The US Empire is on the decline - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 16 July 2010
The US Empire is on the decline A  A  A

Paris, France,

George Loewenstein and Peter Hubel are allegedly professors at Carnegie Mellon and Duke respectively. We've had our doubts about American higher education. Their piece in today's International Herald Tribune (the global edition of the New York Times) confirms our suspicions: academics aren't really very interested in figuring out how things work.

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We made the point about economists earlier this week. Modern men and women of the economic persuasion don't spend much time trying to understand a real economy. Instead, they pass their waking hours trying to force it to operate the way they want.

They aren't naturalists observing jungle life in other words; they are zookeepers.

Along come Loewenstein and Ubel with keys in their pockets and a bucket of meat in their hands... But we can come back to them in a moment. You're probably more interested in what's happening in the markets. So let's take a look.

Wall Street suffered its first reversal 8 days yesterday. The Dow dropped a modest 7 points.

For its part, gold rose $1.30 and the dollar fell.

More importantly, the latest news is that inflation rates continue to fall. Producer prices went down 0.8% in the last two months - and the rate of decline is accelerating. It won't be long before the US is in outright deflation - just like Japan.

What's more, the yield on the 10-year note is telling the same story. It fell below 3% yesterday.

And here's something. The Washington Post reports that home foreclosures are expected to rise to a new record this year - over 1 million.

What this tells us is that the big 'D's are still in charge. Deflation. Default. De-leverage. Depression.

Want another one? How about 'Decline?' What do we mean by 'decline?' We're talking about the thing the anglo-saxon empire is in.

Wait a minute. We're still Number One, right? the sense that we can, in theory, kick any butt in the world. That is, if the Chinese let us. They've got so much of our money and so many of our bonds, if they decided to dump them, we'd be in one helluva fix. Because we don't pay enough in taxes to fund our social programs and the Pentagon at the same time. We can't afford it. So the nice Chinese lend us money.

But don't worry. They've promised not to dump our bonds. And we're sure they'll honor that promise for as long as they want to.

As far as we know, no empire that had to borrow money from its rivals has ever lasted very long. Britain got itself in that position in WWI. It could no longer afford the carrying costs of the empire - including the huge cost of the war itself. So, it borrowed from the US. The Germans borrowed from US lenders too. But America's lenders to Britain had more money in New York and more power in Washington. So, the US entered the war on Britain's side rather on Germany's side.

Then, in WWII, when an American general was put in charge of D-Day, it was clear that Britain had ceded the lead dog position to the US. It was a friendly handover, achieved by force of economics rather than by force of arms. The US did not have to defeat Britain militarily. Instead, she merely had to finance her.

A few years later, during the Suez crisis, Britain learned what it was like to be a subordinate power. She discovered that she could no longer throw her weight around without US consent.

But that is on the military front. At home, Britons discovered that they were poor...and getting relatively poorer. Under the weight of growing social welfare programs and a shrinking empire, Britain's economy sagged. Its old allies - France and the US - boomed in the post-war years. So did its old enemies - Japan and Germany. Soon, not only were its friends richer and more were its adversaries.

Britain's growth rate was barely positive. The country limped along through the '50s, '60s, and '70s...with strikes, shortages, rationing, and energy blackouts.

Your editor recalls his first visit in 1971. London was dark. England felt like a depressed, backward country. There were still the vestiges of empire in public places - statues, inscriptions, monuments to heroes who fought and died in places few could find on a map. In private places - such as hotel rooms - life was shabby and cold. Hotel rooms required you to feed coins into metered electric heaters. Otherwise, you just shivered among the flowered wallpaper and drab, worn-out carpets. You could still have a decent tea at the Savoy and buy a hand made suit on Saville Row. As Katherine Hepburn said of aging actors, Britain was "selling its deteriorating self."

Is that what we have to look forward to in
America...a post-imperial decline , where our standard of living stagnates ...our economy limps...and our place in the world frays and crumbles?

Yes. Most likely.

Why? Because the government is taking a larger and larger role in the economy. Because US social programs are too costly. Because we don't have enough money to pay for them. Because not enough money has been invested in productive business. Because our military burden is too heavy...and difficult to escape. Because we have no savings. Because we will likely spend the next 10 years paying down private debt. Because the rest of the world is racing ahead. Because we are growing older. Because our leaders are corrupt and incompetent. And because the whole society becomes more zombified every day.

*** Back to the zookeepers...

Loewenstein and Ubel take aim at the jungle. They believe "behavorial economics," in which you actually watch what people do, is a threat to their trade.

"For all its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our challenges," they write.

What sort of 'far-reaching policies?'

Well, to give you an idea. The feds came to the conclusion that it was not a good idea to let people get so fat. What to do about it?

"The fashionable response," say the two, "based on the belief that better information can lead to better behavior, is to influence consumers through things like calorie labeling."

But the latest studies show that "it has little impact." In other words, people don't seem to care. But instead of letting fully informed people make their own decisions about how fat they will be, the zookeepers want to decide for them.

The problem is that food is too cheap, they conclude. So "we need to consider taxes on unhealthful foods."

But "an over-reliance on behavioral economics is not limited to health care," they point out. Take energy consumption. The two note that merely telling drivers how much gas they're burning is not enough. The real problem is that "gas is still relatively cheap. An increase in the gas tax that made the price of gas reflect its true cost [what?] would be ...far more effective."

Deconstruction: The two academics are closed-minded, meddling bumblers. Obviously, the fat person chooses to be fat and the gas guzzler chooses to guzzle gas. Both of them have their eyes wide open. Loewenstein and Ubel merely want to substitute their own tastes and judgments for those of the native fauna. They're the zookeepers, after all.

*** And what's this? You can't say we didn't warn him. George W. Bush, that is. We told him that he was in danger of being arrested. What for? Crimes against humanity...

Now we see that retired judge Andrew Napolitano agrees with us. Speaking of the former president and his vice president, Dick Cheney:

"They should have been indicted. They absolutely should have been indicted... "What President Bush did with the suspension of habeas corpus, with the whole concept of Guantánamo Bay, with the whole idea that he could avoid and evade federal laws, treaties, federal judges and the constitution was blatantly unconstitutional — and in some cases criminal.

"They should have been indicted. They absolutely should have been indicted. For torturing, for spying, for arresting without warrants. I'd like to say they should be indicted for lying but believe it or not, unless you're under oath, lying is not a crime."


Sinking prices; sinking ships

Imagine the face of Lt. George Morris. On March 8, 1862, his ship, the USS Cumberland, found itself a victim of what the economist Joseph Schumpeter called 'creative destruction.' The creativity came in the form of a revolutionary new technology, iron-clad ships. The destruction came in the form cannonballs, which were smashing the poor Cumberland to bits. The Cumberland fired its cannons too. But its volleys merely ricocheted off its adversary, the CSS Virginia, like pebbles off a turtle's back.

Our subject today is not naval warfare. Nor is it history or metallurgy. Instead, it is a worry fit only for an economist. No sensible man would waste a minute on it. It is the problem of 'too much.'

The normal ups and downs of a healthy economy frighten capitalists terribly. As soon as their businesses get into trouble they howl for subsidies. When their investments go down, they whine for bailouts and central planning. It is not brains they lack; it is courage. They are not dumb, in other words; they are wimps.

But their philosophers and policymakers are the most pusillanimous of all. Their desperate reaction to the mini-recession of '01 led to the bubble of '05-'07. In a panic, they turned the fiscal balance of the US government upside down, from surplus to deficit; the country added $2 trillion to its national debt in the following 48 months. Meanwhile, interest rates were dropped below the rate of consumer price inflation - where they've been ever since. Then, when their bubble popped in '07-'09, they showed no interest in discovering what was really going on or why. Instead, blinded by fear, they rushed in like a waiter dousing the flames on a bananas foster.

And now we sit in front of a soggy mess. Having learned nothing, our leading economists are all for action. In his advice to the Fed, for example, Paul Krugman urges a variety of experiments. "Nobody knows how well any one of these actions would work," he admits. But the Fed should be "doing all it can..." Why? His English counterpart, Martin Wolf, answers. Because "advanced countries remain highly short of demand...a threat to the survival of the Eurozone and even the open world economy."

The terror du jour is the most remarkable yet. Wolf and Krugman believe there is an imbalance between the supply and demand. No kidding. They fear capitalism is not up to its most basic and simplest challenge.

Krugman: "The fact remains that our current problem is, in effect, a problem of excess worldwide savings, looking for someplace to go." With five people looking for every US job, there is also presumably an excess of labor. Even the normally level-headed Nouriel Roubini says we have a "world of excess supply."

Can you believe it? Their knees give way, fretting that markets no longer match up buyers and sellers. They might as well worry that maggots won't find dead meat. Karl Marx warned about the same thing. Driven by the profit motive, entrepreneurs will always overdo it, he said. Then comes a correction, as overcapacity is eliminated. The correction will cause people to lose jobs, he continued. The unemployed workers will have to stop shopping, causing a depression. Oh ye of little faith! There's always a buyer for every seller - at some price. For thousands of years, supplies have always come together with demand.

What is the cure for 'excess' capacity? Falling prices. Everybody who is not a swindler or a fool knows it. The real problem, from the activists' point of view, is not excess or shortage. It is fear. They are afraid of the prices it will take to clear the market. Shares may have to lose half their value. Property could be knocked down by another 20%. Banks and nations may go broke.

Falling prices are painful. But it could be worse. Capacity could be reduced in another way. Iron ships were pioneered by the French in 1859. Their first effort was named La Gloire. The British quickly made their own ship, Warrior, a year later. But it was in America, at the mouth of the Chesapeake Bay, that the world first saw what iron hulls and steam engines had wrought. The iron-clad CSS Virginia shot up the USS Cumberland, and the USS Congress. It retired for the night, having destroyed an entire industry too - timber-based shipbuilding. The next day, the confederate ship came back to finish off the USS Minnesota, which had run aground the previous day. In its path was an even newer and more modern ship, the USS Monitor, with only two big guns and a revolving turret. The two of them blasted away at each other for 3 hours. Neither could land a decisive blow.

In 48 hours, shipbuilding capacity was destroyed twice. Until then, there were shipyards all over the world that could turn out state-of the art vessels. But on March 10, 1862, there was hardly a single one. First, the heavy iron-clad Virginia had made wooden warships obsolete. And then, the technologically more advanced Monitor brought forth a whole new era. It was not enough to cover a ship in iron. The ship had to be radically redesigned and constructed using new skills and new materials. Suddenly, the iron mongers were working night and day...and the great oaks could relax.

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

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.

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1 Responses to "The US Empire is on the decline"

Ratan Lal Nangalia

Jul 16, 2010

Your articles make an interesting reading for those with international veiw of economics. However why are you so pessimistic all the time. US has always been in debt and Japanese in surplus since ages. There are always ups and downs in an economy and erstwhile stalwarts like India, Spain, Portugal, Germany, Britain and other super powers like Russia have all declined. Now is the time for emerging economies in South East. This is a natural cycle and I wonder how long human intervention can stop it.

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