Empire of Debt

Empire of Debt: Torture, Abuse and Deception
by Bill Bonner and Addison Wiggin
The Rude Awakening
Wall Street, New York
Wednesday, November 23, 2005

In a further exceprt from Empire of Debt, Bill Bonner and Addison Wiggin reveal what goes into making an Empire of Debt.

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Eric Fry, reporting from Wall Street...

Life in America is good...too good. And whenever something
becomes too good, it is usually not far away from becoming
less good, or even bad. Even so, the cyclical nature of our
existence does not absolutely require that our fat and
happy American lifestyle become lean and miserable...but
our massive debt loads might. We have been financing our
lavish lifestyle so creatively for so many years that we
have created a mess.

Venezuelan President Hugo Chavez recently complained that
the "world cannot tolerate the American way of life." Heck,
we Americans cannot even tolerate the American lifestyle,
much less pay for it! Nevertheless, we have been attempting
the intolerable and unaffordable for more than two
decades...and enjoying every minute of it.

As we have spent the money we don't really have, and
borrowed (and spent) the money we might never repay, we
have consumed our way toward a parody of prosperity. We
pretend to own our comfortable houses, shiny cars and high-
resolution TV sets...even though credit card companies
and/or foreign central banks hold the titles. We feel that
we are growing wealthy, even though our debts are mounting.

And none of this faux-prosperity would have been possible
without Alan Greenspan. Thanks to the questionable
stewardship of the widely-esteemed Fed chairman, we
Americans have never owed so much to so many for the sake
of so little long-term benefit. And yet, Ben Bernanke, the
incoming Fed chairman promises – nay, threatens – to
maintain the same elegant mix of moronic economics and
self-deception that Greenspan initiated and nurtured during
the last 18 years.

"I intend to be flexible and to learn from experience,"
says Ben Bernanke, the soon-to-be Chairman of the Federal
Reserve. "But I believe the right starting point is the
point where we currently are, that Chairman Greenspan has
demonstrated in his policymaking."

"Where we currently are" may be the "right starting point"
for something, but NOT for continuing prosperity – or even
for continuing the illusion of prosperity to which we
Americans have become accustomed.

It is not a starting point for prosperity, as Bill Bonner
and Addison Wiggin explained in yesterday's column, because
it is an ending point. "It is not morning in America," they
wrote, "because it is evening. People are not getting
richer, because they are getting poorer."

"Where we are" is neck-deep in the foul brine excess debt,
depleted savings and bubble-like asset prices. And yet, Ben
Bernanke, the incoming Fed Chairman wishes to emulate these
same reckless policies that created this mess.
Funny thing: Greenspan's successor praises his
policymaking, while Greenspan's predecessor scorns it...and
its lamentable consequences.

"[U]nder the placid surface," Greenspan's predecessor, Paul
Volcker, remarked in a column for the Washington Post,
"there are disturbing trends: huge imbalances,
disequilibria, risks -- call them what you will. Altogether
the circumstances seem to me as dangerous and intractable
as any I can remember, and I can remember quite a lot."

[To read all of Volcker's column, "An Economy On Thin Ice,"
click here: www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html].

"We are buying a lot of housing at rising prices, but home
ownership has become a vehicle for borrowing as much as a
source of financial security. As a nation we are consuming
and investing about 6 percent more than we are producing."

"What holds it all together is a massive and growing flow
of capital from abroad, running to more than $2 billion
every working day, and growing."

"The difficulty is that this seemingly comfortable pattern
can't go on indefinitely. I don't know of any country that
has managed to consume and invest 6 percent more than it
produces for long. The United States is absorbing about 80
percent of the net flow of international capital. And at
some point, both central banks and private institutions
will have their fill of dollars."

"I don't know whether change will come with a bang or a
whimper, whether sooner or later. But as things stand, it
is more likely than not that it will be financial crises
rather than policy foresight that will force the change."

"So I think we are skating on increasingly thin ice. On the
present trajectory, the deficits and imbalances will
increase. At some point, the sense of confidence in capital
markets that today so benignly supports the flow of funds
to the United States and the growing world economy could
fade. Then some event, or combination of events, could come
along to disturb markets, with damaging volatility in both
exchange markets and interest rates."

We here at the Rude Awakening have no idea what "event, or
combination of events, could come along" to disrupt our
borrowed prosperity. Nor what miracle, or combination of
miracles might deliver us from the grim consequences of our
over-consumption. We know merely that we are pushing the
limits of fiscal imprudence.

We Americans have created an "Empire of Debt," to borrow
the title of the new book by our colleagues, Bill Bonner
and Addison Wiggin. The Empire has accomplished many
amazing feats, the authors assert, but like all empires, is
destined to collapse under the weight of its own excesses
and follies.

In yesterday's Rude Awakening, we published a riveting
excerpt from the book. Today, we present another timely and
engaging excerpt.

I love this book, and I'm not just saying that because
Bonner and Wiggin sign my paychecks. Honestly, I would love
it, even if I were not a paid shill. Please, see for
yourself...

Order your copy at discount before they are all gone:

Empire of Debt:The Rise of an Epic Financial Crisis

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Let us take a moment to stand back and gaze at America's
great Empire of Debt. It is the largest edifice of debt
ever put up. It sustains the most magnificent world economy
ever assembled. It brings more wealth to more people than
any system ever before devised.

Not only is it incomparably effective, it is also
immeasurably entertaining...The Roman Empire rested on a
classical model of imperial finance. Beneath a complex and
nuanced pyramid of relationships was a foundation of
tribute formed with the hard rock of brute force. America's
empire of debt, on the other hand, stands not as a solid
pyramid of trust, authority, and power relationships but as
a rickety slum of delusion, fraud, and misapprehension.

Thus the foundation of the debt pyramid is laid down in a
bed of mutual deceit and cupidity, and covered with another
level of fabrications. Lenders do not stick around to see
how the loans work out. Instead, they pretend the credits
are good, and package the mortgages into convenient units
so that investors can buy them. The financiers know damned
well that many buyers can't really afford to pay for the
houses they buy, but they see no point in mentioning it.
Nor do the investors want to know. They're in on the scam,
too. The smartest of them even have figured out how it
works: The Fed holds down short-term rates below the
inflation rate so that investors in long-term mortgage
financing and buyers of U.S. Treasury obligations can make
an easy profit.

Empire of Debt: Six Impossible Things before Breakfast

Further up the steps of imperial debt are whole legions of
analysts, economists, and full-time obfuscators whose role
is to make us all believe six impossible things before
breakfast and a dozen more before dinner. Quack economists
at the Bureau of Labor Statistics do to numbers what guards
at Guantanamo did to prisoners. They rough them up so
badly, they are ready to say anything...This abuse of
statistics is what allows Americans to deceive themselves
about their own economy. It is healthy, they say. It is
growing. It is stable. All these so-called facts are little
more than elaborate prevarications.

Economists, commentators, and policymakers take up these
distortions and add their own twists. It is obvious to
anyone who bothers to think about it that an economy that
spends more than it earns is in decline. But try to find an
economist willing to say so!...They will tell you the
economy is expanding, but it is an expansion similar to
what happens when a compulsive eater escapes from a fat
farm. The longer he is on the loose, the worse off he
becomes.

On the issue of the trade deficit, they will say what the
senators and consuls want to hear, as Levey and Brown did
in Foreign Affairs magazine: "The United States' current
account deficit and foreign debt are not dire threats to
its global position, as would-be Cassandras warn. U.S.
power is firmly grounded on economic superiority and
financial stability that will not end soon." In fact, the
story of international trade, circa 2005, is the most
preposterous tale economists have ever heard. One nation
buys things that it cannot afford and doesn't need with
money it doesn't have. Another sells on credit to people
who already cannot pay and builds more factories to
increase output.

Empire of Debt: Acts of Wanton Recklessness
 
Every level colludes with every other level to keep the
flimflam going. On the banks of the Potomac, people of all
classes, rank, and station are pleased to believe that all
is well. And there, at the Federal Reserve headquarters, is
another caste of loyal liars. Alan Greenspan and his fellow
connivers not only urge citizens to mortgage their houses,
buy SUVs, and commit other acts of wanton recklessness,
they also control the nation's money and make sure that it
plays along with the fraud. They do not even have to clip
the precious metal out of the imperial coins; there is none
in it.
 
From the center to the furthest garrisons on the periphery,
from the lowest rank to the highest — everyone, everywhere
willingly, happily, and proudly participates in one of the
greatest deceits of all time. At the bottom of the empire
are wage slaves squandering borrowed money on imported
doodads. The plebes gamble on adjustable rate mortgages
(ARMs). The patricians gamble on hedge funds that speculate
on huge swaths of mortgage debt. Near the top are Fed
economists urging them to do it!

The spectacle is breathtaking. And endlessly entertaining.
We are humbled by the majesty of it. Everywhere we look, we
see an exquisite but precarious balance between things that
are equally and oppositely absurd.
 
On the one side of the globe — in the Anglo-Saxon countries
in general, but the United States in particular — are the
consumers. On the other side — principally in Asia — are
the producers. One side makes, the other takes. One saves,
the other borrows. One produces, the other consumes. That
is not the way it was meant to be.

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And the Markets...