When The Money Runs Out... So Does The Empire

Tyler Durden's picture

Submitted by Bill Bonner via Acting-Man blog,

Funding an Empire with Debt

In 2006, we wrote a book with Addison Wiggin called Empire of Debt: The Rise of an Epic Financial Crisis. The idea of the book was as follows:

Empires are not the result of conscious thought; they happen when a group is large enough and powerful enough to impose itself on others. But empires are expensive. They are typically financed by theft and forced tribute. The imperial power conquers… steals… and then requires that its subjects pay “taxes” so that it can protect them.

The US never got the hang of it. It conquers. But it loses money on each conquest. How does it sustain itself? With debt.

It doesn’t take tribute from the rest of the world; it borrows from it. As far as we know, no other empire has ever tried to finance itself by borrowing. But it is a special kind of debt. The US borrows in its own currency – which it can print as it chooses. If the burden of repayment is too high, in theory, the Fed can just print more dollars to satisfy its obligations.

 

Nashville_parthenon_01-300x249

(Photo credit: Michael Brown)

 

Here is further insight from two foreign policy professors Flynt Leverett and Hillary Mann Leverett:

 

 

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

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

 

Total credit liabilities, US

In the 1950s and 1960s, this posed little risk to foreigners, because the US dollar was backed by gold. But in 1971 – on August 15 – President Nixon repudiated the greenback’s gold backing – click to enlarge.

 

Global Inflation

Nevertheless, the dollar reigned supreme. Foreign nations needed to stock dollars in order to settle up on their overseas financial transactions. The US printed dollars… Americans spent them on foreign goods… foreign central banks bought them from their local merchants and manufacturers, and reinvested much of them in US government debt.

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

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

When foreign central banks took in dollars, they had to print local currencies to give to local exporters in exchange for dollars. The owner of an export firm presented the dollars to the local bank; he needed yuan, yen or zlotys to pay his bills. The local central bank invested those dollars back in the US.

This is how the US credit boom led to an explosion of cash and credit all over the world. Foreign central banks had to increase their money supplies – by printing up local currencies – to use to exchange for the rush of dollars.

This is what led Ben Bernanke to refer to a “global savings glut.” Actually, these were not savings at all – but money created ex nihilo by central banks. Our point is that all empires end when they are defeated by a more vigorous empire… or when their financing runs out.

 

China's Reserves

China's forex reserves: this is one of the symptoms of US debt and money supply inflation - click to enlarge.

 

The Beginning of the End

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

 

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

 

Economist Liam Halligan, writing in British newspaper The Telegraph elaborates:

 

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

 

When the money runs out… so does the empire. Perhaps with a whimper. Or maybe a bang.

 

decline-of-a-hegemon

How hegemons decline, via JCMargeson – click to enlarge.

 

colosseum

One of the left-overs of the Western Roman Empire. They didn't expect this to happen, but ultimately, Rome was brought down by the same overreach and the same reaction to its failure that brings down all empires. What ultimately ended the Roman empire was, you guessed it, inflation and price controls!

(Photo by DAVID ILIFF. License: CC-BY-SA 3.0)

 

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El Vaquero's picture

You still don't understand what energy is.  Come back to me with a working definition.

ekm1's picture

Ok, I'm stupid. So please ignore my comments

El Vaquero's picture

Or you could actually educate yourself.  I'll give you a hint:  Leverage gives you the ability to apply greater FORCE over a shorter DISTANCE. 

ekm1's picture

Ok, let me explain it in another way to you.

 

Are we ever going to run out of air to breathe?

Answer: No

 

Same with energy.

Nature provides free energy like gravity and ocean water power which can technologically be channeled to be used as 'archimedes lever' which I used as analogy as to how naturally available energy is utilised.

 

There are risks for sure, no doubt, like BP ocean spill.

Technology bears lots of risks.

peakgrowth's picture

No.     First and Second LAWS of Thermodynamics.  Read. Learn. Understand. Come back to this blog. Energy is everything.

ekm1's picture

Yes as far as laws.

Earth will go extinct in few trillion of years.

Idaho potato head's picture

Newtonian physics is experiencing a dismantling, there are other realities emerging that go beyond it's scope. just sayin.

El Vaquero's picture

Newtonian physics has been superseded for around 100 years.  Yet, it still works within the realm that it was originally observed in.  I'm not going to use quantum mechanics or general relativity to predict where an artillery shell will land.  Newtonian mechanics works under those conditions where arterlirry works.  When going to the other math-ey portions of physics, the definition of energy hasn't changed, and the shit still works as well as Newtonian mechanics does when shit's not going too fast, shit's not too small and shit's not exposed to a different level of gravity.

 

The physical observation that energy gets shit done is not going away.

CrazyCooter's picture

Ok, I think I get your logic now; you don't use air, there fore air is infinite.

Aye = Bee, Bee = See, See what I mean?

Fucking brilliant logic! You need to get your ass in an Econ PHD program at a top U ... bright future ahead!

Regards,

Cooter

ekm1's picture

Free energy available in nature is hyper plenty.

There are many risks for sure.

It's a tradeoff

Totentänzerlied's picture

"Are we ever going to run out of air to breathe?"

Earth's air could very easily become unbreatheable, say if the Nitrogen or Carbon percentage rose even just a few whole percent.

But to stick to your phrasing, a powerful enough CME or quasar or meteor could easily destroy/remove Earth's upper atmosphere, and all of the tropospheric gases we call air would quickly escape into space.

Also, any physicist will tell and explain to you that gravity is not energy. Ocean hydropower is no more free than solar or wind power, that is, not at all, because you have to first develop and produce the technology and infrastructure to use it, and that of course has opportunity costs.

umdesch4's picture

Please don't give up that easily. I see where you're going (and appreciate that link you provided further up), and it's a debate that's worth having, IMHO. I think you're basically saying that we will continue to find ways to innovate and stay ahead of the curve, if not indefinitely, then at least far enough into the future that it won't matter to our great-great-grandkids. I want to believe that's true. Past performance would suggest it, but you know what they say about past performance being an indicator of anything. I'm not at all confident about making any predictions into the future, but I appreciate the people who know a lot more than me on the subject, and are trying. Every innovation I read about gives me some degree of hope.

Errol's picture

umdesch4, "find ways to innovate and stay ahead of the curve" is why the industrialized nations have spent probably a tillion dollars (in current dollars) on fusion reasearch.  It didn't work out, and there is not enough time and unencumbered capital left to build-out anything else.  We are well and truly toast; the elite have been thoroughly briefed on this and so are in the process of eating the seed corn.

bid the soldiers shoot's picture

"At some point, there's a reality brick wall that will be hit, where a military will spend more energy and resources acquiring and defending supplies than it gains."

That's why a smart military, like ours, for example, should make its move sooner rather than later.

Hey, that's what it's doing.

hedgiex's picture

Develop this thought. The military true to its calling can make a difference to balance the structure and uses its assertiveness against Wall Street.

It has happened in the 1940s when the Red Army then uncorrupted connected with the proleteriat to impose its will for China.

The dangers lie in the Military not falling into the hands of demagogues.

Any other historical success elsewhere

yogibear's picture

All China and Russia have to do is help the Fed crush the dollar. Essentially bankrupt, the US won't be able to afford it's military.

In essence the Federal Reserve is treasonous. Prosecute all the Federal Reserve heads as traitors. 

db51's picture

Ya'll are dreaming.   China and Russia are the Fed's Butt boys....bending over on command.  Sure, they get out of line once in a great while - onnly b y design. -  but then the spanking, and after smacking that little ass a couple time, the Fed pounds the hell out of it with their big hard dick.   Rinse, Lather and Repeat.   This game goes on forever, there will be no consequences, not now, not ever for the Power Elite.   Now children, go back to your room and play.  All Hail the Fed....and King Dollar.

yogibear's picture

You realize that China and Russia play the Fed's game as long as it benefits them. When the benefits stop Russia and China as well as others that hate the US will end up chopping that dick off. The US is following Japan into the debt black hole.

People with the big money are already preparing for this.

umdesch4's picture

Yup, I never understand why people fail to reach a simple logical conclusion. The power elite demonstrate daily that they are sociopaths. I'm sure nobody on this site would argue against that. But if that's true, then that implies that they also have none of the mental processes that would invoke any degree of patriotism. They wouldn't feel anything at all if the US became a 3rd world country overnight. They'll know it's coming, and already have their assets transferred, and be living in some place far away from all the people they care nothing whatsoever about.

Escrava Isaura's picture

db51

My advice, for whatever it is worth? Do more reading, instead posting nonsense.

Winston Churchill's picture

He already KNOWS god is a very exceptional  American, and plays baseball.

Its his delusion. let him enjoy it.

Escrava Isaura's picture

I guess I have some catch up to do. Thanks for the warning. Now, I feel ready to face losts of stupidity.

alexcojones's picture

The Money can Never run out.

Confidence & Trust run out, before the printing press stops.

But that is why wheelbarrows were made, and buzzards too

IridiumRebel's picture

Funny how people think that...especially those with liberal leanings. 

Ivan Nokabolokov's picture

'If Beijing and Moscow – the world’s largest energy importer and producer respectively – drop dollar energy pricing, America’s reserve currency status could unravel. '

Could happen this winter if this asinine warmongering continues.

q99x2's picture

still flailing and over-reactive bitchez.

The inbreds over-reacted and lost.

They would not give up at all cost.

Within the ground

Their borrows may be found.

When aliens dig through the frost.

Seek_Truth's picture

After this I saw another angel coming down from heaven. He had great authority, and the earth was illuminated by his splendor. With a mighty voice he shouted:

“‘Fallen! Fallen is Babylon the Great!’

She has become a dwelling for demons

and a haunt for every impure spirit,

a haunt for every unclean bird,

a haunt for every unclean and detestable animal.

For all the nations have drunk

the maddening wine of her adulteries.

The kings of the earth committed adultery with her,

and the merchants of the earth grew rich from her excessive luxuries.”…

“The merchants of the earth will weep and mourn over her because no one buys their cargoes anymore…

Then a mighty angel picked up a boulder the size of a large millstone and threw it into the sea, and said:

“With such violence

the great city of Babylon will be thrown down,

never to be found again…

Your merchants were the world’s important people.

By your magic spell all the nations were led astray.

-          Revelation 18: 1,2,3,11,21,23

The "magic spell" is fiat currency, fractional reserve lending, derivaties, swaps, etc. '"Babylon the Great" is the global financial system that has long profitted from this magic spell. Both are doomed and on their way out, soon.

Dubaibanker's picture

While the entire western Govts comprising of 7 countries on the planet run amok like a madman with schizophrenia & amnesia of history while being obese and with no money to even buy a bottle of booze and can only think of bombs, bombs and more bombs thrown into other countries, instead of diplomacy or non intervention into other people's affairs or peaceful negotiations.....which is truly sad! These were the acts of uncivilized people in the stone ages, not monkeys in suits, oops, our chosen leaders!

Meanwhile, what Russian and Chinese are doing is like hitting in the nuts of USA-where it hurts the most!

Russia, China agree on more trade currency swaps to bypass dollar

http://rt.com/business/179032-currency-swap-russia-china/

Escrava Isaura's picture

"run amok like a madman with schizophrenia & amnesia of history.... instead of diplomacy"

Uhmm!

Can't tell, at this moment, where I see this trend. But, I have a feeling, it's nearby.

bombdog's picture

Ironic considering most of your posts, I've upvoted your comment because the least diplomatic person in the room is definitley nearby - it's you!

edwardo1's picture

"In the 1950s and 1960s, this posed little risk to foreigners, because the US dollar was backed by gold."

That's something of a howler. Clearly the author of that quote has a very narrow definition of the words risk and foreigners.

More to the point, the author leaves out some crucial history as it pertains to the reason why the dollar ceased to be "as good as gold." The French, first and foremost, recognized that the U.S. government-see Vietnam as an important chronologically relevant example- were abusing their exhorbitant privilege, and did what any sensible nation would do in response, they exchanged their dollars for physical thereby making manifest the somewhat obscured reality that the dollar was not as good as gold as a SOV.

In any case, the main point of the author is absolutely correct, ex priv, more than any other factor, and by a large factor, underlies the inordinate military might of the U.S. And when the ex priv goes (and it is well down the road to oblivion now) so too will all vestiges of U.S. hegemony.

Renfield's picture

Welcome Bill Bonner, the blogger who first introduced me to gold and educated me on it many years ago. The man whose crisis alert flag got us well ahead of the 2008 dive even when people were snickering. You will never know the good your advice did for our family.

I am glad to see your clear writing on the Hedge. You cut to the heart of it: wars must be financed. World War III cannot be financed via military for long, when global currencies are all in the process of trying to avoid a hyperinflationary collapse in a world of resource shortage. World War III is a currency war.

Escrava Isaura's picture

Renfield,

Too simplistic! You ought to do better than that.

This might shed some light:

"I don't know (how WW-3 will be fought). But I can tell you what they'll use in the fourth. They'll use rocks!" – Albert Einstein

Escrava Isaura's picture

By the way, get 'Curious' about The Inca Empire.

That too, will help a lot!

JenkinsLane's picture

“Great empires, such as the Roman and British, were extractive. The empires succeeded because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance. Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agribusiness and the Israel lobby use the government to extract resources from Americans to serve their profits and power. The US Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%. That is how the American Empire functions.”

Dr Paul Craig Roberts

Escrava Isaura's picture

new JenkinsLane,

That quote by Dr Paul Craig Roberts is nonsense... and you should know that.

JenkinsLane's picture

In the real, adult world, when you disagree with an individual's argument, or believe it to be

incorrect, you explain the reasons why. You do not blindly assert that the argument is "nonsense"

or "wrong" followed up by a variation of the ad hominem attack.

Escrava Isaura's picture

Jenkins,

Good point. I had a feeling you would nail me for that.... and you did.

By the way, I am a great fun of Dr. Roberts. But, I have major issue with this quote:

Dr. Roberts said: “Great empires, such as the Roman and British, were extractive.

Wrong! There are NO great Empires. Just ask the people that were robbed by them.

Roberts:“The empires succeeded because the value of the resources and wealth extracted from conquered lands exceeded the value of conquest and governance.”

Duh! Getting rich at somebody else’s expense.

Roberts: “Washington’s empire extracts resources from the American people for the benefit of the few powerful interest groups that rule America. The military-security complex, Wall Street, agribusiness and the Israel lobby use the government to extract resources from Americans to serve their profits and power.

Oh boy! Here Roberts goes off the railing. Which resources is Roberts talking about it?

US top ten exports: http://www.worldsrichestcountries.com/top_us_exports.html

Roberts: The US Constitution has been extracted in the interests of the Security State, and Americans’ incomes have been redirected to the pockets of the 1%. That is how the American Empire functions.”

Duh! This is exactly how an Empire is supposed to work. There is NOT enough wealth for everyone, period!

As a matter of fact, it only gets worse, because we live in a finite planet. The link below will help.

http://www.amazon.com/Twilight-Abundance-Century-Nasty-Brutish/dp/1621571580/ref=pd_ybh_1

 

bombdog's picture

Wrong! There are NO great Empires. Just ask the people that were robbed by them.

What was it about the word "extractive" that you didn't understand?

Which resources is Roberts talking about it?

Your link to US export figures doesn't prove anything. Maybe you should instead look at the decline of the civilian economy and the dwindling American middle class? For example the work of Seymour Melman shows how the military industrial complex destroyed the productive capacity of the civilian industries and made the US uncompetitive. It doesn't follow that an empire robs its own citizens, at least not until the final phases. Clearly the US is being hollowed out domestically and you need look no further than the massive numbers of people on foodstamps for that. But it was not always this way and Americans (rightly or wrongly) had the best standards of living and industrial progress during most of the 20th century.

Roberts is basically correct and your arguments are essentially specious, especially the "finite planet" planet part which is a complete tangent to the discussion.

Lordflin's picture

Actually, the money runes out long before the Empire. That is what makes the finale so spectacular.

yogibear's picture

The US dollar is backed by nothing but BS. Once countries wake up and realize that the only thing it manufactures is debt they'll dump the Ponzi fiat paper.

Monty Burns's picture

And replace it with what?

Ckierst1's picture

Honest money.  Need I say more at this late date?

KnuckleDragger-X's picture

Every nation has its own game plan that it thinks is a winner. The problem is it tends to be hard on the people who support it. The interconnected world only gaurantee's more pain for more people. History is preparing to tke a giant step backwards into feudalism.

alexcojones's picture

See Truth - Speak Truth

Many Well-reasoned opinions and ideas here today. And some?

Have a good weekend

Alex C