All bubbles and all empires blow up - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 21 April 2014
PRINTER FRIENDLY | ARCHIVES
All bubbles and all empires blow up A  A  A

Gualfin, Argentina

We pointed out last week: the empire and the credit bubble will probably come to an end at the same time.

Each depends on the other. If America were not so big and powerful, it could not impose its money as the world's reserve currency. Without its reserve status (dollars instead of gold), the US wouldn't be able to flood the world with its own cash. Without the dollars, the credit bubble couldn't continue growing. And without the credit growth there would be no way to pay the expense of maintaining a worldwide empire.

This does not really explain the miracle of growth without savings that we discussed last week, but it gives us a hint of what will happen when the trick no longer works. All bubbles...and all empires...blow up. An empire that depends on a credit bubble is doubly explosive. All it takes is a turn in the credit cycle, and the fuse is lit.

From the invasion of the Philippines to Vietnam War the US empire was financed by the rich, productive power of the US economy. But as the Vietnam War was winding down, the source of imperial finance changed from current output to future output. America switched to a purely-paper money system ...and turned to borrowing to finance its military adventures. Today's blockhead puffs out his chest and enjoys feeling like a big shot. He passes the bill on to tomorrow's taxpayer.

Advertisement
Rs 140...

What can we get for Rs 140 nowadays?

A cup of coffee...

A Piece of cake...

Maybe a couple of slices of Pizza I guess...

However today, for effectively less than Rs 140 per month, you can get Solid Blue Chip Recommendations right in your inbox... uninterrupted for Next 3 years!

Recommendations which could guide you towards creating that Solid Equity Portfolio you've always wanted.

But you need to hurry!

This is a Limited Period invitation that expires soon.

Click here for full details... and make the most out of your 140 Rupees...

The argument for heavy security spending collapsed between 1979 (when China took the capitalist road) and 1989 (when Russia abandoned communism). But by then the "military industrial complex" that Eisenhower warned us about was already firmly in control of Washington. Presidents - Democrat and Republican - came and went. Nothing nor nobody could keep resources from the security industry. One disastrous adventure merely led to another. Each one provided a source of more funding...more status...more power...more generals...more security clearances...more clandestine, off-budget operations... and more jackass parasites pretending to protect Americans from unknown enemies.

The return on investment from this spending was probably well below zero. That is, the foreign meddling probably created more enemies than it neutralized. But it didn't matter. Besides, the same phenomenon was happening in other major industries. In health, education and finance, more and more resources were commanded by political considerations even though these industries were still considered part of the private sector economy. In education, for example, the number of teachers stagnated while the number of administrators and 'educators' soared. Freighted with zombies, there were few real gains in these sectors, while the manufacturing sector withered. Real wages stopped increasing. Growth slowed.

Meanwhile, social welfare spending increased. "Guns and Butter," was LBJ's promise. Both were greasy and slippery. And without the strong growth of the '50s and '60s it was not possible to pay for so much zombie lard. The empire turned to credit. It has not had a genuinely balanced budget since. Instead, since the end of the Carter Administration deficits have increased, year after year.

When the Reagan team came into office in the early '80s there was a fierce internal battle about what to do with federal finances. The old conservatives - led by David Stockman, Reagan's young Budget Director -- felt the government had an obligation to balance its budget. The new or "neo" conservatives were more hip to the public mood...and to the miracle made possible by increasing credit. "Deficits don't matter," said Dick Cheney. The neos won. Stockman left the administration and went to Wall Street. Deficits soared. And Stockman wrote a good book, "The Great Deformation," explaining how the US economy had been corrupted by its leading industries - government, security, and finance.

By the '90s, the combination of a bull market on Wall Street, falling interest rates, the end of the cold war, and a disillusionment with traditional old-style democratic spending left the Clinton Administration in a rare sweet spot. It found that it couldn't spend money fast enough. Its revenues were high. Its spending opportunities were low. The result was what was called a 'balanced budget' - but the books only balanced if you ignored the cost of Social Security!

But it was George W. Bush who really took the lid off the credit machine. Details to follow...tomorrow...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "All bubbles and all empires blow up". Click here!

  

Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.