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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TVP's picture

The dollar has been strengthening in fiat terms, because of other periphery currencies inflating even faster.  A "flight to safety" has caused buying of US dollars and treasuries.  

None of this means anything until a viable alternative to the dollar has been established (BRICS bank, anyone?)  

Until then, people want the only fiat they know has exchange value for certain, and this will cause the dollar to continue to rally.  The ultimate paradox, perhaps.  

nicoacademia's picture

well. maybe the jest from those on the american continent will now end.

 

i'd be very afraid if The Empire unravels whilst still talking shit out of its ass.

logicalman's picture

The whole financial world runs on ignorance, not faith and trust.

Next time you are standing in line somewhere and get chatting to someone next to you, ask them what money is and where it comes from. You'll likely see a blank expression or a look of puzzlement.

If it wasn't for people's lack of knowledge and understanding the world would be a very different place.

You are never taught about the reality of money/currency in school. I wonder why? ;-)

All wars are banksters wars.

 

Escrava Isaura's picture

logicalman,

You said: "The whole financial world runs on ignorance... All wars are banksters wars.

C’mon logical!

1) Financial world is NOT ignorant. These are very smart people.

2) Wars are ‘mainly’ because of wanted something that somebody else has.

Smedley Darlington Butler, a United States Marine Corps major general, and at the time of his death the most decorated Marine in U.S. history would have had strongly disagreed with your statement.

“War is a racket. It is the only one in which the profits are reckoned in dollars and the losses in lives. I helped purify Nicaragua for the international banking house of Brown Brothers in 1909-1912. I helped make Haiti and Cuba a decent place for City Bank boys to collect revenues in. I helped make Mexico, especially Tampico, safe for American oil interests in 1914. I brought light to the Dominican Republic for American sugar interests in 1916. In China I helped to see to it that Standard Oil went its way unmolested” -- Smedley Butler

 

DanDaley's picture

...and get chatting to someone next to you, ask them what money is and where it comes from.

 

Or as Jim Willie says, ask them what the difference is between legal tender and money. (Legal tender is what the government tells you to use to pay taxes and what must be accepted as money, but real money...

edotabin's picture

Dude, everyone knows starbucks prints the money.  That's why the dollar is green.

Duc888's picture

nicoacedemia:

well. maybe the jest from those on the american continent will now end.

 

i'd be very afraid if The Empire unravels whilst still talking shit out of its ass.

 

Listen up.  Different "factions" of US government are fighting EACH OTHER in the proxy warz.

http://www.veteranstoday.com/2014/08/08/breaking-news-terror-alert-insid...

 

You'll never hear this on MSM.  Our government is split up into a few factions and they're now fighting each other in Europe and the Mideast.

 

 


Escrava Isaura's picture

Duc888,

US is a complicated nation because, in one side, it labels its self as an Republic, but the states don’t get along; all while running an Empire.

Peter Pan's picture

In short, the world has been had for over half a century and in process a series of paradigm shifts have been spawned that have led to nothing of beneficial and enduring substance other than war, debt and unfullfillable promises by government.

And to put it more succinctly, one nation has been gorging itself at the expense of all others.

Raoul_Luke's picture

That's what happens when you do imperialism while trying to maintain your image as the good guys.

optimator's picture

The most dangerous empire in the world is one who collapses financially, morally, and totally, but remains the world's premier nuclear power.

Libertarian777's picture

"no other empire has ever tried to finance itself by borrowing"

 

wtf. Ever hear about the French? or the British?

or dozens of European wars. All empire wars funded by debt.

there are many empires that resorted to deficit spending. It is the last vestiage of an empire. debase the currency and issue bonds till you're blue in the face.

Bazza McKenzie's picture

The British empire was actually very profitable for Britain.

The debts it incurred that ultimately were a problem was money borrowed, largely from the US, to fight Germany that had invaded the rest of Europe. Ironically, the loser in WWI and WWII got to repudiate its debts, while the European winner, Britain, was stuck having to repay them at a point where the empire countries had become independent.

GeoffreyT's picture

The British Empire was profitable for a narrow clique of politically-connected cronies, and literally nobody else. For the first three centuries of the British Empire, living standards outside of the upper-middle class (the top 5% or so) were stagnant.

The broader rise in living standards in the last century of the Empire - those that riased the lot of the median-and-below - were not due to resource-transfer-by-conquest, but due to technological change. This should be obvious - because they rose more rapidly, in places that weren't part of the Bitish Empire (e.g., the US).

All Empires exist to transfer resource-exploitation profits to political cronies, with the resource-acquisition undertakn by force and funded by tax-payers.

Once there is any meaningful resistance to Empire (once the fuzzie-wuzzies get technology more effective than pointed sticks), the costs of maintaining control over resources rapidly exceeds the costs of obtaining them through trade.

 

And if the locals give the Empire a black eye at any point, it's basically all over due to the complete loss of respect for authoritaah. Examples: Rome at Teutoberger Wald (53BCE); Rome at Carrhae (9CE); Rome in Palestine (70CE); Rome in Caledonia (122CE); France in Egypt (1790s); France in Mexico (Hacienda Camaro - 1863); Britain in Afghanistan (1830s); Britain in New Zealand (1830s-1890s); the US in VietNam (1960s/70s); the USSR in Afghanistan (1980s); the US in Iraq and Afghanistan (2000s/10s). Failure to impose on the locals makes the whole empire begin to unravel. (Napoleon's invasion of Russia in 1812 is not included, because it was power-on-power).

It used to take some time (centuries) for folks to see the writing on the wall, but since the printing press news has travelled faster; then radio and TV made it even faster; and now we have the internet so we see things in real time, unfiltered by .gov....

And if the local indigenes decide on a guerilla war (as the Maori did in NZ, and the Viet Cong, Afghan mujaheddin andf IRaqi insurgents have done recently), you simply can't profitably exploit them - which is why NZ was a part of the British Empire by choice, subject to a Treaty with terms unlike any other that the British ever agreed to anywhere else on the pink bits of the map.

Totentänzerlied's picture

“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."

Pay attention. Anti-dollar. Not anti-IMF. Not anti-BIS. Not anti-World Bank.

Still waiting for anyone to show me anything that suggests Russia and China are not among the strongest supporters today of the IMF and by implication the BIS- they just want to see it placed under new management, and are getting a bit impatient. All the BRICS are jockeying for position in the post-Anglo-American global financial system, and that means having a large share in the SDR basket.

bytebank's picture

I guess we want Russia's gold now. Ever more desperate. How long before the collapse?

robobbob's picture

The US never got the hang of it.............

you're making the mistake of confusing the ruling shadow government with the political marionettes or the American people

those running the game are making a fortune, its the sappy american taxpayers that are picking up the tab.


AdvancingTime's picture

Those who look closely understand that it is not the 1% at the top stealing the icing off the cake, but the much smaller .1% or .01% that are skewing the numbers and overreaching.

I contend the biggest problem is the massive growth in crony capitalism and corruption in Washington. Much of this can be attributed to the ability of those in control "changing the rules" and positioning themselves to benefit at every corner. In our busy and complex world we have found it impossible to watch all the moving parts. More on this subject in the article below.

http://brucewilds.blogspot.com/2014/05/how-empires-collapse.html

 

22winmag's picture

The curtain is hanging on by a thread and about to be torn down (finally and forever this time).

 

What will remain? Tens of millions of highly motivated, heavily armed, well informed American citizens seeking redress.

BlackVoid's picture

No, it is not debt. It is hidden imperial tribute.

The US can get essentially free goods for freshly printed paper. The dollar system is in fact a tribute system.

 

And the financial woes are only a symptom to the real problem: diminishing returns everywhere - most importantly in energy production. Everything else is a consequence of this.