keep up appearances. Or else he must stop. In market manias, love, politics, or war, people rarely stop until they are forced to. In 1921, a dollar would buy 276 marks. By August 1923, it would buy 5 million of them. Middle-class savers were wiped out. If only we could roust Herr Helferrich from his eternal sleep! We have some questions we would like to put to his wormy cadaver. (And here, we think not of praising the dead, but of tormenting them.) What fun it would be to show him what his policies—the same, by and large, as are now put forward by Greenspan, Bernanke, and Bush—provoked. How gratifying it would be to see the little kraut squirm under an intense interrogation: What was he thinking, after all? Why did he think that more of the dreadful printing press money would undo the harm that had already been done by too much? Bresciani-Turoni continues: The inf lation retarded the crisis for some time, but this broke out later, throwing millions out of employment. At f irst inf lation stimulated production . . . but later . . . it annihilated thrift; it made reform of the

I M PE R I A A BSU R DUM national budget impossible for years; it obstructed the solution of the Reparations question; it destroyed incalculable moral and intellectual values. It provoked a serious revolution in social classes, a few people accumulating wealth and forming a class of usurpers of national property, whilst millions of individuals were thrown into poverty. It was a distressing preoccupation and constant torment of innumerable families; it poisoned the German people by spreading among all classes the spirit of speculation and by diverting them from proper and regular work, and it was the cause of incessant political and moral disturbance. It is indeed easy enough to understand why the record of the sad years 1919–1923 always weighs like a nightmare on the German people.9

Surely some special corner of Hell is reserved for central bankers. Ben Strong. John Law. They are probably all down there. Maybe Charles Ponzi is with them. What do they do down there? Play cards, perhaps. Helferrich must be there too—roasting. For when he undermined the Germans’ faith in their system, their money, and their culture, did he not also pave the way to Hell for millions of his fellow countrymen? If only we could talk to them! Didn’t they sacrifice their souls, and do they not now writhe in eternal torment? And for what? Why should God make a moral example out of them if no one pays attention? Every central banker in the world has taken the devil’s bait, creating money, out of thin air, as if no one were looking. As if it had not been tried before. As if they could get away with it and people really could get something for nothing! And yet, they all seem unable to do anything different—even with the threat of scorching their fat derrieres in the afterlife.

SECRETS OF THE NEAR DEAD If the dead have secrets, what about those who are almost dead? We read an interview with Sir John Templeton. The great old man said he thought shares and houses in America were too expensive and that the United States was cruising for trouble with its trade deficit and U.S. federal deficit. He said he anticipated a long bear market in shares, falling residential real estate prices and a serious slump in the economy. Implicitly, he advised investors to hold cash.10

Dead Men Talking

The person who wrote the article then asked local analysts and stockbrokers what they thought of Templeton’s opinion. One challenged Templeton’s competence, saying that because of his advanced age (Templeton was 92), he might be “out of touch” with current thinking. Templeton was not even dead yet, and already they were shoveling the mud on his face. But being out of touch is precisely what made his opinions valuable. We like old things. Old buildings. Old ideas. Old trees. Old rules. Old investors. The older the investor, the more confidence we have in him. He has seen good times and bad times. He has seen bulls and bears. People who have been around for a long time have had an opportunity to see several cycles. An American born after 1960, on the other hand, barely came of age when the 1982 to 2002 boom began. He has never seen a sustained bear market or a period when the nation was downcast or desperate. Templeton was a young man when Wall Street crashed in 1929. He was an adult in the Great Depression. He recalls the dark days of World War II, when it looked as though the allies might lose. During his life span, there have been booms and busts, mass murders, the worst wars in history, famines, hyperinf lation, and national bankruptcies. Dozens of currencies and at least five empires have gone defunct. Dozens of coups and revolutions have taken place. Ideologies have come and gone. Thousands of banks and businesses have gone bust. Prominent careers have been ruined and reputations lost. A man who has seen so much and still has his wits about him is a great treasure. If he is still solvent, that is even better. Somehow, he must have avoided the bad ideas, bad investments, and bad advice. Innovations are like genetic mutations. Most of them are mistakes. Most fail. Old people tend to reject new ideas, new styles, and new things. This is not simply because these dogs are too old to learn new tricks. What the oldsters know—from experience—is that the new tricks are probably not worth learning. What we have around us are only the innovations that succeeded. Companies, products, ideas, governments, clubs, styles—all that we see are the successful ones. The unsuccessful innovations—thousands and thousands of them—all disappeared. Even wildly successful innovations, such as heavier-than-air f light, are not successful for everyone. Warren Buffett estimates that if you had owned the entire airline industry from the moment after Orville and Wilbur made the first f light, right up to the day the Concorde made its last f light, you scarcely would have made a dime. Many other industries

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are the same. There are companies quoted on Wall Street that make money in those industries. But they are the survivors. Many others failed long ago. Nassim Nicholas Taleb explains it in his book, Fooled by Randomness: Mathematically, progress means that some new information is better than past information, not that the average of new information will supplant past information, which means that it is optimal for someone, when in doubt, to systematically reject the new idea, information, or method . . . The Saturday newspaper lists dozens of new patents of such items that can revolutionize our lives. People tend to infer that because some inventions have revolutionized our lives that inventions are good to endorse and we should favour the new over the old. I take the opposite view. The opportunity cost of missing a “new new thing” like the airplane and the automobile is minuscule compared to the toxicity of all the garbage one has to go through to get to these jewels (assuming these have brought some improvement to our lives, which I frequently doubt).11

A young man has access to information. With the Internet, he can get all he wants. What he lacks is the “high-proof ” distilled information—the wisdom—that comes with age. Mr. Taleb continues, “A preference for distilled thinking implies favoring old investors and traders, that is, investors who have been exposed to markets the longest, a matter that is counter to the Wall Street practice of preferring those that have been the most profitable and preferring the younger whenever possible . . .”12 Testing the proposition using a mathematical model, Taleb “found a significant advantage in selecting aged traders, using, as a selection criterion, their cumulative years of experience rather than their absolute success (conditional on their having survived without blowing up).”13 Distilled information tends to be expressed as moral interdictions. Don’t steal. Don’t lie. Don’t buy expensive stocks or sell cheap ones. Don’t expect to get something for nothing. Don’t neglect your spouse. Don’t forget St. Patrick’s day. Don’t spend too much. Don’t eat too fast. Don’t drink before 6 PM. Don’t mess around with the boss’s wife. Each don’t represents lessons learned by previous generations. For every don’t, there must be a million sorry souls burning in Hell.

Dead Men Talking

Undistilled information, on the other hand, is nothing more than noise—newspaper headlines, TV babble, cocktail chatter, the latest innovation, the latest business secret, the latest fashion. It is public information, backed by no real experience or private insights. It is not useless. It is worse than useless, for it misleads people into thinking they know something.

DEAD PRESIDENTS David M. Walker, Comptroller General of the United States, clarified America’s debt situation in late 2004: “The Federal government’s gross debt—the accumulation of its annual deficits—was about $7 trillion last September, which works out to about $24,000 for every man, woman, and child in the country,” he announced. “But that number excludes items like the gap between the government’s Social Security and Medicare commitments and the money put aside to pay for them. If these items are factored in, the burden for every American rises to well over $100,000.” We add to Walker’s lament: As we will see, $7 trillion is chicken feed. The real debt is far higher. Plus, one out of every four dollars spent by the federal government is borrowed. And for every dollar that comes in the door from income taxes, the feds borrow another 80 cents. Economists used to worry about government using up the nation’s savings. But now Americans have no more savings to use. Still, the nation that can’t save a dime sets out to save the entire planet. The cost is as monumental as the project. Taking out Social Security surpluses, federal deficits are expected to be about a half trillion dollars each year for the next 10 years—or $5 trillion in total (half of gross domestic product, or GDP). We put no exclamation point following that last sentence, because the numbers shriek without one. Still, America’s economists are deaf to the problem, just as its policymakers are dumb to any solution. After all, in the words of Dick Cheney: “Deficits don’t matter.” Meanwhile, the private sector also has been running up immense debts. In 2005, for every $19 Americans earned, they spent $20. This difference was recorded in the trade deficit figures, measuring the speed at which Americans raced down the road to ruin. Top speed as of this writing was $58.3 billion. That was the figure for January 2005 when the nation was clocked overspending at a rate of almost $2 billion per day. It was the difference between what Americans sold to foreigners in the month of

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January and what they bought from them. It was a negative number. On a chart of the nation’s accounts, it would be in red. Or in brackets. Or preceded by a minus sign. If it were divided among the nation’s families, it would come to about $600 for each one. This represents only a single month’s trade deficit, so we should multiply it by 12 to get the measure of damage on an annual basis: $7,200 per family per year. Compared with the average family’s income, it is such a big number that we wondered if we had done the arithmetic correctly. On a macroeconomic scale, the shortfall was rising to 6 percent of GDP. In the old days of the gold standard, the nation on the plus side of this exchange would pile up its excess foreign currency and take it to the other nation’s central bank. Gold was the common reference and an uncommon restraint. It was real money. If a nation ran out of gold, it ran out of money. It could no longer borrow. It could no longer run trade deficits, because when the foreign currencies were presented to it, it would have no means of settling up. It would have to declare bankruptcy, which happened from time to time. But it has been 34 years since the United States settled its overseas obligations in gold. Since then, it has found it far easier to offer U.S. dollardenominated Treasury bonds. Remarkably, the foreigners have accepted them as if they were as good as gold. More remarkably, for most of that time the bonds were not only as good as gold—they were better. Gold fell in price for two decades following Ronald Reagan’s first presidential election. Overseas central bankers took the Treasury bonds and felt grateful, even lucky, to have them. The United States was just too lucky. It could spend without really paying. It could borrow without ever really paying back. It could dig itself into such a deep hole of debt, it could find no easy way out. Among the noisy headlines of 2005 was the remarkable information that China—a Third World nation—lends the United States $300 billion per year. Without Chinese support, the dollar would have already collapsed, bond yields would have soared, and the U.S. economy would be in a recession, if not a depression. Where does the money come from? The Chinese get the dead presidents from selling products to live Americans, who seem ready to consume anything that comes their way. First, the dollars come rolling off U.S. printing presses, then they make their way into the hands of Chinese

Dead Men Talking

and other manufacturers, and finally, they are returned to their birthplace as loans. China is fast becoming America’s “company store,” to whom we owe our standard of living and maybe even our soul. By the end of 2004, two central banks—Japan and China—held almost a trillion dollars’ worth of U.S. Treasury bonds. On their willingness to save and to recycle savings into U.S. Treasury bonds stood the U.S consumer economy. A single word from either central bank could send the U.S. economy into a severe slump: sell. And thus comes an even more remarkable curiosity: “In an era of free trade,” began a complaint from Treasury Secretary John Snow, “we should not have to confront the issue of countries distorting their currencies to gain unfair trade advantages.”

The specific country to which Snow referred was China. The trade advantage the latter enjoyed was that it sold much more to the United States than the United States sold to it, by a ratio of 5 to 1. And the unfair distortion was that China pegged its own currency to the dollar. In the spring of 2005, the exchange was called “manipulation”; the United States demanded that China revalue by 10 percent. How were the Chinese manipulating the yuan? By fixing it to the imperial currency! Oh, that was clever, wily, diabolical. The Chinese insisted on maintaining their 10-year-old policy of pegging the yuan to the dollar. The United States counts on a steady devaluation of its money. It buys from overseas and pays in dollars. Then, in effect, it prints up more dollars to replace those it has shipped overseas. The resulting inf lation of the currency—ref lected in the increase in prices of oil, gold, and other internationally traded goods—is a form of imperial tribute. It is America’s only way of making the empire pay. As the dollar goes down, the trillions of dollars held in foreign accounts become less valuable. An “exorbitant privilege,” said Charles de Gaulle. But the Chinese refused to play along. As the dollar went down, so did their yuan. Instead of raising prices on Chinese goods and lowering the value of Chinese dollar holdings relative to its own currency, everything remained even. The Chinese weren’t paying their tribute. Americans were indignant. A Senate committee said it would rewrite the law of the land to make what the Chinese were doing qualify as

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currency manipulation. Bush administration officials gave the Chinese a deadline to shape up. In the summer of 2005, the Chinese finally announced that they were giving up the dollar peg, or at least widening “the channel” a little. But the problem was never caused by China. An entire American generation has grown up being told that it could spend its way to prosperity. Snow, McTeer, Greenspan, Bernanke—they all still believe it. Debt is no problem, they say. Spend, spend, spend. American spending created a boom in China, where the average person works in a sweatshop, lives in a hovel, and saves 25 percent of his earnings. Americans had come to believe there was something unfair about China’s trade practices, that they must be stealing jobs with a distorted currency, instead of competing for them fair and square. Meanwhile, in the United States, the average man lives in a house he can’t pay for, drives a car he can’t afford, and waits for the next shipment from Hong Kong for distractions he can’t resist. He saves nothing and believes the Chinese will lend him money forever, on the same terms. That this cannot go on forever hardly seems worth pointing out. Whether it will go on much longer, we cannot say. But that it will end badly seems a cinch. We can barely wait to find out how it all turns out. Maybe a year from now. Maybe 2 . . . 5 . . . 10 years. We want to know the precise date on which the imperial consumer credit economy stops muddling through. For it must shake, rattle, and roll over some day. Everything does. The day may come and go without notice. The world created in the pax dollarium era may end with scarcely a whimper and no bang whatsoever. But it will end. Then the dead will cluck: ‘I told you so’.

2 Empires of Dirt ong is the historical record of empires. Short is the list of common elements. There are “good” empires. And bad ones. There are ones in which the imperialists get rich and others in which they become very poor. There are some in which the imperium functions with the brute elegance of a guillotine; in others, the complexities and subtleties baff le historians. But among all the empires that have come and gone, the U.S. imperium stands out as the most absurd. The absurdity arises at the most basic level. Seeking to deceive, the Ivy League Alexanders and the Plain State Caesars deceived themselves more than anyone. From the very beginning, they knew not what business they were in. We can enjoy a superior chuckle at the screwball humbug of it. Historians of the future are likely to get cramps from laughing. But economists—when they finally come to their senses and realize what is happening—are the ones who will revel in the biggest joke. The only reason they are not palsied with mirth already is that they have missed the punch line. This is the funniest and most preposterous scheme of imperial finance the world has ever seen; when they finally get it, they will laugh till it hurts. At the risk of spoiling a great joke, we will explain it. The typical program for imperial finance is simple. The imperial power, the imperium, provides—at its own initiative—a public good; it extends security and order. In return, the groups that benefit pay tribute. The imperium should not merely breakeven; it should make a profit. Living standards in the homeland should rise, compared with those in vassal states. Even the

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Austro-Hungarians got that right, as a trip to Vienna will easily confirm. The city got rich in the nineteenth century. America provides a pax dollarium for nearly the entire world. But the United States does not take direct tribute from its vassal states and dependent territories for providing this service. Instead, it borrows from them. Living standards rise in the United States. But they are rising on borrowed money, not on stolen money. The big difference is that America’s vassal states can stop lending at any time. If they care to, they can even dump their current loans on the open market destroying the U.S. dollar and forcing interest rates so high that a recession—or depression— is practically guaranteed. What is worse, the longer the present system continues, the worse off Americans are. The closer you look at it, the larger the absurdity becomes. In the first half of 2005, Americans got poorer, not richer—at the rate of $80 million per hour. Their system of imperial finance was impoverishing them. Even that is not the worst of it, because it also reduced their ability to compete in the modern economic world. While they were providing a public good—at a loss—their competitors were saving money, building capital and expertise, setting up factories, and taking market share away from them. Each year, Asians produce more of what Americans buy, and Americans produce less of what anyone buys. Products leave Asia for North America. Money leaves North America for Asia. The money comes back to America within days. America’s economists breathe easy. What is there to worry about, they ask, as long as it comes back to us. “It is a form of tribute,” they claim; the empire works. But it works in a perverse way. The money that comes back is not the same as the money that left. It has been transformed: It goes out as an asset and comes back as a liability.

THE HUNS ARE COMING! For many centuries, Europeans had nightmares. Periodically, barbarian invaders from the East came in waves from the steppes of Eurasia. Celtic tribes pushed out or exterminated whoever was there before them. Then, new groups came after them. Mounted on horseback, they came fast and hard. They so terrified the more settled communities that the tribes

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picked up and pushed to the west. Germanic tribes eventually pushed the Celts to the far corners of Europe and later sacked Rome. The Huns were barbarians. They were ruthless, cunning, fearless, and were reported to be invincible in battle. What chance was there against them? In market terms, this was a good time to be “short” Europe. A fund manager might say that he chose to “underweight” the Old World. It was a time when the expansion of the previous period was likely to be corrected. There would be wailing women and gnashing of teeth. It was a time when fear and despair would likely dominate. It was a sell signal for the growth of civilization and commerce, which tend to go hand in hand like a prisoner with his police escort. Politics and war are not zero-sum games. For every winner there is not a loser. Nor is a dollar gained for every dollar that is lost. Instead, the destruction of war and the costs of politics make them net losing propositions always. Most people lose. Wealth disappears. As a whole, people are poorer. But, as in a bear market, some people gain from war. Those who win the war feel like winners, even though they may be poorer and many of their comrades may be dead. A few contractors and speculators actually make money on war. The barbarian invasions of Europe had their bright side. The barbarians were in their expansion phase—their bull market stage—with rising expectations and positive, bullish hopes. They were getting something, not for nothing, but for next to nothing. What was the effort of killing a man compared with the wealth it brought the killer? A small investment. A trif le really, and an enjoyable one for many people. But conquest was not without risk. There are no completely free lunches, even for thieves and murderers. The Huns took a risk. On the upside were booty, women, slaves—and the pure exhilaration of battle and the prestige of conquest. On the downside, they might be defeated and killed. The Hun might have been a sell signal for civilization, but he was a buy signal for his own fortunes, his status, his group, his empire, and his genes. It was a time to be “long” politics: There is a time to plant, to reap, and to trade with others peaceably. And there is a time for force, for taking what you want without paying for it and for killing anyone who gets in your way, for the Hunnish invasions meant rape, not for sweet talk and courtship. They meant theft, looting, and pillage, not further elaboration

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of property rights or the division of labor. Things got simpler, more brutal, mean, and nasty; lives were shortened. It was not a time to be in the insurance business. What caused the periodic invasions no one knows. Perhaps good weather out on the plains produced population explosions that caused the nomads to expand. Perhaps bad weather caused famine that sent hungry mouths in search of someone else’s meat and grain. Historians don’t know. But fear of the barbarians from the steppes has been a chronic theme of Western history—particularly among the Teutonic tribes that were most exposed to them.

THE GREAT KHAN Perhaps the most successful empire builder of all time was a leader of one of these periods of barbarian expansion—Genghis Khan. Since the time of the Romans, it has been fashionable to put a civilized mask on your face when you put the imperial purple on your back. You are bringing religion to the heathen. You are bringing civilization to the indigenes. You are bringing culture, education, and technology. Even Alexander the Great thought he was doing the world a favor. Conquerors do not like to admit—even to themselves—that their instincts are no different from those of barbarians. They have better table manners. But they are subject to the same urges as Genghis or Attila. Bloodlust, prestige, power, status— who can deny that it would be a thrill to conquer a whole city or an entire nation? But empire builders typically put on the imperial purple like a set of angel’s wings, leap off the balcony, and come down with a thud. Genghis Khan needed no mask. The man showed his face as it really was. He united the Mongolian tribes in about 1129 and beginning with a series of attacks on northern China, he embarked on a spectacular epic of mass slaughter and rapine from which two empires were derived. One of them, the Ottoman Empire, lasted until the end of World War I. The Mongol hordes overran northern China, Tibet, Persia, nearly all of central Asia and the Caucasus, Korea, Burma, Vietnam, Anatolia, and much of Russia. They attacked India and eventually, in 1526, Babar, one of Genghis Khan’s descendants, set himself up as emperor of the place. In China, too, Genghis’s descendants founded the Yuan dynasty, which ruled until nearly the fifteenth century.

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All empires have to pay, in one way or another. The Mongols made theirs pay in the most elemental, and probably most satisfying, way. From an evolutionary point of view, all human activity has a single purpose—to propagate one’s genes. A man tries to get rich or get elected to demonstrate that he is the sort of fellow a woman would want to mate; he will produce offspring as capable as he is; and he has the resources to take care of them. In this sense, history records no more spectacular success than the great Genghis Khan. At one point, Genghis was told by his generals that the sweetest pleasure in life was falconry. “No,” the empire builder is said to have replied, “You are mistaken. Man’s greatest good fortune is to chase and defeat his enemy, seize his total possessions, leave his married women weeping and wailing, ride his gelding and use the bodies of his women as a nightshirt and support.”1 Genghis was so successful that a recent DNA study of 2,123 men from across Asia permitted scientists to estimate that he may have as many as 16 million male descendants spread out from Manchuria to Afghanistan. Genghis made the empire pay in another way, too. He imposed a rough income tax tribute on all his subject peoples. The rate was only 10 percent—considerably less barbaric than today’s rates. Now that Mongolia is free from Soviet rule, its citizens are beginning to take a renewed interest in the man so many of them can trace as an ancestor. “Within this rapidly changing world, Genghis Khan, if we acknowledge him without bias, can serve as a moral anchor. He can be Mongolia’s root, its source of certainty at a time when many things are uncertain.”2 We quote that passage from the Harvard Asia Pacific Review merely to embarrass Professor Tsetsenbileg, of the Mongolian Academy of Sciences, who said it. Genghis Khan may be popular in Mongolia, but it just raises questions about the Mongolians. “All who surrender will be spared; whoever does not surrender but opposes with struggle and dissension, shall be annihilated,”3 said Genghis before attacking the ancient cities of Bukhara and Samarkand. It has been estimated that his campaigns killed as many as 40 million people based on census data of the times: Genghis Khan preferred to offer opponents the chance to submit to his rule without a f ight, but was merciless if he encountered any resistance.

I M PE R I A A BSU R DUM Genghis Khan’s conquests were characterized by wholesale destruction on unprecedented scale and radically changed the demographics in Asia. According to the works of Iranian historian Rashid al-Din, Mongols killed over 70,000 people in Merv and more than a million in Nishapur. China suffered a drastic decline in population. Before the Mongol invasion, China had about 100 million inhabitants; after the complete conquest in 1279, the census in 1300 showed it to have roughly 60 million people. How many of these deaths were attributable directly to Genghis and his forces is unclear.4

But those were also the days when a man lied to exaggerate his murders, rather than cover them up. Genghis Khan was proud of killing people. In a way, he should have been; he did it so well. But how could so few have done so much to so many? The entire population of Mongolia could not have exceeded about 200,000 persons. Military historians argue that it was largely because the Mongols were so bloodthirsty, so merciless, so fanatical, so fast, and so lethal that they were hard to stop. They were superb horsemen, frequently without infantry support, who were able to move more quickly than their more sedentary enemies much like panzer divisions in World War II. Their ghazi was a forerunner of today’s jihad. Their composite bows were like today’s Kalashnikovs (a Russian-made rif le that can fire bullets continuously). And they had a sophisticated system of communications that included semaphorelike information exchange on the battlefield and a pony express relay of “arrow riders” shooting across the prairies. With these advantages, they took what they wanted and killed everyone who got in their way. It was not a very polite way to run an empire, but it worked. Genghis died in 1227. His son Ogedei was elected to succeed him. Those who think democracy deters state violence do not bother to talk to the dead: Mussolini, Hitler, and Ogedei Khan all won office, at least in part, thanks to the ballot box. After his election victory, Ogedei Khan continued his father’s expansion. He pushed farther into northeastern Asia and conquered Korea and northern China. By the time of his sudden death in 1241, his armies were on the frontier of Egypt and present-day Poland. But democracy cut them off. Mongol law required that the new Khan be chosen by a new vote of Genghis’s descendants. Were it not for this interruption, the Mongol armies might have pushed beyond the Rhine and thrown Europe into a new Dark Age. As it turned out, by the

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time the Mongols had chosen a new leader—Genghis’s grandson, Mongka—the momentum in Europe had been lost. In 1257, the Mongols turned toward Baghdad. Hulagu, another grandson of Genghis, demanded that the caliph of Baghdad, al-Muta’sim, receive him as his sovereign, just as he had done with the Seljuk Turks when they swept over the area. But the caliph of Baghdad was the 37th of the Abbasid dynasty and leader of Muslims throughout the Middle East. He believed that his people would come to his aid against the infidel. They did not, and Hulagu marched on Baghdad with an army of hundreds of thousands of cavalry, wiping out the old Assassin fortress at Alamut on his way. The caliph realized his mistake. He offered Hulagu the title of “Sultan.” Hulagu’s name would be given at Friday prayers in all the mosques of Baghdad, he added. Later, the caliph went in person to see Hulagu. This time, he said his citizens would lay down their arms if the Mongols would spare their lives. But as soon as their swords and bows had been collected, the Muslim fighters were exterminated. Then the Mongols went to work on the civilians. Eighty thousand men, women, and children were massacred. The caliph was strangled. The only people not killed in Baghdad were the Christians. Mongka Khan’s mother was a Nestorian Christian. At one point, perhaps at her urging, the Mongols sent emissaries to the King of the Franks, who was then fighting their mutual enemies—the Muslims—in the Holy Lands. The Mongols offered to turn to Christ, but his suggestion seems to have been ignored so he turned East, instead of West. Mongka Khan died just as his armies were about to attack Cairo. The next Khan, Kublai, moved the Mongol court to Beijing and founded the Yuan dynasty. Something about the Baghdad area must attract empire builders the way a beehive attracts bears. Only a few miles away is the site of ancient Ctesiphon—a city that was taken and retaken at least 36 times before it was finally destroyed after the Saracens took it in AD 637. The Romans took the place five times, three times in the second century alone. Before that, the Hittites, Akkadians, Persians, Parthians, Sassanids, Macedonians, and countless others had already left their sandalprints between the Tigris and Euphrates. Emperor Trajan captured Ctesiphon in AD116 and made it part of Rome. The next year, Hadrian gave it back to the Parthians in a peace settlement. In 164, it was again taken, by Roman general Avidius Cassius,

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but later abandoned. Then, Septimus Severus finally made the campaigns pay when he took the city in 197. He sold as many as 100,000 of the city’s citizens into slavery. A hundred years later, the city was again in the news. Emperor Galerius was defeated outside the city walls by an army of Persians. In 296, he sought a rematch and this time won the city, which he traded for Armenia. Much later, in 627, Heraclius, took the city. The Western Empire was already history, but Heraclius ruled brief ly from Constantinople. He gave up the city soon after its capture. Ten years later, it fell to the Saracens and was soon in ruins. A British army was defeated by Ottoman forces in 1915, but regained title to the city in the Treaty of Versailles. Later, the British readily let go of Baghdad, after they realized how expensive it was to hold on to the place. It gained its independence along with other British imperial possessions in 1921. More recently, the city was once again taken by American forces.

WHERE HAVE ALL THE DEAD EMPIRES GONE? Of all the silly things people said toward the end of the twentieth century, perhaps the silliest came out of the mouth of Francis Fukuyama. The man was so infatuated by the apparent success of the American imperium, he believed the “end of history” might have arrived. What is the history of this tattered ball but the record of the rise and fall of civilizations, of governments, of battles and heroes? But so perfect in Fukuyama’s eyes was the new American empire, he thought it had risen beyond the tug of gravity. So, solidly launched was the rocket of democratic capitalism that he could not imagine that it would ever fall to earth. Nor could he fathom how anything could ever compete with it or take its place.5 Fukuyama did not seem to appreciate how history works. Politics, like markets and love affairs, often throws up periods of relative contentment, as well as sour periods of despair and bubbles of temporary insanity. If they last for more than a generation, people think they are permanent. In the case of bubbles, people believe that some new era has arrived and that things will never be as they were before. Bubble markets—such as the tech bubble in the late 1990s or the residential property bubble in certain areas of the United States in 2004 and 2005—come along from time to time. People take leave of their senses. They are willing to buy things at

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twice, three times, ten times prices they would have judged too high just a few years before. In the famous Tulip Bubble in Holland from 1634 to 1637, people paid up to 5,000 guilders for a single tulip bulb. In the South Sea Bubble in England, in 1711, speculators paid up to 1,000 pounds for stocks that were reduced to nothing by the latter half of 1720. In the Japanese Bubble of the late 1980s, investors paid such high prices for real estate in downtown Tokyo that the grounds of the Imperial Palace were said to be worth more than the entire state of California. Investors pay extravagant prices because they are convinced that something fundamental has changed and that they will never again have an opportunity to buy at current prices, no matter how high they have become. They believe the world will never be the same, that the rules that govern human activity have been altered or suspended. Markets make opinions, the old-timers say. It is an expression we return to several times in this book. As prices rise, people invent explanations for why they have gone up and they will continue. In the case of the tech bubble of the late 1990s, they told themselves that new developments in electronic communications had completely changed the ancient relationships. Thanks to computer-driven devices and the Internet, material progress was about to accelerate. Assets were about to get much more valuable. It did not bother them that the two propositions were contradictory. A society in which the future comes faster should logically depreciate the present more quickly. Factories, means of production, and capital assets should be expected to become obsolete sooner and thus should be worth less, not more. But no one thinks very hard when markets are rising. This is true of the real estate bubble on both coasts in 2004 and 2005. Houses in Southern California were increasing in value at four times the rate of gross domestic product (GDP) growth and an infinitely great multiple of real income growth—which was negative. It made no sense, but who mentioned it? Prices were rising; investors had no trouble coming up with reasons. It was a new era, they said; property would never again be worth what it used to be. In politics, too, there are bubbles—times when the horizon is so clear and cloudless, people begin to think it will never rain again. The old principles—the wisdom of the dead and the virtues that brought them to where they are—no longer matter. It is a new era. They are the imperial power, the hegemon, the cock of the walk. They are on top of the world and are looking for reasons they will be there forever. But the reason

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comes to them readily. They look in the mirror, and there it is. Instead of their own faces, however, they see only the dull, puerile masks they have put on. It is as if they all have become candidates for president; they are “hollow dummies,” to use Orwell’s expression—vain imposters, pretending to be something even dimmer and less interesting than they actually are. They look in the mirror and think they see a race so clever, virtuous, sturdy, and industrious that they deserve to be on top of the world. Surely, they have created something that can never be matched. All of history has been marching toward this perfection. Time has stopped. History has come to an end; there is no need for any more of it. In 1989, American democratic imperialism triumphed unmistakably against its adversary— the Evil Empire. The Good Empire was the last one standing. God had shined his light on us and would never turn it off. Many people said many dumb things in the twentieth century. Usually, they were only mistakes or lies. When Neville Chamberlain said we would have “peace in our time,” he was making a prediction. He was wrong. But if you hung everyone who guessed wrong about the future, the lampposts and traffic lights of Wall Street would be full of bodies. And when Adolph Hitler said Germany needed lebensraum, he was merely covering up his desire for conquest by putting on a mask. But when, after the Berlin Wall fell and Francis Fukuyama declared the end of history, he must have made the gods chuckle. Here was a ref lection so vain and imbecilic, it practically cracked mirrors. It was as if Fukuyama never actually read any history. Empires are living things. They are born; they must die, too. No one conquers without eventually being conquered. No bubble expands without eventually blowing up. There are no exceptions. All empires die. Here, for amusement, we look at the gravestones (see Table 2.1). Only one, and that one of relatively recent naissance, still lives. But the grave and the tombstone are there, waiting for it. Fukuyama’s concept was that the desire for power, glory, conquest, revenge—all the dark forces of destruction and regression—had disappeared. They had been replaced by an evolving civilization of consensual, democratic government and market-driven material progress, led by an enlightened U.S. imperium. This is what America offered the world— peace and prosperity. But even a casual look at the historical record would show that neither empires nor democracy are any guarantee of peace or prosperity.

Empires of Dirt TABLE 2.1

EMPIRES THROUGHOUT HISTORY

Empires are living things with a logic of their own. They are born; they must die, too. No one conquers without eventually being conquered. No bubble expands without eventually blowing up. In history, there are no exceptions. ● ●

● ● ● ● ● ● ● ● ● ● ●

● ● ● ● ● ● ● ● ● ● ● ● ●

Abyssinian Empire (1270 –1974) Achaemenid Empire (commonly known as the Persian Empire) (c. 550 –330 BC) Akkadian Empire (c. 2350 – 2150 BC) American Empire (1917– ) Arabian Empire (c. 630 – 1258) Assyrian Empire (c. 900 – 612 BC) Athenian Empire (c. 500 – 300 BC) Austro-Hungarian Empire (1867–1918) Austrian Empire (1804–1867) Aztec Empire (1375 – 1521) Brazilian Empire (1822 –1889) British Empire (circa 1583 – )De jure* British Raj (1858 –1947) (Imperial: 1877–1947) Byzantine Empire (395 –1453) Central African Empire (1977–1979) Chinese Empire (221 BC –1912) Dutch colonial empire (1627–1814) Egyptian Empire (1550–1070 BC) First French Empire (1804 –1815) Second French Empire (1853–1871) French colonial empire (c. 1605 –1960s) German Empire (1871–1918) German colonial empire (1884 –1918) German Third Reich (1933 –1945) Golden Horde (1378 –1502) Greater East Asia Co-Prosperity Sphere (1940 –1945)

● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Haitian Empire (1804 –1806) Hittite Empire (c. 1460 –1180 BC) Holy Roman Empire (843–1806) Inca Empire (1438–1533) Ilkhanate (c. 1256 –1338) Japanese Empire (1871–1945) Khmer Empire (802–1462) Kongo Empire (c. 1230 –1665) Korean Empire (1897–1910) Macedonian Empire (circa 338 BC –309 BC) Mexican Empire (1822–1823, 1864 –1867) Mogul Empire (1526 –1857) Mongol Empire (1206 –1294) Old Babylonian Empire (c. 1900 –1600 BC) Ottoman Empire (1281–1923) Persian Empire (c. 648 BC –330 BC) Portuguese Empire (1495 –1975) Roman Empire (31 BC –AD 476) Russian Empire (1721–1917) Sassanian Empire (224 – 651) Seleucid Empire (323 BC – 60 BC) Seljuk Empire (c.1037 AD–1194 AD) Spanish Empire (1492–1975) Swedish Empire (1561–1878) Timurid Empire (1401–1505) Ur III Empire (c. 2100 –2000 BC) Vijayanagara Empire (c. 1350 –1700)

For proof that empires are hardly peaceful places, we turn to the history of Rome. And here we offer readers a history of the rise and fall of the world’s greatest empire as brief as the latest Italian underpants. THE ROMAN EMPIRE In the eighth century BC, Rome was nothing more than a collection of villages along the Tiber, inhabited by several tribes, principally Latin, Sabine,

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and Etruscan. Gradually, these Romans grew in numbers and power, and went to war with almost everyone. They were already constructing an empire before the fifth century BC. In a celebrated early incident, perhaps only legendary, they invited their neighbors, the Sabines, to a feast and then stole their women. The Sabine men were not happy; they took offense and nursed a grudge. But there was hardly a tribe, kingdom, or empire in Europe, North Africa, or the Middle East with whom the Romans did not pick a fight. After the Sabine war, there were wars against the Albii, Etruscans, Volcii, Carthaginians, Etruscans again, the Latin League (and this is only a partial list), the Volsquii, Equii, Veieii, Gauls, Samnites, more Gauls, Epirians, Carthaginians again, and more Gauls, Macedonians, Syrians, Macedonians again, slaves in Sicily, Parthians—and even Romans in the civil wars. And we have not even arrived at Caesar’s wars against the Gauls in 58 to 51 BC. Roman history has another 500 years of wars to go! The civil wars in the first century BC put an end to the Republic. Then, Caesar crossed the Rubicon, and it was a new era in Rome. It was as if Tommy Franks had decided to move his army to Washington, DC, and make a regime change of his own. Some people would object, of course (the liberal papers would howl), but most people wouldn’t care. In ancient Rome, as in modern Washington, people chose their ideas the same way they chose their clothes—they wanted something that not only did the job, but was also fashionable. And at the time, it was à la mode for emperors and individuals alike to pretend they lived in a free republic that honored citizens’ rights. But in practice, the government, and its leader, could get away with almost anything. And what they seemed to like doing was going out and making war against everyone they thought they could beat. That is what Empires do. Back then, war was a paying proposition. When Emperor Trajan took Ctesiphon (near modern Baghdad), he captured 100,000 people who were sold into slavery. When Augustus took Egypt, he used the Nile’s wheat harvest to feed the growing population of rabble in Rome. But while some people came out ahead, in the aggregate, wars then— as now—were negative gain enterprises. And as the empire grew, the costs also mounted, to the point where both became grotesque and insupportable. Octavian, under the name Augustus, was installed in 27 BC. The Romans only used pure gold and silver coins, but Augustus needed more money to finance his wars and domestic improvements. There were no government printing presses capable of running off a batch of $100s in a few

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seconds. Nor was there a global bond market, from which he could raise billions in loans overnight. All he could do was to order the governmentowned mines in Spain and France to work overtime. Around the clock, miners dug out the precious metals. The money supply rose. As the supply of something rises relative to the supply of something else, the value of the former declines relative to the latter. Thus, did prices rise in Rome as more money chased the same quantity of consumer goods. Between the day Augustus came to power and the day Jesus Christ was born—a period of 27 years—consumer prices nearly doubled. Augustus, or his advisors, realized the problem. They cut back the money supply and prices stabilized. Rome wasn’t built in a day, nor was its money destroyed overnight. In AD 64, in Nero’s reign, the aureus was reduced by 10 percent of its weight. Thereafter, whenever the Romans needed more money to finance their wars, their public improvements, their social welfare services and circuses, and their trade deficits, they reduced the metal content of the coins. By the time Odoacer deposed the last emperor in 476, the silver denarius contained only 0.02 percent silver. THE INVINCIBLE ARMADA The impulse to build up an empire seems to be as strong as the impulse to tear one down. To the question, when does a country aim for empire, comes the answer: whenever it can. Every country in Europe has at one time or another reached for the imperial purple. Portugal and Spain discovered and conquered vast jungles, swamps, and pampas, and built empires for themselves. For Spain, the conquests were extremely profitable after they found huge quantities of gold and silver. But nothing ruins a nation faster than easy money. The money supply grew larger with every ship’s return from the New World. People felt rich, but prices soon soared. Worse, the easy money from the new territories undermined honest industry. In the bubble economy of the early sixteenth century, Spain developed a trade deficit similar to that of the United States today. People took their money and bought goods from abroad. By the time the New World mines petered out, the Spanish were bankrupt. The Spanish government defaulted on its loans in 1557, 1575, 1607, 1627, and 1647. Not only was the damage severe, it was longlasting. The Iberian Peninsula became the “sick man of Europe” and remained on bed rest until the 1980s.

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If empires are to endure, they must pay. But if they pay too well, success ruins the homeland. In the summer of 1588, the Invincible Armada of King Philip II of Spain headed toward the Low Countries. You and I, dear reader, can spot the error already. Philip would have done better to call his f leet the “Almost Invincible Armada,” or perhaps even better, the “Best Little Armada We Could Put Together at the Time.” Calling an armada invincible is like calling a WorldCom unbeatable; it is a challenge to the gods and an invitation to destruction. The Armada’s mission was simple, but not easy—to pick up soldiers in the Netherlands and transport them to England. It had been 500 years since anyone had attempted an invasion of England. The last assault, led by William, Duke of Normandy, had been a big success. Philip was ready to have a go at it again. The reasons for the campaign were not so simple. In the jargon of today, he might have labeled his effort a “War on Terror,” for English pirates had been terrorizing Spanish shipping for years. The pirates were not necessarily sponsored by the English crown. But they, literally, found safe harbor in English ports, similar to the way al-Qaida found Afghanistan hospitable. Of course, there was more to it. Religion played a part. Just as George Bush’s War on Terror has a subtext of religion, so did Philip of Spain’s campaign against England. Henry VIII of England had rejected the authority of the pope and set himself up as head of the Church of England. When his daughter, Elizabeth, ordered the execution of her Catholic rival, Mary Queen of Scots, Philip (who had been king of England 30 years prior, when he was married to Mary I) thought the time had come for action. By 1588, Spain had become a powerful empire—with colonies in the New World that had made them rich. Money poured into Spanish coffers during the sixteenth century—the country imported it the way the United States imports big-screen televisions, giving little in return. What a magnificent system of imperial finance. Ships went west with soldiers and came back with gold and silver. It was almost as good as America’s system. In 2005, ships went west from Long Beach and Seattle almost empty. They came back full to the gunwales with Asian-made goods. And like America’s system, Spain’s trade was almost too good to be true. Anything that must come to an end must come to an end somehow. Great empires look for ways to destroy themselves. They usually have lit-

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tle trouble finding them. In 1588, Spain found the English f leet—and the North Sea. History records the Battle of Gravelines as one of the world’s most important naval engagements. The Spanish ships were trapped against the Flemish coast. The Spanish commander, the Duke of Medina, decided to use a portion of his f leet to hold off the English, while the rest made their way to open water.6 The English engaged the defending Spanish ships with a 10-to-1 numerical advantage. Soon, three of the huge Spanish galleons were sunk, with 600 Spaniards killed and more than 800 others wounded. “The decks ran with their blood,” said eyewitness accounts.7 Most of the English ships, having done their work and run out of ammunition, sought their ports. The Spanish, badly battered and realizing their cause was doomed, decided they could not fight their way back through the Channel. Instead, they sailed north intending to make their way around Scotland (though they had neglected to bring maps of the area) and thence back to Spain by the open Atlantic. What the English began, the gods finished. On September 18, 1588, the Spaniards ran into one of the worst storms ever to smash into Scotland. In high seas off Cape Wrath, the Invincible Armada proved vincible; it broke up. Some ships sank; others ran out of food and water. In an effort to keep the leaky vessels above water, sailors manned the buckets day and night, but many soon ran out of energy or died of scurvy, dysentery, and fever. The sun was never supposed to set on Philip’s Spanish empire. But it sank along with the armada in 1588. Financially, Spanish fortunes had begun taking on water long before. “The mines of Brazil were the ruin of Portugal, as those of Mexico and Peru had been of Spain; all manufacture fell into insane contempt . . .” explained Alfred Thayer Mahan in his opus, The Inf luence of Sea Power upon History, 1660 –1783, “The tendency to trade, involving of necessity the production of something to trade with, is the national characteristic most important to the development of sea power.”8 Prices rose sharply in the sixteenth century. As a result of the increase in the money supply caused by the gold and silver shipped in from the colonies, prices in all of Europe went up 400 percent. Then, when the mines and robberies eased off after 1580, the inf lationary boom was over. A long depression began on the Iberian Peninsula. The Spanish and Portuguese were victims of their own good fortune.

3 How Empires Work othing is born but from another living thing. No empire ever arose without some link to its predecessors. But the system of imperial finance in the United States bears little resemblance to its immediate predecessor, the British Empire. There are no colonies from which we buy raw materials at discount prices. And there are few U.S. factories for turning raw materials into salable products. Nor does the American imperium bear much likeness to the imperial finance systems of the Germans, the Austro-Hungarians, the Romans, the Greeks, or the Mongols. But there is a slight family resemblance in the Spanish colonial empire. Ships went to the New World from Spanish and Portuguese ports armed with soldiers, provisions, and colonial administrators. They came back laden with gold and silver. Gold and silver was real money. It could not be easily replicated, counterfeited, or called into being with the stroke of a keyboard. Still, the increase in money—with no corresponding increase in productive output—was fatal to the Iberians. They spent without really earning. They consumed without producing. When the f low of easy money stopped, they found that real money had made them really poor, not rich. America’s impoverishment is even more ridiculous. She is sustained by foreign wealth, but without real money. It is merely paper money without the paper—electronic registration of units of paper money. It is a mirage—a chimeric representation of something that doesn’t exist anywhere. For every additional dollar the U.S. Treasury calls into being, there is no extra dollar of savings, no extra dollar of profit, not even the

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paper dollar itself. At least the gold taken from Latin America is still around today and is still valuable. The dollars created by the Treasury are likely to disappear completely. The United States entered the empire business in the late nineteenth century. She was able to straighten herself out for a few years but the lure of it later became irresistible. Between 1917 and 1971, the country was transformed from a simple republic that mostly minded its own business to a grandiose empire with imagined interests and real troops nearly everywhere. In normal places at normal times, people go about their normal lives earning a living the best they can. But an empire changes the way people think. The common householder turns away from his humble house and his spouse and begins to think about the fair world beyond his kith, kin, and ken. He looks outward and sees how much better the world could be if he and his fellow citizens could run it their way. He sees that he must play a greater role in global affairs that he must walk on the world stage, not as a bit player, but as the main character—the hero. He must play the lead role. Instead of sticking to their looms, fields, and factories, the imperial citizens begin to appreciate the financial logic of empire: They enjoy the loot that comes from the far edges of the imperial system. Gradually, they neglect their own commerce and depend on their subordinates, lackeys, and subject peoples to support them. While administrative commands, fashions, and proclamations f low from the center of the empire to the extremities, there also is an important f low in the other direction. Rome brought in its wheat from Egypt (Romans needed bread), its gladiators from the Balkans (Romans wanted circuses), its soldiers from Gaul, and its money from foreign treasuries and tax collectors from Judea to Britannia. A modest republic pays its own way. In 1952, nearly 90 percent of the federal government’s borrowings came from domestic investors. Americans saved their money and used some of it to support the programs of the Eisenhower administration. But the maturing empire of 2005 depends on a global debt market and the savings of foreigners. From less than 5 percent of Treasury bonds in overseas hands in 1952, the total now approaches 45 percent, while the percentage of lending coming from domestic sources has been cut in half. Americans still grow their own wheat, but the trucks to move it may be manufactured in Europe or Asia, and the pans it cooks in are probably

How Empires Work

made in China. They get their electronic paraphernalia from Taiwan, clothes from Malaysia, and automobiles from Japan. They get scientists from India and classical musicians from Korea. And money comes from all over the Eastern Periphery to keep it all going.

THE HISTORY OF EMPIRES Reading the history of empires, we learn that the central power tends to weaken as the periphery states grow stronger. Eventually, the subordinate states get tired of supporting the imperium. They stop paying tribute and show up at the gates of Rome. France and England built their own empires in the eighteenth and nineteenth centuries. Napoleon’s conquests took less than a dozen years to complete, but the empire collapsed even faster. By the end of the nineteenth century, all that was left of the French empire were a few islands no one could find on a map and some godforsaken colonies in Africa that the French would soon regret ever having laid eyes on. Almost all were lost, forgotten, or surrendered by the 1960s with nothing much to show for them except what you find in the Louvre—and a population of African immigrants who now weigh heavily on France’s social welfare budget. England’s empire was much grander, stretched further, and left more debris when it broke up. But the end result was about the same: The pound was degraded and the British were nearly bankrupt. Germany lost its overseas colonies after World War I. It then created another empire—by conquest—in the late 1930s and early 1940s. The enterprise ran into Russia’s empire in the East—resulting in history’s largest and bloodiest land battles. In the end, thanks partly to American intervention on the side of the Russians, the German empire was destroyed. The Russians’ empire collapsed under its own weight 44 years later. •

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While the Romans were still kicking Sabine derrieres, Athens was already a mini-empire. By 431 BC, Athens had become an empire, with subject states throughout the Aegean. In that year, on some pretext not worth recalling, the first Peloponnesian War began between Sparta and Athens and its allies.

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Pericles decided that the best offense was a good defense. He brought the Athenians within the city’s walls hoping that the enemy would exhaust itself in futile attacks. But bubonic plague broke out in the besieged city and killed a quarter of the population—including Pericles. Thence, a nephew of Pericles, Alcibiades, stirred the Athenians to an offensive campaign. A great armada was assembled to attack Syracuse, a city in Sicily allied with Athens’ foes. The campaign was a complete disaster. The armada was destroyed and the army sold into slavery. Sensing a shift in the wind, other Greek citystates broke with Athens and went over to Sparta. In 405 BC, the remaining ships in the Athenian f leet were captured at the battle of Aegospotami. Not long after, Athens’ walls were breached and the city became a vassal state to Sparta. The Athenian empire was replaced by the Spartan empire, which was eventually supplanted by the Macedonian empire, which then became the empire of Alexander. When Alexander died in 323 BC, his empire died with him. The next great chapter of imperial history was written by the Romans, who defeated what was left of the Greeks at the Battle of Pydna in 168 BC. One empire died. Another was born. Nature can’t bear a vacuum and abhors a monopoly. A world without an empire is a world with a hole in it. An empire fills the empty spot. But Nature is a fickle mistress. No sooner has an empire been born than Nature hardens her face against it. An empire has a monopoly on the use of force, or attempts to have one. An empire claims for itself the exclusive right to use preemptive force against any power that may pose a challenge. Nature tolerates it for a while. But she nurtures rivals and encourages competitors. Sooner or later, they find their opportunity. Athens ran the first recorded empire in the West. America runs the current one; it took over from Britain after World War I. For the first eight decades, Americans denied any imperial role or purple ambitions. But by the early twenty-first century, they were warming up to empire. In March 2004, the New York Times reported that it was now respectable to describe the United States as an empire. “Today,” said the NYT, “America is no mere superpower or hegemon, but a full blown empire in the Roman and British sense.” “No country has been as dominant culturally, economically, technologically and militarily in the history of the world since the Roman Empire,”1 added the columnist in the same paper.

How Empires Work

Robert Kaplan’s book, Warrior Politics: Why Leadership Demands a Pagan Ethos, gave this assessment: Our future leaders could do worse than be praised for their tenacity, their penetrating intellects and their ability to bring prosperity to distant part of the world under America’s soft imperial inf luence. The more successful our foreign policy, the more leverage Americans will have in the world. Thus, the more likely that future historians will look back on the twenty-f irst century United States as an empire as well as a republic, however different from that of Roman and every other empire throughout history.2

The June 11, 2005, edition of IHT ran Roger Cohen’s “Globalist” column, which contained this remark: “We guarantee the security of the world, protect our allies, keep critical sea lanes open and lead the war on terror,” said Max Boot of the imperial burden. “. . . the Pax Americana in Asia, as in Europe, has been conducive to a half-century of growth, peace and prosperity.”3 Paul Kennedy went further, pointing out that the imbalance is even greater than in the Roman era. “The Roman Empire stretched further afield,” he notes, “but there was another great empire in Persia and a larger one in China.”4 America had no rivals, he said. Militarily, China was no real competition; it was just another country on America’s hit list. Even after 227 years, America’s stock continues to rise. That it had gotten high enough to vex Nature worries no one. That it might decline troubles no one’s sleep. That being an empire is not necessarily an unadulterated blessing bothers neither the president nor his ministers. The modest republic of 1776 has become the great power of 2005 with pretensions to empire that can no longer be denied. That its citizens will not be freer is understood and accepted. But will they be richer under an empire than they would have been under a humble republic? Will they be safer? Will they be happier? If so, pity the poor Swiss. In their mountain fastnesses, they have only had themselves to boss around; only their own pastures, lakes, and peaks to amuse their eyes; and only their own industries to provide employment and sustenance. And their poor armed forces! Imagine the boredom, the tedious waiting for someone to attack. What glory is there in defense? Oh, for a foreign adventure! Thanks to their colonial empire, the sun never set on the

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British. After the Napoleonic Wars, as many as a quarter of the world’s population lived under British rule. Meanwhile, the sun set every single day on the Swiss Federation. But that didn’t stop the Swiss franc from rising, almost daily, against the British pound. In 1815, a British pound could have been exchanged for 13 Swiss francs and a half-pound of cheese. Today, a pound brings you only 2.3 Swiss francs. And forget the cheese. While the British economy grew sluggish in the twentieth century, the Swiss economy boomed. By the end of the century, gross domestic product (GDP) per person in Britain was only around $20,000. The Swiss, meanwhile, were producing $28,550 in GDP per capita. But the poor yodelers never got the glory of empire. They never got to admire themselves on maps or in headlines. What Swiss president gets to send troops to remote hellholes, join a peace-keeping mission, or fight terrorists? How often do the Swiss get to cheer on their heroes and mourn their dead? Who even knows who the president of Switzerland is? Who cares? While Americans get to make a public spectacle of themselves, the Swiss have to make do with private life. The Swiss have to mind their own business and watch the Sturm und Drang of the world pass them by. But would the Swiss really be better off if they, too, had an empire to run? The available evidence from history is mixed and anecdotal. If the past is any guide, early military successes are inevitably followed by humiliating defeats. Financial progress is nearly always trailed by national bankruptcy and the destruction of the currency. And the good sense of a decent people is soon replaced by a malign megalomania that brings the whole population to complete ruin. But who cares? It is not for us to know the future or to prescribe it. Instead, we get out our field glasses and prepare to watch the spectacle.

BACK TO THE FUTURE A great empire is to the world of geopolitics what a great bubble is to the world of economics. It is attractive at the outset, but a catastrophe eventually. We know of no exceptions. After the battle of Pydna, Rome became the leading empire of the Western world. (We continue our simplified narrative to show how things worked out.)

How Empires Work

Augustus died in AD 14, leaving the empire in the hands of his stepson Tiberius, who had married Augustus’ free-and-easy daughter, Julia. Tiberius clipped the coinage (reduced the precious metal content). This, and other prudent policies, greatly increased the amount of money in the treasury. By the time he was assassinated in AD 37, there were 700 million denarii in the treasury—far more than there had been at the time of Augustus’s death. Tiberius handed off the imperial purple to Caligula, who quickly spent all the savings and more. Rome suffered a series of mad and lavish rulers. To confiscate the money of wealthy Roman families, Caligula would falsely accuse them of plotting against him. He was succeeded by Claudius who, in turn, gave way to Nero. By this time, Rome was deeply in debt and running large trade deficits with its periphery states—similar to the condition of the United States today. Nero took the time-honored expedient of clipping the coins (taking out the gold and silver content) even more. In AD 64, he proclaimed that henceforth the aureus would be 10 percent lighter in weight. So, whereas in the past, 41 aurei had been minted from one pound of gold, the ratio now become 45 aurei to a pound. Nero was deposed in AD 68. But the precedent was set. Maintaining order throughout the empire was expensive. Rome became dependent on imported capital, imported soldiers, and imported goods—just as America is today. But Rome had its own version of a central bank. Each new emergency was met with more phony cash just as it is today. By the time the barbarians sacked Rome, the currency, the denarius, still bore the ancient form with the images of dead emperors pressed on it. But the value had been taken out; the currency had lost 99.98 percent of its value. While this seems like a dreadful rate of inf lation, it is not really as bad as the current U.S. example. In less than 100 years, the U.S. dollar has lost 95 percent of its value. If this rate continues for just another 150 years, the dollar will do in half the time what took the denarius almost 500 years. Thomas Cahill describes the last days of Rome in his book, How the Irish Saved Civilization: . . . the changing character of the native population, brought about through unremarked pressures on porous borders; the creation of an increasingly unwieldy and rigid bureaucracy, whose own survival becomes its overriding goal; the despising of the military and the avoidance of its service by established families, while its off ices present

I M PE R I A A BSU R DUM unprecedented opportunity for marginal men to whom its ranks had once been closed; the lip service paid to values long dead; the pretense that we still are what we once were; the increasing concentrations of the populace into richer and poorer by way of a corrupt tax system, and the desperation that inevitably follows; the aggrandizement of executive power at the expense of the legislature; ineffectual legislation promulgated with great show; the moral vocation of the man at the top to maintain order at all costs, while growing blind to the cruel dilemmas of ordinary life . . .

Cahill continues: . . . these are all themes with which our world is familiar, nor are they the God-given property of any party or political point of view, even though we often act as if they were. At least, the emperor could not heap his economic burdens on posterity by creating long-term public debt, for f loating capital had not yet been conceptualized. The only kinds of wealth worth speaking of were the fruits of the earth.5

Finally, the cost so weakened the empire that the barbarians were at the gate. “The thicker the grass, the more easily scythed,” said Alaric, king of the Visigoths, from AD 395 to 410 He was speaking to the Roman envoys sent to shoo him away. The Roman envoys had just told him that if he and his filthy band of barbarian buddies didn’t go away, they would unleash legions of Roman warriors to crush him. They then asked him what it would take for him to turn around and go. He replied that his men would like to comb the city, take all the gold and silver plus everything else valuable that could be moved, plus all the barbarian slaves. And what, said the envoys, would that leave us Romans? Replied Alaric, “your lives.”6 Empires, like bubble markets, end up where they began. Rome began as a town on the Tiber, with sheep grazing on the hills. A bull market in Roman property lasted about 1,000 years—from 700 BC to about AD 300, when temples, monuments, and villas crowded the Palatine. Then, a bear market began that lasted at least another 1,000 years. As late as the eighteenth century, Rome was once again a city on the Tiber with sheep grazing on the hillsides, amid broken marble columns

How Empires Work

and immense brick walls. They had been built for a reason, but no one could recall why.

IN PRAISE OF EMPIRES It is said that empires provide an expanse of law and order under which trade, commerce, investment, and profit taking can f lourish. Here, we will spot the empire builders and their apologists a point or two. Even the Mongol reign of terror was said to have permitted an uptick in trade. And why not? The imperialists levied a tribute on output. They had an interest in economic growth. Why shouldn’t they make sure bills were paid and property was safe? One of the leading proponents of the American empire is a man named Deepak Lal, who wrote a book entitled In Praise of Empires. “The Roman empire had through its Pax brought unprecedented prosperity to the inhabitants of the Mediterranean littoral for nearly a millennium,” Lal writes.7 He believes that empires are good things, because people are materially better off under imperial rule than other forms of government. We have no intention of trying to prove him wrong. The economic record is not complete enough to prove anything. How fat and happy might the residents of the Mediterranean littoral have been if the Romans had stayed in Rome? We don’t know. Nor do we know much about the relative growth rates of groups not under Roman rule. So we cannot prove anything, except that Lal can’t either. And for that we need to call only one witness to the stand, Lal himself. In the 500 years preceding World War II, when the economic picture is more visible, the Holy Roman Empire—which, as Voltaire remarked, was neither holy, nor Roman, nor a real empire—was extinguished. In its place rose various sovereign nation-states, often with imperial ambitions and bubble-like excesses, but none able to assert itself over much of Europe or for very long. Europe, in other words, was nonimperial. China, India, and Anatolia/the Middle East, by contrast, were still run by the vestiges of the Mongol Empire and its successors. Which civilization was most successful economically? We have no figures for the Ottoman Empire, but the 500 years in China produced a net decline in GDP per person. In India, the rate of increase was negligible according to the figures that Lal

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presents; all the growth that there was came after the Mogul Empire had been replaced by the British. It wasn’t imperial rule that gave the place a shot in the arm; it was British investment and know-how. Lal makes the point decisively and then proceeds to ignore it: By creating order over a large economic space, empires have inevitably generated Smithian [as in Adam Smith’s Wealth of Nations] growth. But given limited technological progress (except for the exceptional period under Sung China), Promethean intensive growth remains a European miracle of the anarchical system of nation-states established after the breakdown of the Roman empire.8

Actually, there are other instances of Promethean growth (e.g., Japan, Hong Kong, and Singapore after World War II). And currently, China is growing at 9 percent per year. Russia and India are growing at 7 percent. It could be argued that their growth is largely thanks to the shade provided by the Americans’ imperial protection. But then you have to wonder why other places, similarly protected, enjoyed no such growth. You also have to wonder how other places, such as Switzerland and the Scandinavian countries got to be the wealthiest places in the world when they enjoyed no more imperial benefits than anywhere else and were largely indifferent to the imperial system. You also have to wonder how it is possible for China to register such high growth rates in the 1990s and 2000s when it is the very thing from which the American imperium offers protection. Apparently, an empire may increase growth rates even for its enemies. The logic of Lal’s “praise of empires” is no different from saying he likes chocolate cake. It is purely a matter of personal taste, nothing more. All we actually know about economic growth is that empire is neither a necessary nor a sufficient condition for it. Empires come and go often, like stock markets. When they shoot up quickly, they generally fall sharply, too. And when they take centuries to build—as with the Romans—it takes centuries to take them back to where they began. By using carrier pigeons, the Mamelukes could have speedy news of all who come and go by sea or land, and thus escape surprise, since they live without defenses, and have neither walls nor fortresses. What finally destroyed the Mongols was the plague, which they picked up in the Far East, and gunpowder, which they also encountered in China. The first so reduced their numbers in the fourteenth and fifteenth centuries that they abandoned not only many of their conquests but also

How Empires Work

much of their own steppes; some of the best pastureland in Asia was effectively returned to nature. The second ended their attacks on more civilized people—who could now blow them out of the saddle. Their descendants in the Mogul Empire in India and the Ottoman Empire in Turkey were largely absorbed into the cultures where they had inserted themselves. And by the seventeenth and eighteenth centuries, the Mongols were once again tending herds of horses in the lonely and inhospitable wastes of Mongolia. By the nineteenth and twentieth centuries, they were paying their own tribute to Russian and Chinese empire builders. Since the days of the great Khans, empires have become much more entertaining. This is not because they are less lethal. It is because they are much more delusional. They cannot bear the barbaric clarity of Genghis’s imperial ambitions. They cannot put on the purple without putting on the masks. After a while their faces take the shape of the mask itself. Rather than follow their atavistic urges and give honest voice to their primitive instincts, they feel obliged to provide reasons that are often fatal to the believer and his victim, but hilarious to the distant observer. Modern imperialists, like their distant ancestors, lust after the usual things—prestige, power, money, status—all proxies, perhaps, for genetic dispersement. These were the same urges that enticed the Khans and the Caesars. But today’s imperialists feel ashamed to admit it. So, they pretend all manner of self less and world-improving motives, everyone of which is either an obvious fraud or a monumental bamboozle. But that is what makes the whole thing so much more amusing and entertaining than either a modest republic or a primitive empire: Modern empire builders are such quacks and popinjays that they practically sprout tail feathers and grow webbed feet. The gist of the modern empire builder’s creed is that he has a duty to make the world a better place, and he can only do it by telling other people what to do. It is inconceivable to him that others might have their own ideas of what a better world would be like. Or that his own plans are nothing more than his own vain tastes and prejudices. It is as if he burst in on his neighbors to tell them what they were going to do on the weekend; it wouldn’t bother him at all that they had their own plans. His are more important! The charm in this is not in watching the empire builder make a mess of things, which he invariably does—usually a bloody mess. The charm is in the elaborate lies and imbecilities he spins to cover up what he is doing.

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His real purpose is no different from those of any Mongol, Greek, or Roman—to feel important, to rule the world and boss other people around, to puff out his chest and pin medals on it, to have power over people and feel superior toward them. The logic of it is inescapable: He feels superior because he rules them. And why does he rule them? Because he is superior! Since the days of Alexander, empire builders have developed elaborate and heroically absurd proofs for why they are superior. They have before them the evidence of their achievements; they have their neighbors under their heel and not the other way around. Fooled by the randomness of historical events, they look for a reason that explains their superiority and justifies their own rule. Many are the daffy explanations and spurious proofs offered. Typically, a group believes it is given its right to rule directly from God. Jehovah delivered to the Jews title to the land of milk and honey. It didn’t matter to them that there were other people who claimed title, too. “Slay them all,” says their God. “And woe to you if you let any of them get away.” The Jews thought they had a special covenant with God. But historians will search in vain for an imperial race whose gods opposed them. No matter what vile mischief they take up, people believe they have the gods’ approval. The European colonial empires in the New World, Africa, and Asia were justified on every imaginable pretext. The Spanish thought they had a duty to Christianize the heathen. The English saw their duty in bringing the benefits of Victorian morals and virtues, including clothing, to the naked savages: Take up the White man’s burden— Send forth the best ye breed— Go, bind your sons to exile To serve your captives’ need9 —Rudyard Kipling

The French, meanwhile, thought the natives should learn to like baguettes and French poets. Their culture was so superior, it was said, they wanted to share it with everyone. They were all successors to Cicero, who maintained that only under Roman imperial rule could civilization f lourish.

How Empires Work

It was obvious to them all that Europeans were superior to other peoples. Was it a matter of race? Religion? Culture? At one time or another, they put forward each of these hypotheses—sometimes all of them. Europeans were a superior race; therefore, they had evolved superior forms of religion, government, and culture. And what accounted for their racial superiority? No delusion was too preposterous. When the Romans were on top of the world, they thought their mild climate must be responsible for creating the world’s best humans. Two millennia later, when the center of empire had shifted to northern Europe, the rigors of European winters were credited with stiffening upper lips, backbones, and virtues. English ladies, traveling in the tropics, wore long-sleeved shirts and carried parasols, for fear that too much of the tropical sun might cause them to “go native.” The effect of all this self-deception is to turn the imperialists into a race of fools. They have to believe what isn’t true—that they are, personally and collectively, better than the people they boss around. Constant dissembling has a corrosive effect on brains and a numbing effect on souls. European imperialists wondered if the Africans, East Indians, and Asians were fully human; often, they treated their subjects as though they thought they were not.

AUSTRO-HUNGARIANS The impulse to imperial power is always the same, but there are many types of imperium. From the pure simplicity of the Mongols to the incomprehensible complexity of the Austro-Hungarians, you could make a go of almost any kind of empire. Whereas the Mongols got their empire by force, the Austro-Hungarian Empire (1867–1918) also known as the dual monarchy came into being largely because they couldn’t think of anything better to do with it. Even its formal name—The Kingdoms and Lands Represented in the Imperial Council and the Lands of the Holy Hungarian Crown (of Stephen)—was a pileup of words on the information highway. Then, as now, no one knew how the empire worked—including the people who supposedly ran it. But that it was an empire, we have no doubt. “A basic, consensus definition would be that an empire is a large political body which rules over territories outside its original borders,” explains Stephen Howe in

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Empire. 10 Austro-Hungary ruled over the Kingdom of Bohemia, the Kingdom of Dalmatia, the Kingdom of Galicia and Lodomeria, the Archduchy of Austria, the Duchy of Bukowina, the Duchy of Carinthia, the Duchy of Carniola, the Duchy of Salzburg, the Duchy of Upper Silesia and Lower Silesia, the Duchy of Styria, the Margraviate of Moravia, the Princely County of Tyrol (including the Land of Vorarlberg), the Coastal Land (including the Princely County of Gorizia and Gradisca, the City of Trieste, and the Margraviate of Istria). And this was just on the Austrian side. On the Hungarian side were all the many obnoxious, quarreling peoples of central Europe and the Balkans—the Slovaks, Bohemians, Moravians, Italians, Poles, Ukrainians, Serbs, Albanians, Macedonians, Croats, Bosnians, Herzegovinians, Montegrans, Czechs, Magyars, and many others. Each of these territories had its own language and customs. Many detested each other. All were jealous of power and how it was used. And at the top were some of the weakest and most confused and conf licted administrators who ever lived. Each had several layers of loyalties: to his own nation; his own class; his own religion; his own family, region, culture, and linguistic group; and his own aristocracy. How could you hope to govern such an empire? The beauty of it was that you couldn’t. There were two separate parliaments and two separate prime ministers along with a collection of archdukes of various talents and responsibilities. In theory, the one royal house—the Habsburgs—had absolute power over the central administration—particularly the military. In practice, they could do little or nothing; they had no money. Occasionally a forceful edict would issue from the government, such as the April 5, 1897, proclamation from the Austrian prime minister, Kasimir Felix Graf von Badeni that permitted the use of the Czech language, along with German, in Bohemia. The ordinance caused so much trouble that poor Badeni was tossed out and Czech was more suppressed than before. Henceforth, Czech newspapers would have to be printed in German! Despite these annoyances, the empire was a modest success. It was largely peaceful and prosperous. Between 1870 and 1913, GDP per capita rose at an annual rate of 1.45 percent, which was faster than the rate in Britain or France, and almost as fast as in Germany. But the imperial family had a bad habit of attracting trouble. Emperor Franz Josef ’s only son died under circumstances that are still considered

How Empires Work

mysterious. His brother had the bad judgment to meddle in the affairs of Mexico and died in front of a firing squad. And, finally, his nephew and heir, the Archduke Franz Ferdinand, had the misfortune to visit Sarajevo in 1914 at the very moment when Bosnian nationalists were gunning for him; he even wore a hat with a huge ostrich plume so they would be sure not to miss.

THE MAKING OF AN EMPIRE When did Rome become an empire? Historians look for a particular moment, even a natural, physical boundary—such as when Caesar crossed the Rubicon—to mark the end of one period and the beginning of the next. No such simple marker exists, however, between empire and other forms of government. Nor does any precise boundary exist between democracy and, say, theocracy or dictatorship. Governments are categorized artificially and often arbitrarily on the basis of theories—usually fraudulent ones. It is often said that democracies depend on the consent of the governed, whereas dictatorships and monarchies do not. A moment’s ref lection, even by a professor of government, would reveal the lie. All systems of government depend on some measure of complicity. “Given the very small number and insignificant presence of imperial agents and municipal officials to insure obedience to the state,” explains Ramsay MacMullen in his Corruption and the Decline of Rome, “millionaires, magnates, and other local notables of all sorts must have cooperated, and from their own free will.”11 It doesn’t matter whether you call a political society free, a democracy, a dictatorship, or an empire, it always involves a great amount of collusion and cooperation on the part of the population. “[Imperial] administrators occupied only a minor place in the system. The emperor had only a handful of agents, whose means of reaching the people were few and rudimentary. The police were practically nonexistent. There were neither social workers nor prosecutors,”12 MacMullen continues. The people who actually ran things “had no official function, or if they had one, they had no need of it to make themselves heard. A huge number of decisions were taken each day and throughout the empire that conformed to their own desires more than to the law, the emperor, or his

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representatives. What’s more, these decisions were those that counted, those that concerned property, movement, career choices, success on the farm, commerce or banking; sometimes even a person’s physical safety.”13 In business, as in empire, vast, complex, informal systems work largely on the basis of trust. People trust others to do more or less what they expect. The emperor could no more control what was done in Judea or Gaul than we can control what goes into our hamburgers. Still, we trust there is nothing too unsavory in them. In the Roman Empire, order was transmitted through an extended web of personal connections, family ties, official functions, traditions, habits, and accepted ideas and procedures so that what happened was more or less what everyone expected. The emperor trusted not only his own functionaries to do what they were supposed to do, but also the local big shots with no official post or authority. The lowest slave responded to his overseer, who responded to his master, who responded to his landlord, who responded to his patron, who responded to his potentiores, consuls, proconsuls, proteuntes, praetors, and quaestors, on up the chain of command to the emperor himself. Even prisons function with the cooperation and complicity of the convicts. In the Soviet gulag system, for example, a group of people—soldiers conscripted and sent to Siberia against their will—policed one group of prisoners who in turn policed a less fortunate group. Supposedly, the entire Soviet Union functioned as a vast slave society, in which everyone was told what to do and no one had any choice in the matter. But how could it be? If they were all in chains, who held the keys? And why did the jailers suddenly undo the locks in 1989? We do not argue that the Soviet system was not wretched, but only that the border between its wretchedness and the misery inf licted by other systems of political organization is not nearly as well marked as we have been told. Always and everywhere, nuances and particularities trump the theories. A dictator cannot rule a country on his own. He needs the help of henchmen and hangmen, soldiers and administrators, tax collectors, and spies. Depending on the size of the country, he might have millions of people all with a stake in his rule. Likewise, what monarch really ruled alone? Even the Sun King, Louis XIV, depended on a whole solar system . . . no, a galaxy . . . of supporters, agents, and factota. He had a vast web of private interests to which he was either beholden, in league, or at

How Empires Work

odds with: the clergy, the aristocracy, the bourgeoisie, the moneylenders, the armed forces, the tax farmers. There is no discreet line between empire and republic, or any other form of government for that matter. But that doesn’t mean there is no difference. Sailing from the Caribbean to the North Atlantic, a voyager crosses no white line. Still, the weather in the two places is hardly the same. A nation may have elections and yet not be a genuine democracy. It may have a king, but not be a genuine monarchy. It may even call itself an empire—such as the Central African Empire, which bullied several tribes in West Africa—but that doesn’t mean it is one. There is plenty of room for fraud and interpretation in political institutions, just as there is in the rest of life. Julius Caesar was accused of being a dictator. He was cut down by the old guard, who wanted to preserve the republic. But Rome had taken the path of empire long before Caesar was born. Like the United States today, it had troops spread far beyond the homeland. For five centuries, the Romans had been imposing themselves, first in what is now Italy and then the Cisalpine region, the Greek Isles, the coast of Anatolia, and down through the Middle East. Caesar himself made his reputation in his wars against the Gauls—people far from Rome who spoke a different language, with different customs, different traditions, different institutions, and different ideas about how things should be done. Caesar believed he was bringing the benefits of Romanization, which to him was one in the same as bringing civilization itself. Octavian, Caesar’s heir, did not call himself emperor or announce that henceforth Rome would be an empire. He did not need to. The term imperator meant “general.” He was already an imperator. Nor was he particularly eager to stir up resentment among the republican partisans. He had seen what had happened to his uncle. Let the empire evolve; just don’t mention it. Speaking to the senate, he was careful to play to the old sentiments: “And now I give back the Republic into your keeping. The laws, the troops, the treasury, the provinces are all restored to you. May you guard them worthily.”14 But the old Republic existed only in their dreams and imaginations. No matter what they said, Rome was an empire. The senators crowned him Augustus, and forgot the old constitution. “People do not easily change, but love their own ancient customs”; wrote Aristotle in his Politics. “And it is by small degrees only that one thing takes the place of another; so that the ancient laws will remain,

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while the power will be in the hands of those who have brought about a revolution in the state.”15 The revolution in Rome took centuries. In America, it took only 58 years (1913–1971). In both cases, most people hardly noticed. The changes were gradual and, generally, agreeable. A republic, a monarchy, or even a dictatorship is a relatively modest undertaking. Its scope is limited, and controlled by leading citizens either through their inf luence on the autocrat or by shaping public opinion. An empire, on the other hand, steps onto the world stage and plays a role that is beyond the control of the citizens. Private life becomes auxiliary, moving to a supporting role while the grand public spectacle plays itself out. In the United States Constitution, it is expressly stated that the people are sovereign, not the government. Ultimately, what people want in their private lives is what is supposed to matter. But the idea passed away when the American Republic died and the empire was born. By 1960, John Kennedy was able to lecture voters to “ask not what the country can do for you; ask what you can do for your country.” Suddenly, the government that was created by, for, and of the people was way out in front of them. They found themselves servants to it, no longer its masters. They could, of course, still write letters to the editor and still vote, but the force of these expressions had gone out of them. The form had barely changed, but the meaning of it had turned around, like a word that had come to mean the opposite of what it once signified. Virtually, for example, once meant “truly.” People would promise to be there “virtually” at noon. Over time, meaning follows practice; virtually slipped to mean not truly, almost, nearly, or sort of. So did the United States Congress come to be what it now is, something not-quite-what-it-was-meant-to-be. Another important event of the revolution in American politics occurred on June 25, 1950. That is the day on which Harry Truman involved the United States in a war in Korea without authorization from Congress. The Constitution clearly states that the people’s representatives alone have the power to determine when the nation’s blood and treasure should be put at risk. But on that date, Truman sent U.S. troops to kill and die, without even informing Congress. Even though this happened while Congress was in session, members of the people’s assemblies found out about it from reading the newspapers. For a week, Congress had little idea of what was going on, until the commander-in-chief decided to tell them. As you might expect, a few members of Congress were cheesed off. But the majority went along. Like the senate in Rome, they had eaten of

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the imperial fruit and liked the taste of it. American forces had to react quickly, they were told. It was a “new era” in warfare, they believed. There was no time for discussion. Meanwhile, the Korean War went on for another 37 months—you would think that they might have found time to talk about it. What had happened was not that the rest of the world had changed so much, but that America had changed. Truman’s doctrine—that the United States would intervene anywhere in the world where it felt its interests were threatened—was not the doctrine of Monroe or Jefferson. It was an imperial doctrine. By then, the nation’s focus had shifted away from the private desires and opinions of citizens, as expressed through their elected representatives, to the world outside America’s borders. What the people thought no longer really counted for much. Public opinion was important, but it was merely part of the imperial burden—something to be carried around, manipulated, and managed. To that end, even in 1951, a huge propaganda apparatus was already set up—with confidential briefings, press leaks, public relations specialists, and enormous printing and publishing arms. Even then, the executive branch was spinning the news to appeal to the marginal voter. They hardly had to bother. The average American reacted just as the average Roman had reacted. When the purple was hoisted, he stood up and saluted. It made him feel like a big shot. If Americans were bossing people around in Asia or the Middle East, it made him feel more important. His homeland team was winning all over the world. And if it did not always seem to be on the winning side, he knew he must support his troops and stand behind their commander-in-chief. No one wants to carp and criticize when soldiers take the field. It is unpatriotic. So, keep the soldiers in the field all the time! While there is no precise DNA test that separates an empire from a ordinary country, there are certain telltale characteristics. A regular country has only its own territory. An empire has a “homeland” and various territorial interests beyond it. It may have subordinate states, protectorates, colonies, satellites, or other client states over whom it exercises a substantial authority. Sometimes it is not even mentioned; but the clients know that if they get out of line, the imperium will come down on them. Typically, the people in the homeland feel superior to the people in the periphery areas. As described, they develop reasons and explanations for their superiority, which are then used to justify further imperial expansion.

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THE AMERICAN EMPIRE America took its first awkward steps toward empire at the end of the nineteenth century, with Theodore Roosevelt intervening in various diarrhea countries for forgettable reasons and with regrettable results. Later, in April 1917, Woodrow Wilson took off at a trot with the fat Rough Rider still breathing down his neck. He urged Congress to declare war on a distant country with which it had no real beef and in which it had no genuine interest. Twenty-three years later, the United States was in another major war. Few would argue that World War II was a case of needless intervention, since the U.S. f leet was attacked at Pearl Harbor. Still, had America wanted to stay out of it, she could have done so. Pearl Harbor was attacked because the U.S. Navy posed a threat to Japanese imperial ambitions. If the United States had not displayed imperial ambitions of her own and had no satellite state in the Philippines, she would have presented no danger to the Japanese imperial forces. Nor was there any particular reason to go to war against Germany. Though allied to Japan, there was no question of Germany intervening in the Pacific War. After World War II, America stepped up the pace, engaging in 111 military actions between 1945 and 2005. Today, the U.S. military divides the world into four regional commands, each given initials—PAC, EUR, CENT, and SOUTH. Each region has its own commander-in-chief (CINC), who is like a proconsul of the Roman Empire. American military bases can be found in 120 different countries, with strike forces ready to light out for almost any place on the planet at a moment’s notice. There is also a vast army of functionaries, intermediaries, consultants, advisors, scientists, engineers, contractors, and busybodies spread all over the globe. Trained in American universities, on the payroll of either the American government or oft-linked U.S. companies, these people provide a class of administrators to keep the imperial money and papers moving. The work of these people was revealed in a marvelous book by John Perkins called Confessions of an Economic Hit Man. A supervisor explained to him: There were two primary objectives of my work, First I was to justify huge international loans that would funnel money back to MAIN [the

How Empires Work

consulting f irm for whom he labored] and other U.S. companies (such as Bechtel, Halliburton, Stone & Webster, and Brown & Root) through massive engineering and construction projects. Second, I would work to bankrupt the countries that received those loans (after they had paid MAIN and other U.S. contractors, of course) so that they would be forever beholden to their creditors and so they would present easy targets when we needed favors, including military bases, UN votes, or access to oil and other natural resources. “Who can doubt that there is an American empire?” wrote Arthur Schlesinger Jr. “an informal empire, not colonial in polity, but still richly equipped with imperial paraphernalia: troops, ships, planes, bases, proconsuls, local collaborators, all spread around the luckless planet.”16

America had mixed and confusing sentiments about empire from the get-go. Its founders were schooled in the history of Rome and determined to avoid what they saw as her mistakes. But at the same time, they couldn’t help but lust for the grandeur of it. They longed for the imperial purple, perhaps, from the very beginning. William Drayton, chief justice of the highest court in South Carolina, wrote in 1776: Empires have their zenith—and their declension and dissolution. . . . The British period is from the year 1758, when they victoriously pursued their Enemies into every Quarter of the Globe. . . . The Almighty . . . has made the choice of the present generation to erect the American Empire . . . and thus has suddenly arisen in the World, a new Empire, styled the United States of America. An Empire that as soon as started into Existence, attracts the attention of the Rest of the Universe; and bids fair by the blessing of God, to be the most glorious of any upon Record.17

John Quincy Adams, however, cautioned that while “she might become the dictatress of the world: she would be no longer ruler of her own spirit.”18 More than two centuries later, her spirit has run wild. She has soldiers garrisoned all over the world. She has interests in places few Americans have ever heard of and fewer still care about. There is no corner or dead-end street in the world that is not somehow patrolled by U.S. forces. At the end of this year, America is scheduled to spend more in a single year on defense than all the rest of the world combined.

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Already, readers must be asking themselves questions: The United States is the world’s only superpower; since the capitulation of the Soviet Union, she has no enemies capable of inf licting serious damage; what is she defending herself against? But that is just the point. The imperial spirit has gotten the best of her. She no longer plays a role that she can understand and control. Now, she is an imperial power; she must read from the script that has been thrust in her hands. She must provide security for the entire world. She must provide the public good of law and order. Someone has to do it. Who else could, but America? It is her turn to wear the purple, whether she wants to do so or not. Thus, did she become dictatress of the world; but no longer ruler of her own spirit—or her own finances. We stop a moment to ref lect. The urge to empire is as irresistible as a free lunch. The male of the species cannot pass up a chance to strut around feeling superior. Scarlet tunics and ostrich feathers have gone out of style, but the men who wore them are the same as those who sacked Rome with Alaric, laid waste to Albi with the Duke de Montfort, and entered Baghdad with the Third Army. The uniforms change, but men are the same grasping, vaunting, humbugging dudes they always have been. There is nothing quite so amusing as watching another man make a fool of himself. That is what makes history so entertaining. And what makes the history of empires particularly entertaining is watching the great emperors: the Napoleons, Alexanders, Caesars, Attilas, and Adolphs—with all their pretensions and sordid butchers—put on the red tunics and burnished helmets, mount their white chargers, and ride right into a stone wall. While leaders make fools of themselves, the mass man is tanned by the ref lected glory of empire. His chin grows stronger as he admires the stalwart troops. His chest swells with every victory. He grows so tall he almost hits his head at the top of doorjambs. We literary economists, on the other hand, can barely suppress a laugh. It is obvious that the poor man has become delusional; but no one appreciates our saying so. Still, we also feel superior, for we cannot help but notice what numskulls they are. Evolutionary biologists reduce the whole impulse to empire to nothing more than genes and math. After a man has enough to eat, his genes—and by command, his thoughts and emotions—want nothing more than to spread his seed as widely as possible. Genes are only interested in replication, according to the hypothesis. All the trappings of wealth and power—including the urge to lord it over others—are merely

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proxies and substitutes for sexual attractiveness. A great ruler conquers a city much for the same reason a middle-aged lawyer buys an expensive sports car, a peacock spreads his tail feathers, or a moral philosopher writes a popular book. It indicates to females that he has good genes. The entertainment comes in when the great ruler is defeated and hung from a meat hook, when the peacock is taken by a fox, and when the red sports car gets the boot. (The prospect of finding this book on the remainder table is not entertaining!) President Wilson got America’s self-deception off to a running start early in the twentieth century: “I believe that God planted in us visions of liberty,” he said, seeking the Democratic nomination in 1912, “that we are chosen and prominently chosen to show the way to the nations of the world how they shall walk in the path of liberty.” So worthy was the mission that there seemed no need to figure out how to pay for it. If God had set us on the trail of Empire, He could jolly well figure out how to pay for it. Neither then, nor now, have Americans bothered to understand how the business of empire works. They think they are doing the world a favor. That deception alone would not be so grave, but they totally miss the point: Nearly every imperial power has claimed to act for the good of others, but they all found a way to make it pay. When it stops paying, they are out of business. Like the Mafia, the United States runs a protection business. Under the protection of the imperial pax dollarium, trade and commerce can f lourish. People get rich. They should be grateful and happy to pay for the service. The imperial power must charge for that service; otherwise, what would be the point? But America has so cleverly deceived itself that it believes it gets its immediate tribute from global commerce and its thanks in Heaven. We have no way of knowing what awaits it in Heaven, but we look around and notice that the tribute America gets is so perverse that we’re glad she does not get more. Instead of getting paid for providing protection, the United States is on the receiving end of loans from its tributary states and trading partners. The whole idea is mad and preposterous. An imperial power is supposed to control lesser states and exploit them for its own selfish ends. Of course, it does not admit it. Truthfulness is as much a disappointment in politics as it is in marriage or poker. The idea is to pretend to do good, while you do well. In America’s absurd version, she does badly for herself and good for others. That is the theme of this book: to

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call America an imperial power is f lattery. In her bizarre version of empire, it is the subordinate powers that control her. They can stop paying tribute whenever they want. “Will China be setting U.S. rates?” asked an article in a May 2005 edition of the International Herald Tribune. 19 The writer, Floyd Norris, had noticed the perverse logic of American imperial finance. What he hadn’t realized was that China was already setting U.S. interest rates. By the end of 2004, China owned $120 billion of U.S. Treasury obligations—or 10 percent of the total in foreign hands, which itself was 25 percent of the total outstanding.20 Had it not bought those bonds, or had it decided to sell them, there would have been significantly less demand for U.S. debt. Or, looked at from a more traditional perspective, there would have been fewer people willing to lend to the United States. Either way, the almost certain result of Chinese lending was to lower the price of lent money, that is, to lower interest rates. Thanks to Asian lending, the United States was able to drop its interest rates below the rate of inf lation and keep them there for 22 months.21 “The way things work now,” Norris explained, “China sells to the world most everything the world wants. China then uses the dollars it receives to buy Treasury securities. That helps to hold down U.S. interest rates and stimulates consumer spending, enabling Americans to buy more from China.”22 This put China in a commanding position. As Americans spent, China built its productive capacity. China got rich, selling gewgaws, electronic knickknacks, and assorted consumer goods. The imperial consumers, on the other hand, got poorer. In 2004, alone, wealth equivalent to 1 percent of the value of all the assets in the United States passed out of Americans’ hands. The idea of imperial finance is that the central, imperial power gets rich at its vassals’ expense. America found a way to do it in reverse; it grew poorer, relatively and absolutely, every day. GDP growth during the five years—2000 to 2005—averaged only 4.4 percent per annum in nominal terms.23 Meanwhile, net operating losses—the difference between what she earned on overseas sales and what she spent on imports far outpaced GDP, growing in 2004 by 24 percent.24 And the cost of maintaining her imperial role—the military budget—was 3.3 percent of GDP.25 The whole thing was a losing proposition. America had found a way to make empire pay—but only for its rivals and enemies.

How Empires Work

To make matters worse, the periphery powers, which were supposed to be subordinate, were capable of ruining the central imperium. If the Chinese and other major holders of U.S. Treasury bonds were to sell, there would be hell to pay in the United States. Interest rates would rise. The housing boom would turn into a housing bust. The imperium would have to beg its subordinate states for more credit. “The U.S. suffers from . . . structural deficits that will limit the effectiveness and duration of its crypto-imperial role in the world,” explains Niall Ferguson. “The first is the nation’s growing dependence on foreign capital to finance excessive private and public consumption. It is difficult to recall any empire that has long endured after becoming so dependent on lending from abroad.”26 What kind of odd empire is this? We have had a long line of U.S. leaders strutting across the world stage—the buffoonish Theodore Roosevelt, the weaselly Wilson, the other Roosevelt, Truman, Kennedy, Johnson, Reagan, Bush ( both of them)—but none of them seems to have understood how to make an empire pay. One of the most riveting features is the remarkable way the masses rush not only to their own ruin, but to the elimination of the institutions they claim to cherish. In America, they claim to love freedom but at the first imperial trumpet blow—the war to make the world safe for democracy, the Cold War to contain the red menace, or the War on Terror—they line up to get registered, inspected, searched, probed, approved, and certified. There seems to be no violation of their liberty so great that they would protest nor any violation of anyone else’s that they wouldn’t applaud, and no expenditure of funds so extravagant that they would bother to ask questions. In 1989, America’s post-World War II rival empire—the Soviet Union—threw in the towel. Not only had it had enough of military competition with the United States, but in one of the great turnarounds of history, it simply renounced its whole ideology. It was almost as if the Jews had tossed aside the Torah, thrown off their yarmulkes, and decided to become Rosicrucians or Jehovah’s Witnesses. But even more astonishing was what happened next. For the first time in 16 centuries, and perhaps the first time in history, the world faced almost no serious military crisis. America had no military competition. No serious threats. There were no nations on earth who could do serious damage to the United States. That did not mean that Americans were guaranteed safe. In addition to the harm they did to each other, they might be kidnapped or killed by any

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number of freelance gangs or revolutionary groups. But the government of the United States had no reason to worry. No nation posed a worthy challenge. So what happened in America? Military expenditures rose! The absurdity can be illustrated by the United States’ attack on Iraq. Like so many imperial powers before it, American forces took Baghdad. But where was the payoff ? Were slaves sold? Was oil stolen? Were women carried off, or at least violated on location? Was Iraq made to pay tribute? No. America seems to have missed the whole point. It invaded Iraq and now pays tribute to the Iraqis! It sends in engineers, medical people, food, contractors, administrators—at a cost of $1 billion per week—to try to keep the Iraqis from disliking them. They would be a lot better off, financially, if the Iraqis had beaten them off. But Americans have worn the mask of their good intentions for so long, their faces have grown in to it. They look in the mirror and see an imperialist who wants only good things for the world—democracy, freedom, harmony. They are all set to ban cigarettes and require seat belts all over the world. They think they can be a “good” empire—killing people neither for glory nor for money, but to make the world a better place. We have to rub our eyes and shake our heads to believe it.

4 As We Go Marching he Germans occupy a special place in recent world history. “Give a German a gun and he heads for France,” was a common expression in the past century. “The Hun is either at your throat or at your feet,” was another. People wondered what it was about the Germans that had made them so ready to go to war and so willing to go along with ghastly deeds on a national scale. Was it something in their blood, in their culture, or in their water? Now, of course, the Hun has been tamed and has become a pacifist. America urged him to join the war against Iraq, but he demurred; he has had his fill of war. And so the question is more puzzling than ever. Has his blood changed? His culture? Or his economy? A marvelous little book by John T. Flynn, As We Go Marching, 1 was written during World War II and provides some insights. Flynn argues that fascism had no particular connection to the Germans themselves nor was there anything in the Teuton spirit that made them especially susceptible. Instead, he points out that the creed was largely developed by an Italian opportunist, Benito Mussolini. It was the hefty Italian who figured out the main parts—including the glorious theatrical elements. The Germans merely added their own corruptions and attached a peculiarly vicious policy of persecuting, and later exterminating, Jews. But it is Flynn’s description of the economic circumstances in Italy in the late nineteenth and early twentieth centuries—the fertile soil in which fascism took root and f lourished—that caught our attention. Italy went to war against Turkey in September 1911. The war was over 12 months later

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and soon forgotten by everyone. But the impulse that drove the Italians to war in the first place was the focus of Flynn’s attention: The vengeance of the Italian spirit on Fate was not appeased. Instead, it whetted the appetite for glory. And once more glory did its work on the budget. But once more, peace—dreadful and realistic peace, the bill collector, heavy with her old problems—was back in Rome. The def icits were larger. The debt was greater, and the various economic planners were more relentless than ever in their determination to subject the capitalist system to control.2

Perhaps they should have lowered interest rates. Or pressured China to raise its currency. Any policy initiative, no matter how pathetic, could be considered. As Flynn puts it: “Out of Italy [as out of America currently] had gone definitely any important party committed to the theory that the economic system should be free.”3 Italy had dug herself into a deep hole of debt. Between 1859—when the centralized Italian state came into being—and 1925, the government ran deficits more than twice as often as it ran surpluses. Politicians, who depended on giving away other people’s money, found themselves with little left to give away. “All the old evils were growing in malignance,” writes Flynn. “The national debt was rising ominously. The army, navy, and social services were absorbing half the revenues of the nation. Italy was the most heavily taxed nation in proportion to her wealth in Europe.”4 Of course, there followed many episodes of financial risorgimento and many pledges to put the books in order. None of them stuck for long. Italian politicians were soon making promises again. When grand promises must be fulfilled, debt creeps higher and so does the resistance of taxpayers and lenders, especially from conservative groups. “Hence it becomes increasingly difficult to go on spending in the presence of persisting deficits and rising debt,” writes Flynn. “Some form of spending must be found that will command the support of conservative groups. Political leaders, embarrassed by their subsidies to the poor, soon learned that one of the easiest ways to spend money is on military establishments and armaments, because it commands the support of the groups most opposed to spending.”5 Military spending gives an economy the false impression of growth and prosperity. People are put to work building expensive military hardware.

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Assembly lines roll and smokestacks smoke. Plus, the spending goes into the domestic economy. Americans, for example, may buy their gewgaws from China, but their tanks are homemade. Military adventures not only seem to stimulate the domestic economy; they also goose up popular support for government. Soon, “it was a time for greatness . . .” as Flynn describes the approach of war. War, Giovanni Papini raved, was “the great anvil of fire and blood on which strong peoples are hammered.”6 There was a time when kings, princes, and emperors ruled the world. Back then, the people knew their place. But in this new, modern world, it became necessary for rulers to appease the masses with various programs designed to fool them into obedience. Armed with ballots, everything seemed possible. Jose Ortega y Gasset describes the scene: Whereas in past time life for the average man meant f inding all around him diff iculties, dangers, want, limitations of his destiny, dependence, the new world appears as a sphere of practically limitless possibilities, safe and independent of anyone . . . and if the traditional sentiment whispered: “To live is to feel oneself limited, and therefore to have to count with that which limits us,” the newest voice shouts: “To live is to meet with no limitation whatever and, consequently, nothing is impossible, nothing is dangerous. . . .”7

He might have been describing the mind-set of the contemporary American investor, who sees no limit to stock prices and no risk anywhere. And so he was—70 years ahead of his time. Voting cannot really increase the masses’ well-being. It brings no more hogs to market, builds no more gadgets, improves no meals, nor does it increase the efficiency of the internal combustion engine. But the masses will believe anything; and after Bismarck and Garibaldi came to believe that this new world of assemblies, parliaments, and election fraud offered a better world, it then became the job of politicians to find a way to appeal to these fantasies. This they did, in nineteenth-century Italy as in twenty-first century America, by borrowing money—thus creating the illusion of spending power out of thin air. From 1859 to 1925, the Italian government ran deficits over 46 years. In only 20 years was the budget balanced. The lire was not a reserve currency; Italian politicos had to do the best they could. But the

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debts continued and led to war. Not because anyone in particular wanted war or debt for that matter. It was just that one was an evolutionary consequence of the other and both were consequences of the natural urges of democratic society. Out of the condition of Italian society sprang certain streams of opinion and of desire that governments acted on and people accepted or at least surrendered to with little resistance, even though they may have not approved or even understood them. Bewildered statesmen turned to government debt as a device for creating purchasing power. No one approved it in principle. But there was no effective resistance because people demanded the fruits it brought. Another was the ever-growing reliance of social-welfare measures to mitigate the privations of the indigent, the unemployed, the sick, the aged. The instruments of debt and spending became standard equipment of politicians. And this need for spending opened the door to an easy surrender to the elements most interested in militarism and its handmaiden, imperialism.8

Whenever the debts threatened to overwhelm the nation, inventive politicians found new enemies to distract the people and quiet opponents. “If the country had no natural enemy to be cultivated, then an enemy had to be invented,”9 wrote Flynn. Following the war with Turkey, World War I provided fresh diversions. But after the war, the debts mounted even higher. The prewar debt was 15 billion lire. When the war ended it was four times as much. But after the war came new promises: an old-age pension system, unemployment insurance, a national heath care plan. The deficit reached 11 billion lire in 1919, then rose to 17 billion in 1921. How could the debts possibly be paid? Was there any way out, people wondered? It was at this point that a scoundrel worthy of the crisis arrived on the scene and proceeded to make things worse. Benito Mussolini was the man for the job—energetic, opportunistic—with no scruples or fixed positions to hamper his movements. Mussolini, like Roosevelt, Bush, and practically every politician elected to any office in the entire twentieth century, denounced the loose spending policies of his predecessors and then spent even more. He decried the unbalanced budgets that had brought Italy to the brink of ruin and then piled new debt on the heavy end of the scale. Taking office in 1921, he found himself with a debt of 93 billion lire. By 1923, the New York Times estimated that his debt had risen to 405 billion lire, with a deficit for the year of 83 billion lire.

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“Spending had become a settled part of the policy of fascism to create national income,” concluded Flynn, “except that the fascist state spent on a scale unimaginable to the old premiers.