The New Empire of Debt The Rise and Fall of an Epic Financial Bubble (2nd edition)

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TableofContentsPraiseTitlePageCopyrightPageIntroductionTHETHEMEOFTHISBOOKINANUTSHELLI-IMPERIAABSURDUMChapter9-Reagan’sLegacyChapter1-DeadMenTalkingChapter10-America’sGloriousEmpireofDebtChapter2-EmpiresofDirtChapter11-ModernImperialChapter3-HowEmpiresWorkFinanceChapter4-AsWeGoMarchingChapter12-SomethingWickedThisWayComesII-WOODROWCROSSESTHERUBICONIV-FINDEBUBBLEChapter5-TheRoadtoHellChapter13-WelcometoSquandervilleChapter6-TheRevolutionof1913andtheGreatDepressionChapter14-StillTurningJapaneseChapter7-MacNamara’sWarChapter15-TheMightyFallenChapter8-Nixon’stheOneChapter16-WhattoDoWhentheBarbariansArriveIII-EVENINGINAMERICANotes PraisefortheFirstEditionofEmpireofDebt“[T]ellsyouwhat’sreallygoingon”intheglobaleconomy.—TheEconomist“EmpireofDebtisawake-upcallforallinvestors.BonnerandWigginmasterfullyillustratewhyweshouldalltakeamuchcloserlookatwhatourfutureholds.”—Marketwatch“Tellsthestoryofhowallempiresareeventuallyundonebythesame‘vainoverreaching.’”—TimesofLondon“Read[EmpireofDebt]andyourviewsoftheworldaroundyouwillnolongerbethesame.”—NassimNicholasTalebAuthorofTheBlackSwan“Thedoommongeringisleavenedwithsomewaspishlywittywriting.”—TheDailyTelegraph“Theauthorsdescribewithsardonichumor—andnosmallamountofnamecalling—howAmericahasbecomeanoverfed,imperialhas-beenandeconomicbasketcase.”—SmartMoney.com“Inadditiontobeingaccomplishedfinancialanalysts,BonnerandWigginaretalentedhistoricalwriters.Andtheyputthistalenttoworkinthecauseofexaminingthepoliticalandeconomiceffectsofempire.”—TheHuffingtonPost Copyright©2009byWilliamBonnerandAddisonWiggin.Allrightsreserved.PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.PublishedsimultaneouslyinCanada.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinanyformorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,withouteitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpaymentoftheappropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,MA01923,(978)750-8400,fax(978)646-8600,oronthewebatwww.copyright.com.RequeststothePublisherforpermissionshouldbeaddressedtothePermissionsDepartment,JohnWiley&Sons,Inc.,111RiverStreet,Hoboken,NJ07030,(201)748-6011,fax(201)748-6008,oronlineathttp://www.wiley.com/go/permissions.Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontactourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnitedStatesat(317)572-3993orfax(317)572-4002.Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsinprintmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts,visitourwebsiteatwww.wiley.com.eISBN:978-0-470-52870-9 INTRODUCTIONTheBubbleEmpireThewillofZeusismovingtowarditsend.—TheIlliadOnedayinearlyspring2005,wetraveledbytrainfromPoitierstoParisandfoundourselvesseatednexttoRobertHue,headoftheFrenchCommunistPartyandasenatorrepresentingVald’Oise.Hesatdownandpulledoutatravelmagazine,justasanyothertravelerwould.AsidefromoneBolshevikmanquéwhostoppedbytosayhello,noonepaidanyattention.AfriendreportsthathewasonthesametrainafewmonthsagowiththenPrimeMinister,Jean-PierreRaffarin,whowasaccompaniedbyonlyasingleaide.Manyyearsago,whentheUnitedStateswasstillamodestrepublic,Americanpresidentswerelikewiseavailabletoalmostanyonewhowantedtoshootthem.ThomasJeffersonwentforawalkdownPennsylvaniaAvenue,alone,andspoketoanyonewhocameuptohim.JohnAdamsusedtoswimnakedinthePotomac.Awomanreportergothimtotalktoherbysittingonhisclothesandrefusingtobudge.Butnowanyonewhowantstoseethepresidentmusthaveabackgroundcheckandpassthroughametaldetector.TheWhiteHousestaffmustapprovereportersbeforetheyareallowedintopressconferences.AndwhentheU.S.headofstatetravels,hedoessoinimperialstyle;hemovesaroundprotectedbyhundredsofpraetorianguards,sharpshootersonrooftops,andthousandsoflocalcenturions.WhenPresidentClintonwenttoChinain1998,hetookwithhimhisfamily,plus“5Cabinetsecretaries,16membersofCongress,86senioraides,150civilianstaff(doctors,lawyers,secretaries,valets,hairdressers,andsoon),150militarystaff(drivers,baggagehandlers,snipers,andsoon),150securitypersonnel,severalbomb-sniffingdogs,andmanytonsofequipment,including10armoredlimousinesandthe‘bluegoose,’Clinton’sbulletprooflectern.”GettingthepresidentialentourageanditsarmadaofequipmenttoChinaand back,theAirForceflew36airliftmissionsonBoeing747,C-141,andC-5aircraft.ThePentagon’scostoftheChinatripwas$14million.OperatingAirForceOnealonecostsover$34,000anhour.Today,thepresidentcavalcadesaroundWashingtoninanarmoredCadillac.Thelimousineisfittedwithbulletproofwindows,equallysturdytires,andaself-containedventilationsystemtowardoffabiologicalorchemicalattack.TheSecretService—theagencychargedwithpreservingthepresidentamongtheliving—employsover5,000people:2,100specialagents,1,200UniformedDivisionemployees,and1,700technicalandadministrativewonks.Everywherethepresidentgoes,hissecurityishandled—bythousandsofguardsandaides,securecompounds,andcarefullyorchestratedmovements.SecuritywassotightduringavisittoOttawa,Canada,in2004thatsomemembersofParliamentwererefusedentryintothebuildingforlackofaspecialone-timesecuritypass,anactapparentlycontradictorytothelawsofCanada.Inlate2003,whenBushdeignedtovisittheBritishIsles,anadditional5,000BritishpoliceofficersweredeployedtothestreetsofLondontoprotecthim.1Parksandstreetswereshutdown.Sniperswerevisibleontheroyalrooftop.AfterBush’sstayatBuckinghamPalaceinLondon,theQueenwashorrifiedbythedamagedonetothePalacegrounds.Theywereleftlookingliketheparking2lotataWal-Marttwo-for-onesale.THETHEMEOFTHISBOOKINANUTSHELLWatchingthenewsisabitlikewatchingabadopera.Youcantellfromalltheshriekingthatsomethingveryimportantissupposedtobehappening,butyoudon’tquiteknowwhatitis.Whatyou’remissingistheplot.Letusbeginbynoticingthatthisisacomicoperathatseemsasthoughitmightveerintotragedyatanymoment.Thecharactersonstagearefamiliartous—consumers,economists,politicians,investors,andbusinessmen.Theyarethesamehustlers,clowns,rubes,anddumbbellsthatwealwaysseebeforeus.Butintoday’sperformancetheyaredoingsomethingextraordinary:Theyarethe richestpeopleontheplanet,buttheyhavecometorelyonthesavingsoftheworld’spoorestpeoplejusttopaytheirbills.Theyroutinelyspendmorethantheymake—andthinktheycancontinuedoingsoindefinitely.Theygodeeperanddeeperindebt,believingtheywillneverhavetosettleup.Theybuyhousesandthenmortgagethemout—roombyroom,untiltheyhavealmostnothingleft.Theyinvadeforeigncountriesinthebeliefthattheyarespreadingfreedomanddemocracy,anddependonlendingfromCommunistChinatopayforit.Butpeoplecometobelievewhatevertheymustbelievewhentheymustbelieveit.AlltheseconceitsandillusionsthatwefindsoamusingintheDailyReckoning(www.dailyreckoning.com),comenotfromthinking,butfromcircumstances.AstheysayonWallStreet,“marketsmakeopinions,”nottheotherwayaround.ThecircumstancethatmakessenseofthisstrangeperformanceisthattheUnitedStatesisanempire—whetherwelikeitornot.Itmustplayawell-knownroleontheworldstage,justasyouandImustplayourroles,notbecausewehavethoughtourwaytothem,butsimplybecauseofwhoweare,whereweare,andwhenweare.Primitivepeopleplayprimitiveroles.Theyarenolessintelligentthantherestofus,buttheywouldbeoutofcharacteriftheybegandoingcalculus.Theyhavetheirpartstoplayjustaswedo.Sophisticatedpeopleplaysophisticatedroles.Theyarenosmarterthananyoneelse,butyoustilldon’texpectthemtowearbonesthroughtheirnoses.We,citizensofthelastgreatempire,haveourrolestoplaytoo,andtheempireitself,mustdowhatanempiremustdo.Institutionshaveawayofevolvingovertime—afterafewyears,theynolongerresembletheoriginals.Earlyinthetwenty-firstcentury,theUnitedStatesisnomoreliketheAmericaof1776thantheVaticanundertheBorgiapopeswaslikeChristianityatthetimeoftheLastSupper,orMicrosoftin2009islikethecompanyBillGatesstartedinhisgarage.Still,whiletheinstitutionsevolve,theideasandtheoriesaboutthemtendtoremainfixed;itisasifpeoplehadn’tnoticed.InAmerica,alltherestraints,inhibitions,andmodestyoftheOldRepublichavebeenblownawaybytheprevailingwindsofthenewempire.Intheirplacehasemergedavainglorioussystemofconceit,deceit,debt,anddelusion. TheUnitedStatesConstitutionisalmostexactlythesamedocumentwithexactlythesamewordsithadwhenitwaswritten,butthewordsthatusedtobindandchafehavebeenturnedintosoftelastic.Thegovernmentthatcouldn’ttax,couldn’tspend,andcouldn’tregulate,cannowdoanythingitwants.Theexecutivehasallthepowerheneedstodopracticallyanything.Congressgoesalong,likeasimplemindedstooge,insistingonlythatthespoilsbespreadaround.ThewholeprocessworkssowellthatamemberofCongresshastobefoundinbed“withaliveboyoradeadgirl”beforeheriskslosingpublicoffice.Americanbusinessesarestillnominallycapitalistic.ButarecentpressitemreportsthatGeneralMotorswillneverbeabletocompeteunlessitditchesitscrushinghealthcarecosts.Whydoesitnotjustcutthecosts?Itseemstolackeitherthenerveortheright,butthejournalistproposedasolution:Nationalizehealthcare!Meanwhile,CEOpayhassoaredtothepointwheretheaveragechiefexecutivein2000earnedcompensationequalto500timestheaveragehourlywage.Stockholders,whosemoneywasbeingsquandered,barelysaidaword.Theywerestillundertheillusionthatthecompanieswereworkingforthem.Theyhadnotnoticedthatthewholecapitalistinstitutionhadbeentrussedupwithsomanychains,wires,redtape,andcomplications,itnolongerfunctionedlikethefreewheeling,moneymakingcorporationsofthenineteenthcentury.Meanwhile,corporationsinChina—acommunistcountry—hadtheirhandsandfeetfreetoeatourlunchesandkickourderrieres.Theentirehomelandeconomynowdependsonthesavingsofpoorpeopleontheperipherytokeepitfromfallingapart.Americansconsumemorethantheyearn.Thedifferenceismadeupbythekindnessofstrangers—thriftyAsianswhosesavingsglutisrecycledintogranitecountertopsandflat-screenTVsallovertheUnitedStates.Buttheseironies,contradictions,andparadoxeshardlydisturbedthesleepoftheimperialrace.Theypermittedthemselvestobelievesomanyabsurdthingsthattheywillnowbelieveanything.Inthefallof2001,peopleinDesMoinesandDuluthwerebuyingducttapetoprotectthemselvesfromterrorist“sleepercellsreadytoattacktheMidwest.”Inthefallof2004,theybelievedtheChineseweremanipulatingtheircurrencybypeggingittothedollarfornearly10years!LikeAlice,theywereexpectedtobelievesiximpossiblethingsbeforebreakfastand anotherhalfdozenbeforetea:Realestatenevergoesdown!Youcangetrichbyspending!Savingsdon’tmatter!Deficitsdon’tmatter!Letthemsweat,we’llthink!Wecan’thelpbutwonderhowitwillturnout.Inthisbook,weturnonceagaintothedustypagesofhistory.WefindourselvesoftentracingthefootstepsoftheWest’sgreatestempire—Rome—searchingforclues.InRome,too,theinstitutionsevolvedanddegradedfasterthanpeople’sideasaboutthem.RomansrememberedtheirOldRepublicwithitsrulesandcustoms.Theystillthoughtthatwasthewaythesystemwassupposedtoworklongafteranewsystemofconsuetudofraudium—habitualcheating—hadtakenhold.Rome’ssystemofimperialfinancewasfarmoresolidthanAmerica’s.Romemadeitsempirepaybyexactingatributeofabout10percentofoutputfromitsvassalstates.Therewerefewillusionsabouthowthesystemworked.RomebroughtthebenefitsofPaxRomana,andsubjectpeopleswereexpectedtopayforit.Mostpaidwithoutmuchprompting.Infact,thecostofrunningtheempirewasgreatlyreducedbythecooperationofcitizensandsubjects.Localnotables,whobenefitedfromimperialrule,butwhowerenotdirectlyontheemperor’spayroll,performedmanycostlyfunctions.Manyfunctionswere“privatized,”saysRamsayMacMulleninhisCorruptionandtheDeclineofRome.Thiswasaccomplishedinavarietyofways.Manyofficials,andeventhesoldiersstationedinperipheryareas,usedtheirpositionstoextortmoneyoutofthelocals.Inthisway,thecostofadministrationandprotectionwaspushedmoredirectlyontotheprivatesector.Commodawasthewordgiventothispractice,whichapparentlybecamemoreandmorewidespreadastheempireaged.MacMullenrecallsatypicalevent:FromMilan,acertainPalladius,tribuneandnotary,leftforCarthagein367.Hewaschargedwithinvestigatingaccusationsofcriminalnegligence—“ifyoudon’tpayme,Iwon’thelpyou”—broughtagainstRomanus,militarycommandantin Africa.BecauseofRomanus’sinaction,theareaaroundTripolihadsufferedattacksbylocaltribes,withoutdefensefromtheempire.Buttheaccusedwasreadyfortheinquisitor,andwhenPalladiusarrivedunexpectedlyatmilitaryheadquartersintheAfricancapital—carryingtheofficers’pay—hewasoffered...underthetable...aconsiderablebribe.Palladius...acceptedit.Buthecontinuedhisinvestigations,accompaniedbytwoofthelocalnotableswhosecomplaintshadlaunchedtheinquiry.Hepreparedhisreporttotheemperor,tellinghimthatthechargesagainstRomanuswereconfirmed.Butthelatterthreatenedtorevealthebribeshehadaccepted.SoPalladiusreportedtotheemperorthattheaccusationswerepureinventions.Romanuswassafe.The3emperororderedthatthetwoaccusers’tonguesbetornout.Astimewenton,theempirecametoresemblelessandlesstheOldRepublicthathadgivenitbirth.Theoldvirtueswerereplacedwithnewvices.Gradually,thetroopsonthefrontierhadtodependmoreandmoreontheirowndevicesfortheirsupport.Theyhadtotakeupagriculture.“Theeffectivenessofthetroopswasdiminishedastheybecamepart-timefarmers,”saysMacMullen.Gradually,theempirehadfewerandfewerreliabletroops.InTrajan’stime,theemperorcouldcountonhundredsofthousandofsoldiersforhiscampaignsinDacia.Butbythefourthcentury,battleswerefoughtwithonlyafewthousand.Bythefifthcentury,thesefewtroopscouldnolongerholdoffthebarbarians.Thecorruptionoftheempirewascomplete.IfyoudenythattheUnitedStatesisnowanempire,youareasbigafoolaswewere.Foraverylongtimeweresistedtheconcept.WedidnotwanttheUnitedStatestobeanempire.Wethoughtitwasapoliticalchoice.WelikedtheoldrepublicofJefferson,Washington,theU.S.Constitution...thehumblenationofhardmoneyandsoftheads;wedidn’twanttogiveitup.WethoughtthatiftheUnitedStatesactedasthoughitwereanempireitwasmakinganerror.Whatmoronswewere.Wemissedthepointcompletely.Itdidn’tmatterwhatwewanted.Therewasnomorechoiceinthematterthanacaterpillarhasachoice aboutwhethertobecomeabutterfly.Thiswasanimportantinsightforus.Untilthen,alloftheblusteringandslapstickpratfallsonstageseemedlike“mistakes.”WhywouldtheUnitedStatesrunsuchhugetradedeficits,wewondered.Itwasobviouslyabadidea,thenationwasruiningitself.AndwhywoulditlaunchaninvasionofIraqorbeginawaronterror—bothofwhichwerealmostcertaintobecostlyblunders.ItwasasiftheUnitedStateswantedtodestroyitself—firstbybankruptingitseconomy,andsecondbycreatingenemiesallovertheglobe.Then,werealized,thatofcourse,thatisexactlywhatitmustdo.Werepeat:Peoplecometobelievewhattheyneedtobelievewhentheyneedtobelieveit.Americaisanempire;itspeoplemustthinklikeimperialists.Inordertofulfilltheirmission,thehomelandcitizenshadtobecomewhatGeorgeOrwellcalled“hollowdummies.”Animperialpeoplemustbelievethattheydeservetobetheimperialpower—thatis,theymustbelievetheyhavetherighttotellotherpeoplewhattodo.Inordertodoso,theymustbelievewhatisn’ttrue—thattheirownculture,society,economy,politicalsystem,ortheythemselvesaresuperiortoothers.Itisavainconceit,butitissobrightandsobigitexercisesakindofgravitationalpullovertheentiresociety.Soon,ithassetinmotionawholesystemofshinyvanitiesandillusionsasdistantfromthetruthasPlutoandasbizarreasSaturn.Americansbelievedtheycouldgetrichbyspendingsomeoneelse’smoney.Theybelievedthatforeigncountriesactuallywantedtobeinvadedandtakenover.Theybelievedtheycouldrunupdebtforever,andthattheirdebt-ladenhouseswereasgoodasmoneyinthebank.Thatiswhatmakesthestudyofcontemporaryeconomicssoentertaining.Wesitatourtelescopesandlaughlikeadivorcelawyerlookingatphotosofarichmaninflagrantedelicto;weknowthere’smoneytobemade.Thingsthatareunusualusuallyreturntonormal.Iftheydidnot,therewouldbeno“normal”toreturnto.Thatiswhyyoucanexpectstockstobecomemoreexpensivewhentheyarecheapandcheaperwhentheyareexpensive.Housesusuallygoupatarateroughlyequaltotherateofinflation,income,orGDPgrowth—nomore.Forthe10yearspriorto2006,however,theywentupthreetofivetimesasfast.Housepricescannotgrowfasterthanincomeforverylong; peoplehavetobeabletopaythepricesinordertoliveinthem.So,youcouldexpecthousestoreverttotheirmeantoo.Thesesimplereversionstomeanarehardlycontroversial.Wedidn’tknowwhentheywouldhappenorhow,butthattheywouldcomeaboutwaspracticallyguaranteed.Moreinterestingtousarethereversionstoother,biggermeans.Anempireitselfisararething.Itisnormal,butunusual.Natureabhorsamonopoly.Anempireisamonopolyonforce.Naturewilltolerateitforawhile,butsoonerorlater,theimperialpeoplemustreverttobeingnormalpeople,andthepreposterousbeliefsthattheimperialpeoplecherish,alsomustpassaway.Theymustgouptoakindofhumbugheaven,whereabsurdideasandidleflatteriesstrutaroundwhilethegodspoint,snicker,androllaroundonthefloorclutchingtheirstomachsasifthehumorofitwasgoingtokillthem.Thedollarisanextraordinarythingtoo.Doyouknowwhatthelong-termmeanvalueofpapercurrencyis?Well,itiszero.Thatiswhattheaveragepapercurrencyisworthmostofthetime...anditistheblackholeintowhichallpapercurrenciesinthepasthavegone.Therecouldbesomethingmagicaboutthedollarthatmakesitunlikeanypapercurrencyinthepast—thatis,somethingthatmakesitnon-meanreverting.Butifanyoneknowswhatitis,heisnotworkingonthisbook.Forthelasthundredyears,thedollarhaslostvaluefasterthanthedeclineoftheroman-eraDinariusafterthereignofNero.Thisisnotsurprising.Romancoinshadsilverorgoldinthem.Inordertomakethecoinslessvaluable,theyhadtoreducethepreciousmetalcontent.Peopledidn’tlikeit.Thedollar,bycontrast,containsnopreciousmetal.Notevenanybasemetal.Itisjustpaper.Ithasnoinherentvalue.Thereisnothingtotakeout,becausetherewasneveranythingthereinthefirstplace.Overtime,thedollarisalmostcertaintoreverttoitsrealvalue—whichisasemptyasdeepspace.Inthebigpictureofthings,itisalsounusualforonecivilizednationtoearnfarmorepercapitathananother.Inthethousandsofyearsofhistory,somegroupswerepoor...otherswererich.Butextremedifferenceshadawayofworkingthemselvesout—bytrade,war,pestilence,anddegeneracy.Bytheyear1700,amaninIndia,China,Arabie,orEuropehadaboutthesamestandardofliving, whichwasnotveryhighanywhere.Butalongcametheindustrialrevolution,whichthrewincomesoutofbalanceandchangedthewaypeoplethink.Europestoleamarchontherestoftheworld’sindustries,withhugegainsinoutputcominginarelativelyshortperiodoftime.Soon,Europeansweretheworld’sleadingimperialists,convincedthattheyhaditsbesteconomicsystem,itsfinestscholars,itshighestmorals,anditsmostsplendiferousarmies.Butiftheworldworksthewaywethinkitdoes,youcanexpecttheincomesofEuropeans—andtheirAmericancousins—toreverttotheirhistoricmeans.Theprocesscouldtakeseveralgenerations.Itcouldstall.Therecouldbecountertrends.Butthereisnoreasontothinkaman’slaborisinherentlyworthmoreinFrancethaninBangladesh,orthataplumberwithstarsandstripesonhisoverallsshouldearnmorethanonewithacrescentmoon.Ifthereisamean,thingswillregresstoit.Youcanexpect,relativelyspeaking,AsianincomestoriseandAmericanincomestofall.Thatis,ofcourse,justwhatishappeningnow.InIndia,forexample,realincomeshavemorethandoubledinthelast10years.InAmericathereissomedisputeaboutthenumbers,butiftherehasbeenanyincomegrowthatallithasbeenslight.Justtointroduceagloomyremark,wenotethatwearepersonallyandindividuallyregressingtothemean.Themeanforahumanbeingisdeath—ornon-existence.Apersonwalkstheearthforonlythree-scoreandten,asitsaysintheBible.Therestofthetime,heisonlyapotentialperson...oraformerperson.Formillionsofyears,heiseitherinthefuture...orinthegrave.You,dearreader,areenjoyingthatever-so-briefperiodofexaggeration...ofhyperbole...ofextraordinary,mean-bustingusualnesswecall“life.”Itisnotforustoknowthetimeorplacewhenitcomestoanend.Butlikeallmean-revertingphenomena,onlyafoolwouldbetagainstit.(Forourownpart,wedonotparticularlycarewhenorhowwemeetourend.Wejustwishtoknowwhere,sowecanavoidtheplace.)ButuntilrecentlybettingagainsttheendisjustwhatmostAmericansweredoing.Theywereborrowingandspendingasiftherewerenotomorrow,andtheywereinvestingasthoughtherewerenoyesterday.Ifthey’donlylookedatthepatterns ofthepast,theywouldhaveseenthatitdoesn’tmakesensetobuyathighprices—youcan’tmakemoneythatway.Thewaypeoplehavealwaysmademoneyisbybuyinglowandsellinghigh.Doingittheotherwayarounddoesn’twork.Nordoesborrowingandspendingmakeyourich.Tomorrowalwayscomes—atleastitalwayshasupuntilnow—andyouhavetopayyourdebts.Overtime,pricesgoupanddown.Manyotherthingsebbandflowaswell,boomandbustorbloomandwither.Allofthesephenomenagothroughpredictablecyclesthatcanberoughlymodeled.Analystsstudythecyclestotrytofigureoutwherewearecurrentlylocatedinthehabitualpattern.Itisoftenfrustratingwork,becausethepatternsarerarelyquiteasregularandwell-definedinthepresentastheyappeartohavebeeninthepast.Still,itisaquestionworthasking:Whereinthecyclearewe?Oneofthewaysyoucantellwhereyouareinthecycleistolookatwhatyourfriendsandneighborsbelieve.Whenpeopleyouknowarealloftheopinionthatstockswillrise15percentperyear—foranindefiniteamountoftime—youcanbesureyouarenearertoatopthanabottom.Whenpeoplebelievetheopposite—thatstockswillnevergoup—mostlikely,youarenearabottom.Beliefsgiveusacluetothelargercyclesaswell.Peoplemustplaytherolesthathavebeenthrustuponthem.Theyarebullishneartheendofabullmarket;theyarebearishneartheendofthebearmarket.Ifitwereotherwise,themarketcouldneverfullyexpressitself.Ifinvestorsgrewsuddenlycautiouswhilenearinganepicbullmarketpeak,theywouldselltheirstocks,andthepeakwouldneverbereached.Orsupposethatafterseveralyearsofsoaringhousepriceshomeownerscametobelievethathousingpriceswouldfall?Howcouldyouhaveaproperhousingbubble?Howcanyouhavearip-roaringpartywithoutanyonegettingdrunk,inotherwords?Howcanpeoplemakefoolsofthemselvesiftheyareunwillingtogetuponthetablesanddance?Thesearedeepphilosophicalquestions.Buttheyhelpusrecognizewherewemaybeinthecycle.Aspricesreachaloonyexcess,peoples’ideasgrowloonytoo.Ergo,thelooniertheideas,themorelikelyitisthataturningpointisnear;thewildertheparty,themorelikelysomeonewillcallthegendarmes. Wealsosuspectthatattitudesevolvesimilarlyinanimperialcycle,duringwhichacountry’seconomic,financial,andmilitarypowerrunsupoverseveralgenerationsandthendeclines.Atthepeak,theimperialpeoplecometobelievethattheirsystemissuperior,thattheirvaluesareuniversal,andthattheirwayoflifewillinevitablydominatetheentireworld.ReaderswillrecognizetheseattitudesinafamousarticlebyFrancisFukayama,writtenafterthefalloftheSovietUnion,inwhichhesuggestedthattheworldmayhavereachedthe“EndofHistory.”ItwastheendofhistorybecausetheAmericansystemhadtriumphed—noimprovementseemedpossible.Fukayama’sideawasnotoriginal.HegelandMarxistintellectualshadproposedthesamethingmorethanahundredyearsearlier.Withthevictoryoftheproletariat,nofurtheradvancecouldbemade.Historyhadtostop.Hegelstoppedticking.Marxdied,too.Historycontinued.Butwhenpeoplefeeltheyareontopoftheworld,theybegintotakethingsforgrantedthattheypreviouslytookforabsurd.Aswementionedearlier,AmericanscametodependonthesavingsofCommunistChinainordertopayfortheirlifestyles...andtheirwarstomaketheworldsafefordemocracy.Theydidsowithoutthinking.Subconsciously,theycametobelievewhatimperialpeoplealwaysseemtobelieve—thattheirsocietyissosuperior,thattherestoftheworldlongstobejustlikethemorisinevitablydrawntobecomelikethem,whethertheylikeitornot.ThatwasthepremisebehindthebillionsofdollarsAmericanswereinvestinginChina.Afewyearsagoifsomeonehadsuggestedthattheyinvestinacommunistcountry,theywouldhavethoughtthepersonmad.Chinaisstillrunbyveteransofvarious“greatleapsforward,”butAmericanswereconvincedthattheywereallleapingtobecomejustlikeus—capitalistsanddemocratsatheart!Sovainarewethatwecan’timagineanyonewantingtobeanythingelse.Andofcourse,theinvasionofIraqwasbasedonthesamesortofthinking:thateventhegrubbydeserttribeswanttobejustlikeus.AllwehadtodowastogetthedictatorofftheirbacksandthemenwouldstartbuildingshoppingmallsandthewomenwouldallstartdressinglikeBritneySpears. Thosearethesortofdelusionsyougetatthetopofanimperialcycle.Butculture,politicalsystems,andeconomiesareneverasuniversalandeternalaswethink.Instead,everythingevolves.EveninFrance,ourclosestcousinsdonotshareourAmericanattitudes.IntheUnitedStates,weallseektomaximizeourincomes.Weworklonghours.Westartenterprises.Weinvest.InFrance,peopledonotseektomaximizetheirincomes.Instead,whattheywanttomaximizeistheirleisure,andthequalityoftheirlives.Theyspendmoretimetalkingabouthowtocookthebaconthantheydoabouthowtobringithome.FranceoncehadaEuropeanEmpirethatreachedfromSpaintoMoscow.Later,ithadaworldwideempire,withsubjectcountriesandcoloniesinAfrica,theWestIndies,andtheSouthPacific.FromthetimeofRichelieutothetimeofLeonBlum,Francehadoneofthemostpowerfularmiesonearth.EvenatthebeginningofWorldWarII,FrancehadthelargestarmyinEurope—onpaper.Butthereneverwasacyclethatdidn’twanttoturn.Andtheimperialcycleturnsalongwiththerestofthem.Formanygenerations,theFrenchbelievedtheyhadthefinestculture,thebestschools,themostadvancedscientists,andthemostdynamicbuildersintheworld.Francesawitsmissionasbringingthebenefitsofitscivilization—ofvinrougeandtheRightsofMan—totherestoftheglobe.Butnowit’sourturn.ItisweAmericanswhothinkwehavethebestculture,thebesteconomy,thebestgovernment,andthebestarmytheworldhaseverseen.Now,itiswewhohavetheburdenofthe“missioncivilisatrice.”Itisourdutytobringfreedomanddemocracytothistatteredoldball;ourpresidentsaidso.HowdidAmericabecomeanempire?Wedon’trecallthequestionevercomingup.Therewasneveradebateonthesubject.Therewasneveranationalreferendum.Nopresidentialcandidateeversuggestedit.Nobodyeversaid,“Hey,let’sbeanempire!”Peopledonotchoosetohaveanempire;itchoosesthem.Graduallyandunconsciously,theirthoughts,beliefs,andinstitutionsarerefashionedtotheimperialagenda.WhiletherehasbeennodiscussionofwhetherAmericashouldbeanempire,therehasbeenmuchpubliccluckingonthespecificpointsoftheimperialagenda.ShouldweattackIranorIraq?Shouldwehavenationalidentitycards?ShouldwesuspendtheBillofRightsinordertocombatterroristsmoreeffectively? Manypeoplewondered,includingyourauthor,whatwasthepointofthewaragainstIraq.Thecountryhadnopartinterroristattacks.Aucontraire,Saddam’sIraqwasabulwarkofsecularpragmatisminanareaunsettledbyreligiousfanaticism.Itwasthereligiousfanaticswhoposedadanger,saidthepapers,nottheruthlessdictatorswhosuppressedthem.OtherswonderedifanattackonIraqwouldmaketheworldsaferormoredangerous.OriftheUnitedStateshadcommittedenoughtroopstogetthejobdone.Butthebigquestionhadalreadybeensettledwithouteverhavingbeenraised.WhyshouldAmericanscarewhathappenedinthemideast?Oranywhereelse?DidtheSwisswonderwhatkindofgovernmentIraqshouldhave?DidtheSwisstrytomaketherestoftheworldmorelikeSwitzerland,orallowthemselvesthevainfantasyofimaginingthateveryoneontheplanetsecretlyyearnedtobemoreliketheSwissthemselves?Whilenoonenoticed,theimperialweedputdownrootsdeepinthesoilofNorthAmerica.Bytheearlytwenty-firstcentury,hardlyanythingelsegrew;ithadcompletelycrowdedoutthedelicateflowersplantedbytheFoundingFathers.ThedebatesurroundingtheinvasionofIraqwasanimperialdebate—aboutmeansandmethods,notaboutrightandwrongornationalinterest.NoonefromeithermajorpoliticalpartybotheredtosuggestthattheUnitedStatesshouldnotbenosingaroundinotherpeoples’business.BothpartiesrecognizedthatIraqwasnotamatterofnationalinterest—itwasamatterofimperialinterest.Nobusiness,nowhere,wastoosmallortooremotenottobeofinteresttotheempire.Fromitsmilitarybasesallovertheglobe,anditssensorsorbitingtheplanet,theAmericanimperiumwatchedeveryone,everywhere,allthetime.Intheyear2005,nosparrowfellanywhereintheworldwithouttriggeringamonitoringdeviceinthePentagon.Thismarkedwhatmaybethepeakofatrendthatbeganmorethanonehundredyearsago.Justabouttheturnofthecentury,theUnitedStatesbecametheworld’slargesteconomy—anditsfastestgrowingone.Nearthesametime,TheodoreRooseveltbeganridingroughoversmall,poornations.America’sfatproto-imperialistrarelysawafighthedidn’twanttogetinto.Itwasathisurging(hehadthreatenedtoraisehisownarmytodothejob)thatWilsonannounced hisreadinesstojointhewarinEuropein1917.Wilsonsaidhewasdoingitto“maketheworldsafefordemocracy.”ThisisthestatedgoalofnearlyallU.S.foreignpolicyeversince:toimprovetheplanetwithmoredemocracy.Ofcourse,almostallempirebuildersthinktheyareimprovingtheplanet.EvenAlexandertheGreatthoughthewasdoingitafavorbyspreadingGreekculture.ButwhenWilsonsenttroopstoEurope,peoplewonderedthenwhattherealpointwas.Americahadnointerestinthewarandnoparticularreasontofavoronesideovertheother.Buttheretoo,theymissedthepoint.Americawasquicklybecominganempire.Empiresarealmostalwaysatwar—fortheirroleisto“maketheworldsafe.”PresidentTrumanclarifiedtheimperialmodusoperanduswhenhesenttheUnitedStatesintobattleinKoreawithnodeclarationofwar.Hedidn’teventellCongressuntilafterthearmywasengagedandAmericansweredying.Then,PresidentJohnsonfollowedupwithanotherwarinafar-offplacethatmadenodifferencetoAmericans—Vietnam.Whatwasthepoint?TheSwissarmywasnowheretobefound.AndwhereweretheBelgians?EventheFrenchhadgivenuponVietnamadecadebefore.ButmorethanthreemillionAmericansoldierswenttoVietnamandmanycamebackflat.Andforwhat?Justanotherwarontheperipheryoftheempire.Noneoftheseengagementsmadeanysenseforahumblenationthatmindeditsownbusiness.NonewouldhavemadeanysenseforAmericauntilthefirstRooseveltadministration;butoncethenationhadbecomeanempire—withahomelandandwide-ranginginterestsbeyondit—almostallwarsseemedappropriate.AnotherlandmarkinthehistoryoftheAmericanempirecameonAugust15,1971.ThatwasthedaythatRichardNixonseveredthelinkbetweentheimperialcurrencyandgold.Thitherto,empireorno,theUnitedStateshadtosettleitsdebtslikeothernations—inacurrencyitcouldn’tmanufacture.Henceforth,thewaywasclearforavastincreaseinempirespending...anddebt.ThuswearriveattherealproblemfortheAmericanempire.Ithasbyfarthestrongestmilitaryintheworld.Ithasnoseriouschallengersbeyonditsborders.Hence,ithadtobecomeitsownworstenemy.Allempiresmustpassaway.Allmustfindawaytodestroythemselves.Americafounddebt. ThetraditionalmethodofempirefinanceissosimpleevenaMongolbarbariancouldmasterit.Nationsareconqueredandforcedtopaytribute.Thehomelandissupposedtomakeaprofit;itissupposedtogrowrichercomparedtothevassalstates.Buthere,Americafellvictimofitsownscam.Pretendingtomaketheworldabetterplace,theUnitedStatescouldnotverywellrequirethepoornationsitconqueredtopayup.Instead,ithadtoborrowfromthem.Thiswasnotaproblemintheearlydays.Untilthemid-1980s,U.S.industriesweresorobusttheywereabletotakeadvantageofthepaxdollariumtoexpandsales,jobs,andprofits.Butinthe1970s,theU.S.tradebalanceturnednegative.BytheyearAlanGreenspantookoverattheFed,foreignersownedmoreU.S.assetsthanAmericansownedforeignones.Americanfactorieshadgrownoldandexpensive.Americanworkerswerepaidtoomuch.Americanbusinessmeninvestedtoolittleintrainingandnewcapitalequipment.Thewholenationdevelopedanattitudemoreinharmonywithanempireonthedeclinethanonethatwasstillrising.Theimperialpeoplechosetospendratherthantosave,andtohallucinate,ratherthanthinkhard.Theydemandedbreadandcircusesathome;lettheAsianssweatabroad.Empiresarethoughtbymanytobegoodthings.Theyexpandtheareainwhichtradecantakeplace.Inmodernparlance,theyallowforincreased“globalization.”Generally,globalizationisgoodforeveryone.Itpermitspeopletospecializeinwhattheydobest,producingmoreandbetterthingsatlowercosts.Butitismorebeneficialtosomethantoothers.TherearethreebillionpeopleinAsia.AndalmosteveryoneofthemiswillingtoworkforafractionoftheaverageAmericanwage.GlobalizationandartificiallylowinterestratesinAmericaallowedAsianindustriestoflourish.ButforeverydollarinrevenuetoanAsianexporter,6centsindebtwasaddedtoAmerica’sheavybalancesheet.Thingshappenthatnooneparticularlywantsorespeciallyencourages,andtheaveragemangoesalongwithwhateverhumbugispopular—withnorealideawhereitleadsorwhyhefavorsit. Eachpersonplaystherolegiventohim;everyonebelieveswhatheneedstobelievetoplaythepart.AlanGreenspanwasfamouslyagainstpapermoneythatwasnotbackedbygoldwhenhewasalibertarianintellectual.Whenhebecameagovernmentfunctionary,hisviewsconvenientlychanged.HecametobelievewhathehadtobelieveinordertobetheheadoftheAmericanempire’scentralbank:theFederalReserve.Theempireneedsalmostunlimitedamountsofcredittocarryoutitsforeignwars,whilemakingbreadandcircusesavailableathome.AlanGreenspanmadesureitgotit.Expensiveforeignwars,expensivebread,expensivecircuses—theseare,ofcourse,whatbankruptedalmosteveryempirefromRometoLondon.Butthatisjustthepoint:Institutionsplaytheirroles,too.Onegrows;anotherdecays.Oneisyounganddynamicwhileanotherisoldanddecrepit.Onehastodietomakewayforthenewonetotakeitsplace.Onehastoruinitselfsothatanothermayflourish.Americanscouldhavecuttheirmilitarybudgetby75percentandstillhavehadthebiggest,mostadvancedarmyintheworld.Theycouldhavetrimmedtheirhouseholdspendingbyhalf,andstilllivedwell.Theycouldhavedrivenlessinsmallercars,theycouldhaveceasedmortgagingtheirhouses,theycouldhave“madedo”withlastyear’sclothesandyesterday’slaptop,buthowcouldtheyruinthemselvesiftheyputonthebrakesbeforegettingtowheretheyaregoing?Butyouneverknowwhereyouareinthecycleuntilitistoolatetodoanythingaboutit.Forallweknow,wecouldbefacingmerelyatemporarypullbackinwhatisstillalong-termbullishperiodfortheAmericanempire.Notlikely,butwhoknows?Thetheorywehavebeenteasingoutisthatpoliticsandmarketsfollowsimilarcyclicalpatterns—boom,bust,bubble,andbamboozle.Ahandfulofcompaniesusuallytakeadominantpositioninthemarket;sometimesasingleonedoes.Sodoafewcountriesdominateworldpolitics...“empires”theyarecalled.Thedifferencebetweenaregularnationandanempireisprofound.Aregularnation—suchasBelgiumorBulgaria—tendsitsownaffairs.Anempirelooks outward,takingonitsshouldersthefateofmuchoftheworld.Anempireislikeabullmarket.Itgrows,itdevelops...oftenitpassesintoabubblephase,whenpeoplecometobelievethemostabsurdthings.Wedon’tknowwhatstagetheAmericanempirehasreached...butwelookaroundandseesomanydegenerateandabsurdthings,weguess:Wemustbenearertheendthanthebeginning.Howwillitend?Whatwillhappennext?Wedon’tknow,butwenotethatpeopledonotgiveuptheirself-servingconceitsandillusionsreadily.Theyholdontothemaslongaspossible.“Americastillhasthegreatest,mostdynamiceconomyonearth,”theytellthemselves,evenasthenationlosesmoney(itsincomeislessthanitsexpenses).Thiskindofmadnessishardnottolike;itislikeanagingwomanwhothinksshebecomesmorefetchingwitheachpassingyear.Thegapbetweenperceptionandrealitygrowswidereveryday,untilfinally,themirrorcracks.Noquestion:Theglasshasfractured;thespellhasbeenbroken.Inthelasthalfof2008,theEmpireofDebtgotthe“margincallfromHell.”Allofasudden,itscitizenswereaskedtopayup.Andnow,theU.S.economyentersadeep,darkpassage.Longsufferingreaderswillfindthisforecastfamiliar.ItisthesameonewemadeyearsagoinanotherbookwithAddisonWiggincalledFinancialReckoningDay(Wiley,2003).Wethoughtthenthatthetechbubblewouldblowup,resultinginalong,softslowslump,àlaJapan.Wellwewerenotwrong.Justfouryearstooearly.Insteadofarealslump,theUnitedStateshadanine-monthphonyrecession(inwhichconsumerdebtactuallyexpanded)andaphonyboomsince(inwhichconsumerdebtexpanded).Thesetwophonyactssetthestageforarealone—anot-so-soft,not-so-slow,slump.Butdon’tworry.Thefedsareonthecase.Asthebubbleinprivatedebtdeflates,theyarepumpingupanew,evenbigger,bubble—inpublicdebt.Andwhenthatoneblowsup...well,we’lljusthavetowaitandsee.... IIMPERIAABSURDUMLookbackoverthepastwithitschangingempiresthatroseandfellandyoucanforeseethechangingfuture,too.—MarcusAurelius1DeadMenTalkingTradition...isthedemocracyofthedead.—G.K.ChestertonOneofthenicestthingsaboutEurope’scitiesisthattheyaresofullofdeadpeople.InParis,thecemeteriesaresopackedthatthecorpsesarelaiddownlikebricks,stackedoneatoptheother.Occasionallythebonesaredugupandstoredinundergroundossuariesthatareturnedintotouristattractions.Thousandsandthousandsofskullsareondisplayinthecatacombs;millionsmoremustbespreadalloverthecity.InVenice,adeadmangets—orusedtoget—asend-offsogloriouslysentimentalhecouldhardlywaittodie.Thereisbarelyroomwithinthecitywallsforthelivingandnoneatallforthedead.Cadaverswereloadedontoamagnificentlymorbidfloatingmariah—arichlydecoratedfuneralgondola,paintedinbrightblackwithgoldangelsonherbowandstern.Then,asifcrossingtheriverStyx,theboatwasrowedacrossthelagoontotheislandofSanMichelebyfourgondoliersinblackoutfitswithgoldtrim.HowAmericanversifiersmusthaveenviedoneoftheirown,EzraPound,when hetookhislastgondolarideinsuchfabulousstylein1972.Andthen,whatluck!Theformerclassicalscholar,poet,andadmirerofBenitoMussolinigotoneofthelastemptyholesonthecemeteryisland.Today,whenVenetiansreachroomtemperature,thebesttheycanhopeforisadampspotonthemainland.Wedonothastentojointhedead,butweseektheircounsel.Whencorpseswhisper,welisten.“Beenthere.Donethat,”theyoftenseemtosay.ReadingMargaretWilsonOliphant’shistoryofthedeaddukes,ordoges,inherclassicbook,TheMakersofVenice,Doges,Conquerors,PaintersandMenof1Letters,wefeltasthoughsomeoneshouldhavesentacopytoGeorgeW.Bush.“Readthis.Spareyourselfsometrouble,”theauthormighthavewrittenontheaccompanyingnote.ButwhoreadsanythingbutnewspapersintheCapitalCity?Whoreadsatall?IntheUnitedStatesifitisn’tontheeveningnews,itdidn’thappen.Ancienthistoryissomethingthathappenedlastweek.Toobad.ForpracticallyallthemostpreposterousideasthatemanatefromthefeverishswampsofthePotomacweretriedoutinthefeverishswampsofVenice,hundredsofyearsago.LESSONSOFTHEFOURTHCRUSADE“Democracy!Empire!Freedom!Nationbuilding!”Theideasarecastintothemurkylagoonofhumanaffairsasifthewordswereclarifyingmagic.Suddenly,wrongisasdistinctfromright,asdayfromnight.Goodfrombad...successfromfailure...howclearlyweseethingsinthecrystalwatersofourowndelusions!TheUnitedStatescongratulatesitselfasbeingthefinestdemocracytheworldhaseverseen,butthesystemforrulingVeniceeightcenturiesagowasalsodemocratic.Peoplevotedforpeoplewhovotedforotherpeople,whothenvotedforyetmorepeoplewhoelectedthedoge.Thewholeideawastoallowordinarypeopletobelievethattheyranthenation,whilerealauthorityremainedinthe handsofafewfamilies—theBushes,Kennedys,Gores,andRockefellersofthirteenth-centuryVenice.“Soeasyisittodeceivethemultitude,”saysMrs.Oliphant.“ThesovereigntyofVenice,underwhateversystemcarriedon,hadalwaysbeeninthehandsofacertainnumberoffamilies,whokepttheirplacewithalmostdynasticregularityundisturbedbyanyintrudersfrombelow—thesystemoftheConsiglioMaggiorewasstillprofessedtobearepresentativesystemofthewidestkind;anditwouldseematthefirstglanceasifallhonestmenwhoweredabeneandrespectedbytheirfellowsmustonetimeorotherhavebeensecureofgainingadmissionto2thatpopularparliament.”ToMrs.Oliphant’sdictumonthemultitude,weaddacorollary:Itiseveneasiertodeceiveoneself.Today,rarearetheAmericanswhoarenotvictimsoftheirownscams.Theymortgagedtheirhomesandthoughttheyweregettingricher.TheyboughtWallStreet’sproductsasthoughtheyweregamblinginLasVegasandbelievedtheywereascleverasWarrenBuffett.TheywenttothepollingstationsinNovember2004andbelievedtheywereselectingthegovernmenttheywanted,whenthechoicehadalreadybeenreducedtotwomenofthesameclass,sameage,sameschooling,samewealth,samesecretclub,samesociety,withmoreorlessthesameideasabouthowthingsshouldberun.InWashington,DC,theUnitedStatesSenatemetinthesamesolemndeceitastheConsiglioMaggiore—pretendingtodothepublic’sbusiness.Whiledownthestreet,America’sowndoge,GeorgeW.Bush,tookupwheretheMichieliandtheDandolosleftoff:tryingtohustletheEast.Makingaverylongstoryshort,atthebeginningofthethirteenthcentury,asatthebeginningofthetwenty-first,manypeoplesawaclashofcivilizationscomingandsharpenedtheirswords.Theywere,thenasnow,thesamecivilizations,clashinginaboutthesamepartoftheworld—theMiddleEast.Whatwasdifferentbackthenwasthattheefforttomaketheworldabetterplace(atleastinthisepisode)wasbeingproddedforwardbytheFrench,whowerethenanexpanding,imperialpower.St.Louis(KingLouisIX)wentontwocrusadeswithaFrencharmyandfailedbothtimes. Mrs.Oliphant’shistorytellsofthearrivalofsixFrenchknightsinshiningarmor,whostrodeintoSanMarcosPiazzatoaskthedogeforhelp.TheywereputtingtogetheranallianceofcivilizedWesternarmiestoreconquerJerusalem,theyexplained—inthesamespiritasKingLouiscenturiesbefore.Theybroughtoutalltheusualarguments.ButtheVenetianswerenotsomuchconvincedbytheFrenchastheyconvincedthemselves.Theywere,theysaidtothemselves(justasMadeleineAlbrightwouldrepeatcenturieslater),the“indispensablenation.”Withoutthem,theeffortwouldfail;thereforetheymustact.Yes,theycouldstillfail,theyacknowledged,butlookwhattheyhadtogain!Fornotonlywouldtheybeingdoinggood,buttheystoodtodowell,too—implantingtradingpostsandportsalongtheway.Andsoafleetof50galleyswasassembledandsetoff,theolddogeleadingtheway.FindingtheirFrenchalliesabitworseforwearandtear,theVenetiansproposedanewdeal:Insteadofattackingtheinfidelsforthwith,theywouldwarmupwithanassaultonZara,atownontheDalmatiancoastthathadrecentlyrebelledagainstitsVenetianmasters.TheFrenchprotested.TheyhadcometomakewaragainsttheenemiesofChrist,notagainstotherChristians.ButsincetheyneededtheVenetians’support,theyhadnochoice.Infivedays,thecityofZarasurrendered;itsdefenseswerenomatchforthearmiesinfrontofthem.Andsothecitywassackedandthebootydividedup.SoonaftercamealetterfromPopeInnocentIII,whowonderedwhytheywerekillingfellowChristians;itwasthepaganstheyweremeanttobekilling,heremindedthem.HecommandedthemtoleaveZaraandproceedtoSyria,“neitherturningtotherighthandnortotheleft.”Thepope’slettersgreatlytroubledthepiousFrench,buttheVenetiansseemedundisturbed.TheyignoredthelettersandremainedinZarauntilanewcomicopportunitypresenteditself.ThistimeConstantinoplewastheunfortunatetarget.Ayoungprincefromthat cityhadcometothem,askingsupportforamissionatonceasaudaciousasitwasabsurd.Hisfatherhadbeenblindedandthrowninadungeon;thecapitalofEasternChristendomwasinthehandsofmenwhomusthavebeenancestorsofSaddamHussein—evilusurpers,dictatorswhomthepeopledetested.IftheVenetianswouldcometohisaid,hepromised,theywouldberewardedgenerously.Morethanthat,heandhisfatherwouldreturntheentireEasternEmpirebacktotheonetruechurchofSt.PeterinRome.TheVenetianscouldn’tresist.InApril1204,theysetsailforBosporusStrait.Andinagreatbattlethatmusthavebeenanundertaker’sdream,theytookthecity.HistorianEdwardGibbondescribesthescene:Thesoldierswholeapedfromthegalleysonshoreimmediatelyascendedtheirscalingladders,whilethelargeships,advancingmoreslowlyintheintervalsandloweringadrawbridge,openedawaythroughtheairfromtheirmaststotherampart.Inthemidstoftheconflictthedoge’svenerableandconspicuousformstoodaloftincompletearmorontheprowofhisgalley.ThegreatstandardofSt.Markwasdisplayedbeforehim;histhreats,promisesandexhortationsurgedthediligenceoftherowers;thisvesselwasthefirstthatstruck;andDandolo[thedoge]wasthefirstwarrioronshore.Thenationsadmiredthemagnanimityofthe3blindoldman...Itproved,however,thattheyoungprinceonwhosestoriesandpromisesthecampaignwaslaunchedhadbeenabitfrugalwiththetruth.Liketheintelligenceservices’warningsofweaponsofmassdestructioninIraq,hisdepictionofthecircumstancesprevailinginConstantinopleatthetimewasinaccurate.Muchofitseemedfanciful.Thoughtheinitialconquestwasfairlyeasyandglorious,subsequenteventswerelessso.Thelocalpopulationroseupagainsttheinvaders.Thecityhadtoberetaken;thistime,thebattlewasbloodier,andthousandsofinnocentcitizenswereputtothesword. Asnearashistorianscantell,theVenetiansearnednolastinggainorbenefit.Dandolodiedin1205,neverhavingsetfootinhishomelandagain.Asforhiscompatriots,whatwasleftofthemeventuallyreturnedtoVenice.“ButtherestillremainsinVenice,”addsMrs.Oliphant,“onestrikingevidenceofthesplendid,disastrousexpedition,theunexampledconquestsandvictoriesyetdismalend,ofwhatiscalledtheFourthCrusade.Andthatisthefourgreatbronzehorses,curious,inappropriatebizarreornamentsthatstandabovethe4doorwaysofSanMarco.Thiswastheblinddoge’slastingpieceofspoil.”“Beenthere.Donethat,”whisperstheolddoge.THETYRANNYOFTHELIVINGWhocares?Eachgenerationneedstobetheretodothat,too.Thoughhappytoturnonanelectriclightinventedbyadeadman,theliving—inlove,war,andfinance—believenothingtheyhaven’tseenwiththeirowneyes,exceptwhentheywantto.“Avoidforeignentanglements,”cautionedthefatherofthecountry.Butcorpseshavenovoiceandnovote,neitherinmarketsnorinpolitics.GeorgeW.BushwasundoubtedlybetterinformedthanGeorgeWashington.HemayhaveneitherthewisdomofaWashingtonnorthebrain,butatleasthehadapulse.Fewpeoplecomplainaboutthistyrannyoftheliving.Mostacceptitasafactoflife.Theywouldnotwantpeopletobeexcludedfromthepleasuresoflifebecauseofanaccidentofbirth.Buttheyareperfectlyhappytohavetheoldestandwisestofourcitizenssystematicallybarredfromthepollingstationsandthetradingfloorsbytheaccidentofdeath.Thedepartedshutupforever,leavingbehindthemtheircarkeys,theirstocks,andtheirvoterregistrations—thatisallthereistoit.Goodbyeandgoodriddance.Itisasiftheyhadlearnednothinguseful,noticednothing,andhadnoideasthatmightbeworthpreserving;asifeachgenerationweresmarterthantheonethatprecededitandeveryson’sthoughtsimprovedonthoseofhisfather. Oh,progress!Thouartforevermakingthingsbetter,aren’tthou?Throwoutthesacredbooks—whatarethey,butthethoughtsofdeadimbeciles?Forgettheoldrules,oldwives’tales,oldtraditionsandhabitsofoldgenerations,old-timers’superstitions,theoldfuddy-duddies’doubts!Wearethecleveresthumanswhohaveeverlived,right?Maybe.Butifwecouldconveneacouncilfromthespiritworldandinvitethedeadtohavetheirsay,whatwouldthecorpsestellus?Venietvidi.Gazeonthedead,andlearntheirsecrets.Nooneseemstocareaboutdeadpeople.Nostockbrokersaskfortheirbusiness.Nopoliticianspanderfortheirvotes.Noonecareswhattheythinkorwhattheymayhavelearnedbeforetheyshuckedtheirmortalshell.Theygetnorespect,justaquicksend-off,andthentheyareontheirown.Whatdidtheold-timersknowofwar?Ofpolitics?Oflove?Ofmoney?Ifonlywecouldask!Yearsago,investorswantedmorefromastockthanjustthehopethatsomeonemightcomealongwhowaswillingtopaymoreforit.Theywantedastockthatpaidadividendoutofearnings.Whentheyheardaboutastock,theyasked:“Howmuchdoesitpay?”Thatwaswhatinvestingwasallabout.Butbythe1990s,theold-timersonWallStreethadalmostalldiedoff.Stockbuyersnolongercaredhowmuchthecompanyearnedorhowlargeadividenditpaid.Alltheycaredaboutwasthatsomegreaterfoolwouldcomealongandtakethestockofftheirhandsatahigherprice.Andthefoolsrushedin.Andnowthemarketisfullofgreaterandgreaterfoolswhothinkthestockmarketistheretomakethemrich.Whatwouldtheold-timersthinkofthem?Andwhatwouldourdeadancestorsthinkofourmortgages?Mostofthemhadsmallmortgages,ifanyatall,ontheirhomes.Andiftheyhadthem,theycouldn’twaittogetridofthem.(Evenourownparentsheldlittlepartiestocelebratefinallypayingoffthemortgageonthefamilyhome.)WhatwouldourforebearsthinkiftheyweretolearnthattherichestgenerationinAmerican historyhasmortgagedagreatershareofitshomesthananyinhistory?Whatwouldtheythinkofno-money-downmortgages,minimumpaymentplans,andnegativeamortizationschedules?Andwhatwouldtheold-timersthinkofourgovernmentdebt?Theunpaidliabilitiesandobligations,expressedasthoughtheyhadtobepaidtoday,cometoabout$56trillion,dependingonthesourceyouchoosetobelieve.AndwhatdothegenerationsofRepublicans,nowintheirgraves,whobelievedsostronglyinbalancedbudgetsforsomanyyears,thinkoftherecentrepublicanointheWhiteHouse,whoproposedthemostunbalancedbudgetsinhistory?AndwhataboutthemillionsofdeadAmericanswhoimmigratedtotheUnitedStatestofindfreedom;whatdotheythinkofthecountrynow?Theycamebelievingthatiftheymindedtheirownbusiness,theywouldbeleftalonetodowhattheywanted.Butnow,everypettifoggingPecksniffwithagovernmentservice(GS)ratingisontheirgrandchildren’scase.Andwhataboutthosemillionsofdeadpeoplewhoscrimpedandsaved—whogotbyonalmostnothing—sotheirchildrenandgrandchildrenmightlivefree,prosperous,andindependentlives?Whatwouldtheythinkoftheirdescendants,sodeepindebtandsodependentonAsianlendersthattheycanbarelypassaChineserestaurantwithoutbendingoverandkissingthepavement?Eachgenerationseemstothinkitisthefirsttostandupright,thatitsmothersandfatherswalkedonfourlegsandhowledatthemoon!Evenwhenthelivingfeignadmirationforsamefallenforebear,itisusuallywithoutpayingtheleastattentiontowhatthepoorschmuckactuallysaidorknew.Thedeadleaveustheirmemoirs,theirgospels,theirhistories,andtheirconstitutions—forwhatisaconstitutionbutapactwiththedead?—andweignorethem.Weseemtobelievethatallthattheysuffered,alltheywentthrough,allthemistakestheymade,holdnomoreinterestforusthanacommentbyasunstruckcontestantinaTVsurvivalshow:“Thisis...like...weird....” WISDOMOFTHEFOUNDINGFATHERSAdeadman,EdmundRandolphofVirginia,attendedtheConstitutionalConventioninPhiladelphiain1789.HeexplainedwhyAmericaneededaconstitution:“ThegeneralobjectwastoproduceacurefortheevilsunderwhichtheUnitedStateslabored;thatintracingtheseevilstotheirorigins,everyman5hadfounditintheturbulenceandfolliesofdemocracy.”Anotherdeadman,JamesMadison,madeitevenclearer:“Democracies,”hewrote,“haveeverbeenspectaclesofturbulenceandcontention;haveeverbeenfoundincompatiblewithpersonalsecurityortherightsofproperty;andhavein6generalbeenasshortintheirlivesastheyhavebeenviolentintheirdeath.”So,weleaveyou“aRepublic,ifyoucankeepit,”addedBenFranklin.Well,wecouldn’tkeepit.Now,wehaveacuriousempire,withaconstitutionasflexibleasitsmoney.EverybodygetsavoteinthisnewdemocraticValhalla.Everyhalf-wit’sballotisworthasmuchasGeorgeW.Bush’s.Everyfoolandmiscreantgetstohaveanopinion.Onlythedead,areleftout.Excluded.Ignored.Forgotten.Itisasifonlythelivinghadopinionsworthhearing,asifonlythehereandnowcountedforanything;asifthesmall,arrogantoligarchyofthosewhohappentobewalkingaroundhadalltheanswers;asifthepresentgenerationhadfoundtheultimatetruthandreachedtheendofhistory.Yourauthorshaveneverkilledanyone,butwereadtheobituarieswithapprovalandinterest.Welookforthedistilledwisdomofsaintandsinneralike.(Theeditorialpages,bycontrast,wereadonlyforentertainment.)Thetroublewiththenewsisthatitisimpossibletoknowwhatisimportantwhenyoumustrelysolelyonthejudgmentofpeoplewhohappentobebreathing.Thelivingcanimaginenoproblemsmoreurgentthantheonestheyconfrontrightnow,andnoopportunitiesgreaterthantheonesrightinfrontofthem.Weprefertheobituaries. THESECONDREICHGermany’sThirdReichisinfamous.ButwhathappenedtotheSecondReich?Historyneverrepeatsitselfperfectly.Butwhatelsecanwestudybuthistory?Thepastmaybeimperfectlyunderstood,butitistheonlyreferencewehave.Whynottakealookatit?Whynotshakethedustoffadeadmanandgethisopinion?Whynotventureintothelandofthedeadtoasksomequestions?“Thestate’sneedofmoneyincreasedrapidly,”writesadeadman,Bresciani-Turoni,describingthesceneinGermany80yearsago.“Privatebanks,7besiegedbytheirclients,founditimpossibletomeetthedemandformoney.”Asthesituationheatedupinthesummerof1923,thereweresomeold-timerswhogaveadvice:“Less,”theysaid.ButofficialswereinroughlythesamesituationasBenBernankeandBarackObamatoday.“More,”saidthey.Theyfearedtheeconomymightfallintotroubleunlesstheymademorecashandcreditavailable.One,namedHelferrich,thefinanceministerinGermany’sWeimarRepublic,explained:Tofollowthegoodcounselofstoppingtheprintingofnoteswouldmean—aslongasthecauseswhichareupsettingtheGermanexchangecontinuetooperate—refusingtogiveeconomiclifetothecirculatingmediumnecessaryfortransactions,paymentsofsalariesandwages,andsoon,itwouldmeanthatinaveryshorttimetheentirepublic,andabovealltheReich,couldnolongerpaymerchants,employees,orworkers.Inafewweeks,besidestheprintingofnotes,factories,mines,railwaysandpostoffice,nationalandlocalgovernments,in8short,allnationalandeconomiclifewouldbestopped.Whenaneconomycomestodependonmoreandmorecredit,itmustgetmore andmoreofitorthateconomywillcometoastop.Amanwhohasborrowedheavilytofinancealifestylehecannotaffordmustcontinueborrowingtokeepupappearances.Orelsehemuststop.Inmarketmanias,love,politics,orwar,peoplerarelystopuntiltheyareforcedto.In1921,adollarwouldbuy276marks.ByAugust1923,itwouldbuy5millionofthem.Middle-classsaverswerewipedout.IfonlywecouldroustHerrHelferrichfromhiseternalsleep!Wehavesomequestionswewouldliketoputtohiswormycadaver.(Andhere,wethinknotofpraisingthedead,butoftormentingthem.)Whatfunitwouldbetoshowhimwhathispolicies—thesame,byandlarge,asarenowputforwardbyGreenspan,Bernanke,andBush—provoked.Howgratifyingitwouldbetoseethelittlekrautsquirmunderanintenseinterrogation:Whatwashethinking,afterall?Whydidhethinkthatmoreofthedreadfulprinting-pressmoneywouldundotheharmthathadalreadybeendonebytoomuch?Bresciani-Turonicontinues:Theinflationretardedthecrisisforsometime,butthisbrokeoutlater,throwingmillionsoutofemployment.Atfirstinflationstimulatedproduction...butlater...itannihilatedthrift;itmadereformofthenationalbudgetimpossibleforyears;itobstructedthesolutionoftheReparationsquestion;itdestroyedincalculablemoralandintellectualvalues.Itprovokedaseriousrevolutioninsocialclasses,afewpeopleaccumulatingwealthandformingaclassofusurpersofnationalproperty,whilstmillionsofindividualswerethrownintopoverty.Itwasadistressingpreoccupationandconstanttormentofinnumerablefamilies;itpoisonedtheGermanpeoplebyspreadingamongallclassesthespiritofspeculationandbydivertingthemfromproperandregularwork,anditwasthecauseofincessantpoliticalandmoraldisturbance.Itisindeedeasyenoughtounderstandwhytherecordofthesadyears1919-1923alwaysweighslikea9nightmareontheGermanpeople.SurelysomespecialcornerofHellisreservedforcentralbankers.BenStrong.JohnLaw.Theyareprobablyalldownthere.MaybeCharlesPonziiswiththem. Whatdotheydodownthere?Playcards,perhaps.Helferrichmustbetheretoo—roasting.ForwhenheunderminedtheGermans’faithintheirsystem,theirmoney,andtheirculture,didhenotalsopavethewaytoHellformillionsofhisfellowcountrymen?Ifonlywecouldtalktothem!Didn’ttheysacrificetheirsouls,anddotheynotnowwritheineternaltorment?Andforwhat?WhyshouldGodmakeamoralexampleoutofthemifnoonepaysattention?Everycentralbankerintheworldhastakenthedevil’sbait,creatingmoney,outofthinair,asifnoonewerelooking.Asifithadnotbeentriedbefore.Asiftheycouldgetawaywithitandpeoplereallycouldgetsomethingfornothing!Andyet,theyallseemunabletodoanythingdifferent—evenwiththethreatofscorchingtheirfatderrieresintheafterlife.SECRETSOFTHENEARDEADIfthedeadhavesecrets,whataboutthosewhoarealmostdead?WereadaninterviewwithSirJohnTempletonbeforehedied.ThegreatoldmansaidhethoughtsharesandhousesinAmericaweretooexpensiveandthattheUnitedStateswascruisingfortroublewithitstradedeficitandU.S.federaldeficit.Hesaidheanticipatedalongbearmarketinshares,fallingresidentialrealestatepricesandaseriousslumpintheeconomy.Implicitly,headvisedinvestors10toholdcash.ThepersonwhowrotethearticlethenaskedlocalanalystsandstockbrokerswhattheythoughtofTempleton’sopinion.OnechallengedTempleton’scompetence,sayingthatbecauseofhisadvancedage(Templetonwas92),hemightbe“outoftouch”withcurrentthinking.Templetonwasnotevendeadyet,andalreadytheywereshovelingthemudonhisface.Butbeingoutoftouchispreciselywhatmadehisopinionsvaluable.Welikeoldthings.Oldbuildings.Oldideas.Oldtrees.Oldrules.Oldinvestors. Theoldertheinvestor,themoreconfidencewehaveinhim.Hehasseengoodtimesandbadtimes.Hehasseenbullsandbears.Peoplewhohavebeenaroundforalongtimehavehadanopportunitytoseeseveralcycles.AnAmericanbornafter1960,ontheotherhand,barelycameofagewhenthe1982to2002boombegan.Untilrecentlyheneversawasustainedbearmarketoraperiodwhenthenationwasdowncastordesperate.TempletonwasayoungmanwhenWallStreetcrashedin1929.HewasanadultintheGreatDepression.HerecalledthedarkdaysofWorldWarII,whenitlookedasthoughthealliesmightlose.Duringhislifespan,therewereboomsandbusts,massmurders,theworstwarsinhistory,famines,hyperinflation,andnationalbankruptcies.Dozensofcurrenciesandatleastfiveempireshadgonedefunct.Dozensofcoupsandrevolutionshadtakenplace.Ideologieshadcomeandgone.Thousandsofbanksandbusinesseshadgonebust.Prominentcareershadbeenruinedandreputationslost.Amanwhohasseensomuchandstillhashiswitsabouthimisagreattreasure.Ifheisstillsolvent,thatisevenbetter.Somehow,hemusthaveavoidedthebadideas,badinvestments,andbadadvice.Innovationsarelikegeneticmutations.Mostofthemaremistakes.Mostfail.Oldpeopletendtorejectnewideas,newstyles,andnewthings.Thisisnotsimplybecausethesedogsaretoooldtolearnnewtricks.Whattheoldstersknow—fromexperience—isthatthenewtricksareprobablynotworthlearning.Whatwehavearoundusareonlytheinnovationsthatsucceeded.Companies,products,ideas,governments,clubs,styles—allthatweseearethesuccessfulones.Theunsuccessfulinnovations—thousandsandthousandsofthem—alldisappeared.Evenwildlysuccessfulinnovations,suchasheavier-than-airflight,arenotsuccessfulforeveryone.WarrenBuffettestimatesthatifyouhadownedtheentireairlineindustryfromthemomentafterOrvilleandWilburmadethefirstflight,rightuptothedaytheConcordemadeitslastflight,youscarcelywouldhavemadeadime.Manyotherindustriesarethesame.TherearecompaniesquotedonWallStreetthatmakemoneyinthoseindustries.Buttheyarethesurvivors.Manyothersfailedlongago. NassimNicholasTalebexplainsitinhisbook,FooledbyRandomness:Mathematically,progressmeansthatsomenewinformationisbetterthanpastinformation,notthattheaverageofnewinformationwillsupplantpastinformation,whichmeansthatitisoptimalforsomeone,whenindoubt,tosystematicallyrejectthenewidea,information,ormethod....TheSaturdaynewspaperlistsdozensofnewpatentsofsuchitemsthatcanrevolutionizeourlives.Peopletendtoinferthatbecausesomeinventionshaverevolutionizedourlivesthatinventionsaregoodtoendorseandweshouldfavourthenewovertheold.Itaketheoppositeview.Theopportunitycostofmissinga“newnewthing”liketheairplaneandtheautomobileisminusculecomparedtothetoxicityofallthegarbageonehastogothroughtogettothesejewels(assumingthesehavebroughtsomeimprovementtoourlives,whichIfrequently11doubt).Ayoungmanhasaccesstoinformation.WiththeInternet,hecangetallhewants.Whathelacksisthe“high-proof”distilledinformation—thewisdom—thatcomeswithage.Mr.Talebcontinues,“Apreferencefordistilledthinkingimpliesfavoringoldinvestorsandtraders,thatis,investorswhohavebeenexposedtomarketsthelongest,amatterthatiscountertotheWallStreetpracticeofpreferringthosethathavebeenthemostprofitableandpreferringtheyoungerwhenever12possible....”Testingthepropositionusingamathematicalmodel,Taleb“foundasignificantadvantageinselectingagedtraders,using,asaselectioncriterion,theircumulativeyearsofexperienceratherthantheirabsolutesuccess(conditionalon13theirhavingsurvivedwithoutblowingup).”Distilledinformationtendstobeexpressedasmoralinterdictions.Don’tsteal. Don’tlie.Don’tbuyexpensivestocksorsellcheapones.Don’texpecttogetsomethingfornothing.Don’tneglectyourspouse.Don’tforgetSt.Patrick’sday.Don’tspendtoomuch.Don’teattoofast.Don’tdrinkbefore6PM.Don’tmessaroundwiththeboss’swife.Eachdon’trepresentslessonslearnedbypreviousgenerations.Foreverydon’t,theremustbeamillionsorrysoulsburninginHell.Undistilledinformation,ontheotherhand,isnothingmorethannoise—newspaperheadlines,TVbabble,cocktailchatter,thelatestinnovation,thelatestbusinesssecret,thelatestfashion.Itispublicinformation,backedbynorealexperienceorprivateinsights.Itisnotuseless.Itisworsethanuseless,foritmisleadspeopleintothinkingtheyknowsomething.DEADPRESIDENTSDavidM.Walker,formerComptrollerGeneraloftheUnitedStates,clarifiedAmerica’sdebtsituationinlate2004:“TheFederalgovernment’sgrossdebt—theaccumulationofitsannualdeficits—wasabout$7trillionlastSeptember,whichworksouttoabout$24,000foreveryman,woman,andchildinthecountry,”heannounced.“Butthatnumberexcludesitemslikethegapbetweenthegovernment’sSocialSecurityandMedicarecommitmentsandthemoneyputasidetopayforthem.Iftheseitemsarefactoredin,theburdenforeveryAmericanrisestowellover$100,000.”WeaddtoWalker’slament:Aswewillsee,$7trillionwaschickenfeed.Therealdebtwasfarhigher.Plus,oneoutofeveryfourdollarsspentbythefederalgovernmentwasborrowed.Andforeverydollarthatcameinthedoorfromincometaxes,thefedsborrowedanother80cents.Economistsusedtoworryaboutgovernmentusingupthenation’ssavings.ButAmericanshadnomoresavingstouse.Still,thenationthatcouldn’tsaveadimesetouttosavetheentireplanet.Inthenextfouryears,theofficialU.S.debtwouldgrownearly50percent.Andthen,inanefforttobailouttheentireworldeconomy,U.S.deficitswouldsoarover$1.8trillionperyear.Meanwhile,theprivatesectoralreadyhadimmensedebts.In2005,forevery$19Americansearned,theyspent$20.Thisdifferencewasrecordedinthetrade deficitfigures,measuringthespeedatwhichAmericansraceddowntheroadtoruin.Topspeedasofthiswritingwas$58.3billion.ThatwasthefigureforJanuary2005whenthenationwasclockedoverspendingatarateofalmost$2billionperday.ItwasthedifferencebetweenwhatAmericanssoldtoforeignersinthemonthofJanuaryandwhattheyboughtfromthem.Itwasanegativenumber.Onachartofthenation’saccounts,itwouldbeinred.Orinbrackets.Orprecededbyaminussign.Ifitweredividedamongthenation’sfamilies,itwouldcometoabout$600foreachone.Thisrepresentsonlyasinglemonth’stradedeficit,soweshouldmultiplyitby12togetthemeasureofdamageonanannualbasis:$7,200perfamilyperyear.Comparedwiththeaveragefamily’sincome,itissuchabignumberthatwewonderedifwehaddonethearithmeticcorrectly.Onamacroeconomicscale,theshortfallwasrisingto6percentofGDP.Intheolddaysofthegoldstandard,thenationontheplussideofthisexchangewouldpileupitsexcessforeigncurrencyandtakeittotheothernation’scentralbank.Goldwasthecommonreferenceandanuncommonrestraint.Itwasrealmoney.Ifanationranoutofgold,itranoutofmoney.Itcouldnolongerborrow.Itcouldnolongerruntradedeficits,becausewhentheforeigncurrencieswerepresentedtoit,itwouldhavenomeansofsettlingup.Itwouldhavetodeclarebankruptcy,whichhappenedfromtimetotime.Butithadbeen34yearssincetheUnitedStatessettleditsoverseasobligationsingold.Sincethen,ithasfounditfareasiertoofferU.S.dollar-denominatedTreasurybonds.Remarkably,theforeignersacceptedthemasiftheywereasgoodasgold.Moreremarkably,formostofthattimethebondswerenotonlyasgoodasgold—theywerebetter.GoldfellinpricefortwodecadesfollowingRonaldReagan’sfirstpresidentialelection.OverseascentralbankerstooktheTreasurybondsandfeltgrateful,evenlucky,tohavethem.TheUnitedStateswasjusttoolucky.Itcouldspendwithoutreallypaying.Itcouldborrowwithouteverreallypayingback.Itcoulddigitselfintosuchadeepholeofdebt,itcouldfindnoeasywayout.Amongthenoisyheadlinesof2005wastheremarkableinformationthat China—aThirdWorldnation—lenttheUnitedStates$300billionperyear.WithoutChinesesupport,thedollarwouldhavealreadycollapsed,bondyieldswouldhavesoared,andtheU.S.economywouldbeinarecession,ifnotadepression.Wheredidthemoneycomefrom?TheChinesegotthedeadpresidentsfromsellingproductstoliveAmericans,whoseemedreadytoconsumeanythingthatcametheirway.First,thedollarscamerollingoffU.S.printingpresses,thentheymadetheirwayintothehandsofChineseandothermanufacturers,andfinally,theyreturnedtotheirbirthplaceasloans.ChinawasfastbecomingAmerica’s“companystore,”towhomweowedourstandardoflivingandmaybeevenoursoul.Bytheendof2004,twocentralbanks—JapanandChina—heldalmostatrilliondollars’worthofU.S.Treasurybonds.OntheirwillingnesstosaveandtorecyclesavingsintoU.S.TreasurybondsstoodtheU.Sconsumereconomy.AsinglewordfromeithercentralbankcouldsendtheU.S.economyintoasevereslump:“sell.”Andthuscameanevenmoreremarkablecuriosity:“Inaneraoffreetrade,”beganacomplaintfromTreasurySecretaryJohnSnow,“weshouldnothavetoconfronttheissueofcountriesdistortingtheircurrenciestogainunfairtradeadvantages.”ThespecificcountrytowhichSnowreferredwasChina.ThetradeadvantagethelatterenjoyedwasthatitsoldmuchmoretotheUnitedStatesthantheUnitedStatessoldtoit,byaratioof5to1.AndtheunfairdistortionwasthatChinapeggeditsowncurrencytothedollar.Inthespringof2005,theexchangewascalled“manipulation”;theUnitedStatesdemandedthatChinarevalueby10percent.HowweretheChinesemanipulatingtheyuan?Byfixingittotheimperialcurrency!Oh,thatwasclever,wily,diabolical.TheChineseinsistedon maintainingtheir10-year-oldpolicyofpeggingtheyuantothedollar.TheUnitedStatescountedonasteadydevaluationofitsmoney.Itboughtfromoverseasandpaidindollars.Then,ineffect,itprintedupmoredollarstoreplacethoseithadshippedoverseas.Theresultinginflationofthecurrency—reflectedintheincreaseinpricesofoil,gold,andotherinternationallytradedgoods—wasaformofimperialtribute.ItwasAmerica’sonlywayofmakingtheempirepay.Asthedollarwentdown,thetrillionsofdollarsheldinforeignaccountsbecamelessvaluable.An“exorbitantprivilege,”saidCharlesdeGaulle.ButtheChineserefusedtoplayalong.Asthedollarwentdown,sodidtheiryuan.InsteadofraisingpricesonChinesegoodsandloweringthevalueofChinesedollarholdingsrelativetoitsowncurrency,everythingremainedeven.TheChineseweren’tpayingtheirtribute.Americanswereindignant.ASenatecommitteesaiditwouldrewritethelawofthelandtomakewhattheChineseweredoingqualifyascurrencymanipulation.BushadministrationofficialsgavetheChineseadeadlinetoshapeup.Inthesummerof2005,theChinesefinallyannouncedthattheyweregivingupthedollarpeg,oratleastwidening“thechannel”alittle.ButtheproblemwasnevercausedbyChina.AnentireAmericangenerationhadgrownupbeingtoldthatitcouldspenditswaytoprosperity.Snow,McTeer,Greenspan,Bernanke—theyallstillbelievedit.Debtwasnoproblem,theysaid.Spend,spend,spend.AmericanspendingcreatedaboominChina,wheretheaveragepersonworksinasweatshop,livesinahovel,andsaves25percentofhisearnings.AmericanshadcometobelievetherewassomethingunfairaboutChina’stradepractices,thattheymustbestealingjobswithadistortedcurrency,insteadofcompetingforthemfairandsquare.Meanwhile,intheUnitedStates,theaveragemanlivedinahousehecould’tpayfor,droveacarhecouldn’tafford,andwaitedforthenextshipmentfromHongKongfordistractionshecouldn’tresist.HesavednothingandbelievedtheChinesewouldlendhimmoneyforever,onthesameterms. Thatthiscouldgoonforeverhardlyseemedworthpointingout.Theworldcreatedinthepaxdollariumerahadtoend.Thenthedeadcouldcluck:“Itoldyouso.”2EmpiresofDirtLongisthehistoricalrecordofempires.Shortisthelistofcommonelements.Thereare“good”empires.Andbadones.Thereareonesinwhichtheimperialistsgetrichandothersinwhichtheybecomeverypoor.Therearesomeinwhichtheimperiumfunctionswiththebruteeleganceofaguillotine;inothers,thecomplexitiesandsubtletiesbafflehistorians.Butamongalltheempiresthathavecomeandgone,theU.S.imperiumstandsoutasthemostabsurd.Theabsurdityarisesatthemostbasiclevel.Seekingtodeceive,theIvyLeagueAlexandersandthePlainStateCaesarsdeceivedthemselvesmorethananyone.Fromtheverybeginning,theyknewnotwhatbusinesstheywerein.Wecanenjoyasuperiorchuckleatthescrewballhumbugofit.Historiansofthefuturearelikelytogetcrampsfromlaughing.Buteconomists—whentheyfinallycometotheirsensesandrealizewhatishappening—aretheoneswhowillrevelinthebiggestjoke.Theonlyreasontheyarenotpalsiedwithmirthalreadyisthattheyhavemissedthepunchline.Thisisthefunniestandmostpreposterousschemeofimperialfinancetheworldhaseverseen;whentheyfinallygetit,theywilllaughtillithurts.Attheriskofspoilingagreatjoke,wewillexplainit.Thetypicalprogramforimperialfinanceissimple.Theimperialpower,theimperium,provides—atitsowninitiative—apublicgood;itextendssecurityandorder.Inreturn,thegroupsthatbenefitpaytribute.Theimperiumshouldnotmerelybreakeven;itshouldmakeaprofit.Livingstandardsinthehomelandshouldrise,comparedwiththoseinvassalstates.EventheAustro-Hungariansgotthatright,asatriptoViennawilleasilyconfirm.Thecitygotrichinthenineteenthcentury. Americaprovidesapaxdollariumfornearlytheentireworld.ButtheUnitedStatesdoesnottakedirecttributefromitsvassalstatesanddependentterritoriesforprovidingthisservice.Instead,itborrowsfromthem.LivingstandardsriseintheUnitedStates.Buttheyarerisingonborrowedmoney,notonstolenmoney.ThebigdifferenceisthatAmerica’svassalstatescanstoplendingatanytime.Iftheycareto,theycanevendumptheircurrentloansontheopenmarketdestroyingtheU.S.dollarandforcinginterestratessohighthatarecession—ordepression—ispracticallyguaranteed.Whatisworse,thelongerthepresentsystemcontinues,theworseoffAmericansare.Thecloseryoulookatit,thelargertheabsurditybecomes.Inthefirsthalfof2005,Americansgotpoorer,notricher—attherateof$80millionperhour.Theirsystemofimperialfinancewasimpoverishingthem.Eventhatisnottheworstofit,becauseitalsoreducedtheirabilitytocompeteinthemoderneconomicworld.Whiletheywereprovidingapublicgood—ataloss—theircompetitorsweresavingmoney,buildingcapitalandexpertise,settingupfactories,andtakingmarketshareawayfromthem.Eachyear,AsiansproducemoreofwhatAmericansbuy,andAmericansproducelessofwhatanyonebuys.ProductsleaveAsiaforNorthAmerica.MoneyleavesNorthAmericaforAsia.ThemoneycomesbacktoAmericawithindays.America’seconomistsbreatheeasy.Whatistheretoworryabout,theyask,aslongasitcomesbacktous.“Itisaformoftribute,”theyclaim;theempireworks.Butitworksinaperverseway.Themoneythatcomesbackisnotthesameasthemoneythatleft.Ithasbeentransformed:Itgoesoutasanassetandcomesbackasaliability.THEHUNSARECOMING!Formanycenturies,Europeanshadnightmares.Periodically,barbarianinvadersfromtheEastcameinwavesfromthesteppesofEurasia.Celtictribespushedoutorexterminatedwhoeverwastherebeforethem.Then,newgroupscameafterthem.Mountedonhorseback,theycamefastandhard.Theysoterrifiedthemoresettledcommunitiesthatthetribespickedupandpushedtothewest.GermanictribeseventuallypushedtheCeltstothefarcornersofEuropeandlatersacked Rome.TheHunswerebarbarians.Theywereruthless,cunning,fearless,andwerereportedtobeinvincibleinbattle.Whatchancewasthereagainstthem?Inmarketterms,thiswasagoodtimetobe“short”Europe.Afundmanagermightsaythathechoseto“underweight”theOldWorld.Itwasatimewhentheexpansionofthepreviousperiodwaslikelytobecorrected.Therewouldbewailingwomenandgnashingofteeth.Itwasatimewhenfearanddespairwouldlikelydominate.Itwasasellsignalforthegrowthofcivilizationandcommerce,whichtendtogohandinhandlikeaprisonerwithhispoliceescort.Politicsandwararenotzero-sumgames.Foreverywinnerthereisnotaloser.Norisadollargainedforeverydollarthatislost.Instead,thedestructionofwarandthecostsofpoliticsmakethemnetlosingpropositionsalways.Mostpeoplelose.Wealthdisappears.Asawhole,peoplearepoorer.But,asinabearmarket,somepeoplegainfromwar.Thosewhowinthewarfeellikewinners,eventhoughtheymaybepoorerandmanyoftheircomradesmaybedead.Afewcontractorsandspeculatorsactuallymakemoneyonwar.ThebarbarianinvasionsofEuropehadtheirbrightside.Thebarbarianswereintheirexpansionphase—theirbullmarketstage—withrisingexpectationsandpositive,bullishhopes.Theyweregettingsomething,notfornothing,butfornexttonothing.Whatwastheeffortofkillingamancomparedwiththewealthitbroughtthekiller?Asmallinvestment.Atriflereally,andanenjoyableoneformanypeople.Butconquestwasnotwithoutrisk.Therearenocompletelyfreelunches,evenforthievesandmurderers.TheHunstookarisk.Ontheupsidewerebooty,women,slaves—andthepureexhilarationofbattleandtheprestigeofconquest.Onthedownside,theymightbedefeatedandkilled.TheHunmighthavebeenasellsignalforcivilization,buthewasabuysignalforhisownfortunes,hisstatus,hisgroup,hisempire,andhisgenes.Itwasatimetobe“long”politics:Thereisatimetoplant,toreap,andtotradewithotherspeaceably.Andthereisatimeforforce,fortakingwhatyouwantwithoutpayingforitandforkillinganyonewhogetsinyourway,fortheHunnish invasionsmeantrape,notforsweettalkandcourtship.Theymeanttheft,looting,andpillage,notfurtherelaborationofpropertyrightsorthedivisionoflabor.Thingsgotsimpler,morebrutal,mean,andnasty;liveswereshortened.Itwasnotatimetobeintheinsurancebusiness.Whatcausedtheperiodicinvasionsnooneknows.Perhapsgoodweatheroutontheplainsproducedpopulationexplosionsthatcausedthenomadstoexpand.Perhapsbadweathercausedfaminethatsenthungrymouthsinsearchofsomeoneelse’smeatandgrain.Historiansdon’tknow.ButfearofthebarbariansfromthesteppeshasbeenachronicthemeofWesternhistory—particularlyamongtheTeutonictribesthatweremostexposedtothem.THEGREATKHANPerhapsthemostsuccessfulempirebuilderofalltimewasaleaderofoneoftheseperiodsofbarbarianexpansion—GenghisKhan.SincethetimeoftheRomans,ithasbeenfashionabletoputacivilizedmaskonyourfacewhenyouputtheimperialpurpleonyourback.Youarebringingreligiontotheheathen.Youarebringingcivilizationtotheindigenes.Youarebringingculture,education,andtechnology.EvenAlexandertheGreatthoughthewasdoingtheworldafavor.Conquerorsdonotliketoadmit—eventothemselves—thattheirinstinctsarenodifferentfromthoseofbarbarians.Theyhavebettertablemanners.ButtheyaresubjecttothesameurgesasGenghisorAttila.Bloodlust,prestige,power,status—whocandenythatitwouldbeathrilltoconquerawholecityoranentirenation?Butempirebuilderstypicallyputontheimperialpurplelikeasetofangel’swings,leapoffthebalcony,andcomedownwithathud.GenghisKhanneedednomask.Themanshowedhisfaceasitreallywas.HeunitedtheMongoliantribesinabout1129andbeginningwithaseriesofattacksonnorthernChina,heembarkedonaspectacularepicofmassslaughterandrapinefromwhichtwoempireswerederived.Oneofthem,theOttomanEmpire,lasteduntiltheendofWorldWarI.TheMongolhordesoverrannorthernChina,Tibet,Persia,nearlyallofcentralAsiaandtheCaucasus,Korea,Burma,Vietnam,Anatolia,andmuchofRussia.TheyattackedIndiaandeventually,in 1526,Babar,oneofGenghisKhan’sdescendants,sethimselfupasemperoroftheplace.InChina,too,Genghis’sdescendantsfoundedtheYuandynasty,whichruleduntilnearlythefifteenthcentury.Allempireshavetopay,inonewayoranother.TheMongolsmadetheirspayinthemostelemental,andprobablymostsatisfying,way.Fromanevolutionarypointofview,allhumanactivityhasasinglepurpose—topropagateone’sgenes.Amantriestogetrichorgetelectedtodemonstratethatheisthesortoffellowawomanwouldwanttomate;hewillproduceoffspringascapableasheis;andhehastheresourcestotakecareofthem.Inthissense,historyrecordsnomorespectacularsuccessthanthegreatGenghisKhan.Atonepoint,Genghiswastoldbyhisgeneralsthatthesweetestpleasureinlifewasfalconry.“No,”theempirebuilderissaidtohavereplied,“Youaremistaken.Man’sgreatestgoodfortuneistochaseanddefeathisenemy,seizehistotalpossessions,leavehismarriedwomenweepingandwailing,ridehisgeldingand1usethebodiesofhiswomenasanightshirtandsupport.”GenghiswassosuccessfulthatarecentDNAstudyof2,123menfromacrossAsiapermittedscientiststoestimatethathemayhaveasmanyas16millionmaledescendantsspreadoutfromManchuriatoAfghanistan.Genghismadetheempirepayinanotherway,too.Heimposedaroughincometaxtributeonallhissubjectpeoples.Theratewasonly10percent—considerablylessbarbaricthantoday’srates.NowthatMongoliaisfreefromSovietrule,itscitizensarebeginningtotakearenewedinterestinthemansomanyofthemcantraceasanancestor.“Withinthisrapidlychangingworld,GenghisKhan,ifweacknowledgehimwithoutbias,canserveasamoralanchor.HecanbeMongolia’sroot,itssourceofcertaintyat2atimewhenmanythingsareuncertain.”WequotethatpassagefromtheHarvardAsiaPacificReviewmerelytoembarrassProfessorTsetsenbileg,oftheMongolianAcademyofSciences,whosaidit.GenghisKhanmaybepopularinMongolia,butitjustraisesquestionsabouttheMongolians. “Allwhosurrenderwillbespared;whoeverdoesnotsurrenderbutopposeswith3struggleanddissension,shallbeannihilated,”saidGenghisbeforeattackingtheancientcitiesofBukharaandSamarkand.Ithasbeenestimatedthathiscampaignskilledasmanyas40millionpeoplebasedoncensusdataofthetimes:GenghisKhanpreferredtoofferopponentsthechancetosubmittohisrulewithoutafight,butwasmercilessifheencounteredanyresistance.GenghisKhan’sconquestswerecharacterizedbywholesaledestructiononunprecedentedscaleandradicallychangedthedemographicsinAsia.AccordingtotheworksofIranianhistorianRashidal-Din,Mongolskilledover70,000peopleinMervandmorethanamillioninNishapur.Chinasufferedadrasticdeclineinpopulation.BeforetheMongolinvasion,Chinahadabout100millioninhabitants;afterthecompleteconquestin1279,thecensusin1300showedittohaveroughly60millionpeople.HowmanyofthesedeathswereattributabledirectlytoGenghis4andhisforcesisunclear.Butthosewerealsothedayswhenamanliedtoexaggeratehismurders,ratherthancoverthemup.GenghisKhanwasproudofkillingpeople.Inaway,heshouldhavebeen;hediditsowell.Buthowcouldsofewhavedonesomuchtosomany?TheentirepopulationofMongoliacouldnothaveexceededabout200,000persons.MilitaryhistoriansarguethatitwaslargelybecausetheMongolsweresobloodthirsty,somerciless,sofanatical,sofast,andsolethalthattheywerehardtostop.Theyweresuperbhorsemen,frequentlywithoutinfantrysupport,whowereabletomovemorequicklythantheirmoresedentaryenemiesmuchlikepanzerdivisionsinWorldWarII.Theirghaziwasaforerunneroftoday’sjihad.Theircompositebowswereliketoday’sKalashnikovs(aRussian-maderiflethatcanfirebulletscontinuously).Andtheyhadasophisticatedsystemofcommunicationsthatincludedsemaphore-likeinformationexchangeonthebattlefieldandaponyexpressrelayof“arrowriders”shootingacrosstheprairies.Withtheseadvantages,theytookwhattheywantedandkilledeveryonewhogotintheirway. Itwasnotaverypolitewaytorunanempire,butitworked.Genghisdiedin1227.HissonOgedeiwaselectedtosucceedhim.Thosewhothinkdemocracydetersstateviolencedonotbothertotalktothedead:Mussolini,Hitler,andOgedeiKhanallwonoffice,atleastinpart,thankstotheballotbox.Afterhiselectionvictory,OgedeiKhancontinuedhisfather’sexpansion.HepushedfartherintonortheasternAsiaandconqueredKoreaandnorthernChina.Bythetimeofhissuddendeathin1241,hisarmieswereonthefrontierofEgyptandpresent-dayPoland.Butdemocracycutthemoff.MongollawrequiredthatthenewKhanbechosenbyanewvoteofGenghis’sdescendants.Wereitnotforthisinterruption,theMongolarmiesmighthavepushedbeyondtheRhineandthrownEuropeintoanewDarkAge.Asitturnedout,bythetimetheMongolshadchosenanewleader—Genghis’sgrandson,Mongka—themomentuminEuropehadbeenlost.In1257,theMongolsturnedtowardBaghdad.Hulagu,anothergrandsonofGenghis,demandedthatthecaliphofBaghdad,al-Muta’sim,receivehimashissovereign,justashehaddonewiththeSeljukTurkswhentheysweptoverthearea.ButthecaliphofBaghdadwasthe37thoftheAbbasiddynastyandleaderofMuslimsthroughouttheMiddleEast.Hebelievedthathispeoplewouldcometohisaidagainsttheinfidel.Theydidnot,andHulagumarchedonBaghdadwithanarmyofhundredsofthousandsofcavalry,wipingouttheoldAssassinfortressatAlamutonhisway.Thecaliphrealizedhismistake.HeofferedHulaguthetitleof“Sultan.”Hulagu’snamewouldbegivenatFridayprayersinallthemosquesofBaghdad,headded.Later,thecaliphwentinpersontoseeHulagu.Thistime,hesaidhiscitizenswouldlaydowntheirarmsiftheMongolswouldsparetheirlives.Butassoonastheirswordsandbowshadbeencollected,theMuslimfighterswereexterminated.ThentheMongolswenttoworkonthecivilians.Eightythousandmen,women,andchildrenweremassacred.Thecaliphwasstrangled.TheonlypeoplenotkilledinBaghdadweretheChristians.MongkaKhan’smotherwasaNestorianChristian.Atonepoint,perhapsatherurging,theMongolssentemissariestotheKingoftheFranks,whowasthenfightingtheirmutualenemies—theMuslims—intheHolyLands.TheMongolsofferedtoturn toChrist,buthissuggestionseemstohavebeenignoredsoheturnedEast,insteadofWest.MongkaKhandiedjustashisarmieswereabouttoattackCairo.ThenextKhan,Kublai,movedtheMongolcourttoBeijingandfoundedtheYuandynasty.SomethingabouttheBaghdadareamustattractempirebuildersthewayabeehiveattractsbears.OnlyafewmilesawayisthesiteofancientCtesiphon—acitythatwastakenandretakenatleast36timesbeforeitwasfinallydestroyedaftertheSaracenstookitinAD637.TheRomanstooktheplacefivetimes,threetimesinthesecondcenturyalone.Beforethat,theHittites,Akkadians,Persians,Parthians,Sassanids,Macedonians,andcountlessothershadalreadylefttheirsandalprintsbetweentheTigrisandEuphrates.EmperorTrajancapturedCtesiphoninAD116andmadeitpartofRome.Thenextyear,HadriangaveitbacktotheParthiansinapeacesettlement.In164,itwasagaintaken,byRomangeneralAvidiusCassius,butlaterabandoned.Then,SeptimusSeverusfinallymadethecampaignspaywhenhetookthecityin197.Hesoldasmanyas100,000ofthecity’scitizensintoslavery.Ahundredyearslater,thecitywasagaininthenews.EmperorGaleriuswasdefeatedoutsidethecitywallsbyanarmyofPersians.In296,hesoughtarematchandthistimewonthecity,whichhetradedforArmenia.Muchlater,in627,Heraclius,tookthecity.TheWesternEmpirewasalreadyhistory,butHeracliusruledbrieflyfromConstantinople.Hegaveupthecitysoonafteritscapture.Tenyearslater,itfelltotheSaracensandwassooninruins.ABritisharmywasdefeatedbyOttomanforcesin1915,butregainedtitletothecityintheTreatyofVersailles.Later,theBritishreadilyletgoofBaghdad,aftertheyrealizedhowexpensiveitwastoholdontotheplace.ItgaineditsindependencealongwithotherBritishimperialpossessionsin1921.Morerecently,thecitywasonceagaintakenbyAmericanforces.WHEREHAVEALLTHEDEADEMPIRESGONE?Ofallthesillythingspeoplesaidtowardtheendofthetwentiethcentury,perhapsthesilliestcameoutofthemouthofFrancisFukuyama.Themanwasso infatuatedbytheapparentsuccessoftheAmericanimperium,hebelievedthe“endofhistory”mighthavearrived.Whatisthehistoryofthistatteredballbuttherecordoftheriseandfallofcivilizations,ofgovernments,ofbattlesandheroes?ButsoperfectinFukuyama’seyeswasthenewAmericanempire,hethoughtithadrisenbeyondthetugofgravity.Sosolidlylaunchedwastherocketofdemocraticcapitalismthathecouldnotimaginethatitwouldeverfalltoearth.5Norcouldhefathomhowanythingcouldevercompetewithitortakeitsplace.Fukuyamadidnotseemtoappreciatehowhistoryworks.Politics,likemarketsandloveaffairs,oftenthrowsupperiodsofrelativecontentment,aswellassourperiodsofdespairandbubblesoftemporaryinsanity.Iftheylastformorethanageneration,peoplethinktheyarepermanent.Inthecaseofbubbles,peoplebelievethatsomenewerahasarrivedandthatthingswillneverbeastheywerebefore.Bubblemarkets—suchasthetechbubbleinthelate1990sortheresidentialpropertybubbleincertainareasoftheUnitedStatesin2004and2005—comealongfromtimetotime.Peopletakeleaveoftheirsenses.Theyarewillingtobuythingsattwice,threetimes,tentimespricestheywouldhavejudgedtoohighjustafewyearsbefore.InthefamousTulipBubbleinHollandfrom1634to1637,peoplepaidupto5,000guildersforasingletulipbulb.IntheSouthSeaBubbleinEngland,in1711,speculatorspaidupto1,000poundsforstocksthatwerereducedtonothingbythelatterhalfof1720.IntheJapaneseBubbleofthelate1980s,investorspaidsuchhighpricesforrealestateindowntownTokyothatthegroundsoftheImperialPalaceweresaidtobeworthmorethantheentirestateofCalifornia.Investorspayextravagantpricesbecausetheyareconvincedthatsomethingfundamentalhaschangedandthattheywillneveragainhaveanopportunitytobuyatcurrentprices,nomatterhowhightheyhavebecome.Theybelievetheworldwillneverbethesame,thattherulesthatgovernhumanactivityhavebeenalteredorsuspended.Marketsmakeopinions,theold-timerssay.Itisanexpressionwereturntoseveraltimesinthisbook.Aspricesrise,peopleinventexplanationsforwhytheyhavegoneupandtheywillcontinue.Inthecaseofthetechbubbleofthelate1990s,theytoldthemselvesthatnewdevelopmentsinelectroniccommunicationshadcompletelychangedtheancientrelationships.Thanksto computer-drivendevicesandtheInternet,materialprogresswasabouttoaccelerate.Assetswereabouttogetmuchmorevaluable.Itdidnotbotherthemthatthetwopropositionswerecontradictory.Asocietyinwhichthefuturecomesfastershouldlogicallydepreciatethepresentmorequickly.Factories,meansofproduction,andcapitalassetsshouldbeexpectedtobecomeobsoletesoonerandthusshouldbeworthless,notmore.Butnoonethinksveryhardwhenmarketsarerising.Thisistrueoftherealestatebubbleonbothcoastsin2004and2005.HousesinSouthernCaliforniawereincreasinginvalueatfourtimestherateofgrossdomesticproduct(GDP)growthandaninfinitelygreatmultipleofrealincomegrowth—whichwasnegative.Itmadenosense,butwhomentionedit?Priceswererising;investorshadnotroublecomingupwithreasons.Itwasanewera,theysaid;propertywouldneveragainbeworthwhatitusedtobe.Inpolitics,too,therearebubbles—timeswhenthehorizonissoclearandcloudless,peoplebegintothinkitwillneverrainagain.Theoldprinciples—thewisdomofthedeadandthevirtuesthatbroughtthemtowheretheyare—nolongermatter.Itisanewera.Theyaretheimperialpower,thehegemon,thecockofthewalk.Theyareontopoftheworldandarelookingforreasonstheywillbethereforever.Butthereasoncomestothemreadily.Theylookinthemirror,andthereitis.Insteadoftheirownfaces,however,theyseeonlythedull,puerilemaskstheyhaveputon.Itisasiftheyallhavebecomecandidatesforpresident;theyare“hollowdummies,”touseOrwell’sexpression—vainimposters,pretendingtobesomethingevendimmerandlessinterestingthantheyactuallyare.Theylookinthemirrorandthinktheyseearacesoclever,virtuous,sturdy,andindustriousthattheydeservetobeontopoftheworld.Surely,theyhavecreatedsomethingthatcanneverbematched.Allofhistoryhasbeenmarchingtowardthisperfection.Timehasstopped.Historyhascometoanend;thereisnoneedforanymoreofit.In1989,Americandemocraticimperialismtriumphedunmistakablyagainstitsadversary—theEvilEmpire.TheGoodEmpirewasthelastonestanding.Godhadshinedhislightonusandwouldneverturnitoff.Manypeoplesaidmanydumbthingsinthetwentiethcentury.Usually,theywereonlymistakesorlies.WhenNevilleChamberlainsaidwewouldhave“peaceinourtime,”hewasmakingaprediction.Hewaswrong.Butifyouhungeveryonewhoguessedwrongaboutthefuture,thelamppostsandtrafficlightsofWall Streetwouldbefullofbodies.AndwhenAdolphHitlersaidGermanyneededlebensraum,hewasmerelycoveringuphisdesireforconquestbyputtingonamask.Butwhen,aftertheBerlinWallfellandFrancisFukuyamadeclaredtheendofhistory,hemusthavemadethegodschuckle.Herewasareflectionsovainandimbecilic,itpracticallycrackedmirrors.Table2.1EmpiresthroughoutHistoryEmpiresarelivingthingswithalogicoftheirown.Theyareborn;theymustdie,too.Nooneconquerswithouteventuallybeingconquered.Nobubbleexpandswithouteventuallyblowingup.Inhistory,therearenoexceptions. ItwasasifFukuyamaneveractuallyreadanyhistory.Empiresarelivingthings.Theyareborn;theymustdie,too.Nooneconquerswithouteventuallybeingconquered.Nobubbleexpandswithouteventuallyblowingup.Therearenoexceptions.Allempiresdie.Here,foramusement,welookatthegravestones(seeTable2.1).Onlyone,andthatoneofrelativelyrecentnaissance,stilllives.Butthegraveandthetombstonearethere,waitingforit.Fukuyama’sconceptwasthatthedesireforpower,glory,conquest,revenge—allthedarkforcesofdestructionandregression—haddisappeared.Theyhadbeenreplacedbyanevolvingcivilizationofconsensual,democraticgovernmentandmarket-drivenmaterialprogress,ledbyanenlightenedU.S.imperium.ThisiswhatAmericaofferedtheworld—peaceandprosperity.Butevenacasuallookatthehistoricalrecordwouldshowthatneitherempiresnordemocracyareanyguaranteeofpeaceorprosperity.Forproofthatempiresarehardlypeacefulplaces,weturntothehistoryofRome.Andhereweofferreadersahistoryoftheriseandfalloftheworld’sgreatestempireasbriefasthelatestItalianunderpants.THEROMANEMPIREIntheeighthcenturyBC,RomewasnothingmorethanacollectionofvillagesalongtheTiber,inhabitedbyseveraltribes,principallyLatin,Sabine,andEtruscan.Gradually,theseRomansgrewinnumbersandpower,andwenttowarwithalmosteveryone.TheywerealreadyconstructinganempirebeforethefifthcenturyBC.Inacelebratedearlyincident,perhapsonlylegendary,theyinvitedtheirneighbors,theSabines,toafeastandthenstoletheirwomen.TheSabinemenwerenothappy;theytookoffenseandnursedagrudge.Buttherewashardlyatribe,kingdom,orempireinEurope,NorthAfrica,ortheMiddleEastwithwhomtheRomansdidnotpickafight.AftertheSabinewar,therewerewarsagainsttheAlbii,Etruscans,Volcii,Carthaginians,Etruscansagain,theLatinLeague(andthisisonlyapartiallist),theVolsquii,Equii,Veieii,Gauls,Samnites,moreGauls,Epirians,Carthaginiansagain,andmoreGauls,Macedonians,Syrians,Macedoniansagain,slavesinSicily,Parthians—andevenRomansinthecivilwars.AndwehavenotevenarrivedatCaesar’swarsagainst theGaulsin58to51BC.Romanhistoryhasanother500yearsofwarstogo!ThecivilwarsinthefirstcenturyBCputanendtotheRepublic.Then,CaesarcrossedtheRubicon,anditwasanewerainRome.ItwasasifTommyFrankshaddecidedtomovehisarmytoWashington,DC,andmakearegimechangeofhisown.Somepeoplewouldobject,ofcourse(theliberalpaperswouldhowl),butmostpeoplewouldn’tcare.InancientRome,asinmodernWashington,peoplechosetheirideasthesamewaytheychosetheirclothes—theywantedsomethingthatnotonlydidthejob,butwasalsofashionable.Andatthetime,itwasàlamodeforemperorsandindividualsaliketopretendtheylivedinafreerepublicthathonoredcitizens’rights.Butinpractice,thegovernment,anditsleader,couldgetawaywithalmostanything.Andwhattheyseemedtolikedoingwasgoingoutandmakingwaragainsteveryonetheythoughttheycouldbeat.ThatiswhatEmpiresdo.Backthen,warwasapayingproposition.WhenEmperorTrajantookCtesiphon(nearmodernBaghdad),hecaptured100,000peoplewhoweresoldintoslavery.WhenAugustustookEgypt,heusedtheNile’swheatharvesttofeedthegrowingpopulationofrabbleinRome.Butwhilesomepeoplecameoutahead,intheaggregate,warsthen—asnow—werenegativegainenterprises.Andastheempiregrew,thecostsalsomounted,tothepointwherebothbecamegrotesqueandinsupportable.Octavian,underthenameAugustus,wasinstalledin27BC.TheRomansonlyusedpuregoldandsilvercoins,butAugustusneededmoremoneytofinancehiswarsanddomesticimprovements.Therewerenogovernmentprintingpressescapableofrunningoffabatchof$100sinafewseconds.Norwasthereaglobalbondmarket,fromwhichhecouldraisebillionsinloansovernight.Allhecoulddowastoorderthegovernment-ownedminesinSpainandFrancetoworkovertime.Aroundtheclock,minersdugoutthepreciousmetals.Themoneysupplyrose.Asthesupplyofsomethingrisesrelativetothesupplyofsomethingelse,thevalueoftheformerdeclinesrelativetothelatter.Thus,didpricesriseinRomeasmoremoneychasedthesamequantityofconsumergoods.BetweenthedayAugustuscametopowerandthedayJesusChristwasborn—aperiodof27 years—consumerpricesnearlydoubled.Augustus,orhisadvisors,realizedtheproblem.Theycutbackthemoneysupplyandpricesstabilized.Romewasn’tbuiltinaday,norwasitsmoneydestroyedovernight.InAD64,inNero’sreign,theaureuswasreducedby10percentofitsweight.Thereafter,whenevertheRomansneededmoremoneytofinancetheirwars,theirpublicimprovements,theirsocialwelfareservicesandcircuses,andtheirtradedeficits,theyreducedthemetalcontentofthecoins.BythetimeOdoacerdeposedthelastemperorin476,thesilverdenariuscontainedonly0.02percentsilver.THEINVINCIBLEARMADATheimpulsetobuildupanempireseemstobeasstrongastheimpulsetotearonedown.Tothequestion,whendoesacountryaimforempire,comestheanswer:wheneveritcan.EverycountryinEuropehasatonetimeoranotherreachedfortheimperialpurple.PortugalandSpaindiscoveredandconqueredvastjungles,swamps,andpampas,andbuiltempiresforthemselves.ForSpain,theconquestswereextremelyprofitableaftertheyfoundhugequantitiesofgoldandsilver.Butnothingruinsanationfasterthaneasymoney.Themoneysupplygrewlargerwitheveryship’sreturnfromtheNewWorld.Peoplefeltrich,butpricessoonsoared.Worse,theeasymoneyfromthenewterritoriesunderminedhonestindustry.Inthebubbleeconomyoftheearlysixteenthcentury,SpaindevelopedatradedeficitsimilartothatoftheUnitedStatestoday.Peopletooktheirmoneyandboughtgoodsfromabroad.BythetimetheNewWorldminespeteredout,theSpanishwerebankrupt.TheSpanishgovernmentdefaultedonitsloansin1557,1575,1607,1627,and1647.Notonlywasthedamagesevere,itwaslong-lasting.TheIberianPeninsulabecamethe“sickmanofEurope”andremainedonbedrestuntilthe1980s.Ifempiresaretoendure,theymustpay.Butiftheypaytoowell,successruinsthehomeland.Inthesummerof1588,theInvincibleArmadaofKingPhilipIIofSpainheaded towardtheLowCountries.YouandI,dearreader,canspottheerroralready.Philipwouldhavedonebettertocallhisfleetthe“AlmostInvincibleArmada,”orperhapsevenbetter,the“BestLittleArmadaWeCouldPutTogetherattheTime.”CallinganarmadainvincibleislikecallingaWorldComunbeatable;itisachallengetothegodsandaninvitationtodestruction.TheArmada’smissionwassimple,butnoteasy—topickupsoldiersintheNetherlandsandtransportthemtoEngland.Ithadbeen500yearssinceanyonehadattemptedaninvasionofEngland.Thelastassault,ledbyWilliam,DukeofNormandy,hadbeenabigsuccess.Philipwasreadytohaveagoatitagain.Thereasonsforthecampaignwerenotsosimple.Inthejargonoftoday,hemighthavelabeledhisefforta“WaronTerror,”forEnglishpirateshadbeenterrorizingSpanishshippingforyears.ThepirateswerenotnecessarilysponsoredbytheEnglishcrown.Butthey,literally,foundsafeharborinEnglishports,similartothewayal-QaidafoundAfghanistanhospitable.Ofcourse,therewasmoretoit.Religionplayedapart.JustasGeorgeBush’sWaronTerrorhadasubtextofreligion,sodidPhilipofSpain’scampaignagainstEngland.HenryVIIIofEnglandhadrejectedtheauthorityofthepopeandsethimselfupasheadoftheChurchofEngland.Whenhisdaughter,Elizabeth,orderedtheexecutionofherCatholicrival,MaryQueenofScots,Philip(whohadbeenkingofEngland30yearsprior,whenhewasmarriedtoMaryI)thoughtthetimehadcomeforaction.By1588,Spainhadbecomeapowerfulempire—withcoloniesintheNewWorldthathadmadethemrich.MoneypouredintoSpanishcoffersduringthesixteenthcentury—thecountryimporteditthewaytheUnitedStatesimportsbig-screentelevisions,givinglittleinreturn.Whatamagnificentsystemofimperialfinance.Shipswentwestwithsoldiersandcamebackwithgoldandsilver.ItwasalmostasgoodasAmerica’ssystem.In2005,shipswentwestfromLongBeachandSeattlealmostempty.TheycamebackfulltothegunwaleswithAsian-madegoods.AndlikeAmerica’ssystem,Spain’stradewasalmosttoogoodtobetrue.Anythingthatmustcometoanendmustcometoanendsomehow.Greatempireslookforwaystodestroythemselves.Theyusuallyhavelittletrouble findingthem.In1588,SpainfoundtheEnglishfleet—andtheNorthSea.HistoryrecordstheBattleofGravelinesasoneoftheworld’smostimportantnavalengagements.TheSpanishshipsweretrappedagainsttheFlemishcoast.TheSpanishcommander,theDukeofMedina,decidedtouseaportionofhis6fleettoholdofftheEnglish,whiletherestmadetheirwaytoopenwater.TheEnglishengagedthedefendingSpanishshipswitha10-to-1numericaladvantage.Soon,threeofthehugeSpanishgalleonsweresunk,with600Spaniardskilledandmorethan800otherswounded.“Thedecksranwiththeir7blood,”saideyewitnessaccounts.MostoftheEnglishships,havingdonetheirworkandrunoutofammunition,soughttheirports.TheSpanish,badlybatteredandrealizingtheircausewasdoomed,decidedtheycouldnotfighttheirwaybackthroughtheChannel.Instead,theysailednorthintendingtomaketheirwayaroundScotland(thoughtheyhadneglectedtobringmapsofthearea)andthencebacktoSpainbytheopenAtlantic.WhattheEnglishbegan,thegodsfinished.OnSeptember18,1588,theSpaniardsranintooneoftheworststormsevertosmashintoScotland.InhighseasoffCapeWrath,theInvincibleArmadaprovedvincible;itbrokeup.Someshipssank;othersranoutoffoodandwater.Inanefforttokeeptheleakyvesselsabovewater,sailorsmannedthebucketsdayandnight,butmanysoonranoutofenergyordiedofscurvy,dysentery,andfever.ThesunwasneversupposedtosetonPhilip’sSpanishempire.Butitsankalongwiththearmadain1588.Financially,Spanishfortuneshadbeguntakingonwaterlongbefore.“TheminesofBrazilweretheruinofPortugal,asthoseofMexicoandPeruhadbeenofSpain;allmanufacturefellintoinsanecontempt...,”explainedAlfredThayerMahaninhisopus,TheInfluenceofSeaPoweruponHistory,1660-1783,“Thetendencytotrade,involvingofnecessitytheproductionofsomethingtotradewith,isthenationalcharacteristicmostimportanttothedevelopmentofsea8power.” Pricesrosesharplyinthesixteenthcentury.Asaresultoftheincreaseinthemoneysupplycausedbythegoldandsilvershippedinfromthecolonies,pricesinallofEuropewentup400percent.Then,whentheminesandrobberieseasedoffafter1580,theinflationaryboomwasover.AlongdepressionbeganontheIberianPeninsula.TheSpanishandPortuguesewerevictimsoftheirowngoodfortune.3HowEmpiresWorkNothingisbornbutfromanotherlivingthing.Noempireeverarosewithoutsomelinktoitspredecessors.ButthesystemofimperialfinanceintheUnitedStatesbearslittleresemblancetoitsimmediatepredecessor,theBritishEmpire.Therearenocoloniesfromwhichwebuyrawmaterialsatdiscountprices.AndtherearefewU.S.factoriesforturningrawmaterialsintosalableproducts.NordoestheAmericanimperiumbearmuchlikenesstotheimperialfinancesystemsoftheGermans,theAustro-Hungarians,theRomans,theGreeks,ortheMongols.ButthereisaslightfamilyresemblanceintheSpanishcolonialempire.ShipswenttotheNewWorldfromSpanishandPortugueseportsarmedwithsoldiers,provisions,andcolonialadministrators.Theycamebackladenwithgoldandsilver.Goldandsilverwasrealmoney.Itcouldnotbeeasilyreplicated,counterfeited,orcalledintobeingwiththestrokeofakeyboard.Still,theincreaseinmoney—withnocorrespondingincreaseinproductiveoutput—wasfataltotheIberians.Theyspentwithoutreallyearning.Theyconsumedwithoutproducing.Whentheflowofeasymoneystopped,theyfoundthatrealmoneyhadmadethemreallypoor,notrich.America’simpoverishmentisevenmoreridiculous.Sheissustainedbyforeignwealth,butwithoutrealmoney.Itismerelypapermoneywithoutthepaper—electronicregistrationofunitsofpapermoney.Itisamirage—achimericrepresentationofsomethingthatdoesn’texistanywhere.Forevery additionaldollartheU.S.Treasurycallsintobeing,thereisnoextradollarofsavings,noextradollarofprofit,noteventhepaperdollaritself.AtleastthegoldtakenfromLatinAmericaisstillaroundtodayandisstillvaluable.ThedollarscreatedbytheTreasuryarelikelytodisappearcompletely.TheUnitedStatesenteredtheempirebusinessinthelatenineteenthcentury.Shewasabletostraightenherselfoutforafewyearsbutthelureofitlaterbecameirresistible.Between1917and1971,thecountrywastransformedfromasimplerepublicthatmostlymindeditsownbusinesstoagrandioseempirewithimaginedinterestsandrealtroopsnearlyeverywhere.Innormalplacesatnormaltimes,peoplegoabouttheirnormallivesearningalivingthebesttheycan.Butanempirechangesthewaypeoplethink.Thecommonhouseholderturnsawayfromhishumblehouseandhisspouseandbeginstothinkaboutthefairworldbeyondhiskith,kin,andken.Helooksoutwardandseeshowmuchbettertheworldcouldbeifheandhisfellowcitizenscouldrunittheirway.Heseesthathemustplayagreaterroleinglobalaffairs,thathemustwalkontheworldstage,notasabitplayer,butasthemaincharacter—thehero.Hemustplaytheleadrole.Insteadofstickingtotheirlooms,fields,andfactories,theimperialcitizensbegintoappreciatethefinanciallogicofempire:Theyenjoythelootthatcomesfromthefaredgesoftheimperialsystem.Gradually,theyneglecttheirowncommerceanddependontheirsubordinates,lackeys,andsubjectpeoplestosupportthem.Whileadministrativecommands,fashions,andproclamationsflowfromthecenteroftheempiretotheextremities,therealsoisanimportantflowintheotherdirection.RomebroughtinitswheatfromEgypt(Romansneededbread),itsgladiatorsfromtheBalkans(Romanswantedcircuses),itssoldiersfromGaul,anditsmoneyfromforeigntreasuriesandtaxcollectorsfromJudeatoBritannia.Amodestrepublicpaysitsownway.In1952,nearly90percentofthefederalgovernment’sborrowingscamefromdomesticinvestors.AmericanssavedtheirmoneyandusedsomeofittosupporttheprogramsoftheEisenhoweradministration.Butthematuringempireof2005dependedonaglobaldebtmarketandthesavingsofforeigners.Fromlessthan5percentofTreasurybondsinoverseashandsin1952,thetotalapproached45percent,whilethepercentage oflendingcomingfromdomesticsourceshadbeencutinhalf.Americansstillgrowtheirownwheat,butthetruckstomoveitmaybemanufacturedinEuropeorAsia,andthepansitcooksinareprobablymadeinChina.TheygettheirelectronicparaphernaliafromTaiwan,clothesfromMalaysia,andautomobilesfromJapan.TheygetscientistsfromIndiaandclassicalmusiciansfromKorea.AndmoneycomesfromallovertheEasternPeripherytokeepitallgoing.THEHISTORYOFEMPIRESReadingthehistoryofempires,welearnthatthecentralpowertendstoweakenastheperipherystatesgrowstronger.Eventually,thesubordinatestatesgettiredofsupportingtheimperium.TheystoppayingtributeandshowupatthegatesofRome.FranceandEnglandbuilttheirownempiresintheeighteenthandnineteenthcenturies.Napoleon’sconqueststooklessthanadozenyearstocomplete,buttheempirecollapsedevenfaster.Bytheendofthenineteenthcentury,allthatwasleftoftheFrenchempirewereafewislandsnoonecouldfindonamapandsomegodforsakencoloniesinAfricathattheFrenchwouldsoonregreteverhavinglaideyeson.Almostallwerelost,forgotten,orsurrenderedbythe1960swithnothingmuchtoshowforthemexceptwhatyoufindintheLouvre—andapopulationofAfricanimmigrantswhonowweighheavilyonFrance’ssocialwelfarebudget.England’sempirewasmuchgrander,stretchedfurther,andleftmoredebriswhenitbrokeup.Buttheendresultwasaboutthesame:ThepoundwasdegradedandtheBritishwerenearlybankrupt.GermanylostitsoverseascoloniesafterWorldWarI.Itthencreatedanotherempire—byconquest—inthelate1930sandearly1940s.TheenterpriseranintoRussia’sempireintheEast—resultinginhistory’slargestandbloodiestlandbattles.Intheend,thankspartlytoAmericaninterventiononthesideoftheRussians,theGermanempirewasdestroyed.TheRussians’empirecollapsed underitsownweight44yearslater.WhiletheRomanswerestillkickingSabinederrieres,Athenswasalreadyamini-empire.By431BC,Athenshadbecomeanempire,withsubjectstatesthroughouttheAegean.Inthatyear,onsomepretextnotworthrecalling,thefirstPeloponnesianWarbeganbetweenSpartaandAthensanditsallies.Periclesdecidedthatthebestoffensewasagooddefense.HebroughttheAthenianswithinthecity’swallshopingthattheenemywouldexhaustitselfinfutileattacks.Butbubonicplaguebrokeoutinthebesiegedcityandkilledaquarterofthepopulation—includingPericles.Thence,anephewofPericles,Alcibiades,stirredtheAthenianstoanoffensivecampaign.AgreatarmadawasassembledtoattackSyracuse,acityinSicilyalliedwithAthens’foes.Thecampaignwasacompletedisaster.Thearmadawasdestroyedandthearmysoldintoslavery.Sensingashiftinthewind,otherGreekcity-statesbrokewithAthensandwentovertoSparta.In405BC,theremainingshipsintheAthenianfleetwerecapturedatthebattleofAegospotami.Notlongafter,Athens’wallswerebreachedandthecitybecameavassalstatetoSparta.TheAthenianempirewasreplacedbytheSpartanempire,whichwaseventuallysupplantedbytheMacedonianempire,whichthenbecametheempireofAlexander.WhenAlexanderdiedin323BC,hisempirediedwithhim.ThenextgreatchapterofimperialhistorywaswrittenbytheRomans,whodefeatedwhatwasleftoftheGreeksattheBattleofPydnain168BC.Oneempiredied.Anotherwasborn.Naturecan’tbearavacuumandabhorsamonopoly.Aworldwithoutanempireisaworldwithaholeinit.Anempirefillstheemptyspot.ButNatureisaficklemistress.NosoonerhasanempirebeenbornthanNaturehardensherfaceagainstit.Anempirehasamonopolyontheuseofforce,orattemptstohaveone.Anempireclaimsforitselftheexclusiverighttousepreemptiveforceagainstanypowerthatmayposeachallenge. Naturetoleratesitforawhile.Butshenurturesrivalsandencouragescompetitors.Soonerorlater,theyfindtheiropportunity.AthensranthefirstrecordedempireintheWest.Americarunsthecurrentone;ittookoverfromBritainafterWorldWarI.Forthefirsteightdecades,Americansdeniedanyimperialroleorpurpleambitions.Butbytheearlytwenty-firstcentury,theywerewarminguptoempire.InMarch2004,theNewYorkTimesreportedthatitwasnowrespectabletodescribetheUnitedStatesasanempire.“Today,”saidtheNYT,“Americaisnomeresuperpowerorhegemon,butafullblownempireintheRomanandBritishsense.”“Nocountryhasbeenasdominantculturally,economically,technologicallyand1militarilyinthehistoryoftheworldsincetheRomanEmpire,”addedthecolumnistinthesamepaper.RobertKaplan’sbook,WarriorPolitics:WhyLeadershipDemandsaPaganEthos,gavethisassessment:Ourfutureleaderscoulddoworsethanbepraisedfortheirtenacity,theirpenetratingintellectsandtheirabilitytobringprosperitytodistantpartsoftheworldunderAmerica’ssoftimperialinfluence.Themoresuccessfulourforeignpolicy,themoreleverageAmericanswillhaveintheworld.Thus,themorelikelythatfuturehistorianswilllookbackonthetwenty-firstcenturyUnitedStatesasanempireaswellasarepublic,howeverdifferentfromthatofRoman2andeveryotherempirethroughouthistory.TheJune11,2005,editionofIHTranRogerCohen’s“Globalist”column,whichcontainedthisremark:“Weguaranteethesecurityoftheworld,protectourallies,keepcriticalsealanesopenandleadthewaronterror,”saidMaxBootoftheimperialburden.“...thePaxAmericanainAsia,asinEurope,hasbeen3conducivetoahalf-centuryofgrowth,peaceandprosperity.”PaulKennedywentfurther,pointingoutthattheimbalanceisevengreaterthan intheRomanera.“TheRomanEmpirestretchedfurtherafield,”henotes,“but4therewasanothergreatempireinPersiaandalargeroneinChina.”Americahadnorivals,hesaid.Militarily,Chinawasnorealcompetition;itwasjustanothercountryonAmerica’shitlist.Evenafter227years,America’sstockcontinuedtorise.ThatithadgottenhighenoughtovexNatureworriednoone.Thatitmightdeclinetroublednoone’ssleep.Thatbeinganempireisnotnecessarilyanunadulteratedblessingbotheredneitherthepresidentnorhisministers.Themodestrepublicof1776hadbecomethegreatpowerof2005withpretensionstoempirethatcouldnolongerbedenied.Thatitscitizenswillnotbefreerwasunderstoodandaccepted.Butwouldtheybericherunderanempirethantheywouldhavebeenunderahumblerepublic?Wouldtheybesafer?Wouldtheybehappier?Ifso,pitythepoorSwiss.Intheirmountainfastnesses,theyhadonlythemselvestobossaround;onlytheirownpastures,lakes,andpeakstoamusetheireyes;andonlytheirownindustriestoprovideemploymentandsustenance.Andtheirpoorarmedforces!Imaginetheboredom,thetediouswaitingforsomeonetoattack.Whatgloryisthereindefense?Oh,foraforeignadventure!Thankstotheircolonialempire,thesunneversetontheBritish.AftertheNapoleonicWars,asmanyasaquarteroftheworld’spopulationlivedunderBritishrule.Meanwhile,thesunseteverysingledayontheSwissFederation.Butthatdidn’tstoptheSwissfrancfromrising,almostdaily,againsttheBritishpound.In1815,aBritishpoundcouldhavebeenexchangedfor13Swissfrancsandahalf-poundofcheese.Today,apoundbringsyouonly1.6Swissfrancs.Andforgetthecheese.WhiletheBritisheconomygrewsluggishinthetwentiethcentury,theSwisseconomyboomed.Bytheendofthecentury,grossdomesticproduct(GDP)perpersoninBritainwasonlyaround$20,000.TheSwiss,meanwhile,wereproducing$28,550inGDPpercapita.Butthepooryodelersnevergotthegloryofempire.Theynevergottoadmire themselvesonmapsorinheadlines.WhatSwisspresidentgetstosendtroopstoremotehellholes,joinapeace-keepingmission,orfightterrorists?HowoftendotheSwissgettocheerontheirheroesandmourntheirdead?WhoevenknowswhothepresidentofSwitzerlandis?Whocares?WhileAmericansgettomakeapublicspectacleofthemselves,theSwisshavetomakedowithprivatelife.TheSwisshavetomindtheirownbusinessandwatchtheSturmundDrangoftheworldpassthemby.ButwouldtheSwissreallybebetteroffifthey,too,hadanempiretorun?Theavailableevidencefromhistoryismixedandanecdotal.Ifthepastisanyguide,earlymilitarysuccessesareinevitablyfollowedbyhumiliatingdefeats.Financialprogressisnearlyalwaystrailedbynationalbankruptcyandthedestructionofthecurrency.Andthegoodsenseofadecentpeopleissoonreplacedbyamalignmegalomaniathatbringsthewholepopulationtocompleteruin.Butwhocares?Itisnotforustoknowthefutureortoprescribeit.Instead,wegetoutourfieldglassesandpreparetowatchthespectacle.BACKTOTHEFUTUREAgreatempireistotheworldofgeopoliticswhatagreatbubbleistotheworldofeconomics.Itisattractiveattheoutset,butacatastropheeventually.Weknowofnoexceptions.AfterthebattleofPydna,RomebecametheleadingempireoftheWesternworld.(Wecontinueoursimplifiednarrativetoshowhowthingsworkedout.)AugustusdiedinAD14,leavingtheempireinthehandsofhisstepson,Tiberius,whohadmarriedAugustus’sfree-and-easydaughter,Julia.Tiberiusclippedthecoinage(reducedthepreciousmetalcontent).This,andotherprudentpolicies,greatlyincreasedtheamountofmoneyinthetreasury.BythetimehewasassassinatedinAD37,therewere700milliondenariiinthetreasury—farmorethantherehadbeenatthetimeofAugustus’sdeath. TiberiushandedofftheimperialpurpletoCaligula,whoquicklyspentallthesavingsandmore.Romesufferedaseriesofmadandlavishrulers.ToconfiscatethemoneyofwealthyRomanfamilies,Caligulawouldfalselyaccusethemofplottingagainsthim.HewassucceededbyClaudiuswho,inturn,gavewaytoNero.Bythistime,Romewasdeeplyindebtandrunninglargetradedeficitswithitsperipherystates—similartotheconditionoftheUnitedStatestoday.Nerotookthetime-honoredexpedientofclippingthecoins(takingoutthegoldandsilvercontent)evenmore.InAD64,heproclaimedthathenceforththeaureuswouldbe10percentlighterinweight.So,whereasinthepast,41aureihadbeenmintedfromonepoundofgold,therationowbecome45aureitoapound.NerowasdeposedinAD68.Buttheprecedentwasset.Maintainingorderthroughouttheempirewasexpensive.Romebecamedependentonimportedcapital,importedsoldiers,andimportedgoods—justasAmericaistoday.ButRomehaditsownversionofacentralbank.Eachnewemergencywasmetwithmorephonycashjustasitistoday.BythetimethebarbarianssackedRome,thecurrency,thedenarius,stillboretheancientformwiththeimagesofdeademperorspressedonit.Butthevaluehadbeentakenout;thecurrencyhadlost99.98percentofitsvalue.Whilethisseemslikeadreadfulrateofinflation,itisnotreallyasbadasthecurrentU.S.example.Inlessthan100years,theU.S.dollarhaslost95percentofitsvalue.Ifthisratecontinuesforjustanother150years,thedollarwilldoinhalfthetimewhattookthedenariusalmost500years.ThomasCahilldescribesthelastdaysofRomeinhisbook,HowtheIrishSavedCivilization:...thechangingcharacterofthenativepopulation,broughtaboutthroughunremarkedpressuresonporousborders;thecreationofanincreasinglyunwieldyandrigidbureaucracy,whoseownsurvivalbecomesitsoverridinggoal;thedespisingofthemilitaryandtheavoidanceofitsservicebyestablishedfamilies,whileitsofficespresentunprecedentedopportunityformarginalmentowhomitsrankshadoncebeenclosed;thelipservicepaidtovalueslongdead;thepretensethatwestillarewhatweoncewere;theincreasingconcentrationsof thepopulaceintoricherandpoorerbywayofacorrupttaxsystem,andthedesperationthatinevitablyfollows;theaggrandizementofexecutivepowerattheexpenseofthelegislature;ineffectuallegislationpromulgatedwithgreatshow;themoralvocationofthemanatthetoptomaintainorderatallcosts,whilegrowingblindtothecrueldilemmasofordinarylife...Cahillcontinues:...theseareallthemeswithwhichourworldisfamiliar,noraretheytheGod-givenpropertyofanypartyorpoliticalpointofview,eventhoughweoftenactasiftheywere.Atleast,theemperorcouldnotheaphiseconomicburdensonposteritybycreatinglong-termpublicdebt,forfloatingcapitalhadnotyetbeenconceptualized.Theonlykindsofwealthworthspeakingofwerethefruitsofthe5earth.Finally,thecostsoweakenedtheempirethatthebarbarianswereatthegate.“Thethickerthegrass,themoreeasilyscythed,”saidAlaric,kingoftheVisigothsfromAD395to410.HewasspeakingtotheRomanenvoyssenttoshoohimaway.TheRomanenvoyshadjusttoldhimthatifheandhisfilthybandofbarbarianbuddiesdidn’tgoaway,theywouldunleashlegionsofRomanwarriorstocrushhim.Theythenaskedhimwhatitwouldtakeforhimtoturnaroundandgo.Herepliedthathismenwouldliketocombthecity,takeallthegoldandsilverpluseverythingelsevaluablethatcouldbemoved,plusallthebarbarianslaves.Andwhat,saidtheenvoys,wouldthatleaveusRomans?RepliedAlaric,“your6lives.”Empires,likebubblemarkets,endupwheretheybegan.Romebeganasatown ontheTiber,withsheepgrazingonthehills.AbullmarketinRomanpropertylastedabout1,000years—from700BCtoaboutAD300,whentemples,monuments,andvillascrowdedthePalatine.Then,abearmarketbeganthatlastedatleastanother1,000years.Aslateastheeighteenthcentury,RomewasonceagainacityontheTiberwithsheepgrazingonthehillsides,amidbrokenmarblecolumnsandimmensebrickwalls.Theyhadbeenbuiltforareason,butnoonecouldrecallwhy.INPRAISEOFEMPIRESItissaidthatempiresprovideanexpanseoflawandorderunderwhichtrade,commerce,investment,andprofittakingcanflourish.Here,wewillspottheempirebuildersandtheirapologistsapointortwo.EventheMongolreignofterrorwassaidtohavepermittedanuptickintrade.Andwhynot?Theimperialistsleviedatributeonoutput.Theyhadaninterestineconomicgrowth.Whyshouldn’ttheymakesurebillswerepaidandpropertywassafe?OneoftheleadingproponentsoftheAmericanempireisamannamedDeepakLal,whowroteabookentitledInPraiseofEmpires.“TheRomanempirehadthroughitsPaxbroughtunprecedentedprosperitytotheinhabitantsofthe7Mediterraneanlittoralfornearlyamillennium,”Lalwrites.Hebelievesthatempiresaregoodthings,becausepeoplearemateriallybetteroffunderimperialrulethanotherformsofgovernment.Wehavenointentionoftryingtoprovehimwrong.Theeconomicrecordisnotcompleteenoughtoproveanything.HowfatandhappymighttheresidentsoftheMediterraneanlittoralhavebeeniftheRomanshadstayedinRome?Wedon’tknow.NordoweknowmuchabouttherelativegrowthratesofgroupsnotunderRomanrule.Sowecannotproveanything,exceptthatLalcan’teither.Andforthatweneedtocallonlyonewitnesstothestand,Lalhimself.Inthe500yearsprecedingWorldWarII,whentheeconomicpictureismorevisible,theHolyRomanEmpire—which,asVoltaireremarked,wasneitherholy,norRoman,norarealempire—wasextinguished.Initsplacerosevarioussovereignnation-states,oftenwithimperialambitionsandbubble-likeexcesses, butnoneabletoassertitselfovermuchofEuropeorforverylong.Europe,inotherwords,wasnonimperial.China,India,andAnatolia/theMiddleEast,bycontrast,werestillrunbythevestigesoftheMongolEmpireanditssuccessors.Whichcivilizationwasmostsuccessfuleconomically?WehavenofiguresfortheOttomanEmpire,butthe500yearsinChinaproducedanetdeclineinGDPperperson.InIndia,therateofincreasewasnegligibleaccordingtothefiguresthatLalpresents;allthegrowththattherewascameaftertheMogulEmpirehadbeenreplacedbytheBritish.Itwasn’timperialrulethatgavetheplaceashotinthearm;itwasBritishinvestmentandknow-how.Lalmakesthepointdecisivelyandthenproceedstoignoreit:Bycreatingorderoveralargeeconomicspace,empireshaveinevitablygeneratedSmithian[asinAdamSmith’sWealthofNations]growth.Butgivenlimitedtechnologicalprogress(exceptfortheexceptionalperiodunderSungChina),PrometheanintensivegrowthremainsaEuropeanmiracleoftheanarchicalsystemofnation-statesestablishedafterthebreakdownoftheRoman8empire.Actually,thereareotherinstancesofPrometheangrowth(e.g.,Japan,HongKong,andSingaporeafterWorldWarII).Andasrecentlyas2007,Chinawassaidtobegrowingat8percentperyear.RussiaandIndiaweregrowingat7percent.ItcouldbearguedthattheirgrowthwaslargelythankstotheshadeprovidedbytheAmericans’imperialprotection.Butthenyouhavetowonderwhyotherplaces,similarlyprotected,enjoyednosuchgrowth.Youalsohavetowonderhowotherplaces,suchasSwitzerlandandtheScandinaviancountriesgottobethewealthiestplacesintheworldwhentheyenjoyednomoreimperialbenefitsthananywhereelseandwerelargelyindifferenttotheimperialsystem.YoualsohavetowonderhowitispossibleforChinatoregistersuchhighgrowthratesinthe1990sand2000swhenitistheverythingfromwhichtheAmericanimperiumoffersprotection.Apparently,anempiremayincreasegrowthratesevenforitsenemies. ThelogicofLal’s“praiseofempires”isnodifferentfromsayinghelikeschocolatecake.Itispurelyamatterofpersonaltaste,nothingmore.Allweactuallyknowabouteconomicgrowthisthatempireisneitheranecessarynorasufficientconditionforit.Empirescomeandgooften,likestockmarkets.Whentheyshootupquickly,theygenerallyfallsharply,too.Andwhentheytakecenturiestobuild—aswiththeRomans—ittakescenturiestotakethembacktowheretheybegan.Byusingcarrierpigeons,theMamelukescouldhavespeedynewsofallwhocomeandgobyseaorland,andthusescapesurprise,sincetheylivewithoutdefenses,andhaveneitherwallsnorfortresses.WhatfinallydestroyedtheMongolswastheplague,whichtheypickedupintheFarEast,andgunpowder,whichtheyalsoencounteredinChina.Thefirstsoreducedtheirnumbersinthefourteenthandfifteenthcenturiesthattheyabandonednotonlymanyoftheirconquestsbutalsomuchoftheirownsteppes;someofthebestpasturelandinAsiawaseffectivelyreturnedtonature.Thesecondendedtheirattacksonmorecivilizedpeople—whocouldnowblowthemoutofthesaddle.TheirdescendantsintheMogulEmpireinIndiaandtheOttomanEmpireinTurkeywerelargelyabsorbedintothecultureswheretheyhadinsertedthemselves.Andbytheseventeenthandeighteenthcenturies,theMongolswereonceagaintendingherdsofhorsesinthelonelyandinhospitablewastesofMongolia.Bythenineteenthandtwentiethcenturies,theywerepayingtheirowntributetoRussianandChineseempirebuilders.SincethedaysofthegreatKhans,empireshavebecomemuchmoreentertaining.Thisisnotbecausetheyarelesslethal.Itisbecausetheyaremuchmoredelusional.TheycannotbearthebarbaricclarityofGenghis’simperialambitions.Theycannotputonthepurplewithoutputtingonthemasks.Afterawhiletheirfacestaketheshapeofthemaskitself.Ratherthanfollowtheiratavisticurgesandgivehonestvoicetotheirprimitiveinstincts,theyfeelobligedtoprovidereasonsthatareoftenfataltothebelieverandhisvictim,buthilarioustothedistantobserver.Modernimperialists,liketheirdistantancestors,lustaftertheusualthings—prestige,power,money,status—allproxies,perhaps,forgeneticdispersement.ThesewerethesameurgesthatenticedtheKhansandtheCaesars. Buttoday’simperialistsfeelashamedtoadmitit.So,theypretendallmannerofselflessandworld-improvingmotives,everyoneofwhichiseitheranobviousfraudoramonumentalbamboozle.Butthatiswhatmakesthewholethingsomuchmoreamusingandentertainingthaneitheramodestrepublicoraprimitiveempire:Modernempirebuildersaresuchquacksandpopinjaysthattheypracticallysprouttailfeathersandgrowwebbedfeet.Thegistofthemodernempirebuilder’screedisthathehasadutytomaketheworldabetterplace,andhecanonlydoitbytellingotherpeoplewhattodo.Itisinconceivabletohimthatothersmighthavetheirownideasofwhatabetterworldwouldbelike.Orthathisownplansarenothingmorethanhisownvaintastesandprejudices.Itisasifheburstinonhisneighborstotellthemwhattheyweregoingtodoontheweekend;itwouldn’tbotherhimatallthattheyhadtheirownplans.Hisaremoreimportant!Thecharminthisisnotinwatchingtheempirebuildermakeamessofthings,whichheinvariablydoes—usuallyabloodymess.Thecharmisintheelaborateliesandimbecilitieshespinstocoverupwhatheisdoing.HisrealpurposeisnodifferentfromthoseofanyMongol,Greek,orRoman—tofeelimportant,toruletheworldandbossotherpeoplearound,topuffouthischestandpinmedalsonit,tohavepoweroverpeopleandfeelsuperiortowardthem.Thelogicofitisinescapable:Hefeelssuperiorbecauseherulesthem.Andwhydoesherulethem?Becauseheissuperior!SincethedaysofAlexander,empirebuildershavedevelopedelaborateandheroicallyabsurdproofsforwhytheyaresuperior.Theyhavebeforethemtheevidenceoftheirachievements;theyhavetheirneighborsundertheirheelandnottheotherwayaround.Fooledbytherandomnessofhistoricalevents,theylookforareasonthatexplainstheirsuperiorityandjustifiestheirownrule.Manyarethedaffyexplanationsandspuriousproofsoffered.Typically,agroupbelievesitisgivenitsrighttoruledirectlyfromGod.JehovahdeliveredtotheJewstitletothelandofmilkandhoney.Itdidn’tmattertothemthattherewereotherpeoplewhoclaimedtitle,too.“Slaythemall,”saystheirGod.“Andwoetoyouifyouletanyofthemgetaway.”TheJewsthoughttheyhadaspecialcovenantwithGod.Buthistorianswillsearchinvainforanimperialracewhose godsopposedthem.Nomatterwhatvilemischieftheytakeup,peoplebelievetheyhavethegods’approval.TheEuropeancolonialempiresintheNewWorld,Africa,andAsiawerejustifiedoneveryimaginablepretext.TheSpanishthoughttheyhadadutytoChristianizetheheathen.TheEnglishsawtheirdutyinbringingthebenefitsofVictorianmoralsandvirtues,includingclothing,tothenakedsavages:TakeuptheWhiteman’sburden—Sendforththebestyebreed—Go,bindyoursonstoexile9Toserveyourcaptives’need—RudyardKiplingTheFrench,meanwhile,thoughtthenativesshouldlearntolikebaguettesandFrenchpoets.Theirculturewassosuperior,itwassaid,theywantedtoshareitwitheveryone.TheywereallsuccessorstoCicero,whomaintainedthatonlyunderRomanimperialrulecouldcivilizationflourish.ItwasobvioustothemallthatEuropeansweresuperiortootherpeoples.Wasitamatterofrace?Religion?Culture?Atonetimeoranother,theyputforwardeachofthesehypotheses—sometimesallofthem.Europeanswereasuperiorrace;therefore,theyhadevolvedsuperiorformsofreligion,government,andculture.Andwhataccountedfortheirracialsuperiority?Nodelusionwastoopreposterous.WhentheRomanswereontopoftheworld,theythoughttheirmildclimatemustberesponsibleforcreatingtheworld’sbesthumans.Twomillennialater,whenthecenterofempirehadshiftedtonorthernEurope,therigorsofEuropeanwinterswerecreditedwithstiffeningupperlips,backbones,andvirtues.Englishladies,travelinginthetropics,worelong-sleevedshirtsandcarriedparasols,forfearthattoomuchofthetropicalsunmightcausethemto“gonative.”Theeffectofallthisself-deceptionistoturntheimperialistsintoaraceoffools. Theyhavetobelievewhatisn’ttrue—thattheyare,personallyandcollectively,betterthanthepeopletheybossaround.Constantdissemblinghasacorrosiveeffectonbrainsandanumbingeffectonsouls.EuropeanimperialistswonderediftheAfricans,EastIndians,andAsianswerefullyhuman;often,theytreatedtheirsubjectsasthoughtheythoughttheywerenot.AUSTRO-HUNGARIANSTheimpulsetoimperialpowerisalwaysthesame,buttherearemanytypesofimperium.FromthepuresimplicityoftheMongolstotheincomprehensiblecomplexityoftheAustro-Hungarians,youcouldmakeagoofalmostanykindofempire.WhereastheMongolsgottheirempirebyforce,theAustro-HungarianEmpire(1867-1918)alsoknownasthedualmonarchycameintobeinglargelybecausetheycouldn’tthinkofanythingbettertodowithit.Evenitsformalname—TheKingdomsandLandsRepresentedintheImperialCouncilandtheLandsoftheHolyHungarianCrown(ofStephen)—wasapileupofwordsontheinformationhighway.Then,asnow,nooneknewhowtheempireworked—includingthepeoplewhosupposedlyranit.Butthatitwasanempire,wehavenodoubt.“Abasic,consensusdefinitionwouldbethatanempireisalargepoliticalbodywhichrulesoverterritories10outsideitsoriginalborders,”explainsStephenHoweinEmpire.Austro-HungaryruledovertheKingdomofBohemia,theKingdomofDalmatia,theKingdomofGaliciaandLodomeria,theArch-duchyofAustria,theDuchyofBukowina,theDuchyofCarinthia,theDuchyofCarniola,theDuchyofSalzburg,theDuchyofUpperSilesiaandLowerSilesia,theDuchyofStyria,theMargraviateofMoravia,thePrincelyCountyofTyrol(includingtheLandofVorarlberg),theCoastalLand(includingthePrincelyCountyofGoriziaandGradisca,theCityofTrieste,andtheMargraviateofIstria).AndthiswasjustontheAustrianside.OntheHungariansidewereallthemanyobnoxious,quarrelingpeoplesofcentralEuropeandtheBalkans—theSlovaks,Bohemians,Moravians,Italians,Poles,Ukrainians,Serbs,Albanians,Macedonians,Croats,Bosnians,Herzegovinians,Montegrans,Czechs,Magyars,andmanyothers. Eachoftheseterritorieshaditsownlanguageandcustoms.Manydetestedeachother.Allwerejealousofpowerandhowitwasused.Andatthetopweresomeoftheweakestandmostconfusedandconflictedadministratorswhoeverlived.Eachhadseverallayersofloyalties:tohisownnation;hisownclass;hisownreligion;hisownfamily,region,culture,andlinguisticgroup;andhisownaristocracy.Howcouldyouhopetogovernsuchanempire?Thebeautyofitwasthatyoucouldn’t.Thereweretwoseparateparliamentsandtwoseparateprimeministersalongwithacollectionofarchdukesofvarioustalentsandresponsibilities.Intheory,theoneroyalhouse—theHabsburgs—hadabsolutepoweroverthecentraladministration—particularlythemilitary.Inpractice,theycoulddolittleornothing;theyhadnomoney.Occasionallyaforcefuledictwouldissuefromthegovernment,suchastheApril5,1897,proclamationfromtheAustrianprimeminister,KasimirFelixGrafvonBadenithatpermittedtheuseoftheCzechlanguage,alongwithGerman,inBohemia.TheordinancecausedsomuchtroublethatpoorBadeniwastossedoutandCzechwasmoresuppressedthanbefore.Henceforth,CzechnewspaperswouldhavetobeprintedinGerman!Despitetheseannoyances,theempirewasamodestsuccess.Itwaslargelypeacefulandprosperous.Between1870and1913,GDPpercapitaroseatanannualrateof1.45percent,whichwasfasterthantherateinBritainorFrance,andalmostasfastasinGermany.Buttheimperialfamilyhadabadhabitofattractingtrouble.EmperorFranzJosef’sonlysondiedundercircumstancesthatarestillconsideredmysterious.HisbrotherhadthebadjudgmenttomeddleintheaffairsofMexicoanddiedinfrontofafiringsquad.And,finally,hisnephewandheir,theArchdukeFranzFerdinand,hadthemisfortunetovisitSarajevoin1914attheverymomentwhenBosniannationalistsweregunningforhim;heevenworeahatwithahugeostrichplumesotheywouldbesurenottomiss. THEMAKINGOFANEMPIREWhendidRomebecomeanempire?Historianslookforaparticularmoment,evenanatural,physicalboundary—suchaswhenCaesarcrossedtheRubicon—tomarktheendofoneperiodandthebeginningofthenext.Nosuchsimplemarkerexists,however,betweenempireandotherformsofgovernment.Nordoesanypreciseboundaryexistbetweendemocracyand,say,theocracyordictatorship.Governmentsarecategorizedartificiallyandoftenarbitrarilyonthebasisoftheories—usuallyfraudulentones.Itisoftensaidthatdemocraciesdependontheconsentofthegoverned,whereasdictatorshipsandmonarchiesdonot.Amoment’sreflection,evenbyaprofessorofgovernment,wouldrevealthelie.Allsystemsofgovernmentdependonsomemeasureofcomplicity.“Giventheverysmallnumberandinsignificantpresenceofimperialagentsandmunicipalofficialstoinsureobediencetothestate,”explainsRamsayMacMulleninhisCorruptionandtheDeclineofRome,“millionaires,magnates,andotherlocalnotablesofallsortsmusthavecooperated,andfromtheirown11freewill.”Itdoesn’tmatterwhetheryoucallapoliticalsocietyfree,ademocracy,adictatorship,oranempire,italwaysinvolvesagreatamountofcollusionandcooperationonthepartofthepopulation.“[Imperial]administratorsoccupiedonlyaminorplaceinthesystem.Theemperorhadonlyahandfulofagents,whosemeansofreachingthepeoplewerefewandrudimentary.Thepolicewerepracticallynonexistent.Therewereneither12socialworkersnorprosecutors,”MacMullencontinues.Thepeoplewhoactuallyranthings“hadnoofficialfunction,oriftheyhadone,theyhadnoneedofittomakethemselvesheard.Ahugenumberofdecisionsweretakeneachdayandthroughouttheempirethatconformedtotheirowndesiresmorethantothelaw,theemperor,orhisrepresentatives.What’smore,thesedecisionswerethosethatcounted,thosethatconcernedproperty,movement,careerchoices,successonthefarm,commerceorbanking;13sometimesevenaperson’sphysicalsafety.”Inbusiness,asinempire,vast,complex,informalsystemsworklargelyonthebasisoftrust.Peopletrustotherstodomoreorlesswhattheyexpect.The emperorcouldnomorecontrolwhatwasdoneinJudeaorGaulthanwecancontrolwhatgoesintoourhamburgers.Still,wetrustthereisnothingtoounsavoryinthem.IntheRomanEmpire,orderwastransmittedthroughanextendedwebofpersonalconnections,familyties,officialfunctions,traditions,habits,andacceptedideasandproceduressothatwhathappenedwasmoreorlesswhateveryoneexpected.Theemperortrustednotonlyhisownfunctionariestodowhattheyweresupposedtodo,butalsothelocalbigshotswithnoofficialpostorauthority.Thelowestslaverespondedtohisoverseer,whorespondedtohismaster,whorespondedtohislandlord,whorespondedtohispatron,whorespondedtohispotentiores,consuls,proconsuls,proteuntes,praetors,andquaestors,onupthechainofcommandtotheemperorhimself.Evenprisonsfunctionwiththecooperationandcomplicityoftheconvicts.IntheSovietgulagsystem,forexample,agroupofpeople—soldiersconscriptedandsenttoSiberiaagainsttheirwill—policedonegroupofprisonerswhointurnpolicedalessfortunategroup.Supposedly,theentireSovietUnionfunctionedasavastslavesociety,inwhicheveryonewastoldwhattodoandnoonehadanychoiceinthematter.Buthowcoulditbe?Iftheywereallinchains,whoheldthekeys?Andwhydidthejailerssuddenlyundothelocksin1989?WedonotarguethattheSovietsystemwasnotwretched,butonlythattheborderbetweenitswretchednessandthemiseryinflictedbyothersystemsofpoliticalorganizationisnotnearlyaswellmarkedaswehavebeentold.Alwaysandeverywhere,nuancesandparticularitiestrumpthetheories.Adictatorcannotruleacountryonhisown.Heneedsthehelpofhenchmenandhangmen,soldiersandadministrators,taxcollectors,andspies.Dependingonthesizeofthecountry,hemighthavemillionsofpeopleallwithastakeinhisrule.Likewise,whatmonarchreallyruledalone?EventheSunKing,LouisXIV,dependedonawholesolarsystem...no,agalaxy...ofsupporters,agents,andfactota.Hehadavastwebofprivateintereststowhichhewaseitherbeholden,inleague,oratoddswith:theclergy,thearistocracy,thebourgeoisie,themoneylenders,thearmedforces,thetaxfarmers.Thereisnodiscreetlinebetweenempireandrepublic,oranyotherformofgovernmentforthatmatter. Butthatdoesn’tmeanthereisnodifference.SailingfromtheCaribbeantotheNorthAtlantic,avoyagercrossesnowhiteline.Still,theweatherinthetwoplacesishardlythesame.Anationmayhaveelectionsandyetnotbeagenuinedemocracy.Itmayhaveaking,butnotbeagenuinemonarchy.Itmayevencallitselfanempire—suchastheCentralAfricanEmpire,whichbulliedseveraltribesinWestAfrica—butthatdoesn’tmeanitisone.Thereisplentyofroomforfraudandinterpretationinpoliticalinstitutions,justasthereisintherestoflife.JuliusCaesarwasaccusedofbeingadictator.Hewascutdownbytheoldguard,whowantedtopreservetherepublic.ButRomehadtakenthepathofempirelongbeforeCaesarwasborn.LiketheUnitedStatestoday,ithadtroopsspreadfarbeyondthehomeland.Forfivecenturies,theRomanshadbeenimposingthemselves,firstinwhatisnowItalyandthentheCisalpineregion,theGreekIsles,thecoastofAnatolia,anddownthroughtheMiddleEast.CaesarhimselfmadehisreputationinhiswarsagainsttheGauls—peoplefarfromRomewhospokeadifferentlanguage,withdifferentcustoms,differenttraditions,differentinstitutions,anddifferentideasabouthowthingsshouldbedone.CaesarbelievedhewasbringingthebenefitsofRomanization,whichtohimwasoneandthesameasbringingcivilizationitself.Octavian,Caesar’sheir,didnotcallhimselfemperororannouncethathenceforthRomewouldbeanempire.Hedidnotneedto.Thetermimperatormeant“general.”Hewasalreadyanimperator.Norwasheparticularlyeagertostirupresentmentamongtherepublicanpartisans.Hehadseenwhathadhappenedtohisuncle.Lettheempireevolve;justdon’tmentionit.Speakingtothesenate,hewascarefultoplaytotheoldsentiments:“AndnowIgivebacktheRepublicintoyourkeeping.Thelaws,thetroops,thetreasury,theprovincesareallrestoredto14you.Mayyouguardthemworthily.”ButtheoldRepublicexistedonlyintheirdreamsandimaginations.Nomatterwhattheysaid,Romewasanempire.ThesenatorscrownedhimAugustus,andforgottheoldconstitution.“Peopledonoteasilychange,butlovetheirownancientcustoms,”wrote AristotleinhisPolitics.“Anditisbysmalldegreesonlythatonethingtakestheplaceofanother;sothattheancientlawswillremain,whilethepowerwillbein15thehandsofthosewhohavebroughtaboutarevolutioninthestate.”TherevolutioninRometookcenturies.InAmerica,ittookonly58years(1913-1971).Inbothcases,mostpeoplehardlynoticed.Thechangesweregradualand,generally,agreeable.Arepublic,amonarchy,orevenadictatorshipisarelativelymodestundertaking.Itsscopeislimited,andcontrolledbyleadingcitizenseitherthroughtheirinfluenceontheautocratorbyshapingpublicopinion.Anempire,ontheotherhand,stepsontotheworldstageandplaysarolethatisbeyondthecontrolofthecitizens.Privatelifebecomesauxiliary,movingtoasupportingrolewhilethegrandpublicspectacleplaysitselfout.IntheUnitedStatesConstitution,itisexpresslystatedthatthepeoplearesovereign,notthegovernment.Ultimately,whatpeoplewantintheirprivatelivesiswhatissupposedtomatter.ButtheideapassedawaywhentheAmericanRepublicdiedandtheempirewasborn.By1960,JohnKennedywasabletolecturevotersto“asknotwhatthecountrycandoforyou;askwhatyoucandoforyourcountry.”Suddenly,thegovernmentthatwascreatedby,for,andofthepeoplewaswayoutinfrontofthem.Theyfoundthemselvesservantstoit,nolongeritsmasters.Theycould,ofcourse,stillwriteletterstotheeditorandstillvote,buttheforceoftheseexpressionshadgoneoutofthem.Theformhadbarelychanged,butthemeaningofithadturnedaround,likeawordthathadcometomeantheoppositeofwhatitoncesignified.Virtually,forexample,oncemeant“truly.”Peoplewouldpromisetobethere“virtually”atnoon.Overtime,meaningfollowspractice;virtuallyslippedtomeannottruly,almost,nearly,orsortof.SodidtheUnitedStatesCongresscometobewhatitnowis,somethingnot-quite-what-it-was-meant-to-be.AnotherimportanteventoftherevolutioninAmericanpoliticsoccurredonJune25,1950.ThatisthedayonwhichHarryTrumaninvolvedtheUnitedStatesinawarinKoreawithoutauthorizationfromCongress.TheConstitutionclearlystatesthatthepeople’srepresentativesalonehavethepowertodeterminewhenthenation’sbloodandtreasureshouldbeputatrisk.Butonthatdate,TrumansentU.S.troopstokillanddie,withouteveninformingCongress.Eventhough thishappenedwhileCongresswasinsession,membersofthepeople’sassembliesfoundoutaboutitfromreadingthenewspapers.Foraweek,Congresshadlittleideaofwhatwasgoingon,untilthecommander-in-chiefdecidedtotellthem.Asyoumightexpect,afewmembersofCongresswerecheesedoff.Butthemajoritywentalong.LikethesenateinRome,theyhadeatenoftheimperialfruitandlikedthetasteofit.Americanforceshadtoreactquickly,theyweretold.Itwasa“newera”inwarfare,theybelieved.Therewasnotimefordiscussion.Meanwhile,theKoreanWarwentonforanother37months—youwouldthinkthattheymighthavefoundtimetotalkaboutit.Whathadhappenedwasnotthattherestoftheworldhadchangedsomuch,butthatAmericahadchanged.Truman’sdoctrine—thattheUnitedStateswouldinterveneanywhereintheworldwhereitfeltitsinterestswerethreatened—wasnotthedoctrineofMonroeorJefferson.Itwasanimperialdoctrine.Bythen,thenation’sfocushadshiftedawayfromtheprivatedesiresandopinionsofcitizens,asexpressedthroughtheirelectedrepresentatives,totheworldoutsideAmerica’sborders.Whatthepeoplethoughtnolongerreallycountedformuch.Publicopinionwasimportant,butitwasmerelypartoftheimperialburden—somethingtobecarriedaround,manipulated,andmanaged.Tothatend,evenin1951,ahugepropagandaapparatuswasalreadysetup—withconfidentialbriefings,pressleaks,publicrelationsspecialists,andenormousprintingandpublishingarms.Eventhen,theexecutivebranchwasspinningthenewstoappealtothemarginalvoter.Theyhardlyhadtobother.TheaverageAmericanreactedjustastheaverageRomanhadreacted.Whenthepurplewashoisted,hestoodupandsaluted.Itmadehimfeellikeabigshot.IfAmericanswerebossingpeoplearoundinAsiaortheMiddleEast,itmadehimfeelmoreimportant.Hishomelandteamwaswinningallovertheworld.Andifitdidnotalwaysseemtobeonthewinningside,heknewhemustsupporthistroopsandstandbehindtheircommander-in-chief.Noonewantstocarpandcriticizewhensoldierstakethefield.Itisunpatriotic.So,keepthesoldiersinthefieldallthetime!WhilethereisnopreciseDNAtestthatseparatesanempirefromanordinary country,therearecertaintelltalecharacteristics.Aregularcountryhasonlyitsownterritory.Anempirehasa“homeland”andvariousterritorialinterestsbeyondit.Itmayhavesubordinatestates,protectorates,colonies,satellites,orotherclientstatesoverwhomitexercisesasubstantialauthority.Sometimesitisnotevenmentioned;buttheclientsknowthatiftheygetoutofline,theimperiumwillcomedownonthem.Typically,thepeopleinthehomelandfeelsuperiortothepeopleintheperipheryareas.Asdescribed,theydevelopreasonsandexplanationsfortheirsuperiority,whicharethenusedtojustifyfurtherimperialexpansion.THEAMERICANEMPIREAmericatookitsfirstawkwardstepstowardempireattheendofthenineteenthcentury,withTheodoreRooseveltinterveninginvariousdiarrheacountriesforforgettablereasonsandwithregrettableresults.Later,inApril1917,WoodrowWilsontookoffatatrotwiththefatRoughRiderstillbreathingdownhisneck.HeurgedCongresstodeclarewaronadistantcountrywithwhichithadnorealbeefandinwhichithadnogenuineinterest.Twenty-threeyearslater,theUnitedStateswasinanothermajorwar.FewwouldarguethatWorldWarIIwasacaseofneedlessintervention,sincetheU.S.fleetwasattackedatPearlHarbor.Still,hadAmericawantedtostayoutofit,shecouldhavedoneso.PearlHarborwasattackedbecausetheU.S.NavyposedathreattoJapaneseimperialambitions.IftheUnitedStateshadnotdisplayedimperialambitionsofherownandhadnosatellitestateinthePhilippines,shewouldhavepresentednodangertotheJapaneseimperialforces.NorwasthereanyparticularreasontogotowaragainstGermany.ThoughalliedtoJapan,therewasnoquestionofGermanyinterveninginthePacificWar.AfterWorldWarII,Americasteppedupthepace,engagingin111militaryactionsbetween1945and2005.Today,theU.S.militarydividestheworldintofourregionalcommands,eachgiveninitials—PAC,EUR,CENT,andSOUTH.Eachregionhasitsowncommander-in-chief(CINC),whoislikeaproconsuloftheRomanEmpire. Americanmilitarybasescanbefoundin120differentcountries,withstrikeforcesreadytolightoutforalmostanyplaceontheplanetatamoment’snotice.Thereisalsoavastarmyoffunctionaries,intermediaries,consultants,advisors,scientists,engineers,contractors,andbusybodiesspreadallovertheglobe.TrainedinAmericanuniversities,onthepayrollofeithertheAmericangovernmentoroft-linkedU.S.companies,thesepeopleprovideaclassofadministratorstokeeptheimperialmoneyandpapersmoving.TheworkofthesepeoplewasrevealedinamarvelousbookbyJohnPerkinscalledConfessionsofanEconomicHitMan.Asupervisorexplainedtohim:Thereweretwoprimaryobjectivesofmywork,FirstIwastojustifyhugeinternationalloansthatwouldfunnelmoneybacktoMAIN[theconsultingfirmforwhomhelabored]andotherU.S.companies(suchasBechtel,Halliburton,Stone&Webster,andBrown&Root)throughmassiveengineeringandconstructionprojects.Second,Iwouldworktobankruptthecountriesthatreceivedthoseloans(aftertheyhadpaidMAINandotherU.S.contractors,ofcourse)sothattheywouldbeforeverbeholdentotheircreditorsandsotheywouldpresenteasytargetswhenweneededfavors,includingmilitarybases,UNvotes,oraccesstooilandothernaturalresources.“WhocandoubtthatthereisanAmericanempire?”wroteArthurSchlesingerJr.“aninformalempire,notcolonialinpolity,butstillrichlyequippedwithimperialparaphernalia:troops,ships,planes,bases,proconsuls,localcollaborators,all16spreadaroundthelucklessplanet.”Americahadmixedandconfusingsentimentsaboutempirefromtheget-go.ItsfounderswereschooledinthehistoryofRomeanddeterminedtoavoidwhattheysawashermistakes.Butatthesametime,theycouldn’thelpbutlustforthegrandeurofit.Theylongedfortheimperialpurple,perhaps,fromtheverybeginning. WilliamDrayton,chiefjusticeofthehighestcourtinSouthCarolina,wrotein1776:Empireshavetheirzenith—andtheirdeclensionanddissolution....TheBritishperiodisfromtheyear1758,whentheyvictoriouslypursuedtheirEnemiesintoeveryQuarteroftheGlobe....TheAlmighty...hasmadethechoiceofthepresentgenerationtoerecttheAmericanEmpire...andthushassuddenlyarisenintheWorld,anewEmpire,styledtheUnitedStatesofAmerica.AnEmpirethatassoonasstartedintoExistence,attractstheattentionoftheRestoftheUniverse;andbidsfairbytheblessingofGod,tobethemostgloriousofany17uponRecord.JohnQuincyAdams,however,cautionedthatwhile“shemightbecomethe18dictatressoftheworld:shewouldbenolongerrulerofherownspirit.”Morethantwocenturieslater,herspirithasrunwild.Shehassoldiersgarrisonedallovertheworld.ShehasinterestsinplacesfewAmericanshaveeverheardofandfewerstillcareabout.Thereisnocornerordead-endstreetintheworldthatisnotsomehowpatrolledbyU.S.forces.Attheendofthisyear,Americaisscheduledtospendmoreinasingleyearondefensethanalltherestoftheworldcombined.Already,readersmustbeaskingthemselvesquestions:TheUnitedStatesistheworld’sonlysuperpower;sincethecapitulationoftheSovietUnion,shehasnoenemiescapableofinflictingseriousdamage;whatisshedefendingherselfagainst?Butthatisjustthepoint.Theimperialspirithasgottenthebestofher.Shenolongerplaysarolethatshecanunderstandandcontrol.Now,sheisanimperialpower;shemustreadfromthescriptthathasbeenthrustinherhands.Shemustprovidesecurityfortheentireworld.Shemustprovidethepublicgoodoflawandorder.Someonehastodoit.Whoelsecould,butAmerica?Itisherturntowearthepurple,whethershewantstodosoornot.Thus,didshebecomedictatressoftheworld;butnolongerrulerofherownspirit—orherownfinances. Westopamomenttoreflect.Theurgetoempireisasirresistibleasafreelunch.Themaleofthespeciescannotpassupachancetostrutaroundfeelingsuperior.Scarlettunicsandostrichfeathershavegoneoutofstyle,butthemenwhoworethemarethesameasthosewhosackedRomewithAlaric,laidwastetoAlbiwiththeDukedeMontfort,andenteredBaghdadwiththeThirdArmy.Theuniformschange,butmenarethesamegrasping,vaunting,humbuggingdudestheyalwayshavebeen.Thereisnothingquitesoamusingaswatchinganothermanmakeafoolofhimself.Thatiswhatmakeshistorysoentertaining.Andwhatmakesthehistoryofempiresparticularlyentertainingiswatchingthegreatemperors:theNapoleons,Alexanders,Caesars,Attilas,andAdolphs—withalltheirpretensionsandsordidbutchers—putontheredtunicsandburnishedhelmets,mounttheirwhitechargers,andriderightintoastonewall.Whileleadersmakefoolsofthemselves,themassmanistannedbythereflectedgloryofempire.Hischingrowsstrongerasheadmiresthestalwarttroops.Hischestswellswitheveryvictory.Hegrowssotallhealmosthitshisheadatthetopofdoorjambs.Weliteraryeconomists,ontheotherhand,canbarelysuppressalaugh.Itisobviousthatthepoormanhasbecomedelusional;butnooneappreciatesoursayingso.Still,wealsofeelsuperior,forwecannothelpbutnoticewhatnumskullstheyare.Evolutionarybiologistsreducethewholeimpulsetoempiretonothingmorethangenesandmath.Afteramanhasenoughtoeat,hisgenes—andbycommand,histhoughtsandemotions—wantnothingmorethantospreadhisseedaswidelyaspossible.Genesareonlyinterestedinreplication,accordingtothehypothesis.Allthetrappingsofwealthandpower—includingtheurgetolorditoverothers—aremerelyproxiesandsubstitutesforsexualattractiveness.Agreatrulerconquersacitymuchforthesamereasonamiddle-agedlawyerbuysanexpensivesportscar,apeacockspreadshistailfeathers,oramoralphilosopherwritesapopularbook.Itindicatestofemalesthathehasgoodgenes.Theentertainmentcomesinwhenthegreatrulerisdefeatedandhungfromameathook,whenthepeacockistakenbyafox,andwhentheredsportscargetstheboot.(Theprospectoffindingthisbookontheremaindertableisnotentertaining!) PresidentWilsongotAmerica’sself-deceptionofftoarunningstartearlyinthetwentiethcentury:“IbelievethatGodplantedinusvisionsofliberty,”hesaid,seekingtheDemocraticnominationin1912,“thatwearechosenandprominentlychosentoshowthewaytothenationsoftheworldhowtheyshallwalkinthepathofliberty.”Soworthywasthemissionthatthereseemednoneedtofigureouthowtopayforit.IfGodhadsetusonthetrailofEmpire,Hecouldjollywellfigureouthowtopayforit.Neitherthen,nornow,haveAmericansbotheredtounderstandhowthebusinessofempireworks.Theythinktheyaredoingtheworldafavor.Thatdeceptionalonewouldnotbesograve,buttheytotallymissthepoint:Nearlyeveryimperialpowerhasclaimedtoactforthegoodofothers,buttheyallfoundawaytomakeitpay.Whenitstopspaying,theyareoutofbusiness.LiketheMafia,theUnitedStatesrunsaprotectionbusiness.Undertheprotectionoftheimperialpaxdollarium,tradeandcommercecanflourish.Peoplegetrich.Theyshouldbegratefulandhappytopayfortheservice.Theimperialpowermustchargeforthatservice;otherwise,whatwouldbethepoint?ButAmericahassocleverlydeceiveditselfthatitbelievesitgetsitsimmediatetributefromglobalcommerceanditsthanksinHeaven.WehavenowayofknowingwhatawaitsitinHeaven,butwelookaroundandnoticethatthetributeAmericagetsissoperversethatwe’regladshedoesnotgetmore.Insteadofgettingpaidforprovidingprotection,theUnitedStatesisonthereceivingendofloansfromitstributarystatesandtradingpartners.Thewholeideaismadandpreposterous.Animperialpowerissupposedtocontrollesserstatesandexploitthemforitsownselfishends.Ofcourse,itdoesnotadmitit.Truthfulnessisasmuchadisappointmentinpoliticsasitisinmarriageorpoker.Theideaistopretendtodogood,whileyoudowell.InAmerica’sabsurdversion,shedoesbadlyforherselfandgoodforothers.Thatisthethemeofthisbook:tocallAmericaanimperialpowerisflattery.Inherbizarreversionofempire,itisthesubordinatepowersthatcontrolher.Theycanstoppayingtributewhenevertheywant.“WillChinabesettingU.S.rates?”askedanarticleinaMay2005editionofthe 19InternationalHeraldTribune.Thewriter,FloydNorris,hadnoticedtheperverselogicofAmericanimperialfinance.Whathehadn’trealizedwasthatChinawasalreadysettingU.S.interestrates.Bytheendof2004,Chinaowned$120billionofU.S.Treasuryobligations—or10percentofthetotalinforeign20hands,whichitselfwas25percentofthetotaloutstanding.Haditnotboughtthosebonds,orhaditdecidedtosellthem,therewouldhavebeensignificantlylessdemandforU.S.debt.Or,lookedatfromamoretraditionalperspective,therewouldhavebeenfewerpeoplewillingtolendtotheUnitedStates.Eitherway,thealmostcertainresultofChineselendingwastolowerthepriceoflentmoney,thatis,tolowerinterestrates.ThankstoAsianlending,theUnitedStateswasabletodropitsinterestratesbelowtherateofinflationandkeepthemthere21for22months.“Thewaythingsworknow,”Norrisexplained,“Chinasellstotheworldmosteverythingtheworldwants.ChinathenusesthedollarsitreceivestobuyTreasurysecurities.ThathelpstoholddownU.S.interestratesandstimulates22consumerspending,enablingAmericanstobuymorefromChina.”ThisputChinainacommandingposition.AsAmericansspent,Chinabuiltitsproductivecapacity.Chinagotrich,sellinggewgaws,electronicknickknacks,andassortedconsumergoods.Theimperialconsumers,ontheotherhand,gotpoorer.In2004,alone,wealthequivalentto1percentofthevalueofalltheassetsintheUnitedStatespassedoutofAmericans’hands.Theideaofimperialfinanceisthatthecentral,imperialpowergetsrichatitsvassals’expense.Americafoundawaytodoitinreverse;itgrewpoorer,relativelyandabsolutely,everyday.GDPgrowthduringthefiveyears—2000to232005—averagedonly4.4percentperannuminnominalterms.Meanwhile,netoperatinglosses—thedifferencebetweenwhatsheearnedonoverseassalesand24whatshespentonimportsfaroutpacedGDP,growingin2004by24percent.Andthecostofmaintainingherimperialrole—themilitarybudget—was3.325percentofGDP.Thewholethingwasalosingproposition.Americahadfoundawaytomakeempirepay—butonlyforitsrivalsandenemies.Tomakemattersworse,theperipherypowers,whichweresupposedtobesubordinate,werecapableofruiningthecentralimperium.IftheChineseand othermajorholdersofU.S.Treasurybondsweretosell,therewouldbehelltopayintheUnitedStates.Interestrateswouldrise.Thehousingboomwouldturnintoahousingbust.Theimperiumwouldhavetobegitssubordinatestatesformorecredit.“TheU.S.suffersfrom...structuraldeficitsthatwilllimittheeffectivenessanddurationofitscrypto-imperialroleintheworld,”explainsNiallFerguson.“Thefirstisthenation’sgrowingdependenceonforeigncapitaltofinanceexcessiveprivateandpublicconsumption.Itisdifficulttorecallanyempirethathaslong26enduredafterbecomingsodependentonlendingfromabroad.”Whatkindofoddempireisthis?WehavehadalonglineofU.S.leadersstruttingacrosstheworldstage—thebuffoonishTheodoreRoosevelt,theweasellyWilson,theotherRoosevelt,Truman,Kennedy,Johnson,Reagan,Bush(bothofthem)—butnoneofthemseemstohaveunderstoodhowtomakeanempirepay.Oneofthemostrivetingfeaturesistheremarkablewaythemassesrushnotonlytotheirownruin,buttotheeliminationoftheinstitutionstheyclaimtocherish.InAmerica,theyclaimtolovefreedombutatthefirstimperialtrumpetblow—thewartomaketheworldsafefordemocracy,theColdWartocontaintheredmenace,ortheWaronTerror—theylineuptogetregistered,inspected,searched,probed,approved,andcertified.Thereseemstobenoviolationoftheirlibertysogreatthattheywouldprotestnoranyviolationofanyoneelse’sthattheywouldn’tapplaud,andnoexpenditureoffundssoextravagantthattheywouldbothertoaskquestions.In1989,America’spost-WorldWarIIrivalempire—theSovietUnion—threwinthetowel.NotonlyhadithadenoughofmilitarycompetitionwiththeUnitedStates,butinoneofthegreatturnaroundsofhistory,itsimplyrenounceditswholeideology.ItwasalmostasiftheJewshadtossedasidetheTorah,thrownofftheiryarmulkes,anddecidedtobecomeRosicruciansorJehovah’sWitnesses.Butevenmoreastonishingwaswhathappenednext.Forthefirsttimein16centuries,andperhapsthefirsttimeinhistory,theworldfacedalmostnoseriousmilitarycrisis.Americahadnomilitarycompetition.Noseriousthreats.TherewerenonationsonearthwhocoulddoseriousdamagetotheUnitedStates.ThatdidnotmeanthatAmericanswereguaranteedsafe.Inadditiontotheharmtheydidtoeachother,theymight bekidnappedorkilledbyanynumberoffreelancegangsorrevolutionarygroups.ButthegovernmentoftheUnitedStateshadnoreasontoworry.Nonationposedaworthychallenge.SowhathappenedinAmerica?Militaryexpendituresrose!TheabsurditycanbeillustratedbytheUnitedStates’attackonIraq.Likesomanyimperialpowersbeforeit,AmericanforcestookBaghdad.Butwherewasthepayoff?Wereslavessold?Wasoilstolen?Werewomencarriedoff,oratleastviolatedonlocation?WasIraqmadetopaytribute?No.Americaseemstohavemissedthewholepoint.ItinvadedIraqandnowpaystributetotheIraqis!Itsendsinengineers,medicalpeople,food,contractors,administrators—atacostof$1billionperweek—totrytokeeptheIraqisfromdislikingthem.Theywouldbealotbetteroff,financially,iftheIraqishadbeatenthemoff.ButAmericanshavewornthemaskoftheirgoodintentionsforsolong,theirfaceshavegrownintoit.Theylookinthemirrorandseeanimperialistwhowantsonlygoodthingsfortheworld—democracy,freedom,harmony.Theyareallsettobancigarettesandrequireseatbeltsallovertheworld.Theythinktheycanbea“good”empire—killingpeopleneitherforglorynorformoney,buttomaketheworldabetterplace.Wehavetoruboureyesandshakeourheadstobelieveit.4AsWeGoMarchingTheGermansoccupyaspecialplaceinrecentworldhistory.“GiveaGermanagunandheheadsforFrance,”wasacommonexpressioninthepastcentury.“TheHuniseitheratyourthroatoratyourfeet,”wasanother.PeoplewonderedwhatitwasabouttheGermansthathadmadethemsoreadytogotowarandsowillingtogoalongwithghastlydeedsonanationalscale.Wasitsomethingintheirblood,intheirculture,orintheirwater? Now,ofcourse,theHunhasbeentamedandhasbecomeapacifist.AmericaurgedhimtojointhewaragainstIraq,buthedemurred;hehashadhisfillofwar.Andsothequestionismorepuzzlingthanever.Hashisbloodchanged?Hisculture?Orhiseconomy?1AmarvelouslittlebookbyJohnT.Flynn,AsWeGoMarching,waswrittenduringWorldWarIIandprovidessomeinsights.FlynnarguesthatfascismhadnoparticularconnectiontotheGermansthemselvesnorwasthereanythingintheTeutonspiritthatmadethemespeciallysusceptible.Instead,hepointsoutthatthecreedwaslargelydevelopedbyanItalianopportunist,BenitoMussolini.ItwastheheftyItalianwhofiguredoutthemainparts—includingtheglorioustheatricalelements.TheGermansmerelyaddedtheirowncorruptionsandattachedapeculiarlyviciouspolicyofpersecuting,andlaterexterminating,Jews.ButitisFlynn’sdescriptionoftheeconomiccircumstancesinItalyinthelatenineteenthandearlytwentiethcenturies—thefertilesoilinwhichfascismtookrootandflourished—thatcaughtourattention.ItalywenttowaragainstTurkeyinSeptember1911.Thewarwasover12monthslaterandsoonforgottenbyeveryone.ButtheimpulsethatdrovetheItalianstowarinthefirstplacewasthefocusofFlynn’sattention:ThevengeanceoftheItalianspiritonFatewasnotappeased.Instead,itwhettedtheappetiteforglory.Andoncemoreglorydiditsworkonthebudget.Butoncemore,peace—dreadfulandrealisticpeace,thebillcollector,heavywithheroldproblems—wasbackinRome.Thedeficitswerelarger.Thedebtwasgreater,andthevariouseconomicplannersweremorerelentlessthaneverintheir2determinationtosubjectthecapitalistsystemtocontrol.Perhapstheyshouldhaveloweredinterestrates.OrpressuredChinatoraiseitscurrency.Anypolicyinitiative,nomatterhowpathetic,couldbeconsidered.AsFlynnputsit:“OutofItaly[asoutofAmericacurrently]hadgonedefinitelyanyimportantpartycommittedtothetheorythattheeconomicsystemshouldbe3free.” Italyhaddugherselfintoadeepholeofdebt.Between1859—whenthecentralizedItalianstatecameintobeing—and1925,thegovernmentrandeficitsmorethantwiceasoftenasitransurpluses.Politicians,whodependedongivingawayotherpeople’smoney,foundthemselveswithlittlelefttogiveaway.“Alltheoldevilsweregrowinginmalignance,”writesFlynn.“Thenationaldebtwasrisingominously.Thearmy,navy,andsocialserviceswereabsorbinghalftherevenuesofthenation.Italywasthemostheavilytaxednationinproportion4toherwealthinEurope.”Ofcourse,therefollowedmanyepisodesoffinancialrisorgimentoandmanypledgestoputthebooksinorder.Noneofthemstuckforlong.Italianpoliticiansweresoonmakingpromisesagain.Whengrandpromisesmustbefulfilled,debtcreepshigherandsodoestheresistanceoftaxpayersandlenders,especiallyfromconservativegroups.“Henceitbecomesincreasinglydifficulttogoonspendinginthepresenceofpersistingdeficitsandrisingdebt,”writesFlynn.“Someformofspendingmustbefoundthatwillcommandthesupportofconservativegroups.Politicalleaders,embarrassedbytheirsubsidiestothepoor,soonlearnedthatoneoftheeasiestwaystospendmoneyisonmilitaryestablishmentsandarmaments,becauseit5commandsthesupportofthegroupsmostopposedtospending.”Militaryspendinggivesaneconomythefalseimpressionofgrowthandprosperity.Peopleareputtoworkbuildingexpensivemilitaryhardware.Assemblylinesrollandsmokestackssmoke.Plus,thespendinggoesintothedomesticeconomy.Americans,forexample,maybuytheirgewgawsfromChina,buttheirtanksarehomemade.Militaryadventuresnotonlyseemtostimulatethedomesticeconomy;theyalsogooseuppopularsupportforgovernment.Soon,“itwasatimeforgreatness...,”asFlynndescribestheapproachofwar.War,GiovanniPapiniraved,was“thegreatanviloffireandbloodonwhichstrongpeoplesare6hammered.” Therewasatimewhenkings,princes,andemperorsruledtheworld.Backthen,thepeopleknewtheirplace.Butinthisnew,modernworld,itbecamenecessaryforrulerstoappeasethemasseswithvariousprogramsdesignedtofoolthemintoobedience.Armedwithballots,everythingseemedpossible.JoseOrtegayGassetdescribesthescene:Whereasinpasttimelifefortheaveragemanmeantfindingallaroundhimdifficulties,dangers,want,limitationsofhisdestiny,dependence,thenewworldappearsasasphereofpracticallylimitlesspossibilities,safeandindependentofanyone...andifthetraditionalsentimentwhispered:“Toliveistofeeloneselflimited,andthereforetohavetocountwiththatwhichlimitsus,”thenewestvoiceshouts:“Toliveistomeetwithnolimitationwhateverand,consequently,7nothingisimpossible,nothingisdangerous....”Hemighthavebeendescribingthemind-setofthecontemporaryAmericaninvestor,whoseesnolimittostockpricesandnoriskanywhere.Andsohewas—70yearsaheadofhistime.Votingcannotreallyincreasethemasses’well-being.Itbringsnomorehogstomarket,buildsnomoregadgets,improvesnomeals,nordoesitincreasetheefficiencyoftheinternalcombustionengine.Butthemasseswillbelieveanything;andafterBismarckandGaribaldicametobelievethatthisnewworldofassemblies,parliaments,andelectionfraudofferedabetterworld,itthenbecamethejobofpoliticianstofindawaytoappealtothesefantasies.Thistheydid,innineteenth-centuryItalyasintwenty-firstcenturyAmerica,byborrowingmoney—thuscreatingtheillusionofspendingpoweroutofthinair.From1859to1925,theItaliangovernmentrandeficitsover46years.Inonly20yearswasthebudgetbalanced.Thelirewasnotareservecurrency;Italianpoliticoshadtodothebesttheycould.Butthedebtscontinuedandledtowar.Notbecauseanyoneinparticularwantedwarordebtforthatmatter.Itwasjustthatonewasanevolutionaryconsequenceoftheotherandbothwere consequencesofthenaturalurgesofdemocraticsociety.OutoftheconditionofItaliansocietysprangcertainstreamsofopinionandofdesirethatgovernmentsactedonandpeopleacceptedoratleastsurrenderedtowithlittleresistance,eventhoughtheymayhavenotapprovedorevenunderstoodthem.Bewilderedstatesmenturnedtogovernmentdebtasadeviceforcreatingpurchasingpower.Nooneapproveditinprinciple.Buttherewasnoeffectiveresistancebecausepeopledemandedthefruitsitbrought.Anotherwastheever-growingrelianceofsocial-welfaremeasurestomitigatetheprivationsoftheindigent,theunemployed,thesick,theaged.Theinstrumentsofdebtandspendingbecamestandardequipmentofpoliticians.Andthisneedforspendingopenedthedoortoaneasysurrendertotheelementsmostinterestedin8militarismanditshandmaiden,imperialism.Wheneverthedebtsthreatenedtooverwhelmthenation,inventivepoliticiansfoundnewenemiestodistractthepeopleandquietopponents.“Ifthecountryhadnonaturalenemytobecultivated,thenanenemyhadtobeinvented,”wrote9Flynn.FollowingthewarwithTurkey,WorldWarIprovidedfreshdiversions.Butafterthewar,thedebtsmountedevenhigher.Theprewardebtwas15billionlire.Whenthewarendeditwasfourtimesasmuch.Butafterthewarcamenewpromises:anold-agepensionsystem,unemploymentinsurance,anationalheathcareplan.Thedeficitreached11billionlirein1919,thenroseto17billionin1921.Howcouldthedebtspossiblybepaid?Wasthereanywayout,peoplewondered?Itwasatthispointthatascoundrelworthyofthecrisisarrivedonthesceneandproceededtomakethingsworse.BenitoMussoliniwasthemanforthejob—energetic,opportunistic—withnoscruplesorfixedpositionstohamperhismovements.Mussolini,likeRoosevelt,Bush,andpracticallyeverypoliticianelectedtoanyofficeintheentiretwentiethcentury,denouncedtheloosespendingpoliciesofhispredecessorsandthenspentevenmore.Hedecriedthe unbalancedbudgetsthathadbroughtItalytothebrinkofruinandthenpilednewdebtontheheavyendofthescale.Takingofficein1921,hefoundhimselfwithadebtof93billionlire.By1923,theNewYorkTimesestimatedthathisdebthadrisento405billionlire,withadeficitfortheyearof83billionlire.“Spendinghadbecomeasettledpartofthepolicyoffascismtocreatenationalincome,”concludedFlynn,“exceptthatthefasciststatespentonascale10unimaginabletotheoldpremiers.”“Wewereabletogiveanewturntofinancialpolicy,”explainedanItalianpamphletfromtheperiod,“whichaimedatimprovingthepublicservicesandatthesametimesecuringamoreeffectiveactiononthepartofthestatein11promotingandfacilitatingnationalprogress.”Thepolicyendedindisaster.Spendingondomesticprogramsshiftedtospendingonmilitaryones.Soon,Italywasatwaragain.Inblood,steel,shame,disgrace,andfinancialruin,itsettleditsaccounts.Theromanticlureofempire—thepoliticalpullofmilitaryspending,theeconomicdelusion,thepolishedbrassandboots—itwasalltoomuchtoresist.DespiteadisastrousexperienceinWorldWarI,eventhefun-lovingItaliansweresoonmarchingaroundinjackbootsandgettingoutmapsofAbyssiniaunderMussolini’snewleadership.Mussoliniwastheperfectfascist.LikeAmerica’sleadingneoconservatives,hewasreallyaleftist,whosawanopportunity.AndalsolikeAmerica’sneoconservatives,hewasanadmirerofMachiavelli,whobelievedthattheruler“mustsupposeallmenbadandexploittheevilqualitiesintheirnaturewheneversuitableoccasionoffers.”EvenAmericanswereimpressed.“HeissomethingnewandvitalinthesluggisholdveinsofEuropeanpolitics,”saidSolBloom,thenchairmanoftheHouseForeignRelationsCommitteein1926.“ItwillbeagreatthingnotonlyforItaly12butforallofusifhesucceeds.”Ininvestments,asinwar,anearlydefeatisoftenmorerewardingthanalaterone. FortunatelyfortheItalians,theAfricancampaignwasafiasco.Inafewyears,MussoliniwashangingfromameathookandItalianswentbacktomakingshoes,handbags,andpasta.MILITARYADVENTURISMAcharacteristicofallempiresisanelevationofthemilitarycaste.Theessentialbusinessofempirebuildersisprovidingsecurityforpartsoftheworldbeyondtheirownhomeland—whetherthesubjectnationswantitornot.Thatisamilitaryexercise.Overtime,otherformsofbusinessandcommerceareneglected.Butmilitarymightrestsoneconomicmight.Peoplearegenerallyblockheadswhenitcomestomilitaryadventures.Builtintotheirgenesisnotonlythedesiretolorditovertheirneighbors,butalsoadeepdistrustofanyonewhofailstodohisdutywhenthenationisatwar.Thatisoneofthethingsthatmakeempiressoattractive.Onceunderway,theymeetwithlittledomesticresistance.Astimegoesby,notonlydootherformsofbusinessdropbythewayside,sodootherdomesticconcerns.Everythinggetssacrificedtothewargods—eventhelibertiesforwhichtheyaremeanttobefighting.Allthatisneededisawar.Forthat,Americanimperialistshavebeenblessedtwice.First,in1950,beganthewaragainsttheEvilEmpire.Itwasanearlyperfectmilitaryengagement;itthreatenedeverylifeinAmericainatangible,butnotimmediate,way.Billionsofdollarswouldhavetobespenttoprotectthenation.Everybodyandeverythingmustbeavailableforconfiscation,shouldtheneedarise.Evenmoneythatdidnotexist—thewealththatfuturegenerationshadnotyetearned—seemedasmallpricetopaytomeetthedangerrightinfrontofthem.TheNewYorkTimesofOctober31,1951,noticedthechange:...theKoreanWarhasbroughtagreatandprobablylong-lastingchangeinourhistoryandourwayoflife...forcingustoadoptmeasureswhicharechangingthewholeAmericansceneandourrelationswiththerestoftheworld....We haveembarkedonapartialmobilizationforwhichaboutahundredbilliondollarshavebeenalreadymadeavailable.Wehavebeencompelledtoactivateandexpandouralliancesatanultimatecostofsometwenty-fivebilliondollars,topressforrearmamentofourformerenemiesandtoscatterourownforcesatmilitarybasesthroughouttheworld.Finally,wehavebeenforcednotonlytoretainbuttoexpandthedraftandtopressforasystemofuniversalmilitarytrainingwhichwillaffectthelivesofawholegeneration.Theproductiveeffortandthetaxburdenresultingfromthesemeasuresarechangingtheeconomicpatternoftheland.Whatisnotsoclearlyunderstood,hereorabroad,isthatthesearenotemporarymeasuresforatemporaryemergencybutratherthebeginningofawhollynewmilitarystatusfortheUnitedStates,whichseemscertaintobewithusforalong13timetocome.Aslongastheempirelasts.Ontheothersideofthisvastmobilizationwasanotherimperialpowerdoingitsownmobilizing—andforsimilarreasons.Bothwereintheprotectionracket.Bothbenefited—inanimperialsense—fromtherivalry.ButtheSovietUnion’seconomyhadbeensowreckedbyitseconomistsandcentralplanners,itcouldn’tkeepup.Bythe1980s,itwasnolongeraworthyadversary.By1989,itcametoitssensesandgotoutoftheempirebusiness.Droppedtaxratescametoan14across-the-board41percent.Andthen,wentonitsway.DuringtheperiodoftheColdWar—from1950to1989,includingthehotperiodsinKoreaandVietnam—theUnitedStatesspentatotalof$5trillionprotectingthefreeworldfromtheEvilEmpire.Ifithadnotspentadime,theoutcomemighthavebeenexactlythesame—butwecannotknowthat.WhatweknowisthatafterthecollapseoftheSovietempire,onlyonewasstillstanding.ButitleftthisAmericanempireinanawkwardposition.Itwasinthebusinessofprovidingprotection,butfromwhom?Howcoulditjustifyhighratesoftaxation?Howcoulditcontinuetoemployitsmilitarymen?Forafew years—duringtheClintonadministration—thenationhesitated.Butby2004,thePentagonbudgetwasnearly20percentgreaterthanitwasin1989.Fortunatelyfortheimperialists,onSeptember11,2001,asmallgroupofMuslimterroristsmanagedoneofthemostdaringandsuccessfulattacksinhistory.WithresourcesnogreaterthanachemicaltraceofthoseoftheirenemiesintheUnitedStates,terroristshijackedcommercialairlinersandflewthemintolandmarkbuildingsinNewYork.Theeventwasseenontelevisionaroundtheworld.Withinhours,GeorgeW.Bushannouncedanewwar—againstterrorism.Thiswasanabsurdstretch,too.Neverbeforehadawarbeendeclaredagainstatactic.ItwasasifhehadgonetowaragainstnavalblockadesorfightingonSunday.Everyotherempiremadewaronitsenemiesoritsfriends.TheBushadministrationwasmakingwaronnooneinparticular,andeveryoneingeneral.Everyfightingforceusesterroratonetimeoranother.Besides,terrorcouldbedefinedalmostanywayyouwanted,andisonlyunacceptablesolongasitremainsunsuccessful.AterroristwhosucceedsgetstohaveteawiththeQueenofEngland,asdidMenachimBegin.Butnoneoftheseissuesseemedtomatter.Inthehomeland,scarcelyanyonecomplained.“Wearenolongerabletochoosebetweenpeaceandwar.Wehaveembracedperpetualwar.Wearenolongerabletochoosethetime,thecircumstanceorthe15battlefield.”YoumaythinkthatthisisaquotationfromajournalistafterSeptember11,2001.Actually,itisaquotefromGaretGarrett,writingabouttheColdWarin1952.Thecommentworksfortheentireperiod,justasitwouldhaveworkedfortheRomansalmostanytimeduringtheir900-yearempire.OrfortheMongolsoreventheBritish.Garrettleavesusanotherinterestingquotefromtheperiod:“Talkofimminentthreattoournationalsecuritythroughtheapplicationofexternalforceispurenonsense,”saidGeneralDouglasMacArthur.“Indeeditisapartofthegeneralpatternofmisguidedpolicythatourcountryisnowgearedtoanarmseconomywhichwasbredinanartificiallyinducedpsychosisofwar hysteriaandnurtureduponanincessantpropagandaoffear.Whilesuchaneconomymayproduceasenseofseemingprosperityforthemoment,itrestsonanillusionaryfoundationofcompleteunreliabilityandrendersamongour16politicalleadersalmostagreaterfearofpeacethanistheirfearofwar.”Washespeakingin1952or2002?SenatorFlanderselaboratedin1951:FearisfeltandspreadbytheDepartmentofDefenseinthePentagon.Inpart,thespreadingofitispurposeful.Facedwithwhatseemtobeenormousarmedforcesaimedagainstus,wecanscarcelyexpecttheDepartmentofDefensetodootherthankeepthepeopleinastateoffearsothattheywillbepreparedwithoutlimittofurnishmenandmunitions....AnothercenterfromwhichfearisspreadistheStateDepartment.Ourdiplomacyhasgoneonthedefensive.TherealdependencesoftheStateDepartmentisinarms,armiesandallies.Thereisnoconfidenceleftinanythingexceptforce.ThefearfulnessofthePentagonandthat17oftheStateDepartmentcomplementandreinforceeachother.“SenatorFlandersmissedthepoint,”saysGarrett.“Empiremustputitsfaithinarms.Fearatlastassumesthephaseofapatrioticobsession.Itisstrongerthan18anypoliticalparty.”NeitherFlandersnorMacArthurrecognizedwhatbusinessAmericahadgottenitselfinto.Astheimperiummovestowardamilitaryfooting,civilinstitutionssink.Senatorsstilldebatethemeritsofparticularitemsoflegislationandstillsneakpork-barrelprojectsintomilitaryauthorizations,butmoreandmore,theybecomeidlewindbagsratherthanreallegislators.Evenwhentheyseeclearlythedriftofthecontinent,theyarepowerlesstostopit.GaretGarrettmentionedthecaseof SenatorTaftdiscussingtheexpensesoftheKoreanWarinMarch1950.“Idonotknowhowlongthisprogramisgoingtocontinue....Wesimplycannotkeepthecountryinreadinesstofightanall-outwarunlesswearewillingtoturnourcountryintoagarrisonstateandabandonalltheidealsoffreedom19uponwhichthisnationhasbeenerected.”Still,SenatorTaftwasnotgoingtostandinthewayofempire.Hevotedfortheappropriationsbill.Fifty-fiveyearslater,thepeople’srepresentativesdon’tevenwanttotakeupthemostimportantissues.Maybetheyaretoohottohandle.Ormaybe,somehow,theyknowthattheimportantissuesarebeyondthem.ItisasifsomeinstinctdirectspeopletodoingNature’sownwork.Naturewillnottolerateanimperialmonopolyforever.Theempiremustfindawaytoexterminateitself.Noonewantstostandinitsway.Thetwomostimportantpublicissuesoftheearlytwenty-firstcenturywerethegrowthofdebtintheUnitedStates,bothpublicandprivate,andthestretchofAmericanmilitaryresourcesaroundtheworld.Eachofthesemattershadthepotentialtoruintheimperiumitselfandgaverisetovitalquestions.Whyarewemeddlingallovertheworld?And,howarewegoingtopayforallthepromiseswe’vemade?Everypubliclyelectedofficialshouldhaveposedthesequestions.Butalmostnonedid.Evenin2001,onthematterofwar,theUnitedStatesConstitutionwasthesameasithadbeensince1789.“TheCongressshallhavethepowertodeclarewar,”itstillsays.Itdoesnotsaythepresidenthasthepower.NortheSecretaryoftheTreasuryorthePostmasterGeneral.Itsays“Congress.”Wecannotimagineagraver,moreseriousactthanadeclarationofwar.WeassumethatitisjustthatsortofweightonhisshouldersandhisconsciencethatamemberofCongressispaidtocarry.ButwhenthetimecametoconsideradeclarationofwaragainstthelawfulgovernmentofAfghanistanandthenIraq,outof98membersoftheSenate,notasingleonevotedagainsttheuseofmilitaryforceinIraq,andnoneaskedforadeclarationofwar.Similarlyinmattersofdomesticpolicy,Congressbecomesmoreandmoremarginalizedastheworkofempiregoesforward.Notthatitparticularlymatters. Thereisnothingnecessarilybetteraboutadecisionmadebyanelectedgroupofhacksthanonemadebyadictator,anappointee,oramonarch.Weonlypointoutthatasempiresdevelop,powerdevelopsatthecenter,aroundtheexecutive,andradiatesoutward.Thepreempireformsarestillthere.Buttheybecomemeaningless.Theexecutivecandowhathelikes,forhecontrolsthebusinessendofthestate:themilitary.Totheextentthatitpromotedeconomicprogressandprosperity,theRomanEmpiredidsobyestablishingpublicorderandotherwiselettingpeoplegetonwiththeirbusiness.Taxratesprobablyaveragedonlyabout5percentofGDP,evenlowerthanthetributedemandedbytheMongols.Butastheimperialbureaucracydevelops,ithasatendencytocloguptheplumbingofcommercewithincreasinglydetailedcontrols.Onemeasurecausesabackup,which,inturn,provokesremediationbyfunctionaries.Anothermeasureislaidon,whichcausesevenaworsebackup.Eventually,peopleareuptotheirknees.ThisiswhathappenedinRome.AfterclippingthecoinsintheperiodfromNerotoDiocletian,inflationseemedoutofcontrol.Thereweremoreandmorecoins.Ittookmoreofthemtobuythesamethingseveryyear.Finally,EmperorDiocletianannouncedhisEdictofPricestostopinflation.Pricesforeverything—includingwages—werecontrolled.Theresult,ascanbeimagined,wasevenworsedisaster.BythetimeoftheNixonadministration,thewaterwasrisinginAmerica,too.Wementionitherenottoexploretheplumbingbuttheconstitutionalsystem.ThereisnothingintheUnitedStatesConstitutionallowingapresidenttofixpricesasthoughhewereaRomanemperor.ButthatisexactlywhatRichardNixondid.Themeasurewasdesperate,illegal,andsoill-advisedastobefinanciallysuicidal.Butwhoopposedit?Afewoldfuddy-duddiesinhisownpartyputupafight,butmostmembersofCongressseemednottocare. IIWOODROWCROSSESTHERUBICONTheroadtoHellispavedwithgoodintentions.—Anonymous5TheRoadtoHellWearedoggedbydeadmen.DownthestreetfromouroldofficeinPariswasthesiteoftheworld’sfirstcentralbank,putupbyJohnLaw,beforehewasforcedtohightailitoutoftown.AroundthecornerfromournewofficeistheCrillonHotel,whereFranklinRoosevelt,thenanassistantsecretaryoftheU.S.Navy,dinedinhighstylewhilepretendingtogetthelowdownonthedoughboysinthetrenches.Inthenextwar,ErnestHemingwayclaimedtohaveliberatedthebarattheCrillonfromtheNazisastheyleftfortheRhine.ButitisbackinBaltimore,Maryland,wheretheghostshauntusmost.Inourveryownoffice,accordingtothelocalhistorybuffs,WoodrowWilsongottogetherwiththeU.S.ambassadortoBelgium,TheodoreMarburg,andginneduponeofthegrandestwishlistsofalltime—theLeagueofNations.Anhonest,uprightmanhasnoplaceinnationalpolitics.Amanwithhiswitsabouthimistoomodestfortherole.Hesuffersgreatnessasasortofhypocrisy.Hehasnobetterideaofhowthenationshouldbeledthananyoneelse—andheknowsit.Dissemblingwearshimdownuntilheisshoulderedoutofthewaybybolderliarsandabjectstoneheads.Theformerwillsaywhateverthevoterswanttohear—andthengoonwithdisastrousprojects.Thelatterhavenoplansorfixedideasofanysort;theymerelyshakehandsandblabberwhatevercockamamy nonsensecomesintotheirheads.Theformernevermakegoodpresidents.Thelatteroftendo.THEBESTPRESIDENTSManyofthebestAmericanpresidents—suchasGarfield,Harding,andArthur—arerarelyevenmentioned.Lincoln,Wilson,andTheodoreRoosevelt,ontheotherhand,areroutinelydescribedasnationalheroes.Nobodyreallyknowswhichpresidentwasgoodforthenationandwhichwasbad.WewouldhavetoknowwhatwouldhavehappenedifthemanintheOvalOfficehaddonesomethingdifferent.WouldthenationbebetteroffifLincolnhadnotslaughteredsomanySoutherners?WouldworldhistoryhavebeenworseifWilsonhadnotmeddledinWorldWarI?Wecan’tknowtheanswers;wecanonlyguess.Butthehistorianswhoguessaboutsuchmattershaveadisturbingtilt—nottowardmediocrity,buttowardimbecility.Likecrookedbutchers,theyadvertiseourbiggestmutton-brainsasprimebeef—andpushtheirthumbsdownonthescalesofhistorytogivethemextraweight.Thosetheyselectasgreataremerelythosewhohavegiventhemthemostmeat—thosewhohavemadethebiggestpublicspectaclesofthemselves.MosthistoriansrateLincoln,Wilson,andFranklinRooseveltasourgreatestpresidents.Butallofthemmightjustaswellhavebeenchargedwithdereliction,grossincompetence,andtreason.Foratonetimeoranother,eachofthembetrayedtheConstitution,gotthecountryintoawarthatprobablycouldhavebeenavoided,andpracticallybankruptedthenation.Thepresumptionthatunderliesthepopularopinionisthatapresidentfaceschallenges.Heisratedonhowwellhefacesuptothem.ButthebiggestchallengeapresidentwillfaceisnodifferentfromthatfacedbyaLouisoraCharles—merelystayingoutoftheway.Peoplehavetheirownchallenges,theirownplans,andtheirownprivatelivestolead.Thelastthingtheyneedisapresidentwhowantstoimprovetheworld.Everysupposedimprovementcostscitizensdearly.Ifitisabridge,itistheywhomustpayforit,whetheritisneededornot.Ifitisalawforbiddingthisorregulatingthat,itistheiractivitiesthatareinterdicted.Ifitisawar,itistheywhomustdie.Everysteptoward phonypublicdo-goodismcomesattheexpenseofgenuineprivateimprovements.Thatiswhyapresidentwhodoesnothingisatreasure.WilliamHenryHarrisonwasamodelnationalleader.Rareinapresident,hedidwhathepromisedtodo.Hetoldvotersthathewould“undernocircumstances”servemorethanasingleterm.Hemadegoodonhispromiseinthemostconclusiveway.Thepoormancaughtpneumoniagivinghisinauguraladdress.Hewasdeadwithin31daysoftakingtheoathofoffice.JamesA.Garfieldwasanothergreatleader.HetookofficeinMarch1881.ThemanwasamarvelwhocouldwriteLatinwithonehandandGreekwiththeother—atthesametime.HewasshotinJulyanddiedthreemonthslater.“Hedidn’thavetimetoaccomplishhisplans,”saythestandardhistories.ThankGod.MillardFillmorewasoneofAmerica’sgreatestpresidents.Hedidlittle—otherthantrytopreservepeaceintheperiodleadinguptotheWarbetweentheStates.Preservingpeacewasanachievement,butinsteadofgivingthemancredit,historiansholdupthehumbug,AbrahamLincoln,forpraise.TheUnitedStateshasneversufferedmoreharmthanonLincoln’swatch.Still,itistheLincolnMemorialtowhichcrowdsofagitatorsandmalcontentsrepair,nottheFillmoreMemorial.Asfarasweknow,nomonumentexiststoFillmore,whonotonlykeptthepeace,butalsoinstalledthefirstsystemofrunningwaterintheWhiteHouse—givingtheplaceitsfirstbathtub.Fillmorewasamodestman.OxfordUniversityofferedhimanhonorarydegree.ButFillmorecouldn’treadLatin.Herefusedthediploma,sayinghedidn’twantadegreehecouldn’tread.IfFillmorecouldn’treadLatin,AndrewJohnsonwasluckytobeabletoreadatall.Heneverwenttoanykindofschool;hiswifetaughthimtoread.Heisoftenheldupasanexampleofafailedpresidency.Instead,heseemstohavemadeoneofthebestdealsfortheAmericanpeopleever—buyingAlaskafromRussiafor$7.2million.Whohasaddedsomuchsince?Whohasactuallymadethenationricher,ratherthanpoorer?Johnsondidthenationagreatservice.Still,hegetslittlerespectandpracticallynothanks.ButourfavoritepresidentisWarrenGamalielHarding. 1Inhishitbook,Blink,MalcolmGladwelltellshowHarryDaugherty(aleaderoftheRepublicanPartyinOhio)metWarrenHardingin1899inthebackgardenoftheGlobeHotelinRichwood,Ohio,wherebothwerehavingtheirshoesshined.Daughertyblinkedandthoughthesawamanwhocouldbepresident.JournalistMarkSullivandescribedthemoment:Hardingwasworthlookingat.Hewasatthetimeabout35yearsold.Hishead,features,shouldersandtorsohadasizethatattractedattention,theirproportionstoeachothermadeaneffect,whichinanymaleatanyplacewouldjustifymorethanthetermhandsome.Inlateryears,whenhecametobeknownbeyondhislocalworld,theword“Roman”wasoccasionallyusedindescriptionsofhim.Ashesteppeddownfromthestand,hislegsboreoutthestrikingandagreeableproportionsofhisbody;andhislightnessonhisfeet,hiserectness,hiseasybearing,addedtotheimpressionofphysicalgraceandvirility.Hissuppleness,combinedwithhisbignessofframe,andhislarge,wide-setratherglowingeyes,hisveryblackhair,andbronzecomplexiongavehimsomeofthehandsomenessofanIndian.Hiscourtesyashesurrenderedhisseattotheothercustomersuggestedgenuinefriendlinesstowardallmankind.Hisvoicewasnoticeablyresonant,masculine,andwarm.Hispleasureintheattentionsofthebootblack’swhiskreflectedaconsciousnessaboutclothesunusualinasmall-townman.Hismannerashebestowedatipsuggestedgenerousgood-nature,awishtogive2pleasure,basedonphysicalwell-beingandsincerekindlinessofheart.NotonlydidHardinghavethelooksandthepresence,healsohadthebad-boyimage.Gladwellwrites,“Notespeciallyintelligent.Likedtoplaypokerandtodrink...andmostofall,chasewomen;hissexualappetiteswerethestuffof3legend.”Asherosefromoneofficetothenext,he“neverdistinguishedhimself.”Hisspeecheswerevacuous.Hehadfewideas,andthosethathehadwereprobablybadones.Still,whenDaughertyarrangedforHardingtospeaktothe1916RepublicanNationalConvention,heguessedwhatmighthappen. “Thereisamanwholookslikeheshouldbepresident,”theonlookerswouldsay.Laterthatday,inthesmoke-filledroomsoftheBlackstoneHotelinChicago,thepowerbrokersrealizedtheyhadaproblem.Whomcouldtheyfindthatnoneofthemwouldobjectto?Well,therewasHarding!“HardingbecamePresidentHarding[in1921],”writesGladwell.“Heservedtwoyearsbeforedyingunexpectedlyofastroke.Hewas,mosthistoriansagree,one4oftheworstpresidentsinAmericanhistory.”Onthesurface,hesoundslikeoneofthebest.Wehaveneverheardofanyonebeingarrestedandchargedunderthe“HardingAct.”WehaveneverseenabuildinginWashington,oranywhereelse,namedtheHardingBuilding.Weknowofnowarsthemancaused.Werecallnogovernmentprogramshesetinmotion.Asfarasweknow,thenationandeveryoneinitwerenobetteroffthedayWarrenHardingsteppedintoofficethantheywerethedayhewascarriedoutofit.Hardingwasadecentmanofreasonabletalents.HeheldpokergamesintheWhiteHousetwiceaweek.Andwheneverhegotachance,hesneakedawaytoaburlesqueshow.Thesepastimesseemedenoughfortheman;theyhelpedhimbearupinhiseminentroleandkepthimfromwantingtodoanything.Anothersavinggracewasthatthepresidentneitherthoughtnorspokeclearlyenoughforanyonetofigureoutwhathewastalkingabout.Hecouldn’trallythetroopsandgetthembehindhisideas;hehadnone.Andevenifhetried,theywouldn’tunderstandhim.H.L.MenckenpreservedabitofwhathecalledGamalielese,justtoholdituptoridicule:Iwouldlikegovernmenttodoallitcantomitigate,then,inunderstandingin5mutualityofinterest,inconcernforthecommongood,ourtaskswillbesolved.Thesentenceissoidioticandmeaningless,itcouldhavecomefromthemouthof GeorgeW.Bush.Butthecrowdsseemedtolikethewayhedeliveredit.Hesaiditwithsuchsolidconviction,it“waslikeablacksmithbringingdownahammer6onanegg,”saysMencken.Hardingwassofullofsuchthunderoustwaddlethathestormedintooffice...andthendrizzledawayuntilhedied.Bravo!Welldone.WILSONCROSSESTHERUBICONHarding,Arthur,Fillmore—unliketheclumsygiantswholefttheirdeepfootprintsintheearthalongPennsylvaniaAvenueandtrodonpracticallyeveryonewhogotintheirway—thesemidgetsmanagedtomaketheirwaythroughthenation’shighestofficeleavinghardlyatrace.Thatis,theyleftthecountryalone.Youwillfindtheirpicturesonno“deadpresidents,”thatis,onnoneofthenation’scurrency.NorwillyoufindtheirprofileschiseledonthetoweringrocksoftheDakotahills.Instead,thereyoufindblowhardssuchasTheodoreRooseveltandsaintlyfraudssuchasAbrahamLincoln.ButinthecrowdedfieldofcontestantsforAmerica’sworstpresident,onemanstandsout.Asaworldimprover,hisstatureisworldclass.Hewashumorless,immodest,andself-righteous.WoodrowWilsonwastheworstkindofpolitician—hewouldn’tlieandcouldn’tbebought.HewassofullofgoodintentionshecouldpracticallypavetheroadtoHellbyhimself.BetweenthebeginningofthetwentiethcenturyandtheendofWorldWarII,theUnitedStatesbecametheworld’srichest,mostadvanced,andmostpowerfulnationinhistory.MorepeopleowedmoremoneytoAmericathanhadeverowedmoneytoanynationanywhere.MorepeopleviewedAmericafavorablythaneverhadviewedanycountrybefore.Americansstoodastridetheglobe,awell-meaningandablecolossus.Butthereneverwasasilverliningwithoutacloudwrappedaroundit.America wastoofortunateforherowngood.Now,justsixdecadeslater,thecountryistheworld’sbiggestdebtor.Itistheworld’sbiggestconsumer—the“world’smouth.”Itistheworld’smostaggressiveandmeddlingmilitarypower.NocountryonearthissogodforsakenastoescapeAmerica’snoticenortoopoortolenditmoney.TheUnitedStateshadbeenthefreestcountryonearth.Now,ithasmorepeoplelockedupinjailthananyothercountry(someofwhomittortures)andemploysahugearmyofbusybodiesandsnitchesalldeterminedthatnocommercialactbetweenconsentingadultswilltakeplacewithouttheexplicitapprovalofahalfdozenmajorbureaucracies.Wepauseamomentandwonderhowwegotwhereweare.Surely,someterriblecrimehasbeencommitted.Wegotothescenetolookforevidence.There,wefindafewsamplesandtakethemovertothelab.Andwhatdowefind?TheDNAsamplesarethoseofThomasWoodrowWilson.Wedonotblametheman.Orholdhimuniquelyresponsible.HisprotégéattheNavyDepartment,FranklinRoosevelt,wasaneageraccomplice.LyndonJohnsondrovethegetawaycar.RonaldReagan,AlanGreenspan,andGeorgeW.Bushjoinedtheganglater.ButWilsonwasthemastermind.Itwashewhodecidedto“improve”theU.S.systemofgovernment.Itwashewhoalsodecidedtoimprovemuchoftheworld.ItwasasifhethoughtallthegenerationsofAmericansthatprecededhim—andallthepeoplesoftheworldoutsideU.S.borders—wereabunchofnincompoops.Heand,apparently,healonewasblessedwiththeabilitytoseejustwhattheentireworldneeded.AndthusheundertooktochangetheU.S.Constitutioninthemostfundamentalwaysandtoreorderthesystemofinternationalrelationsthathadevolvedoverthousandsofyears.“Thespiritoflibertyisthespiritwhichisnottoosurethatitisright,”saidJudge7LearnedHandin1944.SuchmodestyneverbotheredAmerica’stwenty-eighthpresident.“Amentallyill,pitiless,mythomaniac,...whobelievedhimselfindirectcommunicationwithGod,guidedbyanintelligentpoweroutsideof8himself....”ThusdidthefatherofmodernpsychoanalysisdescribeWoodrowWilson.ButFreud’sjudgmentofthemanwastoogenerous.Wilsonwasa self-satisfied,sanctimoniousdelusionalbunglerwhopracticallysingle-handedlytransformedthecountryintoamockingshellofwhatitwassupposedtobe.WebeginourinspectionwithaquotationattributedtoWilsonafterhispresidentialelectionvictory:“RememberthatGodordainedthatIshouldbethenextpresidentoftheUnitedStates.Neitheryounoranyothermortalormortalscouldhavepreventedthis.”IsthereanydoubtthatWilsonwasmad?HeclaimedtobeaDemocrat.Later,heclaimedtowanttomaketheworld“safefordemocracy.”Butrighthere,weseehebelievedindivineprovidencetodecideleadershipissues.Hehadnotbeenelectedbythepeople;hehadbeenchosenbyGod.Whythen,bothertohaveelectionsatall?WealsopausetowonderhowtheformercollegeprofessorcouldhaveknownGod’smind.Wehavetriedourselves,manytimes.DoesGodintendstockpricestorise,weaskourselves?WillGodletthisplanelandsafely,wewonderedrecently?WherethehelldidGodletusleavethecarkeys?Butthoughwehavegiventhematteragood-faithtry,wehavenevermasteredit.Surely,Woodrowmusthavesuppedwiththegods.PerhapshehadGod’searorevenhisthroat.Forthemancouldlookintothefutureaseasilyaswecanlookintoanemptybeerstein.Heknewnotonlythathewasdestinedtobecomepresident,butthathecouldbuildaworldevenbetterthantheoneGodhadgivenhim—bylookingintothefutureandimprovingitbeforeithappenedandbyreplacingtheprivategoalsandhopesofmillionsofpeoplewiththoseofhisown.HowdidheknowthattheworldwouldbeabetterplaceifaFederalReserveSystemweresetuptocontrolthenation’smoney?HowdidheknowthatMexicowouldbeaworsecountryandaworsefriendtotheUnitedStates—ifithadGeneralHuertaatitshead,insteadofWilson’sman,Carranza?WhatmadehimthinkthathisownjudgmentaboutwhatsortofgovernmentMexicansshouldhavewasbetterthanthatoftheMexicansthemselves?WhatmadehimthinkthatademocracywassuperiortoaconstitutionalmonarchyorthatWorldWarIwouldendbetterifAmericansgotinvolvedinit? InhisApril2,1917,speech,inwhichheurgedthenationtowar,WilsonnotedthattheRussianshadalwaysbeen“democraticatheart.”“[W]onderful,and9hearteningthings...havebeenhappeningwiththelastfewweeksinRussia,”hecontinued.WhathadbeenhappeningwasthebeginningoftheuprisingthatwouldlaterbecometheBolshevikRevolution.First,themoderatestookoverfromtheTsar.ButtheKerenskygovernmentkeptRussiainthewar.Germany,meanwhile,fearedAmerica’sentryinthewarontheenemy’sside.ShedesperatelyneededtostabilizetheEasternFrontsoshecouldturnherattentiontotherenewedthreatintheWest.Hertechniquewasascleverasitwasdisastrous.ShefoundawindyrevolutionarynamedLeninwhohadbeenexiledfromRussiamanyyearsbefore.Hewasbank-rolled,putonatrain,andsentbackintoRussiawiththeexpresspurposeofmakingtrouble.ThetroublehemadewastheBolshevikRevolution,whichknockedRussiaoutofthewar,justastheGermanshadhoped.Wilsonhadnoclue.Hehadnowayofknowingwhatwouldhappenanywhere.Hewasguessing,justlikeeveryoneelse,andalmostalwaysguessingwrong.Manyreaderswillrushtojudgment.“Hemadeamistake,”theywillsay.Or,“HowcouldanyoneknowthattheRussianRevolutionwouldbefollowedbyoneofthemostcruelandabsurdepisodesofbadgovernmentintheentiresordid,historyoftheplanet?”Sinceitisimpossibletoknow,theywilladd,“Youjusthavetodoyourbest....Besides,youhavetotakeaction!”Theprejudiceforactioninpublicaffairsisaconstant.Andaconstantdisappointment.Ofcourse,Wilsoncouldnotknowwhatwouldhappen.Itwasvaintothinkotherwise.ButWilsondidthinkotherwiseandwasdeterminedtoedithistorybeforeitwaswritten—inHaiti,inMexico,inNicaraguaandthen,whenthestakeswerebigger,inEurope.HeevensenttroopstoRussiatotrytobeatbacktheBolsheviks.ButthiswastypicalofWilson.Heseemedtowanttointerveneeverywhere. THEHALLSOFMONTEZUMAAmericanswereperfectlyhappywiththegovernmentofPorfirioD’azinMexico.Butthen,themalcontentsinMexicobegancausingtroublebecausethemostimportantindustriesinthecountrywereownedbynon-Mexicans.Ineconomictermsitbarelymatterswhatpassportscapitalistscarry,butpoliticiansprefertohavelocalsownlocalindustries,sothattheywillbeclosertohandtoleanon.Beyondthat,theMexicansfoundforeignownershipausefulspoonwithwhichtostirupthemobs.Anewpresident,FranciscoMadero,cameinafterPorfiriowasoverthrownin1910.Heimmediatelywenttoworktryingtodispossesstheforeigners—manyofwhomwereAmericans.“Giveusadictatorwecantrust,”thedispossessedsaidtothen-presidentTaft.InFebruary1913,MaderowasoverthrownandmurderedbyGeneralVictorianoHuerta.ThenewAmericanpresident,Wilson,didnotlikethelatestregimeinMexicoandrefusedtorecognizeit.Instead,hebackedtheoppositionmovement,ledbyVenustianoCarranzaandhisConstitutionalistparty.Wilsonsaidhewasfollowingapolicyof“watchfulwaiting,”buthemusthavegottentiredofwatchingafterawhile.OnApril21,1914,hedecidedtoact.HeorderedthebombardmentofVeraCruz.Blowingupanothercountry’scityisnotanambiguousact.Itisadecisiveactofwar.TheUnitedStatesConstitutionspecificallysaysthatCongress,andonlyCongress,hasthepowertodeclarewar.ButWilsoncouldn’twait.TheMexican“crisis”pothadbeenonalowboilformonths.ForeignshipslayoffthecoastofseveralMexicanportsawaitingtrouble.AnincidentinTampico,whereagroupofAmericansailorswasdetainedbyMexicantroops,turneduptheheat.Thesailorswerereleasedshortly,withapologies.ButWilsonrarelyletanopportunityformishappassunmolested.HedemandedthattheHuertagovernmenthoisttheAmericanflagoverTampicoandgivea21-gunsalutetoatonefortheinsult.Huertawouldhaveratherjumpednakedintoanalligatorpond.Herefused.Wilsonbroughtuphismarines.ButTampicohadnodecentplacetolandthem;VeraCruzwassubstituted. TheproximatereasonforWilson’sattackonVeraCruzwastheapproachofaGermanship,saidtohavearmsaboardfortheMexicangovernment.MexicowasnotatwarwiththeUnitedStates.TheUnitedStateswasnotatwarwithGermany.Noonewasatwarwithanyone.Mexicocouldbuyitsarmsfromwhatevercountryitwanted.Wilson’sinterventionwasfantastic,almostunbelievable.InthebattleofVeraCruz,90Americansdiedandmorethan300Mexicans.Whattheydiedfor,nooneknew.Wilson’smilitarymeddlingquicklyproducedtheexactoppositeresultthantheonehehadexpected.Hisman,Carranza,wassoappalledhejoinedforceswithhisadversary,unitingtheentirecountryagainsttheUnitedStatesanddemandingtheremovalofAmericantroops.TheMexicangovernmentsevereddiplomaticrelationswiththeUnitedStatesandpreparedtoseizeassetsofU.S.nationals.Now,thetwonationswereonthevergeofrealwar.Andforwhat?Mr.WilsonhadnevermeteitherGeneralHuertaorMr.Carranza,norasfarasweknow,hadheeversetfootinMexico,eatenasingletaco,orswallowedasingleshotoftequila.Yet,theAmericanpresidentthoughtheknewbestwhoshouldbeheadofstatesouthoftheRioGrande.Thewholeaffairendedaspreposterouslyandpatheticallyasitbegan.ThewarinEuropebeganandWilson’swifedied.ThepresidentnolongerhadthetimeorenergytobuildabetterworldinMexico.Afterabitofnegotiation,Wilsontypedupapressrelease:BothGeneralCarranzaandtheConventionatAguascalienteshavinggiventheassurancesandguaranteeswerequested,itisthepurposeoftheAdministrationtowithdrawthetroopsoftheUnitedStatesfromVeraCruzonMonday,thetwenty-thirdofNovember.AllthepersonsthereforwhosepersonalsafetythisGovernmenthadmadeitselfresponsiblehavenowleftthecity.Thepriestsandnunswhohadtakenrefugethereandforwhosesafetyfearswereentertainedare10ontheirwaytothiscountry.ButtheWilsonianinterventionwasnotover.AfterthesettlementoftheVera Cruzincident,WilsonbackedarivaltoCarranza—acolorfulcharacternamedFrancisco“Pancho”Villa,whoonceownedachainofbutchershops.VillamusthavebeenanearlyrolemodelforCheGuevara.Helovedpublicityandwasaccusedofstagingbattlesonlytogethisnameinthepaper.Hollywoodadoredhim.IftherehadbeenaT-shirtindustryin1916,hispicturewouldhavebeenonmillionsofthem.ButVillawasnotonlycomic,hewaslethal.OnJanuary10,1916,hismenattackedagroupofAmericanminingengineerswhohadbeeninvitedtotheareatoreviveabandonedminesatSantaYsabel.Villamurdered18ofthem.ThenonMarch9,hegrewmoreprovocative.HismencrossedthebordertoattackasmallgarrisoninColumbus,NewMexico.Thetownwasburnedand17Americanswerekilledintheraid.BeforeyoucouldsayayChihuahua,peopleallovertheUnitedStateswerefoamingatthemouth,eagerforwar.Onceagain,WilsongaveupwatchfulwaitingandappointedGeneralJohnJ.(“BlackJack”)PershingtobringhimtheheadofPanchoVilla—deadoralive.This,too,wasafailure.Despitethecall-upofapunitiveforceof12,000soldiers,Panchoalwaysseemedtogetaway.“Villaiseverywhere,butVillaisnowhere,”PershingtoldWilson.PershingchasedVillaforninemonths.HewascalledhomebyWilsontwomonthsbeforethepresidentannouncedhisplansforanewintervention,thistimeamajor-leagueoperation.ButVilladidnotgetawayforlong.Hewasambushedseveralyearslaterandkilled.Fromhumbug,tofarce,todisaster,WilsonhadwrittenthescriptfornearlyallAmerica’simperialmilitaryadventures.TheeffectofWilson’sinterventionsinLatinAmerica(hehadtroopsinNicaragua,Haiti,andtheDominicanRepublicaswellasMexico)wastheoppositeofwhathehadhopedfor.InsteadofincreasingfriendsoftheUnitedStatesintheregion,thenumberofherswornenemiesmultiplied.Forthenexttwogenerations,theexpression,“Yanquigohome”wasasfamiliarasfrijolesinmanyLatinAmericancountries.THEGREATWARHehada“self-regardingarroganceandsmugness,masqueradingasrighteousness,”sayshistorianPaulJohnsonofWoodrowWilson,“whichwas alwaysthereandwhichgrewwiththeexerciseofpower.”Likeallthegreatempirebuilders,Wilsonwassosurehewasmakingthingsbetterhehadnoneedforthepoliteconstraintsofbourgeoissociety,simpletruth,orconstitutionalgovernment.Wilsonhad“apassionforinterpretinggreateventstotheworld,”he11toldhisfirstwife.Hewantedto“inspireagreatmovementofopinion.”ItwasnotenoughtobossaroundthehidalgosofLatinAmerica;Wilsonhadanevengreaterambition,tolorditovertheEuropeans,too.Economically,thenationwasalreadyontopoftheworld—U.S.grossdomesticproductsurpassedEngland’sin1910.Justaseveryyoungbuckwantstochallengetheoldbulls,herewasAmerica’sturntoassertitselfmilitarilyamongtheworld’smajorpowers.Inanswertothequestion,whydidtheUnitedStatesbeginmeddlinginforeignaffairsinthetwentiethcentury,andnotbefore,comestheeasyanswer:becauseitcould.OnApril2,1917,ThomasWoodrowWilsonstoodbeforeajointsessionofCongressanddazzledtheassemblywithatorrentofrhetoricalair.Hehadhardlytosayaword.Theanimalswerealreadysnortingandpawingtheground.TheEuropeanpowershadlockedhorns.Now,itwasAmerica’schancetojointhebattleandWilson’schancetobecomealphamaleoftheentireworld.“Wemustputexcitedfeelingaway,”saidthepresident,andthenlaunchedintooneofthegreatestmob-incitingdeclarationseverdelivered.WilsonwasurgingCongresstodeclarewaragainstGermany.TheHuns,hesaid,weregovernedby12a“selfishandautocraticpower.”Whattheyhaddonetojustifytryingtokillthemwasamatterofgreatdispute.Robert“FightingBob”LaFollette,senatorfromWisconsin,thoughttheyhadn’tdonemuchofanything.TheywereaccusedofbayonetingbabiesandcuttingoffthearmsofboysinBelgium.ButwhenagroupofAmericanjournalistswentonafact-findingmissiontogettothetruthofthematter,theycouldfindnoevidenceofit.ClarenceDarrow,thelawyerwholatermadeamonkeyoutofWilliamJenningsBryanintheScopesTrial,saidhewouldoffera$1,000rewardtoanyonewhocameforwardwhosearmhadbeencutoffbytheGermans.Athousanddollarswasalotofmoneybackthen(thiswaswhentheFedhadbarelysettleddowntowork),equaltoabout$20,000today.Still,nooneclaimedthemoney.TheGermanshadalsosunkafewships.ButtherewasawargoingoninEurope. GermanytriedtoimposeablockadeofEnglishportswiththeonlyweaponithad,submarines.YoutookarisktryingtosailintoEngland,especiallyifyourshipwascarryingammunition;everyoneknewit.TheEnglishwereblockadingGermanports,too.ThedifferencewasthattheEnglishhadabiggernavyandwerebetteratit.Therewasnothingnewaboutnavalblockades.LincolnhadblockadedtheSouthduringtheWarbetweentheStates.Itwasalongandcomplicatedstory.Inretrospect,theUnitedStateswouldalmostcertainlyhavebeenbetteroffbystayingoutofit.SenatorRobertLaFollettethoughtsoatthetime.HetoldanyonewhowouldlistenthatthestruggleinEuropewasbestunderstoodasapoliticalandcommercialrivalry.TheGermanswerechallengingtheEnglisheverywhere.TheGermaneconomywasgrowingfaster.WhileGermanyindustrializedmuchlaterthanEngland,shewentaboutitwithtypicalGermanthoroughnessandenergy.Outputincreasedover600percentfrom1855to1913.WhereasBritain’sempireseemedtobepeakingout,theGermanswerebuildingnewfactoriesanddevelopingnewmarkets.Aslateas1870,Britainwasresponsibleforathirdoftheentireworld’smanufacturing.By1910,herpercentagehadfalleninhalf;GermanyandAmericabothproducedmore.InAfrica,GermancolonialistsweremenacingEnglishterritories;twiceintheyearsrunninguptoWorldWarI,acrisisinAfricabroughtthemajorpowersclosetowar.InEurope,GermanmanufacturersweretakingmarketsharefromtheirEnglishcompetitors.Onthehighseas,theGermanNavywasbecomingabiggerandbiggerthreattotheRoyalNavy.Andso,theEnglishandtheGermanswerefinallyhavingitout.Leavethemtoit,saidFightingBobLaFollette.ButWoodrowWilsonhadhisownideas.“Civilizationitself”seemedinthebalance,hetoldthepoliticians.“Weshallfightforthethingswehavealwayscarriedinourhearts—fordemocracy,fortherightofthosewhosubmittoauthoritytohaveavoiceintheirowngovernments,fortherightsandlibertiesofsmallnations[hedidnotmentionMexico,Haiti,orNicaragua],forauniversaldominionofrightbysuchaconcertoffreepeoplesasshallbringpeaceand13safetytoallnationsandmaketheworlditselfatlastfree.”Whenhefinishedhisspeech,mostofthemembersofCongressrosetotheirfeetandcheered.Tearsstreameddownmanyfaces.Atlast,theUnitedStateswas goingtowar!Twomillionpeoplehadalreadydiedinthewar.Forwhatreason,noonequiteknew.Wilsonhadtoresorttobombastandbalderdashtotrytoexplainit.IthadbeenjustanotherfoolishEuropeanwaruntilthen—theverysortofwartheFoundingFathershadurgedtheirdescendantstoavoid.Don’tgoforthlookingfor“monsterstoslay,”saidAdams.Butnowthehappymomenthadcome.Now,theUnitedStateswasready.Wilsonhadfoundamonster.Hallelujah!Untilthisdate,thewarinEuropewasjustanotherwarinEurope.Notthefirst,andnotthelast.Asrecentlyas1870,FranceandGermanyhadgoneatit.Francehadattacked.Germanycounterattackedsobrilliantly,shewasabletoencircleParisandlaysiegetothecity.TheUnitedStatesfeltnodesiretoentertheFranco-PrussianWar.ShewasstillhobblingaroundoncrutchesfromherownWarbetweentheStates.Andwhenthewarof1870wasover,theFrenchwereforcedtopayreparations.ButthemoneypaidovertotheGermanswasquicklyrecycledbacktotheFrench,fromwhomtheGermansboughtgoodsandservices.Losingthewarturnedouttobeasgoodaswinningit;FranceboomedandGermany,too.Apartfromthatconflict,Europehadenjoyedanentirecenturyofpeaceandprosperity.Theupperbrainmighthavethought—welldone,wewillholdasteadycourse.Butdowninthelimbicsystem,primitiveurgeswereswelling.Aftersuchalongperiodofpeace,warmightberefreshing.Aftersuchalongperiodofprosperity,theyheardthewildcallofdebt,destruction,andinsolvency.OnJune28,1914,thearchdukeFranzFerdinand,oftheAustro-HungarianEmpire,andhiswifewereshotandkilledbyamalcontentnamedGavriloPrincip.NooneinAmericaparticularlycared.Forallitmatteredoutontheprairie,theywouldhavehadthedukestuffedandusedasaparlorornament.FewpeoplehadanyideawhytheEuropeanswereatwar.TheyhadbeenwarnedbytheFoundingFatherstomindtheirownbusiness.Americahadthemostdynamiceconomyintheworld;Americanshadplentyofbusinesstomind.TosensiblepeopleintheUnitedStates,mindingyourownbusinessstillseemedlikethebestforeignpolicy.Buttheeditorialpagesfulminatedwithreasonstogetintothefight.Nationalism, economiccompetition,militarism,secrettreaties,loftyideals,low-downsecretdeals,treachery,rivalry—theanswersflewoutofthefrontallobelikeplasticbagsoutofawelfarehigh-rise.Prettysoon,theywerehangingfromeverytreeandelectricpole.Eventoday,youcouldgofromoneendofthecountrytotheotheraskinghistorianswhytheUnitedStatesdecidedtoenterthewarorwhyitenteredonthesideofEnglandandFranceinsteadofonthesideofGermanyandAustria.Youwouldgetplentyofanswers,butnotasinglereasonthatcomesclosetojustifyingthedeathsofnearlyhalfamillionAmericans.Youwouldnot,becausetheydon’texist.PrincipwaslikeacharacterfromaChekovplaysayshistorianA.J.P.Taylor.Exceptthathedidn’tmiss.DiditmakesensetosacrificehalfamillionAmericansbecausePrinciphithismark?Hadhebeenaworseshot,wouldthe14wareverhavebegun?Isthattherealreasonthewarbegan?Princip’smarksmanshipdidnotsomuchtriggerthewarasallowittocommence.Noneofthemajorpowersreallywantedwar—notinthesensethattheyexpectedanybenefitfromit.Nonewaspreparedforit.Andyet,nonewasverygoodatstoppingit.Allofasudden,troopswerebeingmobilizedthroughouttheBalkans.GermanKaiserWilhelmIIwasalarmedandtriedtostopit.OnJuly30,at2:55AM,hesentanurgenttelegramtotheGermanambassadorinVienna:Trymediation,hetoldthediplomats.Then,asnow,nobodyreallyknewanything.Britain,France,Austria-Hungary,Russia,Germany—allrepeatedlymisreadeachothers’intentions,miscalculatedtheeffectoftheirownactions,andcompletelymisunderstoodwhattheyweregettingthemselvesinto.ManypeopleinEuropeatthetimehadbeeninfluencedbythewritingsofNormanAngell,whobelievedthatwarwaspracticallyimpossible.Angellmadeagoodargument.Moderneconomiesarebasedontrade,commerce,andmanufacture.Wealthnolongerrestedonland—whichcouldbeseized—butonfactories,railroads,capital,andbusinessrelationships.Wardestroyscapitalandstifleseconomicactivity.Therefore,menwouldnotmakewar;itwouldbetoocostly,illogical,andunreasonable.NormanAngell’sbook,TheGreatIllusion,wastranslatedintoseverallanguages andreceivedhighpraisefrommanyquarters.OneofitsmostvisibleadmirerswasViscountEsher,chairmanoftheWarCommitteeinEngland.LordEshergavelecturesonthenewideaatCambridgeandtheSorbonne.Hetoldlistenersthat“neweconomicfactorsclearlyprovetheinanityofaggressivewars.”Noonewouldmakewar,saidhe,becauseitwouldcausesuch“commercialdisaster,financialruinandindividualsuffering”thatpeoplewouldnaturallyturnawayfromit.Thewholeideaofmodernwarfare,heexplained,was“sopregnantwith15restraininginfluences”thatwarmustsoonbeathingofthepast.Therewasalsotheargumentthattechnologyinhibitswar.Atthebeginningofthetwentiethcentury,WinstonChurchillsaid,“Humanitywasinformedthatitcouldmakemachinesthatwouldflythroughtheair....“Thewholeprospectandoutlookofmankindgrewimmeasurablylarger,andthemultiplicationofideasalsoproceededatanincrediblerate....“Whilehenursedtheillusionofgrowingmasteryandexultedinhisnewtrappings,hebecamethesportandpresentlythevictimoftidesandcurrents,ofwhirlpoolsandtornadoesamidwhichhewasfarmorehelplessthanhehadbeen16foralongtime.”Notlongaftertheturnofthenewcentury,OrvilleandWilburWrightdemonstratedthatthepromiseofairtransportationwasreal.Onthewind-sweptbanksofNorthCarolina,forthefirsttimeinhistory,anairplanegotoffthegroundandcompletedacontrolledflight.Thepromisewasfulfilled.Airplanesworked.Threedecadesafterthebirthofairplanes,theywereoverChurchill’swartimebunkerinLondon,droppingexplosivesonthecity.“Wetookitalmostforgrantedthatsciencewouldconfercontinualboonsandblessingsuponus,”Churchillexplained.Butit“wasnotaccompaniedbyanynoticeableadvanceinthestatureofman,eitherinhismentalfacultiesorhis17moralcharacter.Hisbraingotnobetter,butitbuzzedthemore....”Othersexpectedadvancesincivilizationhadmadewarpassé.Freudexplained thissentimentinthespringof1915:Wewerepreparedtofindthatwarsbetweentheprimitiveandcivilizedpeoples,betweentheraceswhoaredividedbythecoloroftheirskin—wars,even,againstandamongthenationalitiesofEuropewhosecivilizationislittledevelopedorhasbeenlost—wouldoccupymankindforsometimetocome.Butwepermittedourselvesotherhopes.Wehadexpectedthegreatworld-dominatingnationsofthewhiteraceuponwhomtheleadershipofthehumanspecieshasfallen,whowereknowntohaveworld-wideinterestsastheirconcern,towhosecreativepowerswereduenotonlyourtechnicaladvancestowardthecontrolofnaturebuttheartisticandscientificstandardsofcivilization—wehadexpectedthesepeoplestosucceedindiscoveringanotherwayofsettlingmisunderstandingsand18conflictsofinterest....OnlytwoofthemajorcombatantsinWorldWarI,theUnitedStatesandFrance,weredemocracies,moreorlessofficially.Butallofthemwereheadedinthatdirection.Ineverycountry,therewereparliamentsandpopularassemblies.Votesweretaken.Publicopinionswereregistered.Newspapersshoutedoutthecurrentprejudicesanddeliveredthelatestmisinformation.Headsofstatehesitated.Autocratsconsultedtheirministersandadvisors.NowhereinEuropewerethereanyrealabsolutemonarchs.Thepress,thechurch,theassemblies,thetradeunions,thearistocrats,thebourgeoisie,theindustrialists,thebankers,andmoneylenders—allhadahearing.AfterWilsondeclaredita“wartomaketheworldsafefordemocracy,”peoplebegantowonderifdemocracyitselfmighthavepreventedthewar.Wilsonsaidasmuch.“Self-governingnationsdonotfilltheirneighborstateswithspies,”saidthechiefexecutive,notquiteanticipatingtheCIA.Nordotheybegin19“cunninglycontrivedplansofdeceptionoraggression...,”headded.Kerensky,themoderaterevolutionaryinRussia,declaredthatdemocraciesnevermadewarononeanother.Theideawaswidelybelievedatthetime,eveninAmerica,wheretwodemocracies—theNorthandSouth—hadbattered themselvesforfouryearsinNorthAmerica’sbloodiestwarever:theWarbetweentheStates.Nordidanyonebothertowonderwhyitwasthat,beforetheirverynoses,theworstwarinhistorywastakingplacebetweennationsthatmaynothavebeencompletedemocracies,butwere,nevertheless,moredemocraticthananyinhistory.Eventoday,peoplestillbelievethatdemocraciesaremorepeacefulthanotherformsofgovernment.TheUnitedStatesofAmericamaintainsthatherformofdemocracyissoimportanttothepeaceandprosperityoftheworld,shenotonlyinvitesothernationstojoinher,sheinsists.Andyetthepointhashardlyeverbeenseriouslyaddressedandneverproven.Whatwedoknowisthatsincedemocracyhasbecomewidespread,therehasbeenlittleletupintheincidenceofwarandprobablyanincreaseinitsviolence.Unlikethesubjectsofatyrantoramonarch,thecitizensofademocraticregimearemorefullyandreadilyengagedinwartime.Whenpeoplefeelthreatened,orfeelthattheyhaveastakeintheconflict,theyaremoreinclinedtodevotetheirenergyandresourcestovictory.Popularnewspapersandtelevisionworkthemuptoviolenceeasily.Givethemtherightlineofguffandtheyarepreparedtohandovertheirwalletsaswellastheirlives.Francewasabletofinance83.5percentofitswartimeexpendituresbyborrowing.Offeringnationaldefensebondsinsmalldenominations,Francesucceeded,saysHewStrachan,in20“mobilizingthewealthofthepublic.”GeorgeOrwellwonderedhowEnglandcouldevertriumphoverGermanyinWorldWarIIsincesocialismwassomuchbetteratmarshalingtheresourcesofapeopleinwartime.Whathedidn’trealizewasthatinwartime,EnglandandAmericaquicklytookonmanyoftheattributesofasocialistsocietysuchasrationing,censorship,economicplanning,andpricecontrols.Healsodidn’trealizethatitisnotmerelythepercentageofasociety’soutputthatthestateisabletograbthatcounts;whatalsomattersisthetotalgrossamounttograbfrom.Bothofthesepointsweretobecomecriticaltothedevelopmentofglobalpoliticsinthetwentiethcentury.Approachingthesubjectfromanotherangle,weaskourselves:Ifdemocracywassuchagoodidea,whydidpeopleputupwithotherformsofgovernmentforso manyhundredsofyears?Weturntothedeadandaskthequestion.Theanswerwegetisthatmostneverconsideredit.Thosewhodidthoughtdemocracyabadsystemofgovernment.TheGreeksinventedit.Buttheirdemocracywasnothinglikeourdefinitionoftheword.EvenAmerica’sfoundershadadeepmistrustofpopulardemocracy.“Democracies,”wroteJamesMadison,“haveeverbeenfoundincompatiblewithpersonalsecurityortherightsofproperty;andhavebeenasshortintheirlivesastheyhavebeenviolentintheirdeaths.”ThomasJeffersonbelievedthat“themajority,oppressinganindividual,isguiltyofacrime,abusesitsstrength...andbreaksupthefoundationsofsociety.”AftertheRevolutionaryWarwasover,thecrafteroftheDeclarationofIndependencealsoarguedthat“anelectivedespotismwasnotthegovernmentwefoughtfor.”Intherepublictheydesignedandanticipated,fewpeoplevoted.Andthen,onlyforonechamberofthenationalgovernment:theHouseofRepresentatives.TheSenatewaschosenbythestates.IfitwassoapparentthatAmerican-styledemocracywasthebestsystemofgovernmenteverinvented,whydidn’ttheChinesepickitup?WhydidtheChinesenevertryitinover4,000yearsofcivilizedcommunity?Surelysomeonemusthavethoughtofit.Andhowcanwebesosurethatitreallyisthebestformofgovernment?Isn’titaninsulttoourancestors?Tothehundredsofgenerationswhoneverthoughtofit,ornevertriedit?Andwhataboutallthesmartpeopleinalltheothercountriesoftheworldfromthemomentmanfirststoodupontwolegstothedaybeforeyesterday—whydidtheysorarelyexperimentwithsuchagloriouslysuccessfulformofgovernment,whichasweallknow,notonlypromotespeaceandprosperity,butalsoliftsmanupandennobleshimintothemostperfectbeingwhoeverwalkedtheearth?Wehaveananswertopropose.DemocracyisnotreallyGod’schoice.Itisnotreallyauniversalconstant;itisnotperfectforallpeopleatalltimes.Itismerelyanevolutionarydevelopment—likeabusinesssuitorrapmusic—sometimessuitableforsomepeople.Whathasmadedemocracytriumphinthemodernworldisprobablythatitisbetterthanmonarchyordictatorshipattakingresourcesfromcitizens,butrarelytakestoomuch.Totalitarianregimes,suchastheSovietUnion,couldtakenearlyalltheresourcestheircitizensproduced,but itwasstillnotenoughtocompetewiththesmallerpercentagestakenfrommoredemocraticregimes.Itisalsoworthnotingthatdemocracyhasevolvedspectacularlyoverthepast200years,andespeciallysinceWoodrowWilsonredefinedit.TheAmericansystemofthetwenty-firstcenturyhasnomoreincommonwiththesystemsetupbytheFoundingFathersthan,say,anewMercedesMaybachhaswithaTinLizzie.IntheGreatWar,almostalltheinnovationsandadvancesthatwerethoughttopreventwaractuallymadeitlongerandmorebrutal—includingdemocracy.Interlockingtreatiesweresaidtopreventanyonenationfromgoingtowar;insteadthesystembroughtinmorecombatants.Modernmethodsofproductionweresupposedtomakewartooeconomicallydestructive;insteadtheybroughtmoreweaponswithgreaterkillingpowertothebattlefield.Boomingeconomieshadthewealthtospendfarmoreonwarthaneverbefore,andtosustainthespendingforalongerperiodoftime.Medievalarmiescouldonlytakethefieldforafewmonths.Afterthat,theywereexhausted.Itwasalsorareforthemtomakewarinbadweather;theysimplydidn’thavethemeanstostayatit.Eveninmodernwars,intenselybadweatherputsanendtothefighting,asitdideverywinterintheWehrmacht’scampaignsinRussia.Moderntechnology,moderntransportation,andmodernmethodsofproductionallhelpedputmoreresourcesatthewarriors’disposal.Sodidmoderndemocracy.TheawakenedandawakeningdemocraciesinallthemajorwarmakersinWorldWarIbroughtfarmorepopularparticipationtothewareffort—moremoney,moreresources,moresoldiers.Andallthesefactorscontributedtowardkeepingnationsatwarforamuchlongerperiod.Butevenwithallthesethings,theabilityofGermany,Austria-Hungary,Russia,England,andFrancetosustainawarwasstillfarmorelimitedthanonemighthavethought.Especiallyinthematteroffinance.Spendinginthewarexceededeveryone’sexpectations.AfterGermanydefeatedFrancein1871,itusedthemoneyitreceivedfromFranceinsettlementtocreateawarchestof120millionmarksheldintheJuliusToweratSpandau.OntheeveofWorldWarI,theamountwasdoubledto240milliongoldmarks,alongwithanadditional120millioninsilver.Itseemedlikealotofmoney.Yet,in1913, theReichsbankfiguredthatmobilizationalone(tosaynothingofwartimelosses)wouldcost1,800millionmarks.ActualexpenditureAugust1914was2,047millionmarks.Andthewarhadhardlybegun.Duringthewar,Germany’sannualexpenditureaveraged45,700millionmarks,asumtwohundredtimesgreaterthantheentirecontentsofthewarchest.Andthewarcontinuedfouryears.ThesituationontheEntentesidewaslittledifferent.Thewarcostfarmorethanexpectedandneedednotonlythesupportofthecitizenry,butalsooftheworld’slargestdemocracy—theUnitedStates.Noonecanknowforsurewhatmighthavehappened.ButitseemsverylikelythatwithoutU.S.financialandmaterialsupport,theGreatWarwouldhaveendedmuchsooner.Thedemocratizationofthewarextendeditinanotherway,aswell.TherulersofBritain,Germany,andRussiawereallrelated.WilhelmIIofGermanyandGeorgeVofEnglandwerebothgrandsonsofQueenVictoria.TsarNicholasIIofRussiawasmarriedtotheircousin.NicholaswasthecousinofGeorgeVthroughhismother,theDowagerEmpressMarie.Beforethewar,WilhelmtriedtobringRussiaintocommoncausewithGermany,sendinghimaseriesoflettersaddressedto“Nicky,”from“Willy.”BothWillyandNicky,wesoonfind,werepreparedtomakewaroneachotherifneedbe.Butneitherthey,northeircousinGeorgeV,woulddosotosuchanextentastoendangertheirempires,theirpositions,ordestroytheroyalhousesofEurope.Itwaspreciselybecausetheirpowershadbeenweakenedthatthewarcontinuedandexpandedtosuchanextentthattwooutofthreeofthemnotonlylosttheirthrones,theirroyalhouseswereextinguishedcompletely.Wecan’tknow,butwecanimaginethatifdemocracyandWoodrowWilsonhadnottransformedthewarintoabiggerevent,WillymighthavewrittentoNickyandGeorgyandcalledthewholethingoff.Butitwastoolateforthat.Thiswasawarbetweenpeoples,notroyalhouses.Itwasalreadyalargelydemocraticwar,inotherwords,evenbeforeWilsonstuckhisnoseinit.Theprogressiveleftsteadfastlymaintainedthatgrowingsocialismwouldalsomakewarimpossible.Pacifismhadalwaysbeenamajorheadlineinthesocialistagenda.Theysawwarasaby-productofcapitalistcompetitionandbourgeoisnationalism.Bothwouldbeeliminated,“cometherevolution.”Butwhenpush cametoshove,socialistsinallcountriesstartedswinging.TheKerenskygovernmentinRussia,aftertheTsar’sarrest,decidedtostayinthewar.Itcalledoncitizenstofight:“Peasantsandworkers,allwhodesirethehappinessandwelfareofRussia,...hardenyourspirits,collectallforces,andwhenyouhavedefendedthecountry,liberateit.”Later,inWorldWarII,afterRussiahadbeencompletelyliberated,Stalinfoundthathe,too,hadtocallonatavisticnationalsentimentstorallythecountrybehindhim.Afteryearsofpurges,starvation,gulags,andCommunistclaptrap,theRussianswerenolongerwillingtofightforsocialistideology.ButtheywouldstillfightfortheMotherland.BothRussiaandGermany(andItaly,too)tooksoft,well-intentionedintellectualsofsocialismandputtheminuniform.Thetransformationwasahugesuccess.Asanevolutionarystrain,NationalSocialismwasmuchmorerobustandaggressivethanthedreamy,internationalistidealismoftheSecondInternational.Hereagain,theresultswerejusttheoppositeofwhathadbeenexpected.Insteadofpromotingpeace,socialismbecamethemostmilitaristic,warmongeringcreedontheplanet.TwentyyearsafterWorldWarI,theU.S.governmentwasstillscratchingitshead—wonderinghowitevergotinvolvedinsuchapointlessandcostlyexercise.AcommitteewassetupinCongresstolookintothematter.Twoyearslater,theNyeCommitteereportedthatbetween1915andApril1917,theUnitedStatesloanedGermany27milliondollars($470,000,000adjustedforinflationin2005dollars).Duringthatsameperiod,U.S.loanstoBritainanditsalliestotaled2.3billiondollars($40,000,000,000adjustedforinflationin2005dollars).ThecommitteeconcludedthatAmericanshadenteredthewarforcommercialreasonsandonthesideoftheAlliesbecauseithad85timesasmuchmoneyatstake.Atleastthenumbersmadesense,fromtheAmericans’pointofview.WhatneverquitemadesensewaswhytheEuropeanswenttowarinthefirstplace.Manyunsatisfyingbookshavebeenwrittenonthesubject.Theproblemisnotthattheyareincorrectorarenotusefulexplanations;theyarereasonsasgoodasany.Itisjustthattheyarenotsufficient.Lookingbacknearly100yearslater,wecan’tseewhatpeoplegotsoworkedupabout.Itmightjustaswellhavebeenareligious war,aWaroftheRoses,orthecrusadeagainsttheAlbigensians.Warisrarelytakenupwithacoolhead.Andlookingintheheadforreasonsisasfutileaslookingfordignityontelevision.Abetterplacetolookisintheheart.Oncethemob’ssentimentisrousedforwar,thereispracticallynostoppingit.Massemotions—whetherinthestockmarketorinwar—areinfectious.Inpracticallynotime,thewholepopulationclamorsforuniformsandmurder.“MydarlingOneandbeautiful...”WinstonChurchillbeganalettertohiswifeonJuly28,1914,“Everythingtendstowardcatastrophe,andcollapse.Iam21interested,geared-upandhappy.”WhatarushofexcitementsweptthroughEuropeinthesummerof1914.Somethingnew.Somethingbig.Somethingmagnificentwasunderway.“Strangersspoketooneanotherinthestreets,”wroteStefanZweig.TheAustrianauthorwasaJew.Later,hewouldfleeanothermassmovement,butthisone,in1914,hefoundtohistastes:“Peoplewhohadavoidedeachotherforyearsshookhands,everywhereonesawexcitedfaces.Eachindividualexperiencedanexaltationofhisego,hewasnolongertheisolatedpersonofformertimes,hehadbeenincorporatedintothemass,hewaspartofthepeople,andhisperson,22hishithertounnoticedperson,hadbeengivenmeaning.”There’snothinglikeagoodwartogivemeaningtoemptylives.23“Waristhehealthofthestate,”Bismarckhadsaid.TheEuropeanstatesneverfeltbetterthanatthebeginningofWorldWarI.Thewordsofpoliticianswerereportedinallthepapers.Peoplewhowouldotherwisehaveneverbeennoticedbythemasses,weretreatedasthoughtheywererockstarsorsportsheroes.Youngmenlineduptovolunteerinthestate’sarmies.Youngwomenjoinednursingassociations,whosegoalswerenottotakecareofpeople,buttofixuptheinjuredwarriorssotheycouldreturntobattleasquicklyaspossible.Motherswerehonoredfortheirwillingnesstosacrificesonstothewareffort.Evenfactoryworkerswereencouragedtothinkoftheirworkasnoble,evenglorious—fortheyweresupplyingthematerielthatmadethewarpossible.Suddenly,everyonehadajobtodo,animportantjob. Therewasasensethatawarwouldbegoodforthespiritandmaybethesoul.Poetslongedforwartoendthe“opulenceofpeace.”Theysawthemselvesassufferingfrombourgeoisprosperity—growingpale,rottingatdesks,growingeffeteoverpolitedinnerconversation.“Today’sman,”wroteDezsoKosztolanyijustafterthewarbrokeout,“...grownupinahothouse,paleandsippingtea—greetsthishealthybrutalityenthusiastically.Letthestormcomeandsweepoutoursalons.”PhilosopherMaxSchelerwelcomedthewaras“analmostmetaphysicalawakeningfromtheemptyexistenceofaleadensleep.”WyndhamLewiswrotethat“killingsomebodymustbethegreatestpleasureinexistence:eitherlikekillingyourselfwithoutbeinginterestedbytheinstinctofself-preservation—orexterminatingtheinstinctofself-preservationitself.”Whiletheintellectualssawthewaras“deadlyenlivening”touseRainerRilke’sphrase,thecommonmenandwomenweretitillated,too.Butchersandclerkswenthomeincrispnewuniformsandwivesfellinlovewiththemalloveragain.Freudremarkedthathislibidohadbeenmobilizedforwar.Theleadershadtheirownprivatejoysandsorrows...andtheirownemptylivestofill.Wilson’sfirstwifediedinearly1914.GermanChancellorTheobaldvonBethmann-Hollweg’swifehaddiedinMay1914.WouldhehavebeensoeagerforwarinJulyifshehadstillbeenaliveinJune?GeneralCountFranzConradvonHotzendorflongedtobeawarhero,itwassaid,sohecouldwintheheartofhisbelovedGinavonReininghaus,inconvenientlymarriedtosomeoneelse.AndpoorKaiserWilhelm,wouldhehavebeenbetteratavoidingwarifhismotherhadnotrejectedhim?(TheKaiserhadawitheredarm,saidtobethecauseofhismother’scoldnesstowardhim.)Wilhelmwas“notquitesane,”inthejudgmentofmorethanoneobserveratthetime.“TheKaiserislikeaballoon,”Bismarckhadsaidofhim.“Ifyoudon’tholdontothestringyouneverknowquitewherehe24willbeoffto.”Whylookforthecausesofsuchapreposterouswardeepintheismsthatfillhistorybooks?Therealcausesarecloserathand—inthepompoustwitofapedantlikeWilsonortheblusterofTheodoreRooseveltorinWilhelm’sinsecurestrutandBethmann-Hollweg’sbrokenheart.They,andmillionsmore,foundtheprospectofashort,sanitarywarcharminglydistracting. WILSON’SWARAmericahadnodogintheEuropeanfight.Duringhisreelectionbattleof1916,WoodrowWilsoncorrectlyreadthepublicmind.“Hekeptusoutofwar,”washiscampaignslogan.Buttherewasnogloryinsittingonthesidelines.Wilsonlongedtogetintoitandimaginedthathecouldtransformthewar—andtheworldthatcameoutofit—inhisownimage.First,itwouldbeaworldwar,notoneconfinedtotheEuropeans.And,second,itwouldhaveahigh-mindedpurpose:tofreetheworldfromtyranny.Neverbeforehadsuchabloodyenterprisebeenundertakenforwhatappearedtobesuchahigh-mindedreason.Thereasonswerejustfluff.Therealreasonswerethesamesordid,complexinstinctsthatalwayslurepeopletowarandruin.Eventhedumbestspecieshavetheiralphasandomegas—theirleaddogsandtheirdronesandmules.“Ifitafearfulthingtoleadthisgreatpeacefulpeopleintowar,intothemostterribleanddisastrousofallwars,civilizationitselfseemingtobeinthebalance.Buttherightismorepreciousthanpeace,andweshallfightforthethingswehavealwayscarriedinourhearts,”saidWilson.“Tosuchataskwecandedicateourlivesandourfortunes,everythingthatweareandeverythingthatwehave,withtheprideofthosewhoknowthatAmericaisprivilegedtospendherbloodandhermightfortheprinciplesthatgaveherbirthandhappinessandthepeacewhichshehastreasured.Godhelpingher,she25candonoother.”Withthislastwhooshofinflatedlanguage,theemptybubblesofMr.Wilson’srhetoricpracticallyexploded.SincetheGettysburgAddress,nooneinAmericanhistoryhadsaidsuchapreposterousthinginpublicthatwasn’tfollowedbycontemptuouslaughter.ButitwashardlythelasttimeAmericansweretohearsuchthings.In1961,PresidentKennedyofferedanotherblankchecktotheforcesofimprovement:“Wewillpayanyprice,bearanyburden,meetanyhardship,supportanyfriend,opposeanyfoe,inordertoassurethesurvivaland 26thesuccessofliberty.”(Sciencemaybecumulative,butwar,finance,andloveoperateincycles.After14yearsofpayingfortheVietnamWar,Americansfigureditwastimetoretrench.RichardNixonaddressedthesentimentofthetimeathisinaugurationin1973:“ThetimehaspassedwhenAmericawillmakeeveryothernation’sconflictourown,ormakeeveryothernation’sfutureourresponsibility,or27presumetotellthepeopleofothernationshowtomanagetheirownaffairs.”Nixonwaswrong.Thetimehadnotpassed—itwashardlybeginning.)AcynicmightdismissWilson’shigh-mindednessaspureclaptrap.Butitwasmorethanthat.Theprofessorofgovernmenthadmanagedtotakeanideaandturnitinsideout.HenowproposedtowasteAmerica’sbloodonwhatwaspracticallytheexactoppositeofthe“principlesthatgaveAmericabirth”andsquanderthehappinessandpeaceshetreasuredintheprocess.TheFoundingFatherscouldn’thavecaredlessaboutwhetherGermanyorEnglandwonthewar,tosaynothingofthegovernmentstructureinthosecountries.TheyalmostcertainlywouldhavedespisedWilson’sbusy-bodying.IftheyhadbeensubjecttotheEspionageandSeditionActsthatWilsonputinplacetostiflecriticism,theyprobablywouldhaverevoltedalloveragain.Then,asnow,criticshackedawayatthelimbsandbranchesofWilson’swarfever.Whatelsecouldtheydo?Theychallengedtheleafyreasons.Nonecouldgetatthenoxiousroots.AfterWilson’sspeech,practicallyeverymemberofCongresswasonhisfeet.Amidyelpsandwarwhoops,theworld’sgreatestdeliberativebodyconvulsedwithexcitement.Finally,thewarwason.Buttherewasoneimportantexception:SenatorRobertLaFollette.AfounderoftheProgressiveParty,LaFollettewasoneofthereasonsWoodrowWilsonwaselectedinthefirstplace.TheprogressivessplittheRepublicanPartyvoteintwo,leavingWilson—theDemocrat—witha42percentmajority,andsohewononafluke.LaFolletterepresentedWisconsin,withalargeGerman-Americanpopulation.Buthisresistancetowarfeverseemedtocomefromhisownresources;heheldtoitlongerthanpoliticallynecessary.Hearguedagainstitso stronglythathiscolleaguesthoughthewascommittingpoliticalsuicide.Manycouldn’thelpbutwonder:IsLaFollettemad?Accordingtosomepapers,hewasa“BenedictArnold.”Hewasa“JudasIscariot,”saidothers.StudentsattheMassachusettsInstituteofTechnologyburnedhimineffigy,andwhenLaFollettelefttheCapitolaftergivinghisspiritedchallengetothewar,anothercolleaguehandedhimarope.ButFightingBobwasnoteasilybullied,notevenafterSenatorOllieJamesofKentuckyrushedathimwithaguninhand.FortunatelyfortheWisconsindelegation,SenatorHarryLaneofOregonattackedJameswithafileandseveralothersenatorstackledhim.Peoplewereinnomoodforquestionmarks.Thequestionstypicallycomelater.Inabubble,oranempire,thingsthatwouldseempreposterousandabsurdunderothercircumstances—stocksat200timesearnings,gettingyourselfkilledfornoapparentreason—becomecommonplace.Doubtandskepticismgivewaytofever.“Itisnotimeforcriticismofthepresident,ofthecabinet,ofCongress....ItistimeforonehundredpercentAmericanism,”saidthesageSenatorWilliamSquireKenyonofIowa.Hemighthavesaidthatitwastimetogetdrunkanddancenakedaroundafire.Theleadingpoliticianswerereadyforanythingaslongasitwashysterical.Bythistime,thesuperpatriotswereoutinforceandcrankedupto150percentAmericanism.TherewererumorsthattheHunswerestirringupaninvasionfromMexico—withanarmymadeupofMexicansand“armedNegroes.”Inanexhibitiongame,baseballlegendTyCobbbeatupanotherplayer,BuckHerzog,yelling“German!”Peoplewhoopposedthewarwerebeingaccusedofcowardice.InTulsa,Oklahoma,acrowdhauledaBulgarianimmigrantoutofabarandlynchedhim.TheymistookhimforaGerman.Alloverthecountry,peopledeclaredtheyhatedGermans,thoughnoneknewwhy.PeoplechangedtheirnamestoavoidsoundingtooTeutonic.TheNewYorkTribunecarriedaphonystoryaboutaGermanfactorythathadbeenconvertedtoturncorpsesintosoap.Nothingwastooabsurd. Evenafterthewar,themomentumofhatredtookyearstohalt.TheBritishcontinuedtheirblockadeofGermanportsandtighteneditaftertheArmisticewasdeclared.ThousandsofGermans—especiallychildren—starvedtodeath.OneBritishjournalistvisitedamaternityhospitalinCologne.Hefound“rowsofbabiesfeverishfromwantoffood,exhaustedbyprivationtothepointwheretheirlittlelimbswerelikeslenderwands,theirexpressionshopeless,andtheirfacesfullofpain.”Butsowhat,saidClemenceau.Therewere20milliontoomanyGermansanyway,reasonedtheFrenchpremier.Finally,at4PMonApril4,twodaysafterthepresident’sappealforwar,SenatorLaFollettetooktheflooroftheSenate.WhyshouldCongressgetbehindthepresident,hewantedtoknow.Wilsonhadbeenwrongaboutotherthings,mightn’thebewrongagain?WhataboutthechargethatGermanywassinkingships?Isn’tthatwhatnationsatwararesupposedtodo?EnglandhadputonablockadeofGermany.Germanyhadretaliatedwithitsownblockade.Americanshipscouldrespecttheblockadesornot.Buttheyshouldn’tmeeklyconsenttotheEnglishblockadeofGermanportswhilebeingindignantaboutGermany’sblockadeofEngland.LaFollettespokefor2hoursand45minutes.Heendedwithtearsstreamingdownhisface,forheknewthathiswordswerenotenough.Hemighthavebeenexplainingtoapackofhoundswhytheyshouldlettherabbitgo.AccordingtoGilsonGardner,itwas“thebestspeechwewill...everhear.”ButbloodwasupalloverAmericaalready.Itdidn’tmatterwhatLaFollettesaid.Hewaswastinghisbreath.Muchofwhathesaidconcernedwhowasatfaultforthewar.WilsonandthewarmongersmaintaineditwasGermany’sfault.GermanyhadinvadedpoorlittleBelgium,whoseneutralitywasguaranteedbyallthemajorcombatants—includingGermany.Yet,Belgiumwasnotreallyneutralatall;shehadsignedasecretagreementwithBritain.Germanyhadstartedthewar,saidtheWilsonians.Butontheevidence,theHunsnomorewantedwarthananyoneelse.TheKaiserhimselfhadtriedtostopit.Thewarbeganamidaflurryoftroopmobilizations,ultimatums,anddeclarations ofwaronallsides.Whowasreallyguiltyofhavingbegunthewar?Whowastheaggressor?AlbertEinsteinsignedadeclarationassertingthatGermanywasinnocent.IthadnotbrokeninternationallawbyinvadingBelgium,saidthetext.NorhadGermanycommittedatrocitiesagainstthecivilianpopulationsofFranceandBelgium.Infact,thedeclarationwentontosaythatthefutureofEuropeancivilizationdependedonaGermanvictory.AndpracticallyeveryprofessorateveryGermanuniversityagreed.Evenoldenemiesadmitted,afterthefact,thatGermanywasnomoretoblamethananyoneelse.LloydGeorge,Britain’sformerprimeminister,beganhismemoirsin1933bystatingthatnobodywantedtheGreatWarandnobody28expectedit.Instead,thenationsofEuropemerely“slitheredoverthebrink.”Now,Americawaspreparingtoslitheroverthebrink,too.OnlyLaFolletteandahandfulofskepticsstoodinherway.ThepresidentclaimedthatGermany’ssubmarineblockadeofEnglandconstituteda“waragainstallnations.”Whythen,LaFollette,wantedtoknow,wastheUnitedStatestheonlyonethatobjectedtoit?AllofScandinavia,LatinAmerica,Spain—alltheworld’snationswereaffectedinexactlythesameway.ButnotasingleoneofthemevenprotestedGermany’sdecision.Certainly,noneofthemsawtheactionasadeclarationofwar.Andthen,therewastheclaimthatGermanywasundertheheelofa“Prussianautocracy.”Sowhat,LaFollettemighthavesaid.WhatbusinessisitofourshowGermanygovernsherself?TheWisconsinsenatorguessedthattheaverageGermanwasmorelikelytobackhisgovernment’swareffortthanAmericansweretobackWilson’sinterventioninGermany’swar.AndifWilsonwassureofthecontrary,lethimproveit.Putthemattertoareferendum.ButAmerica’sentryintowhatbecameWorldWarIwasneversubjectedtoapopularvote.Democracyisallverywell,aslongasittakesyouwhereyouwanttogo.Besides,whowouldreallytrustthebumpkinstovoteonsomethingsoimportant?Wilsonknewwhatwasbestforeveryone—Americanvotersaswell asGermans.Withlittlemoredebate,theU.S.Congressvotedtobackthepresident.Onlyonemember,apartperhapsfromLaFollette,seemstohavehadanyideawhatwasatstake.WilliamJ.Stone,ofMissouri,toldhiscolleagues:“Iwon’tvoteforthiswarbecauseifwegointoit,wewillneveragainhavethis29sameoldRepublic.”Thenewspaperspracticallyaccusedhimoftreason.Stonewasright;butthatwasthepointofthewar,tomaketheUnitedStatesintoanempire.WilsonwasproposingtocrosstheAtlanticasAlexanderhadcrossedtheHellespontandCaesarhadcrossedtheRubicon.Everygreatpublicmovement—andalmosteveryempire—beginsindeceit,developsintofarce,andendsindisaster.Wilson’swarwasnodifferent.Theideaofmakingtheworldsafefordemocracywaspurehumbug.TheEuropeanshadbeenfightingfortwoyears.Ifitwasafightfordemocracy,itcameasnewstothem.Afterthefightingwasover,theFrenchandEnglishlaughedatWilsonandignoredhisFourteenPointswhenevertheyconflictedwiththeirowninterests.“Mr.WilsonboresmewithhisFourteenPoints,”saidClemenceau,puncturing30theAmerican’sbubble,“Why,GodAlmightyonlyhasten.”TheAmericanpresidentwasappalledandhumiliated;hesufferedastrokeandneverrecovered.Wastheworldanysaferfordemocracyattheend?Notontheevidence.Justtheopposite;intheaftermathofthewar,andWilson’sineptsettlement,arosedemocracy’smostaggressiveandruthlessopponents—menwhohadambitionstoempirethemselvesandfewscruplesabouthowtoachieveit.ARMISTICEDAYFinally,18monthsaftertheUnitedStatesenteredthewar,itwasover.InmuchofEurope,theendisstillrecalled.At11AMonthe11thdayofthe11thmonth,bellstollinFrance.InBritain,everythinggoessilent.TheremembranceisforallthemillionsofyoungmenwhobeganputtingonuniformsinAugust1914.Thesewet,furryballswerepluckedfromtownsalloverEurope,putontrains,andsenttowardthefighting.Backhome,mothers,fathers,andbarownersunrolledmaps sotheycouldfollowtheprogressofthemenandboystheylovedandtrace,withtheirfingers,thegloryandgravityofwar.Itwasawarunlikeanyothertheworldhadseen.AginggeneralslookedtothelessonsoftheAmericanWarbetweentheStatesortheFranco-PrussianWarof1870forcluesastohowthewarmightproceed.Buttherewerenoprecedentsforwhatwastohappen.Itwasanewerainwarfare.Peoplewerealreadyfamiliarwiththepromiseofthemachineage.Theyhadseenitcoming,developing,buildingforalongtime.Theyhadevenchangedthelanguagetheyusedtoreflectthisnewunderstandingofhowthingsworked.Inhisbook,DevilTaketheHindmost,EdwardChancellorrecallshowtherailwayinvestmentmaniahadcausedpeopletotalkabout“gettingupsteam”or“heading31downthetrack”or“beingontherighttrack.”AllthesenewmetaphorswouldhavebeenmysteriouslynonsensicalpriortotheIndustrialAge.Thenewtechnologyhadchangedthewaypeoplethoughtandthewaytheyspoke.WorldWarIshowedtheworldthatthenewparadigmhadadeadlypowerbeyondwhatanyoneexpected.Attheoutbreakofthewar,GermanforcesfollowedAlfredvonSchlieffen’splan.TheywheeledfromthenorthanddrovetheFrenchArmybeforethem.SoontheFrenchwereretreatingdowntheMarneValleynearParis.AnditlookedasthoughtheGermanswouldsoonbevictorious.TheGermangeneralsbelievedtheFrenchwerebroken.Encouraged,GeneralvonKluckdepartedfromtheplan;insteadoftakingParis,hedecidedtochasetheFrenchArmy,retreatingadjacenttothecity,inhopesofdestroyingitcompletely.Buttherewassomethingodd;therewererelativelyfewprisoners.Anarmythatisbreakingupusuallythrowsofflotsofprisoners.Asitturnedout,theFrenchArmyhadnotbeenbeaten.Itwasretreatingingoodorder.AndwhenGalieni,theoldFrenchgeneral,sawwhatwashappening—GermantroopsmovingdowntheMarneonlyafewmilesfromParis—heutteredthefamousremark,“Gentlemen,theyofferustheirflank.” Galieniattacked,drivingsoldierstothefrontlineinParistaxicabs.TheGermanswerebeatenbackandthewarbecameatrench-warnightmareofmachineguns,mustardgas,barbedwire,andartillery.BythetimetheUnitedStatesenteredthewar,thepoetRupertBrookewasalreadydead,andthelifeexpectancyforasoldieronthefrontlineswasjust21days.Onebyone,thepeoplebackathomegotthetelegrams,theletters.Thechurchbellsrang.Theblackclothcameout.And,onebyone,themapswererolledup.Fingersforgotthemapsandclutchednervouslyatcrossesandcigarettes.Therewasnogloryleft,justtears.Anotherpoet’smothergotthesadnewsonArmisticeDay.AtelegramarrivedinformingthefamilythatWilfredOwenhadbeenkilled.Comingasitdidonthedaythewarended,thenewsmusthavebroughtmorethanjustgrief.“Whatwasthepoint?”theymusthavewondered.WilfredOwenhadwondered,too.Hispoetrymockedthegloryofwar.Hedescribedsoldierswhohadbeengassedas“gargling”theirwaytodeathfrom“froth-corruptedlungs.”Owensawmanymendie;itwasneithersweetnorglorious,heobserved,butghastly.Itdoesn’tseemquiterightthatsomanypeopleshouldhavediedfornothing.Peoplecan’tstandtheidea.Itleavesahole,ahugegapthatthebrainlaborstofill.Otherwise,thedeathshavenomeaning.Itisnotenoughtoappreciatebraveryandself-sacrificeforitsownsake.Itmustmakesense.So,bringoutthehumbug!WefoundourselvesinCanada’smaritimeprovincesinNovember2004,readingthepaper.“Don’tforgettospendamomentonRemembranceDay,”theCanadianBroadcastingCompanyremindedreaders,“torecallthosemanyCanadianswhodiedprotectingourlibertyandourcountry.”NoteventhemaddestoftheWilsonianswouldhavesuggestedthatNorthAmericans’libertywasatstake.TheHunswerenotgoingtocrosstheAtlantictoattackNewBrunswickorNewYork.WhatdidtheYanksandCanuckshaveatstake?Nothingatall.Butpeoplefinditeasiertodiethantothink;andformost people,itisprobablypreferable.ThepaperreportedthatoneofthelastCanadianWorldWarIveteranshadjustdiedat106yearsold.Therewereonly10left.(InFrance,therewere36stillwithapulseasofNovember2004.)Theoldsoldiersaredyingfast.Canadiansoldierswereamongthebestcolonialtroops,saidthepressreport,andthemostlikelytobekilled.Ifdyinginwarissweet,theNewfoundlandersgotthemostcavaties.Oneoutof4ofthe6,000menoftheNewfoundlandRegimentneverreturnedhome.But“nothingmatchedthetollofthemassacreatBeaumont-HamelonthewesternfrontonJuly1,1916,”reportstheTorontoGlobeandMail.“About800NewfoundlanderschargedoutoftheirtrenchesintotheteethofGermanmachine-gunfire.TheyhadbeentoldthattheGermanswouldbeweakenedbyintensebombardment,thatthelethalstringsofthickbarbedwirestrewnacrossnoman’slandwouldbegoneandthatanotherregimentwouldjointhem.Noneofitwastrue.Thenextmorning,only68membersoftheregimentansweredtherollcall.“OneeyewitnesssaidtheNewfoundlandersadvancedintothehailofbulletswith32theirchinstuckedintotheirnecks,astheymightweatheranoceanstorm.”Then,theoldlieswallowedthemup,likeatempest.InthesmallvillagesofFrancehardlyafamilywasspared.EverysmalltownhasitsmonumentinacentrallocationtoNosHeros...MortPourLaFrance.Often,thelistofnamesseemslongerthanthepresentpopulation.Andstillpeoplewonder,whathappened?WecanturntoWilson’sbogusexplanation...oranyoneofhundreds.Thecapitalistsaretoblame!It’stheGermansfault!IfonlyEuropeannationshadbeendemocracies!IfonlyPrinciphadmissedhismark!ButthereisanotherwaytounderstandtheGreatWar:AbullmarketindeathbeganinAugust1914;itprobablywouldhaveendedin1916or1917butforthefreshnewresourcesoftheUnitedStates.WilsonlongedtogivethewarmeaningbyusingittoturnAmericaintoaworld-improving,hegemonicpower.Allhehadtodo,hethought,wastopreventanearlysettlementofthewargivinghimtimetohelptheFrenchandEnglishwinatotalvictoryratherthananegotiatedpeace. Then,hebelieved,hewouldbethetruevictor.HecouldcometoEuropelikeanarchangelataCatholic-schoolpicnic.HewouldwalkacrosstheAtlanticandimposehisFourteenPointsontheworldasiftheywerewrittenonclaytabletsandhadbeenhandedtohimbyGod.MAKINGTHEWORLDSAFEFORDEMOCRACYWhenWoodrowWilsonstoodbeforeCongressandaskedforadeclarationofwaragainstGermany,thewordscameoutoftheadvancedpartofthebrain.Theywerethenice,multisyllabic,Latinatewordsyouwouldexpectfromaformerprofessorofgovernment.Theywerenotsimple,honestwords,butgreasyandmeaninglessones,alsojustwhatyouwouldexpect.Itwasthekindofboshyoufindonatypicalhigh-mindededitorialpage.Itwasasifthepresidentopenedhismouthandbrightlycoloredbubblespoppedout.Airily...lightly...theyfloatedabovethecrowds,whocranedtheirnecksupwardinadmirationandawe.Theydidn’tseemtomindthatthewordswereempty.Theyweregaudy;thatwasallthatseemedtomatter.Wilson’stalkofmakingtheworldsafefordemocracywasnothingmorethangas.HewasproposingtogointothewaronthesideoftheEnglish,whowereatthatverymomentsuppressingdemocracyallovertheglobe.TheIrish,theIndians,theEgyptians—theAmericanpresidentdidn’tevenmentionthem.Hadtheupperbrainbeenallowedtodoitswork,surelyitwouldhavetoldhimthatifhewantedtomaketheworldsafefordemocracy,heoughttoasksomequestionsofthenationthathelditincheck.AsamatteroflogichemightjustaswellhaveenteredthewaronthesideofGermanyagainstEngland.Butburieddeepinthepresident’sslybrainwereidealizedpicturesoftheMagnaCarta,therobesandwigsofEnglishjudges,HighTeaattheSavoy,DickensandThackeray—allthetrappingsoftheEnglishupperclassesastheywereimaginedbyanaïveandadmiringcollegeprofessorfromPrinceton,NewJersey.Thepresident,hisadvisors,hiscabinet,andhisleadingallieshadsuchbadcasesofanglophilia,theypracticallystutteredanddrooled.Andwhentheystirredthemobwithbigwords,thegaudyballoonstheysentaloftmeantnothingmorethanasignalthatthefighthadbegun.Thepoorschmucks’bloodwasupalready.All ittookwasareasonandtheywerereadytodie.AmomentofrealthoughtbyfiringafewsynapsesintheupperlateralprefrontalcortexwouldhaveshownwhatalosingpropositiontheEuropeanwarwouldlikelybe.Butwhateverthinkingwastakingplacewasdeeperdowninthelimbicsystem,notinthelateralprefrontalcortex.Wilsonhadalreadymadehisdecision.Andthepublic,too,wassoonengaged.Thecannonsweredrawnup.Medalswerepolished.Innotimeatall,peoplewereontheirkneespledgingalltheyhadtothewareffort,givinguptheirpurses,theirsons,andtheirintegrity.Aroundthecountry,superpatriotsweredrillingholesthroughtheirwallssotheycouldspyonneighborswithnameslikeBauerandFeldgenhauer.InBaltimore,aformermayorblewhisbrainsoutafterbeingchargedwithbeingaGermansympathizer.Anyonewhodaredtolaughorcrywassoondoingpenanceordoingtime.Warappealstothelimbicsystemlikeanewpairofshoes.Theyahoosgrowtallerwhenwarisannounced.Andwhenpeoplewalk,theytakeonaproudmartialair.Lookingaroundthem,theyseethebrightshineofpolishedbrassandofbombsexplodinginairandtheyaredrawntothemlikesinnerstothesparklinggatesofHell.Politiciansfeeltheneedtoexplainit,tojustifyit,todressitupinrespectableclothestohidethejackbootsandtosloshonperfumetocoverthestenchofdeath.Butthewordsmeannothing.Whenthesentimentsinthelimbicsystemarereadyforit,thecommonmanisaseagerforwarasheisforanextensionofhislineofcredit.WorldWarIturnedouttobeacatastropheasmeaninglessandsenselessasWilson’swords.WelookatitherebecauseitmarksthebeginningoftheU.S.imperium.Ithelpsexplaintoday’sworld.Now,asthen,theyahooscheeranewgroupof“Wilsonian”officials.Onceagain,theythinktheyaremakingtheworldsafefordemocracy.Onceagain,theybelievethatalmostnopriceistooheavyforthebenefitsofthebetterworldtheyimagine.Andonceagain,theysoftenupthenation’sheadsanditsmoneytopayforit.Butitisnotthesameworldthatwehadin1917.ItisWilson’sworldnow,theworldhehelpedtomake.Americaisnolongertherisingpower;Chinaisrising now.AmericaisinBritain’sWorldWarIposition,tryingtoholdontoitscommercialedgeagainstnewer,moreaggressiverivals.Americansarenolongerleanandhungryforworkandprofit;nowtheyarethefattestpeopleontheplanetandhavegrownusedtolivingoffthehardworkofothers.“Virtueiswhatusedtopay,”saidGordonTullock.ButwhatusedtopayforAmericanswerethevirtuesofhardwork,thrift,self-discipline,andmindingtheirownbusiness.AmericanswerevirtuousuntilWilsontookover.Sincethen,theyhavegivenuponwhatusedtopayinfavorofwhatseemstopaynow—meddling,borrowing,andspending—overseasaswellasathome.Intheprivatesphere,adelusionalmanissoonimpoverished,friendless,powerless,andhopeless.Allhecandoatthatpointisrunforpublicoffice,becauseinpubliclife,foolishargumentshavefewerandlessimmediateconsequences.Itisinpubliclife,thatpeoplegetcarriedawaywithreason.“Historyisanargumentwithoutend,”saidPieterGeyl.Onenationarguesthatitmustdominateitsneighborsbecauseitneeds“livingroom.”Anothersaysithasamanifestdestinytodoso.Onepublicleadersayshemustcreatea“co-prosperitysphere.”Anothersayshewillmaketheworldsafefordemocracy.Noneoftheseflourishesarerootedinlogicorreason,butintherich,fetidloamoftheheart.Withineveryworldimproverandempirebuilderlurksavainanimal—displayinghistailfeathers.Andwithineverydemocraticassemblyisabunchofstagsinrut,waitingforanopportunitytobuttheadsandmakeapublicspectacleofthemselves.Foritisneitherlovenormoneythatmakestheworldgo’round—butvanity.Wilsonhadnoparticularloveandnotmuchmoney.KingGeorgeVdrewhismeasureasaccuratelyasFreud,callinghim“anentirelycoldacademicprofessor—anodiousman.”Butvanityhehadinabundance.PAYINGFORWARNothingsoftensmoneyupasfastaswar.Theshellspoundit.Thebulletspunctureit.Armiesmarchonit.Andpoliticiansandcentralbankersstretchitouttothepointthatitinevitablybreaks. InJuly1914,allthemajorbelligerentswereonthegoldstandard—alongwith44othercountries.Thesystemwassimpleandeffective.IthadfosteredaninternationalfinancialclimatesoconducivetothegrowthofcapitalandtradethatmostoftheWesthadneverbeenmoreprosperous.Centralbanksofthevariousnationsheldgoldintheircoffers.Thegoldwasusedtobackupthepapercurrencies.Ifanationspenttoomuchonexternalproducts,itscurrencyflowedtoforeigncountries.Itcamebackinpaymentforeithergoodsorservicessuppliedbythehomecountry.Intheeventofanimbalance,thatistosaywhenaforeignnationfounditselfwithmoreofthenation’scurrencythanitcouldspendongoodsandservicesfromthatnation,theresultingsurpluscurrencywaspresentedtothecentralbanktobereplacedbygold.Everynation’simbalancesweresettledintheonethingthatnoneofthemcouldprintorcounterfeit:gold.Ifanationranapersistenttradedeficit,itwouldfinditsgoldpulledaway.Thiswouldencouragethecentralbanktodosomethingtoprotectit.Usually,interestratesrose,whichhadtheeffectofrewardingsavingsanddiscouragingtheoutflowoffunds.Thesystemwasneat.Itwashonest.Whichmadeitill-suitedtotheneedsofwarandempirebuilders.War,particularly,wasdistressinglyexpensive.Politiciansnoticed—asmonarchshadlongago—thatpeoplemightbeenthralledbythecannonfire,buttheyhatedtopayforit.Typically,accordingtoR.S.Hamilton-Grace,whostudiedEnglishwarfinancing,aboutathirdofthecostofwarhadtobecoveredbyborrowing.Goldwasfamouslyuncooperative.Ityieldedneithertoflatterynortotechnology.Youcouldn’tpretenditwasworthmorethanitwas.Andyoucouldn’tcreatemore“outofthinair.”Eachounceneededtobedugupoutoftheearth—atconsiderableexpense.Increasingthemoneysupply—nomatterhowgloriousorworthwhilethecause—wasadifficultthingtodo.Centralbankshadonlysomuchgold.Iftheywantedmore,ithadtocomefromsomewhere.Ithadtobesaved,putaway,stored.Theoldexpression,“youcan’tgetsomethingfornothing,”seemedtohavebeencoinedtodescribetheyellowmetal.Everyounceofitrepresentedanounceofthrift,apoundofself-discipline,andatonofforbearance.Itrepresentedmoneythathadnotbeenspentonnewclothes,orguns,orfood,orentertainment,lodging,tools,roads,oramillionotherpotentialuses.Goldwassohardtogetthatcentralbankswerereluctanttoletitgo.Kings usedtocastratethekeepersoftheirroyalmintsiftheyletthegoldslipaway,eitherthroughchicaneryorlackofattention.Centralbankerswerenaturallycarefulwiththestuff;cautionwasintheirblood.Theyknewthatiftheyissuedtoomuchpaper—thatis,iftheyallowedtoomanyclaimsagainsttheirhordeofgold—theyriskedhavingittakenfromthem.Ontheotherhand,waralsowasaseriousmatter.Andcentralbankswereaskedtohelpfinancethewar.Thisdifficultpositionwasmadeevenworsein1914whenthethreatofwarcausedadropinstockprices—wipingoutmuchoftheliquiditythatmightbesoppedupforwartimefinance.TheEuropeannationsneededtoborrowvastamountstocoverthewarexpenses.Buteachadditionalunitofcurrencyfurtherreducedthegoldcover,ortheabilityoftheborrowingnationtopayitsdebtswithrealmoney.Readerswillbequicktonoticetheparallelstotheglobalfinancialsystemof2005.TheEuropeanswantedtoincreasetheconsumptionofwarmateriel.Now,Americansconsumeotherthingsasiftheywerefightingfortheirlives.Cannonsandbulletswerenotmuchdifferentfrombig-screenTVsandautomobiles;theywerequicklyusedupwithnoeconomicprogresstoshowforit.From1914to1918,FranceandBritainneededU.S.financingtoconductwarbeyondtheirmeans.Now,AmericaturnstoitsprincipalsuppliersinAsiaandasksforcredit.Withoutit,theUnitedStatescannotcontinueconsumingatitspresentrate.In1914,theworld’smostimportantsupplierwastheUnitedStates.France,Britain,andRussia(andtoamuchlesserextent,Germany,earlyinthewar)hadtoturntotheUnitedStatesforsupplies.Butsincetheyconsumedmorethantheyearned,theyputtheirgoldreservesatrisk.Francedealtwiththisproblemearlyonbysimplygoingoffthegoldstandard.Britainremainedonthegoldstandardthroughoutthewar,barely,butonlybythegraceofU.S.creditors.FortunatelyforBritain,theUnitedStatesdidnotforcetheissue.(FortunatelyforAmerica90yearslater,itsmajorcreditorsinAsiadonotseemtowanttoforcetheissueeither—atleast,notyet.Evenwithoutagoldstandard,ChinaandJapancouldwreakhavocwiththedollaranytimetheychose.Forthemoment,likeAmericain1914to1916,theyarehappytotaketheordersandincreasemarketshare,knowingthattheirmajorcustomercannotreallyaffordtopayforallthattheysendher.) Asthewargrewmoreandmoregrim,notonlywasthehonestmoneyofthegoldstandardabandonedbymostbelligerents,theexportofgoldtosettleaccountswasexpresslyforbidden(undercoveroffearthatthegoldwouldfallintoenemyhands).Eachnationbeganincreasingitssupplyofmoney,issuingmorepapercurrency,borrowingmoreandmoremoneyfromforeign(mostlyAmerican)anddomesticsources,andspendingfarbeyonditsmeans.Francewasalreadyheavilyindebtwhenthewarbegan,withaconsolidateddebtinJuly1914of27,000millionfrancs,inarrearsalreadyby967million.Normally,theFrenchassemblyresisted—howeverweakly—planstospendmoremoney.ButwithwarcriesintheirearsandtheHunsattheSomme,thepeoples’representativesgotinthehabitofmerelyrubber-stampinganyrequestthatcametheirway.Theyvotedforcreditsof22,804.5millionfrancsin1915—anamountthatroseeveryyear,reaching54,537.1millionin1918.Inpractice,thegovernmentspentfarmorethanthecreditsthathadbeenvoted,usingspecialaccountsthatwemightcall“offbudget”accountssimilartothoseusedbytheBushadministrationtopayforthewarinIraq.In1920,30,000millionfrancs—anamountnearlyequaltothenation’sentireprewardebt—passedthroughthespecialaccounts(seeFigure5.1).Figure5.1U.S.FederalOutlays,1910-1920WoodrowWilsonisbestrememberedforhisdesireto“maketheworldsafefordemocracy.”However,hisinvolvementinWorldWarIwascostly.TheoneandonlyrespectinwhichthewarpaidoffwasthatitturnedAmericaintoanempire.Source:“HistoricalTable,”BudgetoftheUnitedStatesGovernment. WhenAmericaenteredthewar,itsexpendituresoutdidtheothercombatants,averaging$42.8millionperdayfromJuly1917untilJune1919.Totalfederalexpenditurerose2,454percentinthethreeyears1916to1919.TheFederalReserveissuedmoreandmorepapernotes;thesupplyroseby754percentbetweenMarch1917andDecember1919.Theoverallmoneysupplyincreased60percentbetween1913and1918,whileGDPincreasedonly13percent.Thegovernmentraisedmoneypartlybytaxingpeoplemuchmoreheavilyandpartlybyborrowingfromthem.Four“LibertyLoans”werefloatedduringthewaryears.Atthewar’send,a“VictoryLoan”wasoffered.Allofthisborrowing,spending,andtaxinglefttheworld’smajoreconomies—especiallythoseinEurope—veryfragile.Afterthewarwasover,theyallattemptedtoreturntotheprewargoldstandardthathadworkedsowellforsolong.ButtheywerelikethefarmersgoingouttoplowtheirfieldsinnortheasternFrance;theykepthittingunexplodedbombsandblowingthemselvesup.Wilson’smeddlingwasdisastrousfrompracticallyeverypointofview—exceptone.Thewarcontinuedforanother18months.NotasinglemajorgovernmentinEuropesurvivedinitsprewarform.“In1914,Europewasasinglecivilizedcommunity...”wroteA.J.P.Taylor,“AmancouldtravelacrossthelengthandbreadthoftheContinentwithoutapassportuntilhereached...RussiaandtheOttomanempire.Hecouldsettleinaforeigncountryforworkorleisurewithout33legalformalities....Everycurrencywasasgoodasgold.”In1919,Europeancivilizationwasawreck,outofwhichtoughnewmenaceswouldbe hammered—firstinRussia,theninItalyandGermany.Nordidanycurrencybuyasmuchattheendofthewarasitdidatthebeginning.Alltheprincipalbelligerents,withtheexceptionoftheUnitedStates,wereforcedoffthegoldstandard.TheoneandonlyrespectinwhichthewarpaidoffwasthatitturnedAmericaintoanempire.AndherewepickupthetrailandfollowthemoneythatleadstoAmerica’sempireofdebt.6TheRevolutionof1913andtheGreatDepressionReadersofthisbookwillscarcelyhavegivenanythoughttothefactthattheyhaveneverlivedinthesystemofgovernmentarguedforbyMadison,Jay,andHamiltonintheFederalistPapers.“Itmaycomeasashock...”wroteJohnFlynn,“tobetoldthat[you]haveneverexperiencedthatkindofsocietywhich[our]ancestorsknewastheAmericanRepublic....”Flynn,theeditorofthepopularweeklytheSaturdayEveningPost,hadalreadycometothisconclusionin1955.InhisbookTheDeclineoftheAmericanRepublic,FlynnobservedthatAmericansneedlessly“liveinthewar-torn,debt-ridden,tax-harriedwreckageofaonceimposingedificeofthefreesocietywhicharoseoutoftheAmerican1RevolutiononthefoundationoftheU.S.Constitution.”Anempireneedsasourceofincomesufficienttofunditsmilitarycampaigns,regulatoryregimes,anddomesticschemes.Italsoneedsastrongcentralauthoritytodirectitsambitiousnewprograms.Inoneshort12-monthspan,ayearthewriterFrankChodorovcallsthe“Revolutionof1913,”theempiregotthetoolsitneeded.Thatyear—thesameyearEuropeancountriesabandonedthegoldstandardinpreparationforWorldWarI—theoldRepublicceasedtoexist.WHERETHEMONEYCOMESFROM America’scurrentsystemofincometaxisatwentieth-centuryinvention.PreviousattemptsatcreatinganationaltaxhadfailedorhadbeenthrownoutbecausetheyviolatedtenetsoftheConstitutiondeemedessentialbythefounders.Initsfirst100years,theUnitedStatessupporteditsfederalgovernmentwithaseriesofwhatwewouldcall“sintaxes”today,onwhiskey,tobacco,andsugar.By1817,allinternaltaxeswereabolishedbyCongress,leavingonlytariffsonimportedgoodsasameansforsupportingthegovernment.ThefirstincometaxthatcitizensoftheyoungRepublicwereforcedtoendurecameaboutbecauseCongresshadbeenaskedtofundtheWarbetweentheStates.In1862,ataxonincomesbetween$600and$10,000wasassessedattherateof3percent,andtheInternalRevenueService(IRS)wascreated.Thewarwas2costing$1.75millionperday.Thegovernmentsoldoffland,borrowedheavily,enactedvariousfees,andincreasedexcisetaxes,butitsimplywasn’tenough.Theincometaxseemedliketheonlywaytofinancethewarandservicethecountry’sthen-staggering$505milliondebt.Thattaxwaspromotedasatemporarywartimemeasure.Temporaryitwas.In1872,afterservicingtheReconstruction,Congressyankedthe“temporary”tax.Butthatwasnottheendofit.Theincometaxappealedtoempirebuildersbecauseitaloneofferedenoughcashtofinancetheenterprise.Butithadanotherappeal—tothelarcenyandenvyintheheartsofordinarycitizens.Followingabankingpanicin1893,SenatorWilliamPefferofKansas,supportedtheprogressiveincometaxinthisway:WealthisaccumulatedinNewYork,andnotbecausethosemenaremoreindustriousthanweare,notbecausetheyarewiserandbetter,butbecausetheytrade,becausetheybuyandsell,becausetheydealinusury,becausetheyreapinwhattheyhaveneverearned,becausetheytakeinandliveoffwhatothermen3earn....TheWestandtheSouthhavemadeyoupeoplerich.ThatsentimentwaspuffedupbyNebraska’sbellicoseworld-improverWilliamJenningsBryan,whoarguedagainstthe“equaltaxation”requirementinthe Constitution,infavorofthecurrentprogressiveone:IfNewYorkandMassachusettspaymoretaxunderthislawthanotherstates,itwillbebecausetheyhavemoretaxableincomeswithintheirborders.Andwhy4shouldnotthosesectionspaymostwhichenjoymost?Thislogicissimple.Peoplewhoaremoreproductiveshouldbeforcedtopayabiggershareoftheircommonexpenses.Butthiskindoflogichadnoplaceinafreerepublicwhereallmenweresupposedlycreatedequal;iftheywereequaltheycouldeachcarrytheirownshareoftheburdenofcentralgovernment.Underthisnewregime,menwerenolongerequal,butgivendifferingloadstocarrybasedonthewhimsofelectedhacks.Withconsiderableforesight,onememberoftheHouseofRepresentativespredicted:Theimpositionofthe[income]taxwillcorruptthepeople.Itwillbringinitstrainthespyandtheinformer.Itwillnecessitateaswarmofofficialswithinquisitorialpowers.Itwillbeasteptowardcentralization....Itbreaksanothercanonoftaxationinthatitisexpensiveinitscollectionandcannotbefairlyimposed...and,finally,itiscontrarytothetraditionsandprinciplesof5republicangovernment.Whenthetaxwasagainintroducedin1894,achallengewenttotheU.S.SupremeCourt.In1895,evenamongthecacophonyofappealsinCongressto“soaktherich,”theSupremeCourtdeclaredthebillunconstitutionalina5-to-4ruling.Inwritingthemajorityopinion,JusticeStephenJ.Fieldquotedanothercasetosupporthisconclusion: Asstatedbycounsel:“Thereisnosuchthinginthetheoryofournationalgovernmentasunlimitedpoweroftaxationincongress.Therearelimitations,ashejustlyobserves,ofitspowersarisingoutoftheessentialnatureofallfreegovernments;therearereservationsofindividualrights,withoutwhichsocietycouldnotexist,andwhicharerespectedbyeverygovernment.Therightof6taxationissubjecttotheselimitations.”Butwhenthewindsofempireblew,theoldyellowedpaperoftheU.S.Constitutionwentflying.FollowingThePanicof1907,PresidentTheodoreRooseveltsidedwithafactionintheDemocraticPartythatwantedtoamendtheConstitutiontoallowanationalincometax.In1909,PresidentTaftstatedthathehad“becomeconvincedthatagreatmajorityofthepeopleofthiscountryarein7favorofvestingtheNationalGovernmentwithpowertolevyanincometax.”Ofcourse,politiciansarealwaysableandwillingtoarguethat“thepeople”wantagovernmenttohavemorepower.Ifthevotersseeafreelunchinthedeal,they’reforit.By1913,justintimeforWilson’semergenceontheworldstage,theSixteenthAmendmenthadbeenratifiedbyenoughstatestoputtheincometaxintolaw.TheAmendmentstates:TheCongressshallhavepowertolayandcollecttaxesonincomes,fromwhateversourcederived,withoutapportionmentamongtheseveralstates,and8withoutregardtoanycensusorenumeration.Itwasn’tlongbeforeCongressexerciseditsnewpowers.WilsonevenconvenedaspecialsessionofCongresstorushthroughthefirsttaxlawundertheSixteenthAmendment,inwhichearningsabove$3,000weresubjecttoa1percenttax,graduallymovingupto7percentonhigherincomelevels.Withitsrathermodestrates,theoriginalincometaxwasviewedasabenigninconvenience.Asearlyas1916,however,thetopratewasmorethandoubled from7percentupto15percent.ThenascashwasneededtosendPershingtoFrance,theratewashikedtoastaggering67percentin1917and77percentby1918.Eventhelowrateswereraised.Fromtheirmicroscopicoriginofonly1percent,theratesettledintoa“modest”23percentbytheendofWorldWarII.Butbythattime,thepeopleoftheoldrepublichadgrowntoacceptanincometaxasanecessaryevil.Nowthatthenationwasanempire,itneededthemoney.Inourpresentera,thecomplexityoftheInternalRevenueCode(IRC)hascreatedanarmyofspecializedlawyersandaccountants.Evenattemptsatreformareoutofcontrol.A“technicalcorrections”billexceeds900pagesofadjustments.Infact,bythebeginningofthetwenty-firstcentury,thetaxcodesexceeded7millionwords,aboutninetimeslongerthantheBible;andtheIRSwassendingoutabout8billionpagesofformsandinstructionseveryyear—atthecostofabout300,000trees!Allthisefforttranslatestoabout5.4billionhoursspenteveryyearbyAmericansjustcomplyingwiththetaxrules.From1913to2005,theincometaxhasenabled,entitled,empowered,andengorgedthefederalgovernment,states,andlocalgovernments,privateenterprises,andmillionsofprivatecitizens.Spendinghasgrownbymorethan13,592percent.Theincometaxgivesthefederalgovernmentablankchecktospendmoney,evenmoneyitdoesnotyethave.Thefederalgovernmentlaysaclaimonallfutureeconomicactivityofitscitizens;itsmassivedebtsarealienontheearningsofpeoplewhohavenotyetevendrawntheirfirstbreaths.What’smore,theincometaxcouldbeusedasbothaneconomictoolandasapoliticalweapon.Taxratescouldbemanipulated,forexample,topunishorrewardfavoredpoliticalgroups.WhentheConstitutionwasratifiedin1789,thecolonistsintheNewWorldbelievedtheyhadwonforthemselvesameasureoffreedomandindependence.“Arepublic,ifyoucankeepit,”BenjaminFranklinwarned.Butbytheendof1913,ascant124yearslater,Americanswerehappytolosetheirrepublic;anempirewaswhattheywanted. AMERICANCAESARSButtheincometaxwasonlythebeginning.Ifoneofthedefiningfeaturesofempireisanopen-endedsourceoffunding,anotheristheshiftofpowerawayfromthelegislatureinfavorofthecentralexecutive.In1913,asecondamendmenttippedthescalesofauthoritytowardWashingtoninawayhardlyconceivedofinthedebatesofthelateeighteenthcentury.WhentheFoundingFatherssetdowntherulesforhowsenatorsweretobeelected,theyanticipatedabalancebetweenstates’rightsandthecentralgovernment.Initsoriginalform,theConstitutionreads:TheSenateoftheUnitedStatesshallbecomposedoftwoSenatorsfromeachstate,electedbythepeoplethereof,forsixyears;andeachSenatorshallhaveonevote.Theelectorsineachstateshallhavethequalificationsrequisiteforelectorsofthemostnumerousbranchofthestatelegislatures.WhenvacancieshappenintherepresentationofanystateintheSenate,theexecutiveauthorityofsuchstateshallissuewritsofelectiontofillsuchvacancies....Thefoundingfatherssawtheindirectelectionofsenatorsasameansforkeepingabalanceofpower,enablingthestatestoexertcontroloverthefederallegislativebranch.TheSenatewasperceivedoriginallyasservingtworoles:Keepingoneeyeonstates’rightsandinterests,andtheotherwaryeyeontheexecutivebranch,thefederalcourts,andtheHouseofRepresentatives.Itwascontemplatedthatmembersofthisbodywouldbeolder,wiser,moreexperienced,andbetterqualifiedthanmembersoftheHouseandmembersofstatelegislatures.AppointedSenatorswereexpectedtobesomewhatisolatedfromknee-jerkreactionstocurrentpublicdebates.Theywouldanswerfortheirpoliticalactstostatelegislatures,andonlyindirectly 9topublicmobsandvoters.“Thepreservationofthestatesinacertaindegreeofagencyisindispensable,”statedJohnDickinson,theDelawaredelegateatthe1787ConstitutionalConvention,“Itwillproducethecollisionbetweenthedifferentauthoritiesthat10shouldbewishedforinordertocheckeachother.”JamesMadison,primaryarchitectoftheU.S.Constitution,notedthatindirectelectionswouldserveas“adefensetothepeopleagainsttheirowntemporary11errorsanddelusions[andwould]blendstabilitywithliberty.”Eachstate—actingthroughitsownlegislature—shouldhavetherighttodirectitssenatorshowtovoteonissuesandhowtobestrepresentthestate’sinterests.Butalongcamethegreathumbug,WilliamJenningsBryan(again).HemaintainedtheSenatewascontrolledbycorruptstatelegislatures.Bryan,whotriedtowinthepresidencythreetimes(in1896,1900,and1908),wasdescribedbyC.H.Hoebeke,FellowinConstitutionalHistoryattheCenterforConstitutionalStudies:SecretaryBryanputhissealuponthereformthat,intheexpectationsofthosewhohadlaboredforit,wouldendthedominanceofparty“bosses”andthestate“machines,”stampouttheundueinfluenceofspecialinterestsintheSenate,makeitmoreresponsivetothewillofthepeople,andofcourse,eliminate,orgreatlyreduce,theexecrablepracticeofspendinglargesumsofmoneytoget12elected.TheSeventeenthAmendment“improved”theoriginalwaythatsenatorswerepickedbymakingtheelectionsystemmoredemocratic.Senatorswouldnowbeelectedbyadirectvoteofthepeopleofeachstate.Theillsofindirectdemocracywouldtherebybecured...bymoredirectdemocracy. Assooftenhappensintheannalsofworldimprovement,thecurewasworsethanthemalady.Corruptionandundueinfluencewerenotundonebytheamendment;theyweresimplyshiftedtoWashington.Thestateswerereducedtovestigesoftheirformerselves.Takentogether,theSixteenthandSeventeenthAmendmentsgreatlyincreasedthepowerofthecentralgovernment.Theoriginalconstitutionalsysteminvolvedtaxingpoweratthestatelevel,withrevenuessubmittedtothefederalgovernmentforthefundingofcommonneeds(raisinganarmy,protectingthecoast,printingmoney).Since1913,theprocesshasbeencompletelyreversed.Thefederalgovernmentnowcollectsmostofthemoneyfromtheincometax,andthendolesouttherevenuetotheindividualstates,usuallywithmanyprovisos,dictates,andcommandsattached.ThisallowsthecentralgovernmenttoexertgreatinfluenceoverstatefundingandinmanyareasnotmentionedintheConstitution:highwayspeedlimits,education,healthcare,medicalmatters,ownershipofweapons,foodanddrugoversight,policeandlawenforcement,libraries,theenvironment,businesspractices—thelistislonganddreary.AndnowwithHomelandSecurityandthePatriotAct,thelistisgettinglonger.NEWMONEYAcentralbank,asthenameimplies,isintendedasanationalcenterforthecontrolofcurrencyincirculation.Itrefereestheexchangeoffundsbetweenstatesandtheirownbanks,andmanagesdebt,bothdomesticallybetweenbanks,andinternationallybetweenthehostcountryandothergovernments.Therepublic,intheyearsleadingupto1913,hadanuneasyrelationship,atbest,withthenotionofacentralbank.AlexanderHamilton,firsttreasurysecretaryofthenewnation,struggledwithhighdebtsfromtheRevolutionaryWar.Heproposedacentralbanktomanagethewardebtandtocreateasinglecurrency.In1791,CongressdraftedacharterfortheFirstBankoftheUnitedStates.Butby1811,thenationalemergencyhadsubsided;Congressdecidedthebanknolongerservedanypurpose,soitwasclosed. Asaconsequenceofclosingthecentralbank,statebanksflourished.Theyissuedbanknotesandthewidespreaddebt-basedexchangesystemwentfarbeyondbankingitself.Thesystemgrewlikezucchini.Everylocationlargeenoughtohave“achurch,atavern,orablacksmithshopwasdeemedasuitableplacefor13settingupabank,”saidJohnKennethGalbraith.Thesebanksissuednotes,andevenbarbersandbartenderscompetedwithbanksinthisrespect.Butthedelightfulfree-for-allbankingsituationcouldn’tlastforever.Predictably,theWarof1812endedwithalargewardebtandinflationrosetoabout14percentperyear.PresidentJamesMadisonsignedanewbillin1816creatingtheSecondBankoftheUnitedStates—withthepurposeofagainmanagingdebtcausedbywar.Bytheendofthe1820s,aconflicthadgrownbetweenthebankandPresidentAndrewJackson,whosawthesystemasathreattothevirtuesoftherepublic.Jacksonarguedthatthebankshouldbedisbanded.Jacksonprevailed,andthebank’scharterwasvetoedin1832,withtheSecondBankoftheUnitedStatesclosingin1836.Theperiodthatfollowed—1837through1862—isknownastheeraof“wildcat”banks;onlystate-charteredbanksoperated,limitedtoactivitiesmandatedbyeachstate’slaws.ThelegalfootingforthecreationofcurrencyislimitedintheConstitution.Article1,Section8permitsCongresstocoinmoneyandregulateitsvalue,andSection10deniesthestatesthesameright.Butbecauseanyagreed-onmediumservesthepurposethatweassociatewithmoney(anexchangeofvalue)thereisnoabsolutebanonstatebanksissuingnotes.NoristhereanyreasonaprivateindividualcannotissuehisownIOUs,forthatmatter.Atthebeginningofthewildcatbankera,theSupremeCourtruledthatstatebankshadtherighttoissuenotesasmediaofexchange.WhenMichiganbecameastatein1837,itallowedabanktogainacharterifitmetspecificcriteria,withoutalsorequiringpermissionfromthestatelegislature.Bankscameandwentlikenailsalons.Astudyof709banksinfourstatesfoundthatbetween1838and1863,halfofthebanksfailed,andathirdwerenotabletohonorredemptionofnotesforgoldorsilverspecie.Overallintheperiod,banksremainedopenonlyfiveyearsonaverage.Widelycirculatedbanknotes—often notbackedbyreserves—replacedthenationalcurrency.Statesstruggledwithwidespreadcounterfeiting,inflatednotevaluation,andthenaturalinstabilityofthefreemarket.ButtheWarbetweentheStatesbroughtthewildcatbankingeratoacrashinghalt.ThefirstNationalBankingActof1863broughtcontroloverbankingtothefederalgovernmentonceagain.Inadditiontocreatingauniformnationalbankingsystemandasinglenationalcurrency,thenewlawalsoprovidedasecondarymarkettotheU.S.TreasurytofinancethegrowingdebtsoftheCivilWar.Thechangewasgradual.By1870,therewere1,638nationalbanksversusonly325statebanks.However,statebankscontinuedtooperate,havingreplacedthebanknotesystemwithanewconcept:thecheckingaccount.By1890,onlyabout10percentoftheU.S.moneysupplywasrepresentedbycurrency.Therestwastransactedprimarilythroughthebankdraftscustomersusedthroughtheircheckingaccounts.Then,thesamefinancialcrisesthatinducednationalsupportfortheincometax,tippedthescalesinfavorofapermanentnationalbankingsystem.TheWallStreetPanicof1907wasblamedfortheworstdepressioninU.S.historyuptothattime.Unemploymentclimbedto20percent.Dozensofbanksfailed.J.P.MorgansavedseveralNewYorkbanksbygrantingpersonalloans.By1910,WallStreetexecutivesandWashingtonpoliticianssawanopportunity.TheymetatJekyllIslandoffthecoastofGeorgia,inseclusionandsecrecy,todiscussformationofacentralizedmonetaryagency.SenatorNelsonAldrichmetwithexecutivesofwhatistodayknownasCitibank;MorganBank;andKuhn,LoebInvestmentHouse.Theso-calledAldrichPlanrecommendedtheformationof15regionalbankscontrolledbyanationalboard.Thebankswouldbeallowedtomakeemergencyloanstomembersandcreateaflexiblecurrency,servingasthemonetaryarmofthefederalgovernment.AlthoughtheoriginalplanwasdefeatedintheHouse,theformulamodeledwhatisnowknownastheFederalReserveSystem.Thelegislation,variouslycalledtheCurrencyBillandtheOwen-GlassAct,emergedastheFederalReserveActof1913.ItcreatedadozenregionalReserveBankstobecoordinatedbyachairmanwhowouldbeappointedbythepresident. WhiletheConstitutiongrantsCongresstherighttoprintmoney,undertheFederalReserveActof1913,CongressapprovedaplantodelegatethisrighttotheFed,whichisnotpartofCongress.TheU.S.dollarisnotissuedbytheU.S.Treasurybutbyaprivatelyownedorganization,whichalsoinfluencesbankinterestrates,theamountofcurrencyincirculation,andeventhelevelsofinflationintheUnitedStates.Aftermonthsoftestimony,debate,andover3,000pagesofdocumentationofthehearings,thebillwaspassedand,onDecember23,1913,ratifiedandsigned.Forthefirsttime,privatelyissueddebtinstruments(currency)wouldbeissuedbyaprivateinstitutionbutguaranteedbythefullfaithandcreditoftheUnitedStates.Thislastinnovation—theestablishmentoftheFederalReserveSystem—playsaspecialroleinshapingAmerica’suniquesystemofimperialfinance,aswewillseelater.ASAFETYNETIf1913wastheyearthatsetthestagefortheempire,the1930swereyearsofheavyplotdevelopment.FranklinRoosevelt’sNewDealhadmanycomponentsbut,morethananythingelse,itwasorganizingthegovernmentforitsimperialtasks.IntheOldRepublic,governmentwasarefereebetweenindividualsandbetweenstates.Lawswererulesoforderthatwereintendedtoberelativelyneutral.Relativelyfewlawswerepassedbecausemostofwhathappenedwasthoughttobeoutoftherangeoftherulemakers.Butthisideaofgovernmentchangedradicallyinthe1930s.Thegovernmentwouldnolongerbeaccuratelydescribedasfunctioningsolelyasalaw-makingandlaw-enforcingbody.Thisnewgovernmentwouldmakethingsbetter!Itisrarelytalkedaboutthesedays,butatthetimetheNewDealprogramswerebeingpassedintolaw,mostpeoplebelievedtheywereintendedtobetemporarymeasures.Attheveryleast,theseprogramswereneverthoughttobethecornerstonesofalong-termchangeinthehomeland.In1935,whentheSocialSecurityActwaspassed,thepromisewasthatevery Americanwouldhaveasecure,ifminimal,retirement(ifheorshebeattheaveragesandoutlivedtheretirementageof65).Thegovernment,onceandforall,wouldeliminatethecommonailmentsrelatedtooldage—sickness,homelessness,disability,andpoverty.ThiswasaradicaldeparturefromAmericantradition.TheNewDealcreatedapermanent,paternalcentralgovernmentthathasonlygrownmorepaternalandmorecentralizedintheyearssince.FranklinRoosevelt’splanforSocialSecuritywasamassiverethinkingofthestate,inthesensethatthenewsystemwasmuchmorethanasimplesafetynet.ItboundordinarycitizenstothefederalgovernmentinawaythathadnotbeenimaginedbytheFoundingFathers.Peoplecametorelyonthestatefortheirdailybread,andtotakeamuchkeenerinterestinthestateitself.Traditionalvirtues—thrift,independence,self-reliance—werereplacedwithnewvirtues:politicalactivismandgamingthesystem.InthesecondRooseveltera,peoplecametoexpectthestatetotakecareofthingsathome;later,theywouldcometoexpecttheAmericangovernmenttobuildabetterworldoutsidethehomeland,too.Whilecampaigningforpresidency,RoosevelthaddenouncedHooverasaspendthrift.Thedemocraticplatformduringthecampaignof1932calledfor,amongotherthings,adrasticreductionofgovernmentspendingbyatleast25percent,abolishinguselesscommissionsandoffices,abudgetbalancedannually,andasoundcurrencytobepreservedatallhazards.ButthecountrywasinthethroesoftheGreatDepression.Thecausesofthedepressionhavebeenhotlydebated.Theygobeyondthescopeofthisbook.Buttheconsequencesoftheeconomicsetbackweretospurthenationtowarditsimperialmission.Afterthecrashofthestockmarketin1929,andafterthecountryhadenteredadeflationarydepressioninthe1930s,therewaslittlethatamansittinginachairat16PennsylvaniaAvenuecoulddotoaverttheaftermathofthedebtbubble.“Everybodytellsmewhatisthematter,butnobodytellsmewhattodo,”Rooseveltcomplainedtohiscabinetatonepointearlyinhispresidency.SoonWashingtonwasfloodedwithdo-gooderschompingatthebittotellthepresidentwhattodo.Newbookspublishedasearlyas1932ledtheway.GeorgeSouleofTheNewRepublicpennedtheinfluential tract“APlannedSociety.”StuartChasepennedanothercalled“ANewDeal.”Beforelong,Rooseveltwasawashinnewideas.Withthenewtoolsfrom1913inhishands,Roosevelthadtheabilitytoturnscrewsandtightenvaluesthroughouttheeconomy.Howcouldheresist?AmongtheideasadoptedwasonepushedforwardbyaCaliforniaphysiciannamedFrancisTownsendin1933.TheTownsendPlanwasdesignedtoextinguishpovertyforever.Whenitfirsthitthepresses,Rooseveltwasopposed.Butitspopularitycaughton;twoyearslaterunderpressurefromthevoters,RooseveltintroducedtheSocialSecurityAct.TheorganizersoftheTownsendPlanbecamemajorcriticsofthegovernmentprogram,complainingthatitdidnotprovideenoughassistance.Followingtheestablishmentoftheact’sprimarybenefit,theoldageinsuranceprovision,Congressamendedthelawfouryearslatertoaddsurvivors’insurance.Medicarebenefitswereaddedin1965.By2005,SocialSecurityandMedicaretookup27percentofthefederalbudget.Whiletheprogramwasrelativelyyoung,itwasanovelideaandcontroversysurroundedthequestionofwhethertheprogrampaidoutenoughbasedontherequiredpayrolldeductionspeoplepaidin.Littleconcernwasgiventowhetheritcouldremainsolventinthelongterm.OtherprogramsintroducedaspartoftheoriginalactincludedtheFederalUnemploymentInsuranceAct(FUTA),fundedbyataxonemployers’sideofpayroll;andAidtoDependentChildren(ADC),nowcalledAidtoFamilieswithDependentChildren(AFDC).SocialSecurityanditsrelatedlegislationhaveexpandedbroadlybeyondthebiggestpieces,oldageinsuranceandMedicare.TheActbeganinstitutionalizationofadual-tracksystem,providingbotholdageinsuranceandrelatedbenefits,andtheotherdesignedtoworkwiththestatesinadollar-matchingprogramforavastnetwork.Today,theoverallprogramincludesnationalminimumwageandchildlaborlaws;federaldisabilityinsurance;Medicaid;publichousingandrententitlements;foodstamps;andmeans-testedincomeassistancefortheelderlyanddisabled.Alltheseprograms—outgrowthsofSocialSecurity—haveexpandedtodaytorepresentalarge,complex,andexpensivesystemofwhattheRomanscalledpanemetcircensis—breadandcircuses(seeFigure6.1). Figure6.1GovernmentEmployment,1939-2005Thegovernmentprogramscreatedinthe1930shaverequiredanever-increasingbureaucracy.Alloftheseprograms—outgrowthsofSocialSecurity—haveexpandedtodaytorepresentalarge,complex,andexpensivesystemofwhattheRomanscalledpanemetcircensis—breadandcircuses.Source:BureauofLaborStatistics.PANEMETCIRCENSISThatthegovernmentshouldtakeresponsibilityfortheneedy,poor,anddisabledisnotanewideaatall.TheElizabethanPoorLawswereenactedinEnglandin1597.Theindividualdutytoprovidethe“sevencorporalworksofmercy”predatesthemodernera.Thesesevenweretofeedthehungry,givedrinktothethirsty,welcomethestranger,clothethenaked,visitthesick,visittheprisoner,andburythedead.Whatisnewistheideathatthestateshouldserveastheprimarycaregiver.TheElizabethanPoorLawswerebasedonthepremisethatthefamilywasprimarilyresponsibleforprovidinghelptoanyoneinneed,especiallywithintheirownfamilies.Elderlyparentsweretobecaredforbyyoungerfamilymembers.Beyondthat,thechurcheswereresponsibleforprovidingrelief.Infact,thecommunityparishwasthebasicunitofresponsibilityundertheElizabethan PoorLawsystem.By1601,inconsistenciesintheadministrationofrelief,thegrowingproblemofburglarsandrobbers—the“sturdybeggars”ofthetimes—andthedifficultyofdealingwiththosewhotookadvantageofthesystemledtoaconsolidationofthesepoorlaws.TheTenthAmendmenttotheU.S.Constitutiondeclared,“ThepowersnotdelegatedtotheUnitedStatesbytheConstitution,norprohibitedbyittothe14states,arereservedtothestatesrespectively,ortothepeople.”Whilebroad,theintentofthisamendmentisclear:Thefederalgovernmentoftheoldrepublichadneverbeenintendedtowatchoverthewelfareofitscitizens.Yet,thefedsnowadministermorewelfareprogramsthanwecanimagine.Rememberingtheirnamesislikelearningthelogarithmictablesbyheart—justasdifficultandevenmorepointless.Stateprograms,whiletheyexist,areoftenonlysupplementary.Inmanyinstances,fundingofstateprogramsisderivedfromhandoutsdeterminedandadministeredbythefederalgovernment,invariablywithstringsattached.Therobustmoboforganizations,designedtoprovidejobs,training,andmore,ismind-boggling.ThesegroupsincludedtheCivilWorksAdministration,theCivilianConservationCorps,theNationalYouthAdministration,andtheWorksProgressAdministration—allagenciesofthefederalgovernment,allintendedtoprovideservicesthat“arereservedtothestatesrespectively”asidentifiedintheTenthAmendment.Thelargestvolumeoflegislation,however,waspassedduringthefirstcongressionalsession,knownasthe“HundredDays”(fromMarch9toJune16,1933): STUFFINGTHECOURTBythetimetheNewDeallegislationhadpassedintolaw,ariftdevelopedbetweenPresidentRooseveltandtheSupremeCourt.In1935,thejustices—amajorityofwhomhadbeenappointedbystodgyoldRepublicanpresidents—declaredmuchoftheNewDealagendaunconstitutional.Thatyear,theCourtthrewouttheRailroadRetirementActof1934,alawthathadsetuppensionplansforrailwayworkers.ItalsothrewoutoneofthemostsignificantpiecesoftheNewDeal,theNationalIndustrialRecoveryActof1933.In1936,thetrendcontinuedwhentheCourtdeclaredtheAgriculturalAdjustmentActof1933unconstitutional.TheSupremeCourtwasintendedtohavethelastwordforthejudiciarybranch.Itwasexpectedtobemadeupofwiseoldmen,likeacouncilofeldersinmoreprimitivesocieties.Atthetime,sixoftheninejudgeswereover70.Theywerenotdead,buttheywereoldenoughtoknowbetterthantogoalongwiththepresident’sambitiousnewprograms.Earlyin1937,Rooseveltspokewithhis advisorsaboutanewdraftbillthatcalledforSupremeCourtjusticestoretireattheageof70.Undertheproposednewrule,iftheydidnotretire,thepresidentwouldbeabletoappointanewjudge,increasingthenumberofjusticesontheCourtto15.RooseveltappealeddirectlytothemassesduringaFiresideChatinMarch1937.Heexplainedhisproposednewlegislationanddefinedboththenewimperialexecutiveanditscontemptforthewisdomofoldage:TheAmericanpeoplehavelearnedfromthedepression.ForinthelastthreenationalelectionsanoverwhelmingmajorityofthemhavevotedamandatethattheCongressandthepresidentbeginthetaskofproviding...protection[akasomethingfornothing]—notafterlongyearsofdebate,butnow.Thecourts,however,havecastdoubtsontheabilityoftheelectedCongresstoprotectusagainstcatastrophebymeetingsquarelyourmodernsocialandeconomicconditions....[S]incetheriseofthemodernmovementforsocialandeconomicprogressthroughlegislation,thecourthasmoreandmoreoftenandmoreandmoreboldlyassertedapowertovetolawspassedbytheCongressandbystatelegislatures....ThecourtinadditiontotheproperuseofitsjudicialfunctionshasimproperlysetitselfupasathirdhouseoftheCongress—asuper-legislature,asoneofthejusticeshascalledit—readingintotheConstitutionwordsandimplicationswhicharenotthere,andwhichwereneverintendedtobethere.Whatismyproposal?Itissimplythis:Wheneverajudgeorjusticeofanyfederalcourthasreachedtheageof70anddoesnotavailhimselfoftheopportunitytoretireonapension,anewmembershallbeappointedbythepresidenttheninoffice,withtheapproval,asrequiredbytheConstitution,ofthe15SenateoftheUnitedStates.Whileretirementwouldnotbemandatoryassoonasajudgeturned70,theoutcomeofthisproposalisapparent.Assoonasajudgedidreachthatage,thepresidentwouldcertainlyappointanewmember.TheUnitedStateswouldhaveendedupwithayounger,moreobligingCourtwithapermanentmembershipof 15.ThosebringingappealsforwardtotheCourtwouldtimetheirfilingsbasedoncurrentage,timetoage70,andthepresidenttheninoffice.EvenRooseveltadmittedthisinaveiledthreattotheCourt,inthesameaddress.Hesaid“Thenumberofjudgestobeappointedwoulddependwhollyonthedecisionofpresentjudgesnowover70,orthosewhowouldsubsequentlyreachtheageof1670.”Congressbalked.Aftermonthsofhearingsonthebill,theSenatekilledFDR’splanwitha70to20vote.Theproposalwassentbacktocommitteeandnothingcameofit.Butthewindsofempirecontinuedtoblowhard.Economists,philosophers,radicals,andothermalcontentsrolledintoWashingtonliketumble-weeds,withplansforcentralizedcontroloftheeconomy.WhenRooseveltenteredoffice,havingchidedtheRepublicansbeforehimforspendingtoomuchmoney,thefederaldebt,after143years,hadgrownto$19billion.Roosevelt—injustfouryears—borrowedalmostasmuchmoneyasallthedeadpresidentswhocamebeforehim.HeandmembersofCongressatthetimeweredisturbedaboutit,butideasariseastheyareneeded.Thebigspendersneededanideathatwouldpermithugenewlevelsofgovernmentdebt.Theysoonfoundit:Agovernment,unlikeanindividual,canborrowandspendindefinitelywithoutfearofbankruptcy.Agovernmentborrowsmoneyfromitscitizens.Therefore,itowesthatdebttoitscitizens.Thedebtisthereforeowedbythepeopletothemselves.Andnomatterhowlargethedebtgets,thefinancialimpactonthecitizensandthegovernmentisnegligible.Onthesubjectofwhatwouldhappenifthatdebtwereowedtoforeignbondholders,theRoosevelteraempirebuilderswerelessclear.“TheapostleofthisslyphilosophywasDr.AlvinHansenofHarvard,”writesJohnT.Flynn,“Whenthissmallbook,writtenbyDr.Hansen’sdisciples,appeared,thedoctorwaspromptlybroughttoWashingtonandinstalledintheFederalReserveBoardastheeconomicphilosopherofthisnewdispensation....NowRoosevelthadaluminousguidethroughthechaos,”observedFlynn,“TheAmericaneconomicsystemplannedanddirectedfromWashingtonandan17endlessflowoffundstospend,suppliedbyendlessborrowing.” TENTHOUSANDCOMMANDMENTSTheSocialSecuritysystemwasconsideredtobeagreatimprovementoftheRooseveltera.Itwassupposedtoprovideacushionofcashforretiredpeople—sotheywouldn’thavetoeatdogfoodintheiroldage.Butneverwasashinybellcastbyworldimproverswithoutabigcrackinitsomewhere.EconomistMartinFeldsteinpointedoutthatifyoucouldcountonreceivingpaymentsfromSocialSecurity,youhadlessneedtosave.Fewersavingsmeantlessmoneyfortheeconomytoinvestinnewindustries.Lessmoneyinvestedmeantlowerproductivityandwages.IfthegovernmenthadfundeditsSocialSecuritysystemhonestly,themissingprivatesavingswouldhavebeenreplacedbypublicsavingsinthe“SocialSecurityTrustFund.”Instead,thesystemwasunfunded.Therewereneveranysavingsinthefund—justliabilitiesfromotherpartsofthefederalgovernment.SocialSecurityreducedtheavailabilityofcapitalandindirectlyreducedcapitalinvestment.Likeothertaxes,SocialSecuritymadepeoplepoorer—byreducingtherateofeconomicgrowth.Therewasalsounemploymentcompensationtoblame.Whenpeoplecouldexpectmoneyeveniftheydidn’twork,manywouldchoosetobeunemployed,creatinganobviousdragontheproductiveeconomy.Allthehundredsofthousandsofpettifoggingrules,laws,andregulationsactedontheeconomylikeVelcroonafuzzball.Bytheearlytwenty-firstcenturythetotalcostoffederalregulationoftheeconomywasallbutimpossibletocalculate.Inanannualreportcalled“TenThousandCommandments”publishedbyboththeCatoInstituteandtheCompetitiveEnterpriseInstitute,theauthor,ClydeWayneCrewsJr.,makessomeastoundingguesses:“Theexactcostoffederalregulationscanneverbeknown.Federalenvironmental,safety,healthandeconomicregulationscosthundredsofbillionsofdollarseveryyear—ontopofofficialfederaloutlays.”Thereportcontinued:•The2004FederalRegistercontained75,676pages,a6.2percentincreasefrom2003’s71,269pages.Thiswasanall-timerecord. •In2004,4,101finalruleswereissuedbyagencies.Thiswasaslight1percentdeclinefrom2003.•Whereasregulatoryagenciesissued4,101finalrules,CongresspassedandthePresidentsignedintolawacomparativelylow299billsin2004.•Inthe2004UnifiedAgenda,agenciesreportedon4,083regulationsthatwereatvariousstagesofimplementationthroughoutthe50-plusfederaldepartments,agencies,andcommissions,a4percentdropfromthepreviousyear’s4,266.•Ofthe4,266regulationsintheregulatorypipeline,135were“economicallysignificant”rulesthatwouldhaveatleast$100millionineconomicimpact.Thoseruleswouldimposeatleast$13.5billionyearlyinfutureoff-budgetcosts.Bossingpeoplearoundlikethiscostsalotofmoney.Howmuch?•BasedonabroadlyconstructedcompilationofannualregulatorycostsbyeconomistsThomasHopkinsandMarkCrain,regulatorycostshitanestimated$877billionin2004,anamountequivalentto38percentofallFY2004outlays.•Regulatorycostsweremorethantwicethe$412billionbudgetdeficit.•Regulatorycostsof$877billionwereequivalentto7.6percentofU.S.grossdomesticproduct,estimatedat$10,980billionfor2003.•Federalregulatorycostsof$877billioncombinedwithoutlaysof$2,292billionbroughtthefederalgovernment’sshareoftheeconomytosome27percent.•Regulatorycostsalsoexceedallcorporatepretaxprofits.•Regulatorycostsexceeded2004individualincometaxesof$765billionandwerefargreaterthancorporateincometaxesof$169billion.Betweenthem,theRevolutionof1913andtheNewDealpreparedthenationforhernewroleasanempireofdebt. 7MacNamara’sWarAjokemadeitswayaroundtheInternetfollowingthetrainbombingsinMadridinMarch2004:“InresponsetotheterrorismeventsinMadrid,theFrenchgovernmentannouncedachangeinitsalertstatus...from‘run’to‘hide.’Ifthethreatworsens,theFrenchmaybeforcedtoincreasetheirlevelofsecurity,declaringamoveto‘surrender’or‘collaboration’statusaseventsdevelop.”OneofthemanyconceitsAmericanspermittedthemselvesintheirimperialpositionwasthattheybravelyfaceduptotheworld’sterroristmenace,whereasothers—mostnotably,theFrench—coweredinfear.Buttheymistookvanityforcourage.Ataboutthesametime,theeditoroftheInternationalHeraldTribunereceivedaletterinwhichthewriterreferredtoabigprobleminthepresidentialcampaignofDemocratichopefulJohnKerry.Thepoormanwasworriedaboutlooking“tooFrench,”whichwouldbeasignof“weakness”intheeyesofthelumpenvoters.Westoppedstillinourtracks.Weheldourbreath.Anyonewhohadeverbeeninthesameroomwithahistorybookcouldn’thelpbutknowthatFrenchhistoryisdrenchedinblood.Whenitcametobutcheringeachother,whattheFrenchdidn’tknowaboutitprobablywasn’tworthknowing.TherewerethewarswiththeRomansandwiththeEnglish,andreligiouswars,warsbetweenprincesandbetweenkingdoms,warsfornoapparentreasonwhatsoever.Weakness?Cowardice?AgroupofNormanFrenchfightersnobiggerthanasmall-townpoliceforceinvadedandcapturedallofEngland.BonapartetookonallofEuropeandalmostbeatthem.GeneralMarbotrecordsanincidentinNapoleon’scampaignagainstRussiainwhichagroupofFrenchsoldierswascutofffromthemainforce,butwasvisiblefromtheEmperor’scommandpost.Realizingthattheycouldnotexpect reinforcements,thebrigadesentamessagetoBonaparte:“We,whoareabouttodie,saluteyou.”Theyfoughttothelastman.Then,therewastheBattleofCamerone.Napoleon’snephewsenttroopstoMexicointhe1860s.IntheactionsurroundingthesiegeofPuebla,agroupof60Frenchforeignlegionnaireswascutoffandconfrontedbyanarmyof2,000Mexicans.TheMexicancommanderaskedforsurrender.Instead,theFrenchvowedtofighttothedeath.Trappedinaninn,thesoldiershadnothingtoeatordrink.Then,theMexicanssettheplaceonfire.“Inspiteoftheheatandsmoke,”explainsareportontheInternet,“thelegionnairesresisted,butmanyofthemwerekilledorinjured.ByfivePMonApril30,1863,only12mencouldstillfightwith2ndLieutenantMaudet.Atthistime,theMexicancolonelgatheredhissoldiersandtoldthemwhatadisgraceitwouldbeiftheywereunabletodefeatsuchasmallnumberofmen.TheMexicanswereabouttogivethegeneralassaultthroughtheholesopenedinthewallsofthecourtyard...[they]onceagainaskedLieutenantMaudettosurrender.Onceagain,Maudetscornfullyrefused.”Thefinalchargewasgiven.Soon,onlyfivemenwereleftaroundMaudet;CorporalMaine,legionnairesCatteau,Wensel,Constantin,andLeonard.Eachhadonlyonebulletleft.Inacornerofthecourtyard,theirbacksagainstthewall,stillfacingtheenemy,theyfixedbayonets.Whenthesignalwasgiven,theyopenedfireandfoughtwiththeirbayonets.LieutenantMaudetandtwolegionnairesfell,mortallywounded.MaineandhistworemainingcompanionswereabouttobeslaughteredwhenaMexicanofficersavedthem.Heshouted:“Surrender!”“Wewill,onlyifyoupromisetoallowustocarryandcareforourinjuredmenandifyouleaveusourguns.”1“Nothingcanberefusedtomenlikeyou,”answeredtheofficer. Morerecently,therewastheBattleofDienBienPhu(May7,1954).WriterGrahamGreenevisitedtheFrenchjustbeforetheshootingstarted.Hefoundthemwellsupplied—with48,000bottlesofwine.TheFrenchhadanumberofadvantagessimilartotheadvantagesAmericanswouldbringtobearinVietnam10yearslater.Theycontrolledtheair.Usingairpower,theybroughtin15,000soldiersandprovisionstoaremoteairfieldwestofHanoi.Theideawastoinstallthemselvesthere,disruptGeneralGiap’ssupplies,blockhismoveintoLaos,andbringhimtoapitchedbattleinwhichsuperiorFrenchfirepowerwouldbedecisive.“Adefeatcanbebornefromavictory,”begantheFigaro’s50-yearlookbackonMay7,2004.“InordertounderstandDienBienPhu,youhavetorememberNa-San.Thisbattle,wonbytheFrenchArmy,explainstheother...andbroughtthewholethingtodisaster.Eighteenmonthsseparatedthem.GeneralGiap,commanderoftheVietminhforces,usedthese18monthstolearnfromhisdefeat.TheFrenchhighcommander,ontheotherhand,becamemoresureofhimself2thanever.”AtNa-San,theFrenchestablishedabaseonaplateau.Giapattacked.TheFrenchwereabletoholdtheirgroundwhiletheVietminhstaggeredaway.Inasinglenight,Giaplost3,000men.IftheFrenchweregoingtodestroythemselvesinSoutheastAsia,theyhadtofindabetterway.TheyfounditatDienBienPhu.Thebroadoutlinesofthebattlewereasfollows:Frenchparachutiststookcontroloftheairfieldfollowedby15,000troopsunderColonelChristiandeCastries.TheFrenchdugtrenchesandsetupbases,towhichtheygavewomen’snames.DienBienPhuwasnotonaplateau,butinadepression,surroundedbyhillscoveredinjungle.IftheVietminhbroughtupheavyartillery,theFrenchgoosewouldbecooked.ButneitherdeCastriesnortheFrenchhighcommandthoughtGiapcoulddoit.ThesurprisebeganonMarch13,1954.Giap’sartillerythrewoffitscamouflageandopenedfireintheafternoon.AshellhittheFrencheverysixseconds,offandon,forthenext56days.Then,Giapsentinwavesofinfantry.Camp“Gabrielle”wastakenbytheVietminhandthenretakenbytheLegionnaires,beforebeing abandonedtotheenemy.“Beatrice”waslostafteritscommanderwaskilled.“Anne-Marie”wentdownnext.TheFrenchheld.ButtheVietminhnoosewasgettingtighter.OnMarch26,aplanemanagedtogetoffthegroundwithacargoofwoundedmen.Itwasthelastone.Afterthat,theFrenchlostcontroloftheairfields.Theonlywaytogetsupplieswastodropthemfromthesky;oftentheyfellintothehandsoftheenemy.TheFrenchwerecutoffanddoomed.Still,theyheldouthopingadiplomaticsolutioncouldbefound.Itdidnotcome.TheweatherturnedagainsttheFrench,saystheFigaro.Theyfoughtinablastfurnace.Thencametherainsandtheywereuptotheirkneesinmud.Doctorsoperatedstandingupinit.OnMay6,Giaporderedageneralassault.“Dominique”and“Eliane”werequicklyoverrun.OnMay7,theorderwasgiventoblowupthemunitions.ColonelPirothcommittedsuicide.By5:30PM,acease-firewassounded,though“Isabelle”heldoutuntil1:00AMthefollowingday.Afterthe56-daysiege,FrenchGeneraldeCastriesradioedhissuperiorinHanoi,soundingNapoleonic:“I’mblowinguptheinstallations.Theammunitiondumpsarealreadyexploding.Aurevoir.”3“Wellthen,”camethereply,“aurevoir,monvieux.”ThousandsofFrenchwerecaptured.Fromtheevidence,theVietminhwerenotparticularlymeantothem,butindifferent.Thevictorshadlittletoeatthemselves,andhardlyanymedicine.TheFrench,manyofthemwounded,diedquickly.Theywereforcedtomarch500to600kilometers;manydidn’tmakeit.Onlyabout3,900ofthemeverreturnedtoFrance.Still,theFrenchshouldcheer.Itwasasmallpricetopayto“putanendtoillusions,”astheFigarodescribedita4half-centurylater.GeneralGiapshouldhavebeensolucky.Likemanycolonies,VietnamhadflourishedunderFrenchadministration.Therewerebars,brothels,andsidewalkcafésinHanoi.Therewereeleganthotelsandwell-dressedwomen,dignifiedbeachhousesneartheocean,andsplendidplantationhomesinthehills.People coulddoprettymuchastheypleased.FrancewasbringingcivilizationtotheindigenouspeoplesofIndochina.Afatlotofthankstheygotforit.HoChiMinhlearnedFrenchandwenttoParis.Scarcelyayearortwohadpassed,andhewasprintingupleafletsurginghiscountrymentokicktheFrenchout.NguyenSinhCung,whowouldlaterchangehisnametoHoChiMinh,wasbornonMay19,1890.Hewasgoodathisstudies,butheseemedtohaveanitchforworldimprovementfromtheget-go.Theurgegrewstronger,accordingtobiographerWilliamJ.Duiker,whenyoungHowenttoschool.HehadwonascholarshiptotheFrench-runNationalAcademyinHue.Cominginfromthecountry,hewasteasedbyotherstudents,whothoughthewasabumpkin.Ononeoccasionwhenhelosthistemperandsluggedafellowstudent,ateacheradvisedhimto“channelhisenergytomoreusefulpurposessuchasthestudyofworld5affairs.”Oohlala!Ifonlytheteacherhadsuggestedanangermanagementprograminstead,maybetheFrenchwouldstillberunningtheplace.TheVietnameseneverhaditsogood,beforeorafter.Hoshouldhaveleftwellenoughalone.ButVietnam’shistoryinthetwentiethcenturyisahistoryofpeoplewhoshouldhaveleftwellenoughalone.OldHocouldn’tkeephishandstohimself.Then,afterHotookoverattheendofWorldWarII,theFrenchshouldhaveleftwellenoughalone.Andwhentheywashedup,theAmericansshouldhaveleftwellenoughalone.Timeaftertime,thehistoryofworldimprovementyieldsthesamelesson:Leavewellenoughalone.Andtimeaftertime,theworldimproversignoreit;theyalwaysknowbetter.Butwearegettingaheadofourstory.WhenHocameofage,thegabbytalkofindependencewasrunningthroughEurope’scolonialpossessionslikeanepidemicofBirdFlu.Localswhohadbeenexposedtoalittleeducationwerequicklyinfectedandoftensuccumbed.HoChiMinhwasoneofmanythousandswhogotthebug.HehadgonetoEurope,whereheheardWoodrowWilson’sairysongoffreedom.ItwasjustafterWorldWarIhadended.Parishadahabitofturningayoungman’shead.Ho’sheadswiveledaroundjustlikeeveryoneelse’s.Soon,hehadjoinednotonlytheAnnamitePatriotsleague,butalsothecommunistparty.Ofalltheworldimproversofthetime,theBolshevikshadthebiggestimprovementsinmind.Nearthecloseofthewar,againstallodds,they tookovertheworld’sbiggestcountryandwereimprovingitmercilessly.Therestoftheimproverslookedoninadmiration,andturnedtoMoscowforguidanceandmoney.Howasnoexception.HoChiMinhtraveledwidely,partlytoseehowtherestoftheworldworked,andpartlytomakecontactsthatwouldbeusefulinhiscampaigntoliberateIndochinafromtheFrench.OnetriptookhimtoNewYorkandBoston,whereheclaimedheworkedasacook’shelperintheParkerHouseHotelinBoston.HealsosaidheoncetookatriptotheSouth,wherehewitnessedthelynchingofblacksbytheKuKluxKlan.(Soundsimprobable;theKlandidnotexactlylynchsomeoneeveryday.ItisalsohardtoimagineayoungmanfreshofftheboatfromVietnamstandingaroundtowatchtheKlanatwork;weimagineHowouldhavefeltlikealambattendingawolves’picnic.)HospentmuchoftheGreatWaryearsinLondon,workingasasous-chefunderthecelebratedculinarymaster,AugusteEscoffierattheCarltonHotel.InthispassagefromHoChiMinh’sbiography,whereinhereferstohimselfas“Ba,”weseehowclosetheworldcametohavinganotherdecentpastrychefinsteadofanotherindecentworldimprover:Eachofushadtotaketurnsintheclearingup.Thewaiters,afterattendingthecustomer,hadtoclearalltheplatesandsendthembymeansofanelectriclifttothekitchen.Thenourjobwastoseparatechinaandsilverforcleaning.WhenitcametoBa’sturnhewasverycareful.Insteadofthrowingoutallthebitsleftover,whichwereoftenaquarterofachickenorahugepieceofsteak,andsoon,Bakeptthemcleanandsentthembacktothekitchen.Noticingthis,ChefEscoffieraskedBa:“Whydidn’tyouthrowtheseremainsintotherubbishastheothersdo?”“Thesethingsshouldn’tbethrownaway.Youcouldgivethemtothepoor.”“Mydearyoungfriend,listentome!”ChefEscoffierseemedtobepleasedandsaid,smiling:“Leaveyourrevolutionaryideasasideforamoment,andIwillteachyoutheartofcooking,whichwillbringyoualotofmoney.Doyouagree?” AndChefEscoffierdidnotleaveBaatthejobofwashingdishesbuttookhimtothecakesection,wherehegothigherwages.Itwasindeedagreateventinthe6kitchenforitwasthefirsttimethe“kitchenking”haddonethatsortofthing.Alas,thesmellofgoodworksmusthavebeenmorealluringthenthepainauchocolat.Theworldlostagoodpastrychefandgainedabadactivist.Insteadofbringingpleasuretoafewhundred,ormaybeathousand,customers,theAnnamiteWilsondecidedinsteadtolaunchhimselfintopoliticsandbeginacampaignthatwouldbringmiseryanddeathtomillions.InLondon,hewarmedupwithstreetdemonstrationsinfavorofIrishindependenceandavarietyofprogressivecauses.WhenhereadMarxandotherrevolutionarypenseurs,hisheadwasturnedsofarhisneckalmostbroke.Herewerepeoplewithagrandtheoryofhowtheentireworldcouldbeimproved.Andherewerepeoplereadytohelpaskinny,pooryoungmantakeoveracountry.HoChiMinhreturnedtoIndochina,organizedtheVietminh,andbeganthelongcampaignforindependence.Thestrugglewasneithereasynorshort.IfhewastobethecapoofVietnam,hehadanumberofothercapostoburyfirst.First,hehadtheFrenchtodealwith.Then,theJapanese.Then,theChinese.ThentheVietnamesenationalists.ThentheFrenchagain.MoreVietnamese.And,finally,theAmericans.Beforehewasfinished,hewouldhavetoburynearlyasmanypeopleasAlexanderorPolPot.HoChiMinh’sbriefvisittotheUnitedStateshadlefthimsomewhatnaïveandpuzzledaboutAmerica.HohadnotkeptupwithWilsonianimprovementsinthelandofthefree.WhenheaddressedthecrowdinBaDinhSquarefollowingtheAugustRevolutionof1945,hespokenotofAmericaasitwas,butperhapsasitshouldhavebeen.ItwastheAmericathatexistedbeforeWilsonimprovedit.ItwastheAmericathatmindeditsownbusinessandhadnotyettakentheroadtoempire.“Allmenarecreatedequal,”saidHo.“Theyareendowedbytheircreatorwithcertaininalienablerights;amongthesearelife,libertyandthepursuitofhappiness.”ThisstatementappearedintheDeclarationofIndependenceofthe UnitedStatesofAmericain1776.Inabroadersense,itmeans:Allthepeoplesontheearthareequalfrombirth,allthepeopleshavearighttoliveandtobehappyandfree.TheDeclarationoftheRightsofManandthecitizen,madeatthetimeoftheFrenchRevolution,in1791,alsostates:“Allmenarebornfreeandwithequalrights,andmustalwaysremainfreeandhaveequalrights.”Inthisshortspeech,Hoextendedahandtotwonations.Onealreadyhadnotjustoneempire,butseveralofthem.IthadbeenhometotheEmpireoftheFranks,andthentheHolyRomanEmpire.Bonapartemadehisownempireandhisnephewrevivedit,briefly.Theothernation,theUnitedStatesofAmerica,hadbeenamodestrepubliconlyafewyearsbefore,butnowhadimperialresponsibilitiesallovertheglobe.Hodidn’tknowit,butifhewantedtoruleIndochinahewouldhavetokickboththeirderrieres.TheAugustRevolutionhadbeenswiftandrelativelybloodless.OnAugust14,theJapanesesurrendered.Allofasudden,therewasanemptyholewhereanimperialpowerusedtosit.TheJapanesewerelayingdowntheirguns.InVietnam,theywantedtosurrender,butdidn’tknowtowhom.FrenchadministratorswerestillintheprisonswheretheJapanesehadputthem.Sowereotheralliedtroops.ChiangKaiShek’sNationalistChinesetroopswouldsoonbecomingdownfromthenorthtooverseetheJapanesedeparture.TheFrenchwouldsoonbeoutofjail.Ho’sVietminhforceshadtoactfast.OnthemorningofAugust25,1945,his“defenseunits”swiftlyseizedgovernmentinstallationsandenterprisesalloverVietnam.Withinhours,thecountrywasunderVietminhcontrol.VoNguyenGiapdescribedthejoyfulsceneinBaDinhSquare,formerlyknownasPlacePuginier:Hanoiwasbedeckedwithredbunting.Aworldofflags,lanternsandflowers.Flutteringredflagsadornedtheroofs,thetreesandthelakes.Streamerswerehungacrossstreetsandroads,bearingslogansinVietnamese,French,English,ChineseandRussian:“VietNamfortheVietnamese.”“DownwithFrenchcolonialism,”“Independenceordeath,”“Supporttheprovisional government,”“SupportPresidentHoChiMinh,”“WelcometotheAlliedmission,”andsoon.Factoriesandshops,bigandsmall,werecloseddown.Marketsweredeserted...thewholecity,oldandyoung,menandwomen,tooktothestreets....MulticoloredstreamsofpeopleflowedtoBaDinhSquarefromalldirections.Workersinwhiteshirtsandbluetrouserscameinranks,fullofstrengthandconfidence....Hundredsofthousandsofpeasantscamefromthecitysuburbs.People’smilitiamencarriedquarter-staffs,swordsorscimitars.Someevencarriedold-stylebronzeclubsandlong-handles[sic]swordstakenfromthearmoriesoftemples.Amongthewomenpeasantsintheirfestivedresses,somewerecladinold-fashionedrobes,yellowturbansandbright-greensashes...Mostlivelywerethechildren....Theymarchedinstepwiththewhistleblows7oftheirleaders,singingrevolutionarysongs.Atthatverymoment,about15,000FrenchpeoplelivinginHanoi,andfivethousandFrenchprisonersstillbeingheldinJapaneseinternmentcamps,alongwithanynumberofVietnamesenationalists,wereallpreparingtocontestHo’sauthority.ButnaïveHocalledonhispeopletotreatforeignerswithtoleranceandrespectandlookedtotheUnitedStatesforsupport.Surelythecountrythatmadewarsofindependencepopularwouldbackhimup.HowroteseveralletterstotheTrumanadministrationaskingforhelp.OnerequestedfoodforstarvingpeopleintheNorthofthecountry.In1945,overamillionpeopleinVietnamstarvedtodeath.AnotherletterpraisedtheUnitedStatesforitshumanitarianidealsandaskedforAmericansupportofthenewgovernment.Noneoftheletterswasanswered.Americanshadcometoseetheworldinanewway.Theywereanimperialpower;theyhadtothinklikeone.WinstonChurchill,representingadecliningempire,stoodbeforeacrowdinFulton,Missouri,andsaidan“ironcurtain”hadcomedownseparatingoneempirefromanother.Therewasnowa“communistbloc”thatthreatenedthe“freeworld.”Communismmustbe“contained,”orit wouldtakeovertheentireworld.Anewwarhadbegun—the“ColdWar.”Typically,theempirebuildersseetheglobeinsimple-mindedterms.Itistheonlywaytheycanunderstandit;theonlywaytheycanjustifytheirownvainandpreposterousinterventions.TherewasnoironcurtaininVietnam,justthesamediaphanousfabricthatwasdrapedovertherestoftheworld.HoChiMinhexplainedittoanAmericanofficial,ArchimedesPatti,onSeptember30,1945.Atthecloseoftheconversation,Horecountedtohisvisitorsomeofthekeyeventsinhislifeasarevolutionary.ConcedingthatmanyAmericansviewedhimasa“Moscowpuppet,”HodeniedthathewasaCommunistintheAmericansense.HavingrepaidhisdebttotheSovietUnionwith15yearsofPartywork(HohadbeenanagentoftheComintern),henowconsideredhimselfafreeagent.Inrecentmonths,hepointedout,theDRV(theDemocraticRepublicofVietnam)hadreceivedmoresupportfromtheUnitedStatesthanfromtheUSSR.WhyshoulditbeindebtedtoMoscow?Astheyparted,HoChiMinhaskedhisvisitortocarrybackamessagethattheVietnamesepeoplewouldalwaysbegratefulfortheassistancetheyreceivedfromtheUnitedStatesandwouldlongrecallitasafriendandally,andthattheAmericanstruggleforindependencewouldalwaysserveasanexampleforVietnam.Afewweekslater,anotherdepartingU.S.militaryofficercarriedaletterfromHoChiMinhtoPresidentTruman.ButthelikelihoodofanyU.S.assistancewasrapidlydimming.Patti’sactivitieshadstrengthenedsuspicionsamongU.S.officialsinbothChinaandtheUnitedStates,andwhenhissuccessorcabledWashingtonthatHanoiwouldwelcomeaU.S.efforttomediatethedispute,bothHanoi’sofferandHo’spreviousletterswereignored.Americanswereonceagaininnomoodformodestrestraint,ambiguity,orquestionmarks.SenatorJosephMcCarthywasreadyinghisinquisition.Childrenwerepledgingallegiancetotheflagandhidingundertheirdesksinpreparationforanuclearattack.Theenemywasatthegates.Itwastimefor“100percentAmericanism.”PooroldHooughttohavegivenup.Inamatterofweeks,theFrenchwereonthelooseandrebuildingtheirbases.Therewasanawkwardperiod—amodus vivendiwasworkedoutwiththeFrench.Theyweretolerated,butagreednottoimposethemselves.OnOctober18,theFrenchship,Dumontd’Urville,sailedintoCamRanhBaywithHoaboard,backfromapeaceconferenceinParis.Buttherewasnopeace.TheFrenchwerebecomingmoreandmoreinsistent.TheydrovearoundinU.S.-madejeepsandcarriedU.S.-madearms.HobegantowonderwhosesidetheAmericanswereon.Again,asinWorldWarI,theUnitedStatesseemedtopickitsallywithoutmuchrealthought.InIndochina,forthenextquarterofacentury,theworldimproverswouldrunintoeachother.HowantedtoliberatetheAnnamitesfromtheyokeofcolonialrule.OtherVietnamese—Catholics,Buddhists,capitalists,traditionalnationalists—wantedtoliberatethemfromHo.TheFrench,meanwhile,didn’twanttoliberatethematall—butforcethemtobegoodsubjectsofFrance’sreconstructedempireintheFarEast.AndAmerica,whatdidAmericawant?Americadidn’tknowexactlywhatshewanted.Butshedefinitelywantedtothrowherweightaround.HowasdulyelectedinJanuary1946.Aspresidentofthecountry,itwasnotatallclearthathehadtoruninadistrictelection,buthechosetodoso,andwon98.4percentofthevote.TheFrenchwereabouttonullifythevoteandreimposecolonialrule.Amoment’sthoughtwouldsuggestthattheAmericanswouldsidewithHo,oratleaststayoutofit.ButifAmericacouldbacktheworld’stwolargestcolonialempiresinWorldWarI—anddosointhenameofdemocracy—therewasnoeffectivelimittothehypocrisyofherforeignpolicy.Besides,onceagain,shelookedupatthosebig,gaudybubbles,thoseempty,floatingwords,andshewasinatrance.Thistimetheydidnotsayanythingaboutdemocracy.Themoodhadchanged.Thistimethebubblessaid“redmenace.”ThefirstIndochinawarbeganonDecember19,1946,whentheVietminhblewupthemunicipalpowerstationinHanoi.Itended89monthslater,indefeatfortheFrenchatDienBienPhuinMay1954.NextitwastheAmerican’sturntomeddle.AfterthefallofIndochina,theFrenchrenouncedtheir“civilizingmission” foreignpolicy.Now,itistheUnitedStatesthatclaimstomaketheworldabetterplace.Butwhenitcomestoblockheadedbellicosityanddesperatecourage,AmericanshavenothingtoteachtheFrench.IncomparisontoNapoleon’sgrandcampaigns,America’searlywarswerepiddlingaffairs.ItswarsagainsttheMexicansandSpaniardsweremoresordidthanglorious.EvenitsRevolutionaryWarwasmerelyaminorengagementcomparedwiththeNapoleonicWars,andonlywonbecausetheFrenchintervenedatacrucialmomenttopullAmericans’chestnutsoutofthefire.Here,wequoteCharlesW.Eliot’shistory,inwhichhedescribeshowthepatriotshadfallen“intoaconditionofdespondencyfromwhichnothingbutthesteadfastnessofWashingtonandtheContinentalarmyand8theaidfromFrancesavedthem.”InWorldWarI,theFrenchbatteredthemselvesagainsttheGermansfortwoyears—andsufferedmorecasualtiesthanAmericahadinallitswarsputtogether—beforePershingeversetfootinFrance.Again,inWorldWarII,Americanswaiteduntilthecombatantshadbeensoftenedupbeforeenteringthewarwithanextraordinaryadvantageinfreshsoldiersandalmostunlimitedsupplies.Americanshavenohistory.Probablyjustaswell.TheFrench,ontheotherhand,havetoomuch.PracticallyeverystreetinParisremindsthemofaslaughtersomewhere.OntheArcdeTriomphe,LesInvalides,anddozensofotherpilesofstone,thenamesoftownsinGermany,Spain,Italy,Poland,Russia,orNorthAfricaareinscribed.EachonemarksthedeathsofthousandsofFrenchsoldiers—goneearlytotheirgravesforwho-remembers-whatimportantnationalpurpose.EverytowninFrance,eventhemostremoteandforlornlittleburg,hasatitscenterapillarofgraniteormarble—withthenamesofthemenwhosebodiesweretorntobitsbyflyingleadorcorrodedbysomebattlefielddisease.AwholeraceoforphansgrewupafterWorldWarIandspecialseatsonthesubwayweredesignatedforthose“mutilatedinwar”includingthousandsofsansgueules—menwhohadhadtheirjawsblownawayandyetsurvived,toohorribletolookon.TheFrenchhavehadenoughofwar—atleastfornow.Letthemenjoyawell-earnedcowardice. MACNAMARA’SWAROnMay1,1995,theworld—oratleastthepartofitthathappenedtobegatheredattheLBJLibraryinAustin,Texas,witnessedarareandremarkablething.RobertS.MacNamarawasintears.HehadjustexplainedhowwhathehaddoneasSecretaryofDefenseduringtheyearsfrom1961to1968was“terribly,terriblywrong.”“WarCriminalsaysSorry,Sobs”washowAlexanderCockburndescribeditinhiscolumnintheNation,February9,2004.Headsofstate,theirministers,andtheirgeneralsgetpeoplekilledoften.Rarelydotheyapologizeforit.Ifthey’relucky,thewargoestheirwayandtheydon’thaveto.Iftheyareunlucky,theygetstrunguplikeMussolini,ortheyshootthemselveslikeHitler.Mr.MacNamaradidn’thavetodoeither.TheNorthVietnameseneverposedanyrealdangertotheUnitedStates,sotherewasnevermuchdangerinbombingthem—unlessChinaorRussiagotspookedandfirednuclearwarheadstowardNorthAmerica.TherewasnowayHoandhismenwereevergoingtoseizeWashingtonandputU.S.leadersinthedockforwarcrimes.NordidMr.MacNamara,Mr.Kennedy,Mr.Johnson,oranyotherofthevastcastofearnestincompetentswhohadahandintheVietnamaffairevervolunteerforthefrontlines.Ifanyonewasgoingtodie,itwasn’tgoingtobethem.Anditwasnottheirmoneypayingforiteither.Mr.MacNamarawasneverreallycutouttobeanempirebuilder.Hewastoocircumspect.Thetypicalworldimprovergoestohisgravebelievinghehasdonepeopleafavorandisoftenbitterthattheydon’tseemtoappreciateit.In1945whenBerlinwasnearstarvationandbeingoverrunbySoviettroops,theFührercomplainedabouttheingratitudeoftheGermanpeople.Wilson,too,feltabandonedandbetrayed—firstbecauseDemocratswantednothingtodowiththebrain-damagedpresidentintheelectionof1920andsecond,becauseinrejectinghisLeagueofNations,Congressseemedtorepudiatehimandallhestoodfor.9“IbeseechyouinthebowelsofChristtoconsiderthatyoumaybewrong.” OliverCromwell’swarninghasnoeffectonrealempirebuilders;youmightaswellcautionsailorsagainstgettingdrunkonshoreleave.Nomatterwhatyousay,they’llfindawaytogetthemselvesintrouble.Accordingtohismemoirs,MacNamarawasalwaysplaguedbydoubts.Heseemsadecentman,whohadnobusinessattheDepartmentofDefense.Hesaidsomuchhimself.“I’mnotqualified,”hetoldPresidentKennedywhenthejobwasofferedtohim.Buthetookthepost,andoverthenextsevenyears,heprovedit.WhatisastonishingaboutMacNamara’smeaculpaisnothisadmissionthathemadeacolossalerror—thoughthatisextraordinaryinitselfandplaceshiminasuperiorcategorytomostpublicofficials—buthiscandidrecordofhowlife-and-deathdecisionsaremadebysupposedlyintelligentandresponsiblegovernments.WhenMacNamaratookoverthemostlethalarmedforcesintheworld,whatpreparationdidhehave?Didheknowanythingaboutwar?Strategy?Thehistoryofcombat?HehadbeenajuniorofficerinWorldWarIIdoingstatisticalanalysis.Then,hehadgonetoworkfortheFordMotorCompanyasanexecutive.HadheevenreadSunTzuorClausewitzorMachiavelli,orCaesarorBonaparte?Hadhetriedtolearnasinglethingfromthemillionsofdeadsoldiers,thethousandsofbattles,thehundredsofwars?Ifso,hedoesn’tmentionit.“IenteredthePentagonwithalimitedgraspofmilitaryaffairsandevenless10graspofcovertoperations,”hesays.WhataboutVietnam?Heknewnothing,zero,abouttheplace.Butthen,ashepointsout,neitherdidKennedyorNationalSecurityAdvisorMcGeorgeBundy,ormilitaryadvisorGeneralMaxwellTaylor.TheonlypeopleintheWesternworldwhoknewanythingaboutVietnamweretheFrench.AndtheAmericanteamdecidedtoignoretheFrench;theywerelosers.Bythistime,theFrenchwerebecomingcynicalofmilitaryaffairs.EverywartheyhadbeeninvolvedinsincethetimeofNapoleonhadgonebad,eventhosetheywon.Bycontrast,everywarAmericahadfought—atleastsincetheWarbetweentheStates—hadbeenareasonablesuccess.Americanswerestillbrighteyed,fullofenergy,ambition,and“cando”spirit.RobertMacNamarawasoneofthe“brightestand best”ofthelot—thekindofAmericanwhomakesyouproudtobeone.Hewasaproblemsolver,adoer,atake-chargeguy,theyoungestSecretaryofDefenseever,badlyinneedofsomeGalliccynicism.Hewassurroundedbypeoplewhowereevenbiggerblockheadsthanhewas.Intheirminds,theywerestoppingtheadvanceofcommunisminSoutheastAsia.Couldtheydoso?Whywouldtheywanttodoso?Whatwouldhappeniftheydidn’t?Eveniftheycoulddoit,howshoulditbedone?Coulditbedoneinsomeotherwaythatdidn’tinvolvekillingpeopleorspendingalotofmoney?Youwouldthinkthatthebrightestandbestwouldhavethoroughlychatted-outsuchbasicquestions.Apparentlynot.Therewasplentyofdiscussion,butthemajorquestionwasneverreallyanswered:Whatdamneddifferencediditmake?Instead,thewholeteammerelywentfromonegafftothenext,improvisingastheywentalong.ManywerethereasonsgivenwhyVietnamwasimportanttoAmerica,butallweregeneralitiesortheories.IfVietnamfell,sowouldallof11SoutheastAsia,likea“rowofdominoes,”asEisenhowerhadputit.Evenifthathadbeentrue,whydiditmattertotheUnitedStatesofAmericawhatkindofgovernmentsruledtheregion?AsfarastheAmericanrepublicwasconcerned,itwasofnointerestwhatever.Butinthenewempire,anychangeofallegiancesetoffalarms.MacNamara,Kennedy,Johnson—alltheguardiansofWilsonianforeignpolicy—heardthetinkleandrushedtotakeaction.Theyhardlynoticedthatnonehadtheblurriestnotionofwhattheywerereallyupto.“IamconvincedthatitwouldbedisastrousfortheUnitedStatesandtheFreeWorldtopermitSoutheastAsiatobeoverrunbytheCommunistNorth,”saidDeanRusk.Why?HadanyonegonetotalktoUncleHo?DidanyoneknowifhisplanswerecompatiblewithU.S.interests?Itdidnotseemtomattertothem.Nordiditmatterthattheactionstheyweretakingwerecontradictorytoeventheirownstatedaims.“Someothersareeagertoenlargetheconflict,”saidPresidentJohnsonin1964.“TheycalluponustosupplyAmericanboystodothejobthatAsianboysshoulddo....SuchactionwouldoffernosolutionatalltotherealproblemofVietnam....TheSouthVietnamesehavethebasicresponsibilityforthedefense12oftheirownfreedom.” Thus,didthepresidentrepeatwhatPresidentKennedyhadsaidbeforehim,andwhateveryAmericanfeltinhisheart:IftheSouthVietnamesewantedindependence,theycouldfightforitjustaswehad.Therewasapracticalconsiderationbehindthesentiment.IftheSouthVietnamesecouldnotorganizeormotivatetheirownpeopletoprotectthemselves,itwouldbeimpossibleforforeignerstodothejobforthem.Noonelikestoadmitthatheisgoingtowarforreasonsofvanityorpride.Thatkindofambitionis,likeabadfacelift,notaprettysight.Ordinarycitizensusuallyturnawayfromit;theydon’tliketheideaofgettingtheirsonskilledandtheirwalletsstolentosupportabrassycampaignofself-aggrandizement.So,realambitionsareusuallyhiddensowellthatnoteventheleadersthemselvescanseetheirownvanityinthem.In1965,PresidentialMilitaryAdvisor,GeneralMaxwellTaylorexplained:“ThesituationinVietnamisdeterioratingandwithoutnewU.S.actiondefeatappearsinevitable...thestakesinVietnamareextremelyhigh....TheinternationalprestigeoftheUnitedStates,andasubstantialpartofourinfluencearedirectlyatriskinVietnam....Any13negotiatedwithdrawalwouldmeansurrenderontheinstallmentplan.”NotjustJohnson,MacNamara,andTaylorhadtheirprideontheline,butthewholenation.TheremayneverhavebeenagoodreasonforfightinginMacNamara’swar,butAmericansbegantofeelthatiftheydidn’tprevailthey’dneverbeabletoholdtheirheadshighagain.Still,aslateas1964,JohnsonchosenottoadmitthathewouldsendhalfamillionAmericanboystodothefightingthatAsianboyswouldn’torcouldn’tdo.Americawasanempire,butstillareluctantone.Maybehedidn’tknowhimself.Besides,itwasprobablynotagoodtimetomentionit.MacNamara,intestimonybeforedefensesubcommitteesofCongress,failedtodisclosetheleveloftroopcommitmentstheadministrationknewwouldberequired.MacNamaratestifiedtotheDefenseSubcommitteeoftheSenateAppropriationsCommitteeonAugust4,1965,that175,000troopswouldhavetobedeployedbyNovember,tobefollowedbyanother100,000thefollowingyear.Hedidnotbothertosaythathealreadyestimatedtheneedforanadditional340,000mentobeaddedtothetourthroughthedraftandextendedtours. Twoyearslater,MacNamaratestifiedbeforetheSenateArmedServicesCommittee.AskedwhetherhecouldprovideamonthlybreakdownofthecostsofVietnam,hesaid,“Itisalmostimpossibletodoitonayearlybasis,anditisreallyimpossibletodoitonamonthlybasis.Icantellyouhowmuchwearespendingintotalfordefensepermonthofcourse,butsplittingthatintoVietnam14andnon-Vietnamishonestlyalmostimpossible.”Wilson’splatformsloganwhenheranforasecondtermwas“HeKeptUsoutofWar.”FranklinRooseveltranforofficesayinghewouldnotsendtroopstofightinEurope’swar.Andintheelectioncampaignof1964,LyndonJohnsonmaintainedthatitwasstillaVietnamesewar,notanAmericanone.Thespiritofempiregotthebetterofallofthem.WhetheryouwantedtogetintotheVietnamWar,orstayoutofit,youcouldfindallthereasonsandargumentsyoucouldwant.Buttheargumentsscarcelymattered;temperatureswerealreadyrising;warfeverwasbubblingupallover.“Aggressionandupheaval,inanypartoftheworld,”saidLyndonJohnsononthe1964campaigntrail,soundingWilsonian,“carrytheseedsofdestructiontoourownfreedomandperhapstocivilizationitself....Friendlycynicsandfierceenemiesalikeoftenunderestimateorignorethestrongthreadofmoralpurpose15whichrunsthroughthefabricofAmericanhistory.”Bytheearly1960s,therewashardlyahalf-witinallNorthAmericawhodidn’tthinkthatthecountrywasindanger.Thistimeitwasn’ttheHunswhothreatenedWesterncivilization;itwascommunists.They’dhearditontelevision.EventheNewYorkTimessaidso.Inamoderndemocracy,itisrelativelyeasytostirthemassestoabsurdity.Peoplearealltunedintothenationaltelevisionstationsandreadthepapers.JustasAmericansin1917cametobelievethattheirwayoflifehadbeenputinjeopardybytheGermans,nowtheycametobelievethatthecommunistswereagraveandgrowingthreat.Iftheyweren’tstoppedinVietnam,saidthepapers,soonthey’dbelandinginCalifornia.Itwaspreposterous.Butthatdidn’tmakeitunpopular.Inthemid-andlate-1960s,thewarinVietnamseemedlikethebiggest,most urgentforeignpolicychallengetheUnitedStatesfaced.TheFrenchweregone;nowVietnamcouldbeaddedtoAmerica’sslushyempire.TherewaslittlequestioninAmericans’mindsthattheycouldsucceedwherethefrogshadfailed.Curiously,butnotunexpectedly,publicsupportforthewargrewastheUnitedStatesgotitselfindeeper.Thebigquestion:“Whyareweinvolvedinthiswar?”disappeared,pushedoutbyamoreurgentandpracticalquestion:“Howarewegoingtowinit?”Inthemiddleofallthis,though,theeconomicaspects(thecostofthewaritself)aswellastherequiredlevelof“bootsontheground”werepurposelyunderstated.Itwasapparent,evenwithintheJohnsonadministration,thattherewouldbelittlesupportforthewariftherealcostswereknown.HeadoftheCouncilofEconomicAdvisors,WalterHeller(whoresignedin1966andwassucceededbyGardnerAckley)saidin1965:WehadnoconcreteideahowmuchVietnamwasgoingtocost.First,Ithinkfundamentallyitwasbeingunderestimatedtobeginwith.And,second,someoftheestimatesweresomehoworanothernotgettingacrossthePotomacfromthePentagontotheExecutiveOfficeBuilding,atleastnottotheCouncil’spartoftheExecutiveOfficeBuilding.Anyway,theCouncilwasoperatingpartiallyin16thedark.AftersupportingtheFrench,theUnitedStatesbackedtheregimeoftheDiembrothers,apairofstaunchlyCatholicconservativeswithatalentforcorruptionandpoliticalclumsiness,oneofwhomwasmarriedtoasorceressknownasMadameNhu.Asabulwarkagainstthecommies,theDiemregimeprovedasineffectiveasitwasquirky.TheUnitedStatesgavethego-aheadtoagroupofgeneralstoreplacethebrothers.Thisdecision,likesomanyothers,wasnottakenaftercarefulconsiderationofthealternativesbythetoppolicymakers.MacNamarasaysitwasinspiredbylower-echelonfunctionarieswhosetitinmotionwhileKennedy,MacNamara,andtheleadingdecisionmakerswereonvacation.Then,ittookonamomentumofitsown.OnNovember2,1963,agroupofgeneralsledbyGeneralMinhroundedupNgoDinhDiemandMadameNhu.Theirhandswereboundbehindtheirbacksandtheywereshovedintoanarmoredpersonnelcarrier.WhenthevehiclearrivedatGeneralHeadquarters, DiemandNhuhadbeenshot;Nhuhadalsobeenknifedseveraltimes.TheSouthVietnamesesaiditwasasuicide.Thetwowere,nodoubt,capableofgreatmischief.Butpeoplewhohavetheirhandstiedbehindtheirbacksdonotoftenshootandknifethemselves.TheofficialversionofeventsservesasaeulogyfortheentireVietnamadventure—improbableattheveryleast,criminalatworst.Meanwhile,thewarratchetedupanotherbignotchafteranincidentintheTonkinGulf,involvingtwoattacksonU.S.ships.Oneoftheattackswasneverconfirmed;manythinkitneverhappened.Theothermayhavebeenamistake.TheNorthVietnamesenowsaytheyneverauthorizedit.AmericanssaidtheybelievedHanoiwasintentionallywideningthewar.TheUnitedStatesfeltithadtoretaliate,notforanyparticularreason,butmerelybecauseitfeltithadtodosomethinganddidn’tknowwhatelsetodo.Beforelong,theUnitedStateshad200,000ofitsowntroopsinVietnamandwasbombingHanoi“backtotheStone17Age.”Finally,afterAmericantrooplevelsinVietnamreachedhalfamillion,andnearlyhalfatrilliondollars(adjustedtoyear2000dollars)hadbeenspent,andnoncombatantswerebeingkilledorseriouslyinjuredattherateof1,000aweek(MacNamara’sestimate),Americanscametotheirsenses.TheidealistslefttheStateDepartmentandtheDefenseDepartment.Realists,ledbyHenryKissinger,cameinandfiguredouthowtoabandonSouthVietnamesealliesandsneakoutofthewarintheleastdisgracefulwaytheycould.VietnamthendidfalltothecommunistsandAmerica’serstwhileallieswerereeducated.Butwastheworldbetterorworse?Noonekneworcared.AfterAmericanslefttheplace,exceptforalengthydiscussionofMIAandPOWs,Vietnamdisappearedfromthenews.Whatpeoplehadworriedaboutsomuchhadhappened.HoChiMinhhadwon.Butitseemedtomakenodifferencetoanybody.DidtherestofSoutheastAsiafall“likedominoes?”Notatall.Cambodialostitsheadinamadfrenzyofmurder.WhatthathadtodowithVietnamisnotentirelyclear;theworldbreathedasighofreliefwhenVietnamesecommunistsinvadedtheplacetorestoreorder.FACINGTHEENEMY Aquartercenturylater,MacNamaraandagroupofassociatesconfrontedateamledbyhisoldadversary,VoNguyenGiap,inaseriesofmeetingsheldinHanoi,between1995and1998.Theexchangewasadvertisedasanattempttolearnsomething.ItisrecordedinabookbyMacNamara,ArgumentwithoutEnd:InSearchofAnswerstotheVietnamTragedy.Appropriately,thereisaphotoofthatarchworldimprover,WoodrowWilson,atthebeginningofthebook.WedonotknowwhatinspirationRobertMacNamaradrewfromWilson,butweguessitwastheworstsort.Wilsonhadsent112,000AmericanstotheirdeathsinWorldWarIinanefforttowinawartoendallwars.TheresultwastheoppositeofWilson’sstatedintention.Butinsteadofreachingtheobviousconclusion—thatWilsonwasadimwit—MacNamararushedtodosomethingjustasfoolish.AttheheightofthewarinApril1969,AmericantroopsinVietnamnumbered543,000,atacostof$61billionperyear—far,farmorethantheadministration’sestimatesof$5billionperyearmaximumprovidedbackin1965(afigurethatseemedtoemergetimeandagainamidthevaguegeneralizationsMacNamaraandothersoffered).MacNamara’sbookmakesamusingreading.ItdescribesafutileeffortonthepartoftheAmericanteamtogettheirVietnamesecounterpartstotakeameasureoftheblameforwhattheyregardedasa“tragedy.”TheVietnamesesawnotragedyandacceptednoblame.Instead,thewaytheyseeit,theircountrywasattackedbyforeigners—firsttheFrench,thentheJapanese,thentheFrenchagain,withsupportfromAmerica,andthenbytheAmericans.Theyhadundertakenalong,costlywartoliberatethecountry—againstavastlysuperiormilitaryforce.Itwasnotragedy;itwasacrime.OntheAmericanside,MacNamaraandhisfellowimperialistsweredeterminedtokeepmoralityoutofthediscussion.Theyregardedthewholeaffairasaseriesofunfortunateerrors,miscalculations,misunderstandings,andmistakes.Theyfacedtheirformerenemiesnotassinnersorcriminals,butasincompetents.TheyseemedpracticallydesperatefortheVietnamesetoplayalong,toadmitthatthey,too,mademistakesthatcontributedtothemisunderstandingthatledtothetragedy.ButtheoldAnnamiteswouldn’tcooperate. Asked,forexample,iftheNorthVietnamesehadn’tmisreadthesignalimpliedinPresidentJohnson’sbombingcampaignthatbeganMarch5,1965(called“RollingThunder”),theVietnamesedelegatesprotested.Theydidn’tknowitwasasignal.TheythoughttheAmericansweretryingtokillthem.Inalmosteveryinstance,MacNamaraandtherestoftheAmericanteamtriedtokeepthediscussiononstrategicissues,diplomaticinitiatives,inputs,outputs,throughputs,andothermumbojumbo.Eventhreedecadesafterthefact,despitethepublicweeping,MacNamaraseemsalmostnottonoticethathesentmentokill,whowerenotalwaystooparticularaboutwhomtheykilled.Whenamansticksaknifeinhisneighbor,itisnoteasytodisguisewhatisreallyhappening.Theeventisrightinfrontofhim.Butthefogofwar,asClausewitzcalledit,multipliesbythesquareofthedistancefromit.IntheOvalOfficeorthewarroomsofthePentagon,thetransactionsthattookplaceinVietnambecame“costs”or“losses”or“collateraldamage.”Itwasasiftheywererunninganinsurancecompany.Thelosseswereregrettableperhaps,butalsoexcusableand,generally,forgettable.TheVietnamWar,1961to1975,wasfarbloodierthanweareaccustomedtothink.Americalost58,000troops.TheVietnameselostanestimated3.8million,accordingtoMacNamara.Yet,readingthewhizkid’saccountofhisinvolvement,itisasifhehadnevermetasingleoneofthem.Everyhumanbeinginthewarwastreatedaswarmatériel.Theywereresources,likebombsandcansofCoke.Treatedasassetsonthemilitarybalancesheet,theyareexpendedasthoughtheywereinflatedcurrency.RobertMacNamarasawthewarasabounded,engineeringproblem.Heexpectedittoberational,asystemthatcouldbemodeledandthatwouldyieldtopracticalplanningandlogicalextrapolation.HeexpectedthewarcouldbewonsimplybyincreasingthecosttotheVietcongandNorthVietnamese.Atsomepoint,thecostwouldbecomeunacceptablyhigh.Inthissense,hewasnotunlikethegeniuseswhoranLong-TermCapitalManagementintothegroundinthelate1990s.Theythoughtthefinancialworldcouldbemodeled,too—justasifitwerescience.Theyreasonedthattheoddsofaninvestmentgoingupordowncouldbecalculatedjustasyoucouldfigurethe oddsofhittinganicebergintheNorthAtlantic.Thenyoucouldmakeyourbetscalmly,scientifically;afterall,itwasjustadvancedmathematics.TheeconomistsatLong-TermCapitalManagementincludedtwowinnersoftheNobelPrize,buttheirtheorieswerewrong.Neitherinvestingnorwarmakingisahardscience;theyare“human”sciencesperhaps,closertoartthanscience.Thedifferenceisobvious.Youcanheatwaterto212degreesFahrenheitanditwillboil—everytime(assumingconstantpressure).Butputamanunderheatorpressure,andthefellowcouldreactinanynumberofdifferent,unpredictable,irrational,andwhollybizarreways.Between1965and1975,theUnitedStatessteppedupitskillingcampaign.TheVietnamesesufferedhundredsofthousandsofcasualtiesasthepressureincreased.Americawasturninguptheheat,readyforittoboiloverandforcetheNorthVietnamesetothenegotiatingtable.Thetablewasset.ButtheAmericanswereastonishedwhennooneshowedup.ItwasasiftheNorthVietnamesedidn’tcarehowhotitgot.ItwasasiftheyignoredalltheresourcestheUnitedStateswasbringingtobearandthelossesthattheywereinflicting.Itwasasiftheycouldn’tcount!ItmadenosensetoMacNamara.So,heaskedthequestionoftheVietnamesedelegationsittingoppositehiminHanoi,30yearslater.HowcomeallthemiseryweinflictedontheVietnamesedidnotbringthemtoaskforasettlement?TranQuangCoreplied:IwouldliketoanswerMr.MacNamara’squestion....ImustsaythatthisquestionofMr.MacNamara’shasallowedustobetterunderstandtheissue.Duringthecoffeebreak,anAmericancolleagueaskedmeifIhadlearnedanythingabouttheU.S.duringthediscussionsofthepastfewdays.AndIrespondedthatIhavelearnedquitealot.However,thankstothisparticularquestion,IbelievewehavelearnedstillmoreabouttheU.S.WeunderstandbetternowthattheU.S.understandsverylittleaboutVietnam.Evennow—inthisconference—theU.S.understandverylittleaboutVietnam.WhentheU.S.bombedtheNorthandbroughtitstroopsintotheSouth,well,of course,toustherewereverynegativemoves.However,withregardtoVietnam,U.S.aggressiondidhavesomepositiveuse.NeverbeforedidthepeopleofVietnam,fromtoptobottom,uniteastheydidduringtheyearsthattheU.S.wasbombingus.NeverbeforehadChairmanHoChiMinh’sappeal—thatthereisnothingmorepreciousthanfreedomandindependence—gostraighttothehearts18andmindsoftheVietnamesepeopleasattheendof1966.TheVietnamWarwasnotmerelyatragedy;orevenacrime.Itwasafarce.Americantroopshadbeensenttokillpeopletheydidn’tknow,inacountrytheyhadneverbeen,forreasonsnoneofthemcouldunderstand,bymenasbenightedastheywere.HoChiMinhhadexpectedtheUnitedStatestocometohisaid,nottoseekhisdestruction.Yet,MacNamaraandPresidentJohnsonsenttroopstokillpeopleonthebasisofanideasoflimsythat,whenthewarwasover,itdisappearedwithoutatrace.Gradually,thewarwasescalatedonthebasisofamistakeandrunasaseriesoferrors,culminatinginadisgracefulrout.Ateverystepoftheway,Americanmilitaryandcivilianofficialsmisunderstoodandunderestimatedtheiropponents.GeneralWilliamWestmorelandbriefedCongressinJuly1967:“Thesituationisnotastalemate.Wearewinningslowlybutsteadily,andthepacecanaccelerateifwereinforceoursuccesses.”Allweneedismoreresources!Hecouldhavesavedhimselfthetroubleofmakingitupandtakenthecommuniqué,wordforword,sentbyFrenchGeneralRaoulSalan,whoinOctober,20yearsbefore,reportedthattheVietminhwereontherun.Allthatwereleftwereisolatedbandssusceptibletopoliceoperations.“Notonceduringthewar,”wroteGeneralBrucePalmerinhisbook,Twenty-fiveYearWar,“didtheJointChiefsofStaffadvisethecommander-in-chieforthesecretaryofdefensethatthestrategybeingpursuedmostprobablywouldfailand19thattheU.S.wouldbeunabletoachieveitsobjectives.”Achieveitsobjectives?NoonereallyknewwhatAmerica’sobjectiveswere.Oriftheywereattainable.Or,iftheyreallymadeanydifferencetoanybodyinAmerica.TheUnitedStateshadbecomeanempirewithscarcelyanyonenoticing. Itsgoalswerenolongerthoseofitspeoplebutoftheempireitself.Anempiremustroutinelyandhabituallycontestcontrolofperipheryareas.Theimperialpeoplehadmerelycometobelievewhattheyhadtobelievetogoalongwiththeprogram.ThemadnessbeganasanoversimplificationbackintheEisenhoweradministration.In1954,PresidentEisenhowerprovidedhisnowfamous“domino”speech,bywayofexplainingthatifSouthVietnamwerelosttocommunism,allofIndochinawouldfall.InNovember1995,GeneralVoNguyenGiapputittoRobertMacNamaragenerously:Dominoes,dominoes,dominoes—thistheorywasanillusion.WhateverhappenedinVietnamhadnothingtodowithwhathappenedinLaos,nothingtodowithIndonesia....Iamamazedthateventhebrightestpeople—peoplelike20yourself—couldhavebelievedit.Believedit?Whatwastheretobelieve?Thatastate—anabstractaswellasphysicalthing—of35millionpeople(in1965)ofvariouscultures,languages,religions,ethnicandracialgroups,politicalpreferences,modernization,andsexualpreferences,livinginalandof127,000squaremiles(aboutthesizeofNewMexico),includingmountains,swamps,beaches,plains,jungle,hamlets,andcitiescouldbeunderstoodasasmall,three-dimensionalobjectpaintedintwocolors!Theideawasnotstupid.Itwasjustabsurd.Einsteinhadsaidthatthingsshouldbemadeassimpleaspossible,butnosimpler.America’sempirebuildersofthe1960shadgonetoofar.ItwasasiftheyhadsimplifiedtheOldTestamentas:“JewskickbuttsintheHolyLand.”Theyhadlostthenuancesanddetailsthatmadeitinteresting.WhetherLaosorCambodiawouldbeaffectedbyeventsinVietnam,noonecouldsay.ButwhattheycouldsaywithcompleteassurancewasthatVietnamwasnotadomino.Ifproximitycausednationstochangetheirpoliticalsystems,whyhadn’tWestGermanybecomelikeEastGermany?WhydidSwitzerlandkeepitsfederalsystemwhenitwassurroundedbycentralizedgovernments?And whoeverheardofdominoesthatfellonlyinonedirection?IfthepresenceofacommunistSouthVietnammightcauseThailandtotoppletowardcommunism,mightn’tthepresenceofThailandonitsbordercauseSouthVietnamtotoppletowardconstitutionalmonarchy?Itwasnotmerelymadtokillpeopleonthebasisofthedominotheory,itwasWilsonian.Butoncethemadnesstookhold,therewasnothingstoppingit.Soon,almosteverymemberofthechatteringclasseshaddecidedthatwhatwasliterallyandobviouslyuntruewasworth(someoneelse)dyingfor.Thirtyyearsafterthefact,MacNamaraseemedembarrassedtorecollectwhyheandhiscolleaguesoncethoughtthematterwassovitallyimportant.Theyfiguredthecommunistsweretakingovereverywhere.IfVietnamalsofelltocommunists,itwouldbeadisaster.Butwhy?Nooneseemedtorecall.Yes,therewerethedominoes.IfVietnamwentcommunist,somightallofSoutheastAsia.Wenowknowthatitwasnonsense.Butwhatifithadbeentrue?IfthepeopleofSoutheastAsiawantedto“gocommunist,”whowerewetotellthemnotto?ItwasonlybecauseAmericapresumedtoempirethatthequestionevencameup.Empiresareinvolvedinconstantwarfare—thestruggletocontrolvassalstatesontheperiphery.Typically,theydosotomaintainorderthroughouttheempire,aswellastoobtainnewsourcesoftribute.Butouranswerpresumesalogicthatisn’tthere.Empiresfightfordominoes—notforanyparticular,logicalreason,butmerelybecausetheyareempires.MacNamarapointsoutthatleadingintellectuals,themedia,politicians,policymakers,andevenstreetbumsviewedthewarasastrugglebetweencommunismandtheFreeWorld.CouldnotVietnamhavebeenindependent,butneutralintheColdWar?Whydiditmatteranyway;Vietnamwasstillaprimitive,mostlyagriculturalnation.Whicheversidegainedherallegiance,whatdidtheygain?Nobodyeverseemedtoask—eitherthemselvesortheotherside.“Iamaghastattheshallownessofourthinkingontheissueofaneutralsolution,”writesMacNamara.“Whydidn’tweaskHanoiforafullexplanation oftheprocesstheyforesaw?Ifwehadasked,andiftheyhadconvincedus,forexample,thattheyforesawreunificationtakingyears,evendecades,mygod,we21wouldhaveorshouldhavejumpedatit.”Inthediscussionsandconfessions30yearsaftertheendofthewar,theVietnamesesaidtheyhadbeenopentosuggestion.Inretrospect,itlooksasthoughthewholeconflict—oratleastthebloodiestpart—couldhavebeenavoided,simplybysittingdownandexploringafewissues.ButthelunkheadsrunningU.S.foreignpolicyatthetimedidnotevenbothertoask.Itwasarrogance,nodoubt,onthepartofMacNamaraandothers,thatpreventedanyoneintheadministrationfromseriouslyconsideringconversationasanalternativetobruteforce.Badideas,foolishtheories,misconceivedcampaigns,misunderstoodsignals—thewarinVietnambeganinalmosttotalignoranceandwentdownhill.Nobodyknewanythingworthknowing.Nobodyunderstoodanythingworthunderstanding.Andnobodydidanythingworthdoing.Butwereturntothecriticalquestion:AmericansweredeadsetagainstlettingVietnam“gocommunist.”Why?IfagroupofpeopleinColumbus,Ohio,decidedtopooltheirpropertyandtolivecollectively,therewouldbenoterribleoutcry.(Thougheventually,theFedswouldprobablygetthemonaweaponsortaxcharge.)Theonlyplausiblereasonforbeingagainstcommunismisthatthecommunistswerealmostinvariablyworld-improversthemselves.Theywerenotcontenttocollectivizetheirownproperty,butinsistedoncollectivizingotherpeople’sproperty,too.Then,whentheyhadmadeamessoftheirowncountry,theyturnedtheirsightsonthecountriesnextdoor.Thefeaturethatmadecommunismbarbaricwasnotthatpeoplesharedthesametoothbrushordeniedtheprofitmotive.Instead,itwasthecommonmarkofallbarbarism—thereadinesstousebruteforcetogetwhatyouwant.Whatmarksacivilizedsociety,ontheotherhand,isareluctancetouseforce,preferringpersuasionandcooperationoverforceandfraud.Thereareonlytwowaystogetwhatyouwantinlife.Youcangetithonestly,bytrade,work,orsomeotherbargain—aneconomicmeansofsomesort.Or,you cangetitdishonestly,bystealingitortakingitawayfromsomeone—thatis,bypoliticalmeans.Thereisnootherway,saveamiracle.Thisdistinctionworksfor“things”suchasautomobilesandwhiskey.Italsoworksforother“wants”—suchassex,ambition,andvanity.Wecanbuildourreputationsandourownamourproprebyeconomicmeans;say,byworkinghardwecanearnmoneyandfeelsuperiortoothers.Orwecanpickafightwithotherstoprovewecanbeatthem.Intowhichcategorydoestheeffortto“bombNorthVietnambacktotheStoneAge”fit?AmericaninvolvementinVietnammayhavebeenwell-intentioned,butitwasmissingthepoint.MartinLutherKingconfrontedthecontradictioninafamousspeech.“Myoppositiontothewar,”hesaid:...growsoutofmyexperienceintheghettoesoftheNorthoverthelastthreeyears—especiallythelastthreesummers.AsIhavewalkedamongthedesperate,rejectedandangryyoungmenIhavetoldthemthatMolotovcocktailsandrifleswouldnotsolvetheirproblems.Ihavetriedtoofferthemmydeepestcompassionwhilemaintainingmyconvictionthatsocialchangecomesmostmeaningfullythroughnonviolentaction.Buttheyasked—andrightlyso—whataboutVietnam?Theyaskedifourownnationwasn’tusingmassivedosesofviolencetosolveitsproblems,tobringaboutthechangesitwanted.Theirquestionshithome,andIknewthatIcouldneveragainraisemyvoiceagainsttheviolenceoftheoppressedintheghettoswithouthavingfirstspokenclearlytothegreatestpurveyorofviolenceintheworldtoday—myowngovernment.Forthesakeofthoseboys,forthesakeofthisgovernment,forthesakeofhundreds22ofthousandstremblingunderourviolence,Icannotbesilent.IfWesterndemocracieshaveavirtue,itisthattheyaregradualandconsensual—thatistosay,thattheyarecivilized.IfsuddenlythemajorityofAmericansweretodecidethateverycitizenwithredhairshouldbeguillotined,itwouldbeanuncivilizedthingtodo—eveniftheyhadvotedonitfairandsquare.Itisthemeansthataretheend.Thefactthatpeoplearewillingtogetalongwithoneanotherwithoutresorttoviolenceiswhatmakesacivilizedsociety,notthe factthattheparticularday-to-daywhimsofthemassesareenactedintolawbyagroupoflegislativehacks.DefendingWesterncivilizationbybombingNorthVietnamwasabitlikewhatClovis,KingoftheFrancs,proposedtodoafterhehadbecomeaChristianandlearnedofChrist’scrucifixion.LegendhasitthatClovisremarked:“IfonlyIhadbeentherewithmyarmies,IwouldhavehadrevengeagainstthoseJews.”Inhisprivatelife,LyndonJohnsonunderstoodwhattheVietnamWarreallymeantforAmerica:Idon’tthinkit’sworthfightingforandIdon’tthinkwecangetout.It’sjustthebiggestdamnedmessIeversaw....Andwejustgottothinkabout—Iwaslookingatthissergeantofminethismorning.Gotsixlittlekids...andhebringingmemythingsandbringingmemynightreading...andIjustthoughtaboutorderinghiskidsinthereandwhatinthehellamIorderinghimouttherefor?WhatthehellisVietnamworthtome?WhatisLaosworthtome?Whatisitworthtothiscountry?No,we’vegotatreaty,but,hell,everybody’sgotatreaty23outthereandthey’renotdoinganythingaboutit.ButAmericawentinanyway.Andthenthebodiescamebackinplasticbags.Andevenafter30years,itseemsnottohaveoccurredtoMacNamarathathedidanythingwrong.Rightandwrongseemedtohavenoplaceinhisanalyticalbrain.Instead,hewonderedhowhecouldhavedonehisjobbetter,howhecouldhavefoughtthewarmoreefficiently,orwhyhe“missedopportunities”tosettleitatlowercost.Hesawnomorallessons—onlypracticalones.Helookedfornowisdomfromthedead,onlyhintsfromthelivingabouthowtowin.Ifhehadonlyhadmoreinformation,saysMacNamara,hisworldimprovementswouldhaveturnedoutbetter.TranQuangCoputhimonthespot: Mr.MacNamaraadmitshismistakes,whichweadmire,butheunfortunatelyattributesmostmistakestomisjudgmentsandmiscalculations.Butwemustalsoask:Whataboutvaluesandintentions?AsIunderstandit,therighttoself-determination—theindependenceofanation—belongstothegeneralvaluesoftheworldcommunity.WhataboutU.S.supportoftheFrenchcolonialistsafterWorldWarII,indefianceofitsowndemocratictraditions?WhataboutthedirectU.S.militaryinterventioninVietnam—ImeansendingU.S.soldierstofindandkillSouthernVietnamese?AndwhatabouttheU.S.policyseekingtodivideVietnamforgoodandto“bombNorthVietnambacktotheStoneAge?”We24mustask:arethesepoliciesconsistentwiththemoralvalues?Principles?Morals?Thereisnoroomforconstitutionalrestraints,authenticvalues,orrealvirtueswhenyouarebuildinganempire.Theheartoverpowersthebrain.Publicchatteroverpowersprivatethoughts.Publicslogansdrownoutprivateactsofdecencyandcourage.Emptywordsandbigtheoriesreplaceactualthinking.Thepublicitselfischarmedandbamboozled,thenrobbed,killed,orboth.AmericanslearnednothingfromtheFrenchexperience.DeGaullewarnedKennedythatVietnamwouldbeagraveyardforAmericansoldiers.Itwasa“rottencountry,”hesaid,unsuitableforWesternwaysofwar.Butintheinflationaryboomofthefirst“GunsandButter”administration,thatofLyndonB.Johnson,AmericansthoughttheycoulddowhattheFrenchcouldn’t.TheyspentfarmoremoneythantheFrenchandlostfarmoremen,butGiapbeatthem,justashehadtheFrench.WhileFranceandAmericaenjoyedtheirdefeats,Vietnamsuffereditsowndrearyindependencelikeawarwound.Thewholecountryoozedapatheticpovertyforthenextquartercentury,scabbedoverwithasqualidideology.Asof2005,GeneralGiapwasstillalive.Theoldman,91whenhewasinterviewedbytheFigaroin2004,wasaskedwhathethoughtofAmerica’ssituationinIraq:“Whenyoutrytoimposeyourwillonaforeignnationyouwillbedefeated.Everynationthatstrugglesforindependencewillwin.”Woeto empires.“Whatwe’vedone,”continuedtheoldman,perhapsdriftingintoseniledementia,forgettingthathiscomradessetupapolicestatefollowinghismilitaryvictory,“wastofightfortherightofeachmantoliveanddevelopashechooses...andtherightofeachpeopletoenjoynationalsovereignty.”8Nixon’stheOneOnAugust15,1971,theadministrationofRichardMilhousNixondidsomethingextraordinary.Itslammedthe“goldwindow”shut.Henceforth,foreigngovernmentswouldnotbeabletoredeemtheirsurplusU.S.dollarsforgold.Mentionthelatepresident’sname,andtheaveragepersonrecallsthecrimewithwhichheissooftenassociated:B&E(breakingandentering)attheWatergate.Butwhilethepublic’sattentionwasdistractedbyNixon’sfumblingsidekicks,anotherteamofNixongoonswaspullingoffthebiggestheistofalltime.Alumpeninvestor,auniversityeconomist,oraFederalReservegovernormighthavereadtheheadlinesofthepast30yearswithoutnoticinghowtheytuckedtogether.Hemighthaveseentheboomingoldofthe1970s,thebubbleinJapaninthe1980s,orthesubsequentbubblesthroughouttherestofAsiaaseventsasindependentofeachotherasastolenhub-capinNewOrleansandastolenkissinBoston.HemightalsohavelookedontheboomandbubbleintheUnitedStatesasunrelatedandmistakentherun-upinstockpricesasaconsequenceoftheNewErawonderage,thenewproductivityofinformationagetechnology,orthenewfoundwisdomoftheguidinghandsattheFederalReserve.Hemayevenhavereferredtotheproductivitymiracleasthesourceofsuchawonderfulthing.Never,ontheotherhand,wouldhehaveimaginedthatallthegreateconomicandmarketeventsofthepastthreedecadesfoundtheirinspirationinthesame placeandtime:atthehandsofNixon’shenchmenintheearly1970s.Figure8.1ConsumerPriceIndex,1960-1980RichardNixon’sdecisiontoslamthe“goldwindow”shuthashadonedemonstrableeffect:Itsetinmotiontheworld-widecreditbubbleofthepaxdollariumage.Asaresult,thepriceAmericanshavetopayfor“goodsandservices”hasrisendramatically—andwithoutapause—eversince.Source:BureauofLaborStatistics.Whatwastheircrime?Breachofcontract?Theft?Fraud?Counterfeiting?Itwasallthosethings.TheybreachedthesolemnpromiseoffivegenerationsofU.S.Treasuryofficialsandsetinmotiontheworldwidecreditbubbleofthepaxdollariumage(seeFigure8.1).In1971,thedecisiontoabandonthegoldstandardwasnotexactlyanimprovisation.ThedecisionwaspartofaseriesofmovesmadebytheNixonadministrationtoholddownwagesandpricesandtocheckinflation.Consumerpricesroseat4.9percentin1970andinflationlookedasthoughitwasgoingtogetworse.Nixoncametobelievethathecouldcontroltheeconomy,eventhoughthisshiftinpolicycontradictedhisownpoliticalandeconomicphilosophyasstatedinthepast.ArthurBurns,chairmanoftheFederalReserveduringNixon’sadministration, hadservedasanadvisorduringNixon’sfailed1960presidentialcampaign.Atthattime,BurnswarnedNixonthattightmoneypolicieswouldworsentheeconomy,hurtingNixonandultimatelycostinghimtheelection.Burnsprovedtoberight:Now,adecadelater,inMay1970,Burnsstoodupanddeclaredthathehadchangedhismindabouteconomicpolicy.Theeconomywasnolongeroperatingasitusedto,owingtothenowmuchmorepowerfulpositionofcorporationsandlaborunions,whichtogetherweredrivingupbothwagesandprices.Thetraditionalfiscalandmonetarypolicieswerenowseenasinadequate.Hissolution:awage-pricereviewboard,composedofdistinguishedcitizens,whowouldpassjudgmentonmajorwageandpriceincreases.Theirpower,inBurns’s1newlexicon,wouldbelimitedtopersuasion,friendlyorotherwise.Nixonagreedwithmostofit,exceptthepartaboutlimitingcontrolstofriendlypersuasion.NotsincethereignofDiocletianhadsuchapowerfulempireattemptedsuchanidioticthing.Aspartofthebigchangesin1971,NixoncreatedtheCostofLivingCouncil,organizedspecificallytoadministera90-dayfreezeonwageandpricehikes.Althoughthistemporarymeasurewasremoved,inflationreturned.InJune1973,controlswerereimposed,shortlybeforeNixon’sresignation.Finally,admittingthatthesepoliciesdidnotworkashoped,thewageandpricecontrolplanwasgivenupinApril1974duringtheFordadministration.PAYINGTHEPRICEFinancially,theVietnamWarwasamess.Thedecisionmakershadnoideahowmuchthewarwouldcost,orhowthebillswouldbepaid.Asearlyas1965,theMacNamarateamhadanestimatefromArmyChiefofStaffGeneralHaroldK.Johnsonthatwinningthewarwouldrequireasmanyas500,000troopsandfiveyearsoffighting.Thepolicymakerswereaghast.Theywerenotpreparedto committoanythinglikethatlevelofinvolvement—intermsofthenumbersofmenaswellasthecostsinvolved.ThechairmanofPresidentJohnson’sCouncilofEconomicAdvisors(CEA)toldthepresidentin1965,“ThecurrentthinkinginDOD[DepartmentofDefense],asrelayedtomebyBobMacNamaraonasuper-confidentialbasis,pointstoagradualandmoderatebuild-upof2expendituresandmanpower.”Thedebateovertherealcostsofthewarcontinuedthroughouttheentireperiodfrom1964through1968.Itwasn’tuntillate1967,however,thatLBJaskedCongressfora10percenttaxsurcharge.Thatsurchargewasapprovedbymid-1968,butonlyonconditionthatJohnsonalsocut$6billionfromdomesticprograms—arequirementthathurthimdearly.HisbelovedGreatSocietyprograms,halfofthe“guns-and-butter”policydefininghispresidency,ultimatelywerecurtailedbytheescalatingcostsofthewarinVietnam.ButneitherthecostsofthewarnorthoseoftheGreatSocietywerecutenough.ThetotalspentbytheUnitedStatesontheVietnamWaramountedtomorethan$500billionintoday’smoney.Thatisalotofmoneyatanytime.Atfirst,Johnsonassuredthenationthatthewarwouldnotjeopardizehisotherpromises.Hehadpledgedtogiveawaybillionsofotherpeople’smoney;theofferwasstillgood,hesaid.HetoldCongressin1966,“Ibelievethatwecancontinuethe3GreatSocietywhilewefightinVietnam.”Asthecostsmountedup,governmentbudgetofficialsandhisowneconomicadvisorsbegantoworry.Themathwasn’tworking.Thepresident’sguns-and-butterpolicy,a1960s’versionoftheRomans’breadandcircuseswastooexpensive.Theyrealizedtheyneededmorerevenue.RisingdeficitsandrisinginflationlevelsintheUnitedStatesworriedforeigndollarholders,whobegancallingawayAmerica’sgold.Onlyhighertaxrevenuescouldcuretheproblem(seeFigure8.2).PresidentJohnsonstoodhisground.Hefearedthat“allhellwillbreakloose,”ifheweretorequestataxincrease.Congresswouldrathercutthebutterthanraisetaxesorgiveuptheguns.TheresultwouldbetheendoftheGreatSociety.LyndonJohnsonhadnomoneyofhisowntofundtheGreatSocietyprogramshesetinplace.Hecouldonlygivemoneytoonevoterbytakingitawayfromanotherone.PeterhadtoberobbedifPaulwastobepaid. Buttheftisnotmurder,andnotonlywillthemajorityofcitizensinademocracyputupwithalittlethievery,theywillwelcomeit—especiallyifitisdoneontheirbehalf.ThemostpopularAmericanpresidentswerethosewhostolemostbountifully.Thelogicofdemocraticlarcenyisthattherearealwaysmorevotersreceivingtaxmoneythangettingittakenfromthem.ThatistherealreasonDemocratsfavordoingsomething“tohelpthepoor”—therearemoreofthem;youcanbuytheirvotescheaply.Wavea$10billinfrontofarichmanandyouwillgetlittleattention—inatrailerpark,youwilldrawacrowd.Still,inafluidsocietyliketheUnitedStates,therearealsoalotofpeoplewhohopetogetrichsomedayandwanttolookforwardtoholdingontotheirmoneyifitevercomestheirway.So,thereisalwaysacertainresistancetohighertaxes,andin1966and1967,LyndonJohnsonwasloathtorunintoit.Figure8.2FederalOutlays,1960-1970ThetotalamountspentbytheUnitedStatesontheVietnamWarexceeded$500billionintoday’smoney.LyndonJohnson’sguns-and-butterpolicy,a1960s’versionoftheRomans’breadandcircuses,wastooexpensive.RisingdeficitsandinflationintheUnitedStatesworriedforeigndollarholders,whobegancallingawayAmerica’sgold.Source:“HistoricalTables”BudgetoftheU.S.Government.Buttherewasresistancetobankruptingthecountry,too.Therewerestillafew geezersinCongresswhobelievedinbalancedbudgets.So,afterthe1966elections,Johnson’s10percenttaxsurchargewaspresented.This,hesaid,wouldgivetheUnitedStates“stayingpower,”initsfightwithcommunism.RobertMacNamaranowclaimsthatheknewthewarwashopelessasearlyas1964,sostayingpowerwasexactlywhattheUnitedStatesdidn’tneed.Whatitneededwasthecouragetoquit.Butitisthiscouragethatismostlackingintimesofwar.Menwouldratherdiethanadmitthattheyaredoinganasinineandpointlessthing.Johnson’staxhikewasopposedintheHousebyMinorityLeaderGeraldFordandWaysandMeansCommitteeChairmanWilburMills.ThesouthernDemocratsandnorthernRepublicanswantedspendingcuts,nottaxhikes.Johnsonsaid:Theywilllivetoruethedaywhentheymadethatdecision,becauseitisadangerousdecision...anunwisedecision....Iknowitdoesn’taddtoyourpollsandyourpopularitytosaywehavetohaveadditionaltaxestofightthiswarabroadandfighttheproblemsinourcitiesathome.Butwecandoitwiththegrossnationalproductwehave.Weshoulddoit.AndIthinkwhentheAmerican4peopleandtheCongressgetthefullstorytheywilldoit.By1968,theempirewasgoingbroke.Goldreserveswerebeingdepleted.Congresshadtoact,passingthe10percenttaxsurchargealongwithabudgetcutof$18billion(abouta10percentcutinappropriations).Johnsonhadtomeltsomebuttertogetmoreguns.Atthetime,Washingtonstilloperatedonold-fashionedKeynesianeconomicsandagoldstandard.Economistsbelievedgovernmentcouldspendmoreheavilyintimesofwarortimesofeconomichardship(to“primethepump”),butitwasstillwidelyagreedthatwhatwasborrowedmustbepaidback.Deficitsstillmattered,partlybecausetheythreatenedthenation’scurrency(anditsgoldbacking),andpartlybecausepolicymakersstillthoughttheywouldhavetomakeupoverspendingnowbyunderspendinginthefuture. Then,asnow,taxpayerscouldbesqueezed,butonlysohardandonlyifpoliticallyrealistic.Otherwise,theywouldsoonstarttohowl.Redistributionofwealthonlyworks,politically,ifsomeoneelse’smoneyisbeingpassedaround.Taxpayersdon’tseeanyadvantageingivinguptheirownmoney.Liberalpoliticiansinthe1960sadvertisedthemselvesmuchasGeorgeW.Bushdoestoday.Theysaidtheywereextendingfreedomathomeaswellasabroad.“Howcananyonesaythatanationwithanincomeofmorethan$8005billioncan’tafforda$30billionwar?”saidPaulDouglasofIllinois.“MilitaryforcesabletodefendthecauseoffreedominVietnamandtocounterotherthreatstonationalsecurityrequiresubstantialresources.Yetwecannotpermitthedefenseoffreedomabroadtosidetrackthestruggleforindividualgrowthanddignityathome,”addedJohnson.VicePresidentHubertHumphreyjoinedin,sayingthatAmerica“canaffordto6extendfreedomathomeatthesametimethatitdefendsitabroad.”“TheUnitedStatesisnotfaced—norcoulditbefaced—withagunsandbutterchoice....Thiscountryhasampleresourcestoprosecutetheshootingwarandstillcombattheshortcomingsofourownsociety,”continuedAFL-CIOpresident7GeorgeMeany.Nordidthepeopledisagree.Americansfavoredmoregunsandmorebutter,overareductioninspendingoneitherfront,byamarginof48percentto39percent,accordingtoaHarrispoll.UntiltheVietnamera,aftereverypreviouswarwasover,federalspendingdropped.WhentheVietnamWarended,however,federalspendingcontinuedtogoup.Thefederalbudgethadbeen$184billionin1969attheheightofthemilitaryspending.In1972,itroseto$231billion.In1969,thefederalgovernmentactuallyranasurplusof$3billion.By1972,withthewarwindingdown,weexpectedtoseethesurplusescontinue;butinsteadthesurplusturnedintoadeficitof$23billion. Theempiregrew,andkeptgrowing.BeforelaunchingtheattackontheUSSR,June22,1941,HitlerremarkedthattheSovietUnionwaslikearicketyoldhouse.Allwehavetodo,hesaid,was“kickinthedoorandthewholethingwillfalldown.”Hewas48yearspremature.TheSovietUnionfellapartin1989byitself;Americadidn’tevenhavetokickinthedoor.ButevenaftertheColdWarwasover,thefederalbudgetcontinuedtorise,from$1.14trillionin1989to$1.38trillionin1992.TheGreatSocietywasmerelythedomesticwingofAmerica’snewsystemofimperialfinance.Johnsonofferedmorebreadandmorecircusesthananypresidentbeforehim.Thefive-yearcostofadministeringtheGreatSocietyprogramswasestimatedat$305.7billion(in2005inflation-adjusteddollars).Thisdoesnotincludethe$250billionincollegeloansandgrantsto29millionstudentssince1965(seeFigure8.3).ThescopeoftheGreatSocietywasmassive,comparabletoFranklinRoosevelt’sNewDealprogramsbutonamoreexpensivescale.EvencountingonlyMedicaidandMedicare,theLBJideahasaddedtrillionstoU.S.futureobligations:During[theJohnson]administration,Congressenactedtwomajorcivil-rightsacts(1964and1965),theEconomicOpportunityAct(1964),andtwoeducationacts(1965).Inaddition,legislationwaspassedthatcreatedtheJobCorps,OperationHeadStart,VolunteersinServicetoAmerica(VISTA),Medicaid,andMedicare.AlthoughtheGreatSocietyprogrammadesignificantcontributionstotheprotectionofcivilrightsandtheexpansionofsocialprograms,criticsincreasinglycomplainedthattheantipovertyprogramswereineffectiveand8wasteful.Figure8.3M3MoneyStockThegreatcostofadministeringtheempirerequiresanever-expandingsupplyoftheimperialcurrency.SinceU.S.currencyhasbecomeuntetheredtogold,thequantityofpaperdollarsfloatingaroundtheglobehasballoonedsignificantly, renderingeachdollaralittlelessvaluablethanthelast.Source:FederalReserve.Thisexpansionhadtheconsequenceofcreatingmassivebureaucracieswithinthefederalsystem.ConsideringtheMedicaidandMedicarecostsalone,wehaveseenexponentialgrowthincurrentandfutureobligations,impracticalcost-benefitoutcomes,widespreadwaste,andfraudwithinthemedicalestablishment.Theprogramswereexpandedpartlytocountergrowingunrestathome.WeshouldrecallthatbytheendofJohnson’spresidency,thecountrywasdisturbed.Raceriotsintheinnercities,massiveantiwarprotests,andclashesbetweenstudentsandpolicewerecommonplacefrom1965onward,andcontinuedintoNixon’sreign.Peoplewantedmorebreadandcircuses.PersonalconsumptionexpenditureshadexpandedsignificantlysincetheendofWorldWarII.By1970,annualexpenditureswere4.5timeshigherthanin1946.After1971,whenthepaxdollarumsystembegan,expendituresgrewexponentially.Bytheyear2000,annuallevelswereat$6.68trillion—46timeshigherthanattheendoftheSecondWorldWar.ButwhatfollowedNixonimmediatelywasaneraoffinancialturmoilthathasrarelybeenequaledinmodernhistory.TheU.S.dollarplungedprecipitously;U.S.unemploymentexceeded10percent;oilpricesskyrocketedto$39abarrel;theDowJonesIndustrialAveragefellto570;goldreached$800anounce;and U.S.inflationandinterestratesclimbedtodouble-digitlevels.Imagineaninvestorwhoboughta30-yearU.S.Treasurybondin1970.Didhenothavearighttoexpecttoreceiveadollarbackforeverydollarlent?Andshouldn’thehavebeenabletoexpectthateachofthosedollarshereceived—intheyear2000—wouldbeworthaboutasmuchasthosehehadgivenup?Wecanmeasurethedamagebylookingatthepriceofgold.In1970,eachdollarwouldbuyaninvestor1/34ofanounceofgold.Thirty-fiveyearslater,Mr.Market,sittingasjudgeandjury,tellsusthatadollarisworthlessthan1/425ofanounceofgold.Investors,takingtheU.S.governmentatitsword,havelosttrillions.Still,sosubtlewasthetheftthatthevictimshavepracticallyapplaudedthecrime.Forthepast20years;theyseemedtothinkitwasmakingthemrich!PAXDOLLARIUMGlobalizedcommerce,aspracticedbytheUnitedStatessince1971,hasafraudulentside.Thehegemonicpowerusespoliticalmeans;evenwhenitshops.Duringthelastbigboostinthedivisionoflabor,inthenineteenthcenturyupuntil1913,goldbackedthemoneyinwhichtransactionswerecalibrated.Nocountry—notevenanimperialone—couldcheat.Ifacountryconsumedmorethanitproduced,othercountriesfoundthemselveswithsurplusesofthelaggardnation’scurrency.Theythencouldaskforgoldinsettlement.Goldwasreal,ultimatemoney.Nonationcouldmanufactureit.Nonationalassemblycouldundermineitsvalueorpassalawthatincreasedit.Whenanation’sgoldhordewasindanger,itquicklyadjusteditspoliciestocorrecttheimbalanceandprotectitsgold.Thedollar,ontheotherhand,ismerelyapieceofpaper,andsinceNixonslammedthegoldwindowshutitisbackedbynothingmorethanthefullfaithandcreditoftheUnitedStatesTreasury.Howgoodapromiseisthat?Nooneknowsforsure.ThegovernmentsetuptheFederalReserveinthefirstplacebecauseitwanteda stoogecurrency.Goldisfine,theysaid,butit’santisocial.Itresistsprogressanddragsitsfeetonfinancingnewwarsandsocialprograms.Whenwefaceawaroragreatnationalpurpose,weneedmoneythatismorepatriotic,theysaid.Goldmalingers.Goldhesitates.Goldisreticent.Goldkeepstoitself,offeringneitheradvicenorencouragement.Goldhasnopartyaffiliation;itdoesn’tvote.Whatweneed,policymakerssaidthemselves,isamorepublic-spiritedmoney,asourceofpublicfunding,aflexible,expandablenationalcurrency,apoliticalmoneythatwecanworkwith.Weneedadollarthatisnotlinkedtogold.InthemanyyearssincetheFederalReservewassetupin1913,goldhasremainedassteadfastandimmobileasever.Anounceofittodaybuysaboutthesameamountofgoodsandservicesasanouncein1913,androughlythesameamountasitdidwhenChristwasborn.Butthedollarhasgonealongwitheverybitofpoliticalgimcrackerythathascomealong—thewarinEurope,theNewDeal,WorldWarII,theColdWar,theVietnamWar,thewaronpoverty,thewaronilliteracy,theNewFrontier,theGreatSociety,SocialSecurity,Medicare,Medicaid,thewarinIraq,thewaronterror.Asaresult,guesshowmuchadollarisworthtodayincomparisontoonein1913?Fivecents.TheFederalReservesystemwassetuptoprovidethenation’sempirebuilderswithaconvenient,expandable,andcompliantmoney.Whenevertheyfelttheyneededmoreofit,thedollarwasrightthere,readyforduty.Therewasacrackinthatbell,too.Thedollarwasreadyforservice,butitsverywillingnesstoserveitsmastersinWashingtonmadeitunreliabletotherestoftheworld.IftheFedaskedthedollartojumpoffacliff,itwoulddoso,noquestionsasked.ThismightbeabenefittoWashington,buttoTokyoorPeking,itwasarisk.Atthebeginningof2005,thetwonationstogetherheldmanyU.S.Treasurynotesthatcouldtakeadiveatanytime.Since1971,theUnitedStateshasaddedtrillionstotheworld’ssupplyofdollarsandcredit.Duringthissametime,onlyabout58,000metrictonsofgoldhavebeenbroughtfromtheground.Soonerorlater,thoseextradollarsmustbemarkedtoanunforgivingmarket.Ofcourse,ithasn’thappenedyet.Investorsaretemptedtolookouttheir windows,seethesunshining,andthinkthedollarwilllastforever.TheyhavenointerestinthefinancialcrimesoftheDiscoAge. IIIEVENINGINAMERICATheborrowershallbeaslavetothelender.—Proverbs22:79Reagan’sLegacyItisstrange,Imeanthewaythingsworkout,”saidaguestatdinneronenight.“Itseemslikeakindofmadnesswandersaroundtheglobe.While,hereinEurope,weweretryingtobattereachothers’brainsoutyou,inAmerica,weresmart.Youweresittingbackandtakingorders.Nowyou’retheoneswhohavegonemad.”Ourguesthaddescribedtheworldofthenineteenthandtwentiethcenturies—thedayswhentheideaofanAmericanempirewasstillrepugnantandabsurd.Whilewars,revolutions,andpogroms,stormedoverEurope—andmuchoftherestoftheworld—Americakepttoitself,reluctanttogetinvolved.AttractivenewideaspoppedupalloverEuropelikepoisonousmushrooms.But,forthemostpart,Americanskepttheirheads.Mostwentabouttheirbusiness,seekinghappinessintheirownprivateways—tryingtogetrich.“ThebusinessofAmericaisbusiness,”CalvinCoolidgeexplained.Moneyisn’teverything,wesuddenlyrecalled.Lustingafterwealthisnotalwaysbecoming,notalwaysrewarding,andrarelyflatteringordignified.Thereissomethingvulgaraboutthehustlearealbusinessneeds...likesweatstainsonastarchedshirtoracoldcupofcoffeeandstubbedoutcigarettes.Amanwhowantstomakearealfortuneusuallyhastogrubforit;it’shardtobeelegantorrefinedwhenyou’rescratchingforcashormarketshare.Butgrubbingformoneyisstillbetterthanmanyotherthingsmendo.Whatfollowsisareflectiononwhat thelustformoneyisbetterthan.Grubbingformoneymightbefineforamodestnationworkingitswayupintheworld,butisitworthyofagreatnationonaroll?“Thetroublewiththeemphasisinconservatismonthemarket,”WilliamF.Buckleysaid,“isthatitbecomesratherboring.Youhearitonce,youmastertheidea.Thenotionofdevotingyourlifetoitishorrifyingifonlybecauseit’ssorepetitious.It’slikesex.”Anotherold“conservative,”IrvingKristolsaid:“What’sthepointofbeingthegreatest,mostpowerfulnationintheworld,andnothavinganimperialrole?”“It’stoobad,”Kristollamentedaboutmoney-grubbing,“IthinkitwouldbenaturalfortheUnitedStates...toplayafarmoredominantroleinworldaffairs...tocommandandtogiveordersastowhatistobedone.Peopleneedthat.”“WhenIthinkofallthecrazythingsthatwentonhereinFranceduringthelastcentury,”continuedourdinnerguest,“OrmaybeIshouldsayinEurope.Youknow,weinventedmostoftheawfulideasbackthen.Deconstructionism,Freudianism,Nazism,Conceptualism,Socialism,Syndicalism,Minimalism,Communism,Functionalism...cometothinkofitalmostalltheworstideascamefromEurope.AndeveninAmerica,ifI’mnotmistaken,almostallthenewdevelopmentsinphilosophy,art,andarchitecturecamefromimmigrants...ormayberefugees...fromEurope.Justabouteverything.Ofcourse,mostofitwasharmless.Funnyeven...likeDadaism.Butpoliticswasn’tsoharmless.Butnow,theworldhasturned.Nowyoudowhatwedid.Youcomeupwiththenewideas...andyoutrytoforceotherpeopletoacceptthem.Youhavethat...whatdotheycallit...neo-conservatism.”“Wesensethatweliveinatimesetapart,”saidGeorgeW.BushinhisStateoftheUnion,2004,address.WhatmadethetimeseemsosetapartwasthattheUnitedStateshadcometoresembleaparodyofitself;ithadcometolooklikethecountryleftistshadalwayscriticizeditforbeing,butthatithadneverbeen:aremarkablecombinationofself-delusionandself-satisfactionheadedfor self-destruction.Theoldconservatives,withtheirknee-jerkaffectionforlimitedgovernment,balancedbudgets,andfewerregulations—RepublicanprinciplesfromtheCoolidgeera—mighthavesavedthem,buttheoldconservativesweregone.Itisashameaboutconservatism.Yes,theoldsticks-in-the-mudwereanimpedimenttoprogress.Yes,theoldmossbacksweredullandpredictable.Yes,theiroldkneesjerkedwhenevertheythoughtsomeonemightbehavingfun.Still,wemissthosefuddy-duddies.Youcouldcountonthemtoresistthetyrannyofthehereandnow.Whensomethingnewpresenteditself,theywouldn’tlikeit.Theywouldresistit,notfromanyintellectualpointofview,butthewayamanresistsanewpairofshoesoradogresistsanewcollar.Thenewstylesmightbemorefashionable,butthatwasreasonenoughtoavoidthem.Asacreed,conservatismhaslostallitsadherents,atleastintheUnitedStates.Asaphilosophy,ithaspracticallydisappeared.Asapoliticalmovement,ithasdroppeddead.Everyonelikesnewthingsnow.Theessentialqualityofconservatismisnotaspecificagenda(neithertolowertaxesnortoraisetheflag),itismerelyawayoflookingatthings—suspiciously;andofreactingtonewproposals—draggingone’sfeet.Conservativesfightagainstnewdoctrinesliketheyfightagainstsushi:Notonlyisitappalling,itlooksasthoughitmightbedangerous,too.Butnowthegeezershavedyedtheirhairandhadtheirfaceslifted.Thecodgersrefinancedtheirhouses,payedwithcreditcards,andvotedforwhoeverpromisedthemthemostofsomeoneelse’smoney.Inpolitics,andinmoney,thegrumpswentalongwithwhateverispopular—justlikeeveryoneelse.Abouttheonlythingyoucanstillcountonisvanity—itneverseemstogooutofstyle.Inthehereandnow,everygenerationisthegreatestonethateverlived.Everyempireispermanent,andeveryonewhomakestroubleforitisanevilsubhuman.Intheearlypartofthetwenty-firstcentury,America’sneoconservativeheirstotheWilsons—WoodrowWilsonandRonaldWilsonReagan—becametheearth’s mostdynamicandambitiousempirebuilders.“TheseColdWarriorsweremostlyliberalsofaspecial,ideologicallyzealousvariety,”explainedanarticleintheAmericanConservative:ManyofthemhadcomefromtheextremeLeft.Theyhadopposedcommunismbecausetheyhaduniversalisticobjectivesoftheirownanddidnotwantanycompetition.Theseproponentsofasinglemodelforallsocietieswereabletoformanalliancewithputativeconservatives,whohadcometobelieveduringtheColdWarthattobeconservativewasalwaystobehawkishandassertiveinforeignpolicy.Usedto“standingupforAmerica,”thesenationalisticandsaber-rattlingconservativesfoundinthecauseofabetterworld,anewoutletfor1theirdesiretoexerciseAmericanpower.Theneoconspreachedarousingsermonof“globaldemocraticrevolution,”toquoteGeorgeW.Bush.Thereisnothingconservativeaboutrevolution,butwhonoticed?AccordingtoformerSecretaryoftheTreasuryPaulO’Neill,theleaderofthefreeworldhadalittletroublefollowingtheforeignpolicydiscussionsintheWhiteHouse.ButGeorgeW.Bushwasashrewdpoliticianwhoknewagoodsloganwhensomeonegaveittohim.HesawimmediatelytheadvantagesofattackingMesopotamia—itgavehimcovertospendmorethananypresidenthadeverspent,withhardlyapeepofprotest.Traditionalconservativeswerestruckdumbbythishawkishaudacity.Alas,sometimesitisbettertoloseawarthantowinone.Victoryseemstoleadtodisgracemoreoftenthanglory,especiallywhenyouareontheroadtobuildinganempire.AftertheWestwonitsColdWarwiththeSovietUnion,theneoconsdesperatelylongedforanewenemy.Whiletheyweresearching,onefoundthem.Intheopeningyearsofthetwenty-firstcentury,theHunswereAmerica’sfriends.Andthecommiesitsnewbusinesspartners.ThenitwastheMuslimsofthe worldwhomustbedefeated!TheMuslimmind,accordingtoneoconservativescholars,waslockedinthepast:itmistreatedwomen,itwasantidemocratic,antiprogress,nihilist,andprofoundly,irretrievablystuckinadeathstrugglewiththegoodguysintheenlightened,free,open-minded,fun-loving,capitalistWest.Whythisshouldbesowasneverclarified.HadnottheMuslimmindbeenaroundfor1,000years?Diditnotevolveaccordingtoitsownprogram,justliketheChristianmind,theConfucianmind,orthemuddledmindofaDemocrat?WeretherenotmanymillionsofMuslims?AreMuslimslesssmartthanChristiansorJews?Andyet,thenewconservativethinkerscouldnotimaginethattheworldwouldbesafeunlessMuslimswerebroughtintotheempireundertheirheel.RonaldReaganhadbeensosuccessfulwithhisattackontheSoviets’EvilEmpire,Republicanshopedforasequel,neverimaginingthattheymightbecapableofalittleevilthemselves.Itwouldbehard,dangerous,andexpensiveworktotransformIslamiccivilization,butsomeonemustdoit,theysaid.AndonlytheUnitedStateshadthemilitarymight,theresolve,thecourage,themoney,andthewilltodoit.Ifonlytheoldconservatives’kneesstilljerked!Howtheywouldhaveharrumphedandgagged.Forherewasanewidea—agrand,sweepingnewidea—thatseemedtocallforthemostaggressiveandactivistU.S.foreignpolicyinAmericanhistory.HerewasachanceforAmericatoentangleitselfinforeignmilitaryadventuresfromwhichitmightnevergetfree.HerewasanopportunityfortheUnitedStatestomaketheIslamicworldsafefordemocracy.HerewasawaytoimprovetheworldandanalmostfoolproofwayforAmericatomakeapublicspectacleofitself,gofurtherintodebt,andexpanditsempire!Theold-timeconservativeswouldhavebeensuspiciousofsuchbigideas,especiallywhentheyweresoflattering.Whenamanflattersyou,itisalmostcertainthathemeanstotakeyourbusiness,pickyourpocket,orsleepwithyourwife.Whenamanflattershimself,hemightjustaswellputarevolverinhismouthandpullthetrigger,forhehaslostalltouchwithreality.Wemaybethegoodguysinthehereandnow,theold-timerswouldhavesaid,butifwewanttobethegoodguysinthefuture,wehavetodogoodthings.They wouldhaverecalledthatpeoplewhomindedbusinessotherthantheirownalmostalwayscametotears.Menareneithergoodnorbad,theoldconservativeswouldhavesaid,butsubjecttoinfluence.TraditionalAmericanconservatismwasnotadoctrineofworldimprovement,butamoodofskepticismtowardall“isms”andempirebuilders.Politicalconservatismwasundergirdedbytwoimportantprinciples.Thefirstprincipleheldthatsincemostinnovationsarefailures,peopleshouldviewanyproposedchangetothetraditionalorderwithskepticism.Thatdoesn’tmeanyoucan’tinnovateinasociety,buttheburdenofproofshouldalwaysbeontheworldimproverstoshowthattheirproposedchangewillmakethingsbetter—somethingtheycanalmostneverdo.Thesecondprincipleofold-timeconservatismwasthepoliticalequivalentofAdamSmith’sobservationaboutfreemarkets:“Theknowledgerequiredtocoordinateanddirectacomplex,dynamicsocietyisclearlybeyondanyindividualorbureaucraticmachine.”Inshort,centralplanningdoesn’tworkverywell,neitherinWashingtonnorinBaghdad.Butweaddourownlittlecorollarytotheknowledgeprinciple—phonyknowledgeincreasesthelargertheundertakingandthefartheryougetfromit,bythesquareofthedistanceandthecubeofthescale.Thatiswhytheold-timeconservativesweresuspiciousofanygrandplantoimprovetheworld—evenifitpromisedtomaketheworldmorefree.Oldtimeconservativesdidn’tbelievein“freedom.”...“Justdon’ttellmewhattodo,”theysay.Theworldcanbeimproved;wedon’tdenyit.Buttheonlyimprovementsthatmaketheplacebetterarethosethatremovetheeyesoresandprevaricationsofpreviousimprovers.RonaldReagan’sgeniuswasthathewasabletoseethathightaxesandregulationdidnotmaketheworldabetterplace,butaworseone.MiltonFriedman’sthree-partformulaforbettergovernment—cuttaxes,cuttaxes,cuttaxes—seemedlikeadecentsolution.Reaganhadtherightinstinct.“Getbigguv’mintoffourbacks,”wasalmosthis campaignthemesong.Whenhehadthechance,heoftendidtherightthing.Facedwithastrikebyair-trafficcontrollers—theonlyuniontobackhiscampaign—hefired10,000ofthem.Whenhesawsome“improvement”createdbyhispredecessors,hisinstinctwasgenerallytogetridofit.ThetroublewasthatonceinWashington,theactorstillrememberedhislines,buthelosttheplot.Almostbeforehecouldgethiscowboybootsoff,hewasmakingimprovementsofhisown.Thiswasespeciallynotableinwhatisknownasforeignpolicy.RepublicanshadlearnedtheirlessonfromtheVietnamWar.Theystillsoughttomaintaintheempire,butbyfairlypassivemeans.Theymerelyhopedto“contain”communism—whichtheysawasamenace.ButReaganfellunderthespelloftheproto-neoconservativesinWashington.Notcontenttoleavethingsalone,hedecidedhecouldimprovetheworldbyactivelytryingtodefeatcommunism.Thisiscelebratedasagreatandgoodvictory.InhercommentsonReagan’sdeath,Britain’sMaggieThatchersaidhewouldbemournedby“millionsofmenandwomenwholiveinfreedomtodaybecauseofthepolicieshepursued.”Maybethisistrue.Maybeitisnot.ItisimpossibletoknowwhatmighthavehappenedhadReaganleftthingsalone.Mostlikely,communismwouldhavefallenapartanyway,perhapssooner.Whenaman’sinvestmentsgoup,heisagenius.Hewhofailedtoinvestisseenasafool.Bycontrast,wheninvestmentsgodown,itisbecauseofeventsthatcouldnotpossiblyhavebeenforeseen.Likewise,inpolitics,thelinkbetweenactionandconsequenceisforgedinawaythatalwaysflatterstheactivists.Ifsomethingturnsoutreasonablywell,itisbecausesomeworldimprovertookactionandmadeitthatway.Ifsomethingturnsoutbadly,itisbecausesomeonefailedtoactwhenheshouldhave.Itisalwaystheactivistswhogetthemonuments.AbrahamLincolniscreditedwithhavingabolishedslavery—atacostof618,000Americanlives,2percentoftheentirepopulation.(Anequivalentdeathtolltodaywouldwipeout6millionAmericans.)Everywhereelseintheworld,slaverywasabolished—ataboutthesametime—withhardlyasinglecorpse.TheGreatEmancipatormightbetterbecursedthanpraised. Likewise,WoodrowWilsonisgivencreditforallmannerofextravagantimprovements.Peoplerarelymentionthathealmostsingle-handedlybroughtaboutWorldWarIIwithhismeddlinginWorldWarI.Instead,whenthesubjectofWorldWarIIcomesup,NevilleChamberlain’snamearisesalmostimmediately.Thepoormangetstheblamefortryingtoavoidwar—thatis,fornottakingactionwhenheshouldhave.Reagan“alsohelpedengineerahugesurgeinAmericanpatriotism,”writesRossMacKenzie.“TheCarteryearswereaperiodofAmericanself-doubtabouttheeconomyandaboutAmericanpower(withthememoryofVietnamstilltormentingmostpolicymakers).Mr.Reagansetaboutwipingthisaway.Heincreasedmilitaryspendingby25percentbetween1981and1985.HetalkedtotheAmericanpeople,notaboutmalaise(asMr.Carterhaddone),butabout‘morninginAmerica.’Bytheendofhissecondpresidency,muchofthetalkaboutAmericandeclinehadgoneoutoffashion:thecountryregardeditselfonceagainnotonlyastheworld’sgreatestsuperpower,butalsoastheworld’smost2dynamiceconomy.”Soontherewasnotraceofself-doubt.Instead,wesawabubbleinconfidence.Thatalonewouldbenodisgrace,butitcamewiththemostimmodestplansforworldimprovementandthebiggestrushofliquiditythewaterplanethaseverseen.“...Aswebegin,letustakeinventory,”saidRonaldReaganathisinauguration.Wefindthathisheadandheartwereintherightplace;hesought,atleastsoheclaimed,nottopraisetheimprovementsofthepast,buttoburythem.Weareanationthathasagovernment—nottheotherwayaround.AndthismakesusspecialamongthenationsoftheEarth.OurGovernmenthasnopowerexceptthatgranteditbythepeople.Itistimetocheckandreversethegrowthofgovernmentwhichshowssignsofhavinggrownbeyondtheconsentofthegoverned.ItismyintentiontocurbthesizeandinfluenceoftheFederalestablishmentandtodemandrecognitionofthedistinctionbetweenthepowersgrantedtotheFederalGovernmentandthosereservedtotheStatesortothepeople.AllofusneedtoberemindedthattheFederalGovernmentdidnotcreate theStates;theStatescreatedtheFederalGovernment.Now,sotherewillbenomisunderstanding,itisnotmyintentiontodoawaywithgovernment.Itis,rather,tomakeitwork—workwithus,notoverus;tostandbyourside,notrideonourback.Governmentcanandmustprovideopportunity,notsmotherit;fosterproductivity,notstifleit.Ifwelooktotheanswerastowhy,forsomanyyears,weachievedsomuch,prosperedasnootherpeopleonEarth,itwasbecausehere,inthisland,weunleashedtheenergyandindividualgeniusofmantoagreaterextentthanhaseverbeendonebefore.FreedomandthedignityoftheindividualhavebeenmoreavailableandassuredherethaninanyotherplaceonEarth.Thepriceforthisfreedomattimeshasbeenhigh,butwehaveneverbeenunwillingtopaythatprice.Itisnocoincidencethatourpresenttroublesparallelandareproportionatetotheinterventionandintrusioninourlivesthatresultfromunnecessaryandexcessivegrowthofgovernment.Itistimeforustorealizethatwearetoogreatanationto3limitourselvestosmalldreams.RonaldReagancalledhimselfaconservative.Thispartofhisinauguraladdressmadeusthinkhereallywasone.Butpeoplecometobelievewhattheymustbelieveinordertoplaytheirroles—evenconservatives.Reagan’srealrevolutionlayinredefiningconservatismasanactivist,imperialcreed.First,theneoconstookoverforeignpolicy.Soon,Americanswerestirringuptroubleeverywhere,fromLatinAmericatoAfghanistan.Then,theytookoverdomesticpolicy.Inafewcases,theghastlyremnantsofpreviousimprovers—suchas70percenttopmarginalrates—wereknockedover.Inmorecases,newedificeswerebuiltup.Butthemajorfailurewasthatthesharptaxcutsof1981werenotfollowedbysharpspendingcuts.Instead,spendingwentup.Andnotjustondefense.ReaganhadpledgedtoabolishtheDepartmentofEducation.Instead,heincreaseditsbudgetby50percent.TheReaganRevolutiontransformedtheRepublicanParty.Ratherthan continuingtofightarearguardactionagainstleftistactivists,Republicanswereemboldenedtotakethelead,becomingactiviststhemselves.Thistheydidbyrelyingonamonumentalfraud.MurrayRothbardwatchedRepublicansscamthemselves.Hewrote:Inthespringof1981,conservativeRepublicansintheHouseofRepresentativescried.Theycriedbecause,inthefirstflushoftheReaganRevolutionthatwassupposedtobringdrasticcutsintaxesandgovernmentspending,aswellasabalancedbudget,theywerebeingaskedbytheWhiteHouseandtheirownleadershiptovoteforanincreaseinthestatutorylimitonthefederalpublicdebt,whichwasthenscrapingthelegalceilingofonetrilliondollars.Theycriedbecausealltheirlivestheyhadvotedagainstanincreaseinpublicdebt,andnowtheywerebeingasked,bytheirownpartyandtheirownmovement,toviolatetheirlifelongprinciples.TheWhiteHouseanditsleadershipassuredthemthatthisbreachinprinciplewouldbetheirlast:thatitwasnecessaryforonelastincreaseinthedebtlimittogivePresidentReaganachancetobringaboutabalancedbudgetandtobegintoreducethedebt.ManyoftheseRepublicanstearfullyannouncedthattheyweretakingthisfatefulstep4becausetheydeeplytrustedtheirpresident,whowouldnotletthemdown.“Famouslastwords,”wroteRothbard.Inasense,theReaganhandlerswereright:therewerenomoretears,nomorecomplaints,becausetheprinciplesthemselveswerequicklyforgotten,sweptintothedustbinofhistory.Deficitsandthepublicdebthavepiledupmountainouslysincethen,andfewpeoplecare,leastofallconservativeRepublicans.Everyfewyears,thelegallimitisraisedautomatically.BytheendoftheReaganreignthefederaldebtwas$2.6trillion.AsofJanuary2009,itwas$11trillion.Thatismerelythecurrentdebt.Aswewillseelater,whenTreasurySecretaryPaulO’Neilltotaledupthepresentvalueoffutureobligationsminusexpectedtaxrevenues,hecametoafiguremorethanfourtimesthatlarge. BeforetheReaganera,conservativeswereclearabouthowtheyfeltaboutdeficitsandthepublicdebt:Abalancedbudgetwasgood,anddeficitsandthepublicdebtwerebad.Inthefamouswordsoftheleft-Keynesianapostleof“functionalfinance,”ProfessorAbbaLerner,thereisnothingwrongwiththepublicdebtbecause“weoweittoourselves.”Inthosedays,atleast,conservativeswereastuteenoughtorealizethatitmadeanenormousamountofdifferencewhether—slicingthroughtheobfuscatorycollectivenouns—oneisamemberofthe“we”(theburdenedtaxpayer)orofthe“ourselves”(thoselivingofftheproceedsoftaxation).SinceReagan,however,intellectual-politicallifehasgonetopsy-turvy.Conservativesandallegedly“free-market”economistshavetwistedthemselvesinsideouttryingtofindnewreasonswhydeficitsdon’tmatter.Today,ifyouweretoposethequestiontothesmall-townRepublican,youmightstillfindafaintresidueoftheOldReligion.Butthepoormanhasbeenbetrayedbyhisparty,byhisrepresentatives,bypoliticsitself,bythelureofempire,andbyhisownvainandfatalurges.Hehascometobelievewhathemust.TherewerefourkeyelementstoReaganomics:Restrictthemoneysupplytoslowinflation(admirablycarriedoutbyPaulVolckerattheFed).Cuttaxes(a25percentacross-the-boardtaxcutwasenactedin1981).Balancethebudgetbycontrollingdomesticspending.(Acompletefailure—deficitsgrewlargerthanever.)Andreducegovernmentregulation.(Ditto.)Thefirsttwoobjectivesweremoreorlessachieved.TheyproducedmoreorlesswhatMiltonFriedmanexpected.Butneitherwasanactivistmeasure.Bothmerelyundidsomeoftheworstdamagedonebypreviousofficeholders.LyndonJohnson,RichardNixon,andJimmyCarterhadmadeamessoftheeconomy.RonaldReaganandPaulVolckerhelpedcleanitup.Buteventhecleanuplackedthenecessarysudsandelbowgrease.Instead,thedirtandclutterweremostlyletalone,whilenewtrashwasheapedon.Thebigcutintaxesgavepeoplemoremoneytospend.Consumersbeganabuyingspree,whilegovernmentborrowedthemoneytofundthedeficit. Wheredidtheextraspendingpowercomefrom?Fewpeopleasked.Iftheyhadthoughtaboutit,theywouldhaverealizedthat,collectively,theyweremerelygoingfurtherintodebttoupgradetheirstandardsofliving.Iftheyhadreflectedonitdeeply,theywouldhaverealizedthattheywererunningupbillsthatfuturegenerationswouldhavetopay;theywerespendingmoneythattheirchildrenandgrandchildrenhadn’tearnedyet.Forwhatwasanationaldebt,butanintergenerationalobligation,aburdenplacedoninfantsbytheirparentsandgrandparents?Hardlyanyonethoughtaboutitthen—orsince.Reagan’ssupply-sideeconomicswasmeanttobedifferentfromKeynesianeconomicsinthatitcelebratedthepowerofthefreemarkettocreatewealth.Ifonlytherestrictionsimposedontheeconomybypreviousgenerationsofworldimproverscouldberemoved,theysaid,theeconomywouldboomandpeoplewouldgetrich.Thus,itcametobethattaxeswerecutandtheeconomyboomed.Butwhatthenewsupply-sidershaddonewasnothingmorethanadministeranold-fashionedKeynesianboost.JohnMaynardKeynes,aBritisheconomistoftheearlytwentiethcentury,hadgivenworldimproversatool.Hebelievedthatnationscouldbewinchedoutofrecessionsbyeasycreditandgovernmentspending.Whenprivatespenderseasedoff,henoted,governmentcouldtakeuptheslack—byrunningdeficits.Wherewouldthemoneycomefrom?Heexpectedgovernmentstorunsurplusesingoodtimessotheywouldhavemoneytospendinbadones.Hadgovernmentactuallydoneso,theKeynesiansystemwouldhaveatleastbeenhonest.Butthiswasthepartthepoliticiansneverparticularlyliked,andthepartofhisplantheynevercouldquitefollow.Itwasallverywelltospendmoney.Onlycurmudgeonlyconservativescomplainedaboutthat.Otherwise,spendingmoneymadeeveryonehappy.Butnotspendingmoneywasanothermatter.Notspendingmeantlessbreadandfewercircuses,andfewerclownsonthepublicpayroll.Itmeantexplainingtovotersthattheywouldn’tgetthenewroadornewmedicalservicesthathadbeenpromised.Itmeantlowerdemandandlessnewmoneyincirculation,theveryoppositeoftheboomeveryonelovedsomuch. PoliticianshadnotroublegivingtheeconomytheboostthatKeyneshadsuggested.Butwhenitcametosavingmoneytohavesomethingtogiveaboostwith,thetimeneverseemedquiteright.Themomentforunderspendingneverseemedtocome.Likefatmenataweddingfeast,policymakerstoldthemselvestheywouldeatlessafterthepartywasover,tomakeupfortheirgluttonynow.Butinpublicfinance,thereisneveragoodtimeforfasting.WhentheReaganteamarrivedinWashington,thenationhadbeenlivingwithKeynesiandeficitsformanyyears.Saversandlendershadgrownwary.Consumerpriceinflationhit13.5percentin1980.Lendersfeareditwouldgohigherstill.Theydemandedprotection.In1980,30-yearmortgagescouldbehadat15percentinterest.Bythefollowingyear,themortgageraterosetoapeakof18.9percent.Butthen,PaulVolcker’santi-inflationpoliciesattheFedbegantopayoff.Investorsdidnotyetknowit,butthebondmarkethadfounditsbottom.Forthenexttwoandahalfdecades,bondswouldgoup.Bondyields—ameasureofwhatpeoplemustpaytoborrow—wentdown.Thus,werethetwocornerstonesoftheReaganerainplace—lowertaxesandlowerrealcostofcredit.NeitherwasanimprovementtoAmerica’ssystemofimperialfinance.Bothweremerelycorrectionstopreviousmeddling.Taxeshadbeenraisedsothatthegovernmentwouldhavemoneytospendonitsimperialprograms:breadandcircusesathome;warsattheperiphery.Highbondyields(ahighcostofcredit)weretheresultofKeynesianpolicies.Neitherproblemwascausedbyneglect.Instead,bothweretheinevitabledebrisofpreviousimprovements,previousinnovationsinthefieldofeconomics,andpreviousgenerationsofself-aggrandizingempirebuildersposingasdo-gooders.AfterReagan’staxcuts,U.S.grossdomesticproduct(GDP)grewatanaveragerateof3.2percentperyearthroughouttheeightyearsofReagan’stwoterms.Thiswasabitmorethanthe2.8percentaveragegainintheeightyearsbeforeandsubstantiallymorethanthe2.1percentoftheeightyearsfollowing.Stillthegrowthwasslowerthanithadbeeninthe1960s,afterKennedy’s30percenttaxcutof1964produced5percentannualGDPrates.Meanwhile,realmedianhouseholdincomerosefrom$37,868in1981to$42,049in1989.This,too,was muchbetterthantherateofgrowthbeforeoraftertheReaganyears.Butmuchofit—maybeallofit—camenotfromrealincreasesinwages,butsimplyfrommorepeopleworkinglongerhours,asweillustratedinourpreviousbook.Realwageincreasesrequirethreethings:First,thesocietymustsavemoneysothatithasthecapitaltoinvest.Second,itmustinvestthesavingsinprofitablebusinesses.Third,thesecapitalinvestmentsmustresultinincreasedproductivity.Alas,noneofthesethingshappened.Instead,thesethreecriticalthingsbegantrendinginthewrongdirection.Nationalsavings—includingpublicsavings—fellfrom7.7percentinthe1970stoonly3percentby1990.Businessinvestmentfellfrom18.6percentofGDPinthe1970sto17.4percentinthe1980s.Andproductivity?Inthe25yearsafterWorldWarII,outputperemployeehadrisenatanaveragerateof2.8percentperyear.Duringthe1980s,thisratefelltolessthan1percent.Therewasabumpinproductivityafter1995,butthiswaslargelyafeatureoftheLaborDepartment’snewwayofcalculatingit.Withfallingsavings,fallingbusinessinvestment,and(consequently)fallingproductivity,youcouldnotexpecttheeconomytodoverywell.Itdidn’t.Whilethesupplysideofsupply-sideeconomicswasatotalflop,thedemandsidewasastunningsuccess.TheReaganteamatleastfiguredouthowtopayforanempire:Borrow.AsapercentageofGDP,federalgovernmentreceiptsfellfrom20.2in1981to18.6in1992.Butspendingrosefrom22.9percentin1981to23.5percentin1992.Naturally,debtsrose.Bytheendof1992,thefederaldebtwasmorethan$4trillion.WhenReagantookover,itwaslessthan$1trillion.Nofraudissolovableastheillusionofgettingsomethingfornothing.Butsomething-for-nothingwasjustwhatthenewconservativesnowpromisedvoters—justliketheDemocrats.ThedifferencewasthattheDemocratspledgedtostealthemoneyfromtherich(Republicans).TheRepublicanspromisedto createitinafreeeconomy,likeJesusmultiplyingtheloavesandfishesatBethSaida.“Voodooeconomics,”washowGeorgeBushdescribedit.ORIGINSOFSUPPLYSIDEWhensupply-sideeconomicsfirstappearedintheAmericanpress,realeconomistswereperplexed.Theyhadneverheardofit.Therewerenouniversitydepartmentsspecializinginit.Therewerenopeer-reviewedpapers.Therewerenoscholarlybooksdescribingit.Therewerescarcelyanyeconomistsclaimingtobesupply-siders.Itwas,apparently,aschoolofthoughtwithoutaschool.Somewonderedifitalsolackedathought.Traditionaleconomists—mostlyempirebuildersandworldimprovers,butoftheKeynesianvariety—hadgottenthemselvesstuckonateeter-totter.Ononeendsatinflation.Ontheotherwasemployment.Theycouldpressdownononeend,buttheotherwouldriseupandhitthemonthechin.Thereseemedtobenowayout.Nofreelunch.Itseemedthattheywouldhavetopayforeverysomethingwithsomethingelse.Iftheywantedtoreduceinflation,itwouldcostthemjobs.Iftheywantedtoincreaseemployment,consumerpriceswouldrise.MiltonFriedman,amongothers,warnedthatKeynesianismwasjustfolderol.Assoonaspeoplerealizedwhatthegovernmentwasdoing,thejigwouldbeup.Theywouldmerelyraisepricesinanticipationofinflation,withoutincreasingproduction.Stagflation—risingpricesinasluggisheconomy—wouldresult.Othereconomistspointedoutthatanyattempttomanipulatethebusinesscyclewouldfailforthesamereason.Oncethepolicywereknown,peoplewouldadjusttheirbehaviortoit,nullifyingitseffectiveness.Theywouldnotmistakeinflationforgreaterdemand:Theywouldnotincreaseproduction;theywouldnothiremoreworkers;theywouldnotspendmoremoney.Theonlythingthepolicymakerscouldpossiblydothatwouldhaveaneffectwouldbesomethingpeopledidnotexpect.Andthatcouldonlybeapolicyofrandommanipulations—whichwouldcausefurtherconfusionandwho-knew-whatresults.Keynesians,evennewKeynesians,neverhadanyrealanswertothisproblem.Butthatdidn’tstopthem.Theydecidedtoignoreit.Meddlersandempirebuilderscan’tbebotheredwiththeoreticalproblems;theyaretoobusy creatingabetterworld!Stagflationcameinthe1970s,justasMiltonFriedmanhadsaiditwould.ItwasnotthebetterworldtheKeynesianeconomistshadhopedtocreate.Butitwastheworldtheygot.(Likeeveryoneelse,worldimproversdon’tgetexactlywhattheyexpect;theygetwhattheydeserve.)Stagflationposedaproblemwithnoeasysolution.Priceswererising,butemploymentwasflat.Policymakerswantedtoincreaseemployment,buttheywereloathtoaddmoreinflation.Theycouldtrytolowerinflation,butthatwouldhurtemploymentevenmore.Alongcamethesupply-siders.Theyhadnorealsolution.Butatleasttheyhadawaytohidetheproblem.Whatboththepublicandthepoliticianswanted,theynoted,wasemploymentwithoutpriceincreases.Theywantedaboomingeconomyandnoinflation.Voterswantedmoneyfromgovernment;theyalsowantedtolowertaxes.Thetroublewithtraditionalconservativeeconomistswasthattheywerealwayspointingoutthetruecostofthings.“There’snosuchthingasafreelunch,”waspracticallytattooedontheirforeheads.Conservativeeconomiststypicallyarguedagainstgovernmentdebt,againstdeficits,andagainstmorespending,againstactivisminallitsforms;theyknewtherewouldbeapricetobepaidforit,eventually.Thisattitudemadeconservativeeconomistsdeeplyunpopular.Theywere,afterall,partypoopers.Whowouldwantsuchakilljoyaround?Nonecouldeverbeelectedtohighoffice.Theessenceofpoliticswaspromisingthingsthatcouldn’tbedeliveredhonestly.Ifamancouldgetnomorefromanelectionthanwhatheactuallyearned,whywouldhebothertovoteatall?Thesupply-siders’proposalseemedtooffersomethingforeveryone—atnocosttoanyone.Taxescouldbecut,saidArthurLaffer;lowertaxeswouldcreatesuchaboomthatoutputwouldgoup—eliminatinginflation.Governmentrevenueswouldgoup,too—evenatlowertaxrates.Thebudgetwouldbebalanced.Mostimportantly,itofferedawaytogetconservativeselected—byturningthemintobigspenders.REALBOOMSVERSUSTHEPHONYVARIETY Realboomsneedrealmoney.Typically,peoplesavemoneywhentheyarewaryandspenditwhentheyareflush.Thespendingisreal.Themoneyisreal.Theboostinsalesisreal.Theprofitsarereal.Butaboomthatpeoplebuildonphonymoneyisitselfphony.Everystepofthewaytakestheminthewrongdirection.Thedemandisanillusion.Thespendingisamistake.Themoneyissuspect.Andtheresultingbusinessprofitsarenotmerelytemporary,theyarenothingmorethannextyear’ssalesdisguisedasthisyear’searnings.Amanwhoborrowsmoneytobeginhisspendingspreecontributesnothingtotheeconomy.Everydollarhespendsmustsomedaybewithdrawn.Itmustbepaidback.Imaginethatheborrows$1million.Inasmalltown,thatsummightbeenoughtosetoffaboom.Hebuysanewcar.Hegoesouttotherestaurant.Hegivesmoneytochurchandcharities.Hetakesaholiday.Heordersanewsuit.Hebuildsanewwingonhishouse.Soon,themoneyisoutofhispocket.Butitisnotgone.Ithasfoundanewhomeinpocketsallovertown.Andnowthebutcher,thebaker,thebuilder,thetravelagent,andmanyothersareallplanninglittleadditionstotheirownstandardsofliving.Butimaginethedisappointmentwhen,thefollowingyear,themanwhospentsofreelynolongercomesaround.Heisnotseenatthetailor,oratthetravelagent,orattherestaurant,orthecardealer.Heisnotevenseensofrequentlyathisoldhaunts.Notonlydoeshenotspendasfreelyashedidtheyearbefore,hebarelyspendsatall.Fornowhemustcuthisregularspendingbyenoughtopaybackthe$1millionplusinterest.Netspendinginthetownwillactuallygodown,overamulti-yearperiod,bytheamountofinteresthepays(assumingthattheloancamefromoutsidethecommunity).(WeinvitereaderstoconsiderthecurrentU.S.situation—whenloansfromoverseassurpass$1trillionperyear.)Thesupply-siders’keyinsightwasthatgovernmentisessentiallyaparasite.Itlivesoffitshostlikealeech.Andlikeanybloodsucker,ithastobecarefulnottosucktoomuch.Otherwise,itwillweakenitshostandmaybeevenkillit.Or,ifit suckstoolittle,itfailstofullyexploittheopportunityandinvitescompetition.Thesupply-siders’conceptwashardlyaformulaformaximizingindividualfreedom.Onthecontrary,itwasaformulaforfinancinganempirebyincreasinggovernmentrevenues.ArthurLaffer’scurvemerelyillustratesarationalbloodsucker’soptimizationstrategy;hewillgetthemostatalevelthatisneithertoohighnortoolow.Agovernmentthatimposestaxratesthataretoohighweakenstheeconomyandendsupwithlessresourcesthanitmightotherwisehave.Thiswasaproblemwithcommunism—itaskedtoomuchofitscitizens.Thepoorschlepsweredraineddry.DemocraticregimesintheWesttookalowerpercentageoftheircitizens’output.Buttheirhoststhrived,givingthegovernmentmoremoneytospend.ThegovernmentoftheSovietUniontooklessfromeachcitizenthantheUnitedStatesdid,butittookamuchhigherpercentageofeachcitizen’soutput.ThiswaswhytheWestwontheColdWar;ithadfixeditstaxrateslower.ButReagan’staxcutswereanemptygesture.Withoutoffsettingcutstofederalspending,deficitsincreased.Whatreallymatterstoaneconomyisnotthenominaltaxrates,butthepercentageoftheeconomy’sresourcestakenawaybythegovernment.ActualtaxratesintheSovietUnionwerezero.Thecommunistsclaimedtherightto100percentofproduction,aportionofwhichwasturnedovertocitizensforpersonaluse.Thegovernment’spercentageofproduction,orwhatmightbecalleditsrealtaxrate,whiledifficulttomeasure,wasveryhigh.That,combinedwithevenmoregovernmentmeddlingthanintheUnitedStates,doomedtheSovietexperiment.Reagancutnominaltaxrates,butgovernmentconsumedmoreandmoreresources.Theleechgrew.Lowertaxratesgavecitizenstheimpressionthattheyhadmoremoneytospend.Individually,theydid.Collectively,theydidnot.Theprogramwasmerelyamonumentallegerdemain.Foreverytax-cutdollarthatacitizenspent,thefederalgovernmenthadtoborrowasmuchas$1.18(withinterest).Still,citizensthoughttheyhadmoretospend.Theyspentit.Itwasthisextraspending—thisKeynesianboostofmoneyborrowedbythefederalgovernmenttoreplacetheforgonetaxrevenues—thatpickeduptheeconomy. Andnow,pardonusifwegoovertothisdeadhorseandlayonthewhipagain.Reducingtaxesisaconservative,anti-activist,anti-world-improving,anti-political,anti-empiregesture.Taxesareimposedbypeoplewhopretendthattheworldwillbeabetterplaceifyourmoneyistakenfromyouandredirectedtoothers’pockets.Cuttingtaxesisawayofremovingtheimprovementresiduesofthepast.Itisawayoftippingsocietyawayfromthepoliticalmeansofdoingthingsbacktowardcivilized,consensual,economiclife.Thelowerthetaxes—andhere,wespeakofrealtaxrates(theamountofresourcesconsumedbythegovernment)—themoremodesttheworld-improvers’ambitions.Loweringtaxrateswastherightidea.Butloweringonlynominaltaxrates,whilesimultaneouslyincreasingthegovernment’sresources,wasasham.Sincethetaxcutwasasham,sowastheresultingboom.Itwasinspiredbyconsumerdemandthatdidn’texist.Butthefinancialworldisacomplicated,confusingaffairwithmanypromiscuousliaisons.Eventsareengenderedbyotherevents.Theyarepathdependent,aseconomistssay.Oneeventfathersanother.LifewasgoodintheReaganyears.Thesupply-siderspattedeachotherontheback.“Wedidit,”theycongratulatedeachother.Someoneshouldhaveaskedforapaternitytest.Whereastaxcutsgaveconsumerspendingatemporaryboost,bondyieldsbeganalong,soliddowntrend.Thelowercostofcreditwasaplusfortheeconomyandforthefinancialmarkets—atleastasimportantastaxcuts.Fallinginterestratesmadeitcheapertoborrow.Fromexperience,peopleexpectedpricestogoup—whichwouldlowerthecostoftheirloansstillfurther.Risingpriceswouldalsounderminethevalueoftheirsavings.Theydidthereasonablething:Theyborrowed.Stocksrose.Thingswerelookingup.Itwas“morninginAmerica.”Thequestionswouldhavetowaituntilevening.FUNNYNUMBERSSince1913,thecostofdo-gooders,empire-builders,andworld-improvershas beenaddingup.Bythe1970s,ithadbeguntodepressproductivityrates.Insteadofgrowingat2.8percentperyear(theratesinceWorldWarII),productivityroseonlyabout1percentfrom1973to1984.Sincethen,theratesthemselveshavebecomefraudulent:In1995,DepartmentofLaborofficialsbegantocrunchthenumbersintosuchoddandawfulshapes,eventheirownmotherswouldnolongerrecognizethem.Thepracticeknownashedonicpriceindexingbasedon“chaineddollars”wasputintoplace.Computerscametobevaluedfortheirpotentialtoincreaseproductivityratherthantheiractualcost,dramaticallyinflatingboththeimportanceofthetechsectorintheeconomy,andoverstatingGDPsoastomakethenumberuseless.NearlyhalftheitemsinAmerica’smeasureofconsumerpriceinflationare“adjusted.”Between2000andtheendof2004,forexample,spendingoncomputersrose9.3percent.Sincecomputersbecamemorepowerful,however,thenumberwasenhancedto113.4percent.Othernumbersintheconsumerpriceinflationcalculationwereadjustedbythesubstitutioneffect.Ifsteakroseinprice,thestatisticiansassumedpeopleswitchedtomutton,therebyreducingtheircostofliving.Sodidtheyadjustthepriceofhousing.Itcostalotmoretoownahousein2005thanitdidintheyear2000,buttheboyswenttoworkonthenumberswithpliersandatorch.Soontheyhadtwistedthecostofactuallyowningahouseintothecostofrentingthesamehouse;“owners’equivalentrent”theycalledit.Becausetheimperialcentralbankheldinterestratesbelowtheconsumerpriceindex(CPI)rate,peoplewhopreviouslywouldhaverented,boughtinstead.Thisreducedrentsevenwhileitincreasedhouseprices.Voilà!TheCPI,ofwhichmorethanaquarteristhecostofhousing,washelddown.Thecreditbubblehadasimilareffectonusedcars.Zerofinancingdealsturnedheadsawayfromusedcarsandtowardnewones.Usedcarpricesfell—andsodidthiscomponentoftheCPI.Togetherthetwoitemsalone—housingandusedcars—wereresponsiblefora1.7percentdropincoreCPIbetweenNovember2001andDecember2003.Whileeveryoneknowsithadbecomemuchmoreexpensivetomakeendsmeet, thesedistortionskepttheofficialCPIlowandthegrossdomesticproduct(GDP)figureshigh.(NominaloutputisreducedbytheofficialCPInumbertogivetherealGDPfigure.ThelowertheCPI,thehighertheresultingGDPfigure.)Theproductivityfigureswerealsobeatensenseless.Outputperhourwasdistortedbythemeasureofoutputitself,whichincludesbothhedonicqualityenhancementsandinflationadjustments.FORGETTINGTODUCKWeturnbacktotheGipper.WhenRonaldWilsonReaganwasfinallycarriedoffinJune2004,thenationsaidgoodbyewithasoftheartandaheadthathadturnedtomush.Hisobsequieswereasfullofhumbugasanationalelection.Themandeservedbetter.Heshouldhavebeencarriedoffbysixjollycowboysandbidfarewellbyhonestdrunks.Instead,Reaganwasgivenasendoffworthyofaworld-classmountebank.Weweretoldthathewasresponsibleforahugeeconomicboominthelandofthefree.Hecutmarginaltaxrates.Hehelpedgetthegovernmentoffourbacks.Hedefeatedcommunism.RodMartinwroteabookpraisingRonaldReaganfor“savingtheworld.”“WithoutReagan,”hewrote,“WemightallbespeakingRussian!”WehavenothingagainstRussian.Butwedoubtthat,inanyreasonablyimaginablecircumstances,AmericanscouldallhavelearnedtospeakRussianinasinglegeneration.Theyarenotthatgoodatlanguages.Butitillustrateshowtheworld-improversthink;ifyouwanttomakeabetterworld,youmustmakeothersdojustasyoudo.MartincouldnotimagineaRussian“victory”withoutimaginingthatwehadtolearntospeaktheRussianlanguage.HeprobablythoughtwewouldhavetolearntolikevodkaanddancelikeCossacks,too.[Reagan’s]certaintythatpeopleeverywhereyearnedforfreedomandthatfreemarketscouldalwaysoutproducecentrallyplannedslaverydrovehisstrategieswhererealpolitikcouldnevergo.Hereplacedbothcontainmentanddétentewithhis“ReaganDoctrine,”proclaimingAmericawouldactivelyrollbackitsfoeby 5helpingfreedomfightersbehindtheIronCurtain.WhatmadeReagansosurethatpeopleeverywhereyearnforfreedomisamystery;thereisnoevidenceofit.EvenAmericans,whoclaimtolovefreedomasmuchasanyone,aremuchmoreinterestedinlowmortgagerates.TheywouldscraptheentireBillofRightsinlessthan24hoursifitmeantguaranteed10percentannualrealestategains.Andiffreemarketscouldalwaysoutproducecentrallyplannedslavery,whywasheworriedaboutlosingouttotheSoviets?Itwasobviouswecouldbeatthem—becausewecouldaffordfarmoreandbetterweapons.RealpolitikwasKissinger’sapproachtoforeignpolicy.Itbeganbytakingpeopleashefoundthem,whethertheywantedWestern-stylefreedomornot,andmakingthebestofthesituation.Thismeantgenerallytryingtoavoidconflictwithoutsurrenderingstrategicinterests—evenimperialones.Theneo-WilsoniansadvisingReagancameupwithamoredaringdoctrine.TheywantedtogetKissingeroutofthewayandremaketheworldintheirownimage.Martindoesnotmentionthatamongthe“freedomfighters”thattheUnitedStatesdecidedtosupportwas,notably,OsamabinLaden.TheWaronTerrorwaslargelyaninventionoftheneoconservatives.Theyhelpedcreatetheenemyandthendevelopedawaragainsthim.Martincontinues:Andfreemeneverywhere,[Reagan]believed,wouldlaydownarms,takeuptoolsandbuildanew,peaceful,prosperousworldforthemselvesandtheir6posterity,giventhechance.WehavenevermetRodMartin;wepresumeheisanhonestanddecentman.Yet,inthisodetoRonaldReaganandGeorgeW.Bush,themanseemedtohave takenleaveofhissensesaltogether.Men—freeornot—occasionallypickupweaponsandbeginkillingeachother.Iflibertyhasanythingtodowithit,thereisnoproofforitinthehistoricalrecord.Yet,Reagan’santi-communismresonatedwiththevoters.Hehadspentagoodpartofhiscareertellingtheworldhowbadthecommunistswere.Butwhatwasitthatwassobadaboutthem?Andwhatbusinesswasitofhis?WhywasRonaldReagansoeagertogetridofBolshevism?Aslongasyoudidn’thavetoliveinacommunistcountry,whatwoulditmattertoyou?Manysmartpeoplethoughtitwasabetterway.Whatmadethecommunistsamenacewasnotthattheywereintentonimprovingtheirownworldwiththebenefitsofcollectivism,butthattheyweredeterminedtoimproveourworld,too.Whatmadethemobnoxiouswasnottheirowngoofycreed,buttheirdeterminationtodopreciselywhatRonaldReaganwantedtodo,remakeitsadversaryintosomethingmorelikeitself.ReaganhadbrandedtheSovietUnion“anevilempire.”Butbehindthewordswasamonstrousconceitthat,bysomespecialgraceofGod,heknewhowpeopleeverywhereweremeanttoliveandhowtheyweremeanttogovernthemselves.Itdidnotmatterthat3,000generationswhohadcomeandgonehadhadotherideas,northatathirdoftheworld’speoplealivein1981hadotherideas.Reaganthoughtheknewwhatwasbestforeveryone.Inastrictlyeconomicsense,communismwasAmerica’sgreatestally.Formanydecades,itkeptmillionsofpeoplepenniless—unabletocompetefortheworld’soilandotherresources.WhiletheUnitedStatesguzzledcheapoilforhalfacentury,communismretardedtheeconomicdevelopmentofitscompetitors.Now,everyremainingbarrelofoilcomesonthemarketwithpeoplebiddingforitfromallovertheplanet—Americans,Europeans,Russians—andthreebillionAsians,too!TheSovietsweresodiscouragedbytheReaganRevolution,wearetold,theydecidedtogiveupbeingSoviets;now,theyareRussiansorLithuaniansorKhazaks.TheChineseweresoimpressed,theydecidedtoloosethedogsofcapitalism;nowtheyarenippingatourheelsandstealingourfood. MARX’SREVENGEForthefirsttimeintwohundredyears,theWest(includingWesternizedJapan)facesrealcompetition.Theworld’slargestnations—China,India,andRussia—satonthesidelinesformostofthenineteenthandtwentiethcenturies.TheyweretooremoteandtoobackwardtoparticipateinthegreatboomthatliftedlivingstandardsduringthereignoftheBritishEmpireinthenineteenthcentury.GDPpercapitarosefrombarelyover$1,000(in1990dollars)intheUnitedStatesatthebeginningofthenineteenthcenturytomorethan$5,000byitsend.China,ontheotherhand,hadaGDPpercapitaofabout$600whenthenineteenthcenturybegan.Byitsend,thefigurehadfallentoaround$525.Indiannumberswereaboutthesame,butintheotherdirection,withasmallgaininthenineteenthcentury—probablytheresultofBritishcolonialdevelopment.Inthetwentiethcentury,Russia,China,andIndiaallbecamevictimsofself-inflictedwounds;variousformsofsocialistclaptraptookthemoutofeconomiccompetition.Butnowtheyareback,anditisawholenewballgame,astheysay.ThesecountriesareeitherontheperipheryofU.S.imperialprotection,orbeyondthepalealtogether.Eitherway,theybenefitfromtheordercreatedbytheU.S.imperium.Foreignworkersseemtobeabletomakeanythingwecanmake—butatmuchlowercost.Beforetherecentcrack-up,Indiawasgrowingat8percentayear,Chinaat9percent—Russiawasboomingtoo.Inaddition,theywereturningoutmillionsofyoungpeoplewhocanmakethings—graduatesinthepracticalartsandsciences—betterandcheaperthanwedointheUnitedStatesorEurope.What’smore,theforeignerstooktheoldvirtuesseriously.Theysavedtheirmoney—thesavingrateinChinaisashighas40percentofthenationalincome,accordingtoofficialsources.Thesesavingsgivethemhugepilesofcapitalwithwhichtobuildmoremodernfactoriesandmoreconvenientinfrastructure.Thepriceoflaborintherichcountriesishigh.Theaveragecostofanhourofsomeone’stimeintheUnitedStates—includingsocialcharges—isabout$20.Theaveragecostofsomeone’stimeinChina,ontheotherhand,issomewherebetween13.5and65cents,dependingonthestatisticsyoulookat.Aslongas capital,expertise,andfinishedproductsarefreetomovearound,itislikelythatthenumberswillgrowclosertogether.Theconsumerdoesn’tparticularlycarewhoassembledhisgadget;heonlycaresthathecanbuyitatthelowestpossibleprice.Laboristhebiggestcomponentofthepriceofmostthings,sobothmanufacturersandconsumersappreciatelowerlaborprices.Ouroldincompetentenemieshavelearnedhowtocompete.WeweretoldthatAmericabecamemuchricherbecauseofReagan’simprovements,butifthatisso,whydidrealwageratesnotrise?Amansweats,humps,busses,totes,andschlepstoday,onaverage,foraboutthesamewagehegotbeforetheReaganrevolutionfireditsfirstshot.Butthatisnottosaythateverythingisjustthesame.Farfromit.Today,peopleownlessoftheirownhomes—homeownerequity(theportionnotmortgaged)hasfallenfromnearly70percentinthelate1970stolessthan55percentin2005.Plus,theaveragepersonowesmoremoneytomorepeoplethaneverbefore.Householddebtrosefrom$7.8trillionin2002tonearly$14trillionin2008.Today,fewerpeoplehavesecuresourcesofmoneyfortheirretirement.Morethantwo-thirdsofolderhouseholds—thoseheadedbypeople47to64—hadsomeoneearningapensionin1983.By2001,fewerthanhalfdid.TheReaganEracamewitharelativelynewidea,thatpeopleshouldberesponsiblefortheirownpensions.Companiesstoppedofferingfixed-benefitpensionplans.Butby2000,oldpeoplewerefeelingtheeffects.Theywerenotaswelloffastheyhadexpectedtobe.Whentheholdingsoftypicalhouseholdswereanalyzed,today’snear-retireesturnedouttobealittlepoorer,inconstantdollars,thanthepreviousgenerationwaswhenitapproachedretirementin1983.EdwardWolff,aneconomistatNewYorkUniversity,lookedat18yearsofhouseholdfinancialdatafromtheFed.Somehowheretainedhissanitylongenoughtodiscoverthatthenetworthoftheaverageolderhouseholddeclinedby2.2percent,or$4,000,duringtheperiod[1983-2001]to$199,900.Welookonthatfactinshockandawe.Howcoulditbethatafterthebiggestexplosionofwealth-creationinthehistoryofman,theaveragemanwasnotricher,butpoorer? WerecalltheCarteryears:Thenationwasatpeace.Despiteinflation,Americanswerestillgettingricher.Wageswererising.Thecountrystillenjoyedapositivebalanceoftrade,andtherestoftheworldstilloweditmorethanitowedtoforeigners.Butin1980,stockshadbeengoingdownfor14yearsandbondshadbeeninabearmarketthatbeganin1945.Witheyesinthebackoftheirheads,peoplemusthavelookedoutandseennothingbuttrouble.TheVietnamWarwasstillinthenearbackground.AndRichardNixon.AndJimmyCarterhimself.Americanswerediscouraged,wearetold;theyhadlostconfidenceinthemselves.Then,alongcameRonaldReaganwithamessageofhope,optimism,andsomething-for-nothing.Thesupplyside,theLafferCurve!Suddenlyitseemedpossibletospendmore...andstillhavemore!Governmentcouldcuttaxes—andgetmorerevenue,saidLaffer.Forgetthedeficit;itwilltakecareofitself.Somehow.Theaveragemanfiguredhecoulddothesame:borrowmore,spendmore,andhewouldgetrich.Pensionswereout.Freepeoplecouldlookoutforthemselves.Theycouldsetuptheirown401(k)plansandmakemoneyincommonstocks.Allyouhadtodowasbuythecompaniesyouliked,saidPeterLynch.Andthecompaniesthemselvesnolongerhadtoworryabouttheiremployees.Managerscouldfocusoncookingthebookstogivetheimpressionofmaximizingshareholdervalue.Americasoonbecame“ShareholderNation”—awholecountryofcapitalists,allgettingrichinthefreest,mostdynamiceconomytheworldhadeverseen.Nowweseethatthewholethingwasahugeswindle.Supply-sidepoliciesneverreallyincreasedthesupplyside.Governmentneveractuallylighteneduptoletpeoplelivetheirownlivesintheirownways.Employeesneverquitegotaroundtoputtingmoneyintotheir401(k)plans;theyweretoobusytryingtokeepupwiththecreditcardbills.Andmanagerssoonrealizedthatmaximizingtheirownincomeswithstockoptions,bonuses,andrichretirementplanswasmorerewardingthanlookingoutforshareholders. Theshareholdersthemselves—themillionsoflumpenpseudoinvestorswhoownedmutualfunds—couldn’ttellthedifference.Theyhadneitherthetime,themoney,northetrainingtoberealcapitalists;theyweremerelychumpsforWallStreet.Andnow,hereweare,nearlythreedecadessinceReaganwontheWhiteHouse.Inrealterms,theaveragemanearnslessperhourworkedthanhedidintheCarteryears.Andthetypicalhouseholdapproachesretirementpoorerthanitwouldhavebeenin1980.Americawastheworld’sbiggestcreditorwhenIkewaspresident.ByRonaldReagan’ssecondterm,about15yearsintothepaxdollariumera,thenationslippedtonet-debtorstatus.Inthefollowing20years,itbrokeallrecords—becomingtheworld’sbiggestdebtorandthegreatestdebtorofalltime.ButThomasGaleMoore,thenamemberofPresidentReagan’sCouncilofEconomicAdvisors,musthaveanticipatedBenBernankewhenhenoticedtheUnitedStatescrossingthecreditor/debtorthresholdinthemid-1980s.Nottoworry,saidhe,“Wecanpayoffanybodybyrunningapress.”In1980,peoplestillheldpartieswhentheypaidofftheirmortgages.PaulVolckersaidthathewouldbringdowninflationrates,andhemeantit.YoucouldbuyastockforsixtimesearningsandlendyourmoneytotheU.S.governmentfora15percentyield.Lendersdemandedthatmuchbecausetheyrememberedtheinflationofthe1970s.Theyknewthatnoteveryinvestmentstoryhadahappyending.Backthen,theUnitedStatesstillmadethings.GeneralMotorswasourbiggestemployer;youcouldtellwhatyearacarwasmadebylookingatthetailfins.WhenEisenhowerwasintheWhiteHouseandWilliamMcChesneyMartinwasattheFed,theUnitedStateshadmostoftheworld’sgoldandmostoftheworld’scredit.ThishappystateofaffairspersisteduntilthereignofRonaldReaganandAlanGreenspan,whenWal-Mart—aretailer,notamanufacturer—becameitsbiggestemployer. SUNRISE,SUNSETUnderRonaldReagan,Americansthoughttheyhadrediscoveredtheiryouth.Theycouldn’tremembereverfeelingmoreconfidentormoreoptimistic.Then,20yearslater,inGeorgeW.Bush,Republicansthoughttheysawtheirheroreincarnate,withanother20yearsofprosperityahead.Andwhyshouldn’titbemorninginAmericaagain?Weanswerthequestiondirectly.ItwasnotmorninginAmericabecauseitwasevening.Therewasnobullmarketbecausetherewasabearmarket.Peoplewerenotgettingricherbecausetheyweregettingpoorer.Itwasnot1981becauseitwas2001.Readerswhofindthisanunsatisfyingexplanationareremindedthatitisnotyourauthorswhosettheplanetsinmotionaroundthesunandcreatedman—suchasheis—outofthedustoftheearth.Morningoftenlooksalotlikeevening—ifyoufacethewrongwayattherighttime.Butitistheoppositeendoftheday’scycle.In1982,interestrateswerehighandstockpriceswerelow.In1982,therewereafewpeoplewhowantedtobuystocks,andmanywhodidn’t.In1982,America,Inc.,lookedlikeahas-beeneconomy.Itscurrencywaswidelyconsiderednear-trashanditsbondsweredescribedas“certificatesofguaranteedconfiscation.”YoucouldbuynearlytheentireDowforjustoneounceofgold.In2000ittook43ounces.Thetrendofthetime,in1982,wasdown.Thensmartpeopleconsiderediteternal.BusinessWeekproclaimedthatequitieswerenotjustinacyclicaldownturn,notjustsick,butdead.Asthemoonlookeddowninthesummerof1982,itshoneonawallofworrysohighthatonlyaknuckleheadedcontrarianwouldthinkofclimbingit.Everyheadlineseemedtogiveanotherreasonthebearmarketwouldlastforever.Everypollshowedthatconsumersexpectedit.Everypriceseemedtoconfirmtheeverlastingtrend;thesunhadsetforever;theblackofnightwaspermanent. Andyet,atthatverymoment,hadaninvestorturnedaround,hewouldhavenoticedabrighteningintheeasternsky.Overthenext18years,thesunrosehigherandhigher,untilinvestorsweresoencouragedbythefavorablegrowingconditionsthattheyscatteredtheirseedlikeconfettiataparade.DidanyonedoubtthatitwouldtakerootinthehardconcreteoflowerManhattan’sfinancialhothouseorthethinsoilsofthetechnologysector?Buttheyear2000waseverythingtheyear1980wasnot.In2000,thereweremanypeoplewhowantedtobuystocksandfewwhodidn’t.Interestrateswerenearlyaslowastheyhavebeeninhalfacenturyandstockswereashighastheyhaveeverbeen.Consumers—whowererelativelyreluctanttospendin1982—pickedtheirownpocketsattheendofthecentury.Consumerspendingwasincreasingatfivetimestheincreaseinwagesandsalaries.AWORLDOFDEBT“Estimatesvary,”PetePetersonpointsoutinRunningOnEmpty,hisvastinquiryintotheimpendingbankruptcyoftheU.S.government,“dependingonmethodology,butthenumbersareallvast.”PetersonpointstostudiesdoneonthefutureobligationsoftheSocialSecurityandMedicaretrustfundalone.In2003,theAmericanEnterpriseInstituteprojecteda$45trillionshortfall;$47trillioncounteredtheInternationalMonetaryFundin2004;theNationalCenterforPolicyAnalysisandtheBrookingsInstitutioncameupwith$50trillionand$60trillion,respectively,intheirownresearchreportspublishedin2003.Thoseareallincomprehensiblylargenumbers,ofcourse,butthebiggestoftheprojectionscamein2004fromSocialSecurityandMedicaretrusteesthemselves.Theyestimatedtheunfundedbenefitliabilitiestohaveacurrentvalueof$74trilliondollars.Asanempirematures,theimperialcitizensbelievemoreandmoreextravagantthings.Bytheopeningofthetwenty-firstcentury,Americanswerespendingmorethantheyearned.Eachdaybroughtmorenewdebtthanrealnewwealth.Yet,almosteveryquartershowedgrowthinGDP.Americansmistookthisgrowthforprogress.Theyknewtheyhadtheworld’sbesteconomy,itsbest systemofgovernment,anditsfinestculture.Theycouldnotimaginethattheyweregrowingpoorer.Buthereweturnagaintothelivingandthedeadforelucidation.Supply-siderJudeWanniskiadmittedthatrealgrowthhadcomealmosttoahalt:IntheUnitedStates,myownworkshowsthatbetween1945and1971,whenthedollarwasfixedtogoldat$35ozunderthe1944BrettonWoodsarrangement,therealeconomyintheUSgrewby4percentperyear.From1971whenthedollarwasfloatedto2004,realgrowthoftheUSeconomyhasonlyapitiful0.37percentperyear.Thegrowth,suchasitwas,intheAmericaneconomy,cameaboutbyvirtueofincreasedemphasisonthepresenttense.Americanscametodespisethepastandneglectthefuture.Thelessonsofthedeadandthedesiresoftheunbornwerebothignored.Instead,allthatseemedtomatterwasconsumptioninthehereandnow.Adeadman,F.A.Hayek,explainedtheconsequences:Theeconomyinitsentiretymustcontinuetodeclinesolongasmoreisbeingconsumedthanproduced,andsomepartofconsumptionthereforetakesplaceattheexpenseoftheexistingcapitalstock.Withoutatheory,Hayekmighthavesaid,thefactsareasmute.Butbytheyear2005,bothfactsandtheorieshadbecomeblabbermouths.Thetroublewasthatthefactshadbeencorruptedsotheynolongertoldthetruth.Andtheoldtheoriesthatmighthavebeenusedtointerpretthefactshadbeenabandonedinfavorofnew,moreconvenientdelusions.Americanscouldnowrunupasmuchdebtastheywanted,saidthenewtheorists. TheAmericaneconomymayormaynothavebeen“growing”intheG.W.Bushyears.Butiftraditional,time-testedtheoriesabouthowwealthandpovertyarecorrect,thankGoditwasnotgrowingmore.Everystepittookmoveditdeeperintodebtandclosertobankruptcy.10America’sGloriousEmpireofDebtLetustakeamomenttostandbackandgazeatAmerica’sgreatEmpireofDebt.Itisthelargestedificeofdebteverputup.Itsustainsthemostmagnificentworldeconomyeverassembled.Itsupportsmorepeopleinbetterstylethananysystemeverbeforedevised.Notonlyisitincomparablyeffective,itisalsoimmeasurablyentertaining.Forithasitsburnishedhelmetsandflyingbanners;itsintellectualsanditsgladiators;itsCaesars,Antonys,Neros,andCaligulas.Ithasitstemples,itsforum,itsCapitol,itssenators;itspraetorianguards;itsviaAppia;itsproconsuls,centurions,andlegionsallovertheworldaswellasitsbreadanditscircusesinthehomeland;anditscostlywarsinperipheryareas.TheRomanEmpirerestedonaclassicalmodelofimperialfinance.Beneathacomplexandnuancedpyramidofrelationshipswasafoundationoftributeformedwiththehardrockofbruteforce.America’sEmpireofDebt,ontheotherhand,standsnotasasolidpyramidoftrust,authority,andpowerrelationshipsbutasaricketyslumofdelusion,fraud,andmisapprehension.“Mytaxguyhasbeenbuggingme....Youknow,realestateiswhereitisat.”InJune2005,NBCquotedayoungwomanwhohadboughtasecondhomeataColoradoresort.Accordingtothereport,morethanathirdofthehousessoldintheprevious12monthswerenotprimaryresidences,butsecondhomesorinvestments.Downatthebottomofthepyramidwerepettyagentsspreadingdeceitand misinformation—suchastheaforementioned“taxguy.”Youwouldthinkayoungwomancouldtrusthercertifiedtaxadvisortogivehersoundcounsel.Instead,heurgedhertospeculateonthemostbubblypropertymarketinAmericanhistory.Naturally,shewentforit,aidednodoubtbyawholeindustryofprofessionaldissemblers.Pressreportstoldusthatappraisersroutinelystretchedvaluationstohelpcloseadeal.Mortgagelendersknewperfectlywelltheappraisalswerelies,buttheywinkedatthemwithoneeyewhilewinkingattheborrower’sphonyincomedeclarationwiththeother.Again,accordingtothepressreports,lendersnolongerverifiedincomeclaims.Theyhadgoneblind!InCalifornia,housepricesracedsofaraheadofincomesthatbarelyoneintenbuyerscouldaffordthemedianhouse.Yetthanksto“creativefinance,”morehouseswerebeingsoldthaneverbefore.Thusthefoundationofthedebtpyramidwaslaiddowninabedofmutualdeceitandcupidity,andcoveredwithanotherleveloffabrications.Lendersdidnotstickaroundtoseehowtheloansworkedout.Instead,theypretendedthecreditsweregood,andpackagedthemortgagesintoconvenientunitssothatinvestorscouldbuythem.Thefinanciersknewdamnedwellthatmanybuyerscouldn’treallyaffordtopayforthehousestheybought,buttheysawnopointinmentioningit.Nordidtheinvestorswanttoknow.Theywereinonthescam,too.Thesmartestofthemevenfiguredouthowitworked.TheFedhelddownshort-termratesbelowtheinflationratesothatinvestorsinlong-termmortgagefinancingandbuyersofU.S.Treasuryobligationscouldmakeaneasyprofit.Furtherupthestepsofimperialdebtwerewholelegionsofanalysts,economists,andfull-timeobfuscatorswhoserolewastomakeusallbelievesiximpossiblethingsbeforebreakfastandadozenmorebeforedinner.EconomistsattheBureauofLaborStatisticsdidtonumberswhatguardsatGuantanamodidtoprisoners.Theyroughedthemupsobadly,theywerereadytosayanything.InJune2005,itwasreportedthatproductivitywasincreasingata2.9percentrate—thefastestpaceinninemonths.Productivitywassupposedtomeasureoutputperunitoftime.Buttheyardstickwasbentbythegovernment’sstatisticalbrownshirts,whosaidthatifacomputerthisyearcanprocessinformation10timesasfastasoneproducedlastyear,theworkerwhoassembledithasmultipliedhisoutput1,000percent.Thisabuseofstatisticsispartofwhat allowedAmericanstodeceivethemselvesabouttheirowneconomy.Itwashealthy,theysaid.Itwasgrowing.Itwasstable.Economists,commentators,andpolicymakerstookupthesedistortionsandaddedtheirowntwists.Itwasobvioustoanyonewhobotheredtothinkaboutitthataneconomythatspendsmorethanitearnsisindecline.Buttrytofindaneconomistwillingtosayso!They’dallbecomelikerichnotablesinthetimeofTrajan,doingtheemperor’sworkwhethertheyareonhispayrollornot.Theywouldtellyoutheeconomyisexpanding,butitwasanexpansionsimilartowhathappenswhenacompulsiveeaterescapesfromafatfarm;thelongerheisontheloose,theworseoffhebecomes.Itwasanexpansionofconsumption,notwealth-producing,job-creatinginvestment.Ontheissueofthetradedeficit,theysaidwhatthesenatorsandconsulswantedtohear,asLeveyandBrowndidinForeignAffairsmagazine:“TheUnitedStates’currentaccountdeficitandforeigndebtarenotdirethreatstoitsglobalposition,aswould-beCassandraswarn.U.S.powerisfirmlygroundedon1economicsuperiorityandfinancialstabilitythatwillnotendsoon.”Infact,thestoryofinternationaltrade,circa2005,wasthemostpreposteroustaleeconomistsevertold.Onenationboughtthingsthatitcouldn’taffordanddidn’tneedwithmoneyitdidn’thave.Anothersoldoncredittopeoplewhoalreadycouldn’tpay...andthenbuiltmorefactoriestoincreaseoutput.Everylevelcolludedwitheveryotherleveltokeeptheflimflamgoing.OnthebanksofthePotomac,peopleofallclasses,rank,andstationwerepleasedtobelievethatallwaswell.Andthere,attheFederalReserveheadquarters,wasanothercasteofloyalliars.AlanGreenspanandhisfellowconniversnotonlyurgdcitizenstomortgagetheirhouses,buySUVs,andcommitotheractsofwantonrecklessness,theyalsocontroledthenation’smoneyandmadesurethatitplayedalongwiththefraud.Fromthecentertothefurthestgarrisonsontheperiphery,fromthelowestranktothehighest—everyone,everywherewillingly,happily,andproudlyparticipatedinoneofthegreatestdeceitsofalltime.Atthebottomoftheempirewerewageslavessquanderingborrowedmoneyonimporteddoodads.Theplebesgambledonadjustableratemortgages(ARMs).Thepatriciansgambledonhedgefunds thatspeculatedonhugeswathsofmortgagedebt.NearthetopwereFedeconomistsurgingthemtodoit!Andattheverypinnaclewasachiefexecutive,modeledafterwhom...AugustusorCommodus?....whocuttaxeswhileincreasingspendingonbread,circuses,andperipheralwars.Thespectaclewasbreathtaking.Andendlesslyentertaining.Wewerehumbledbythemajestyofit.Everywherewelooked,wesawanexquisitebutprecariousbalancebetweenthingsthatwereequallyandoppositelyabsurd.Ontheonesideoftheglobe—intheAnglo-Saxoncountriesingeneral,buttheUnitedStatesinparticular—weretheconsumers.Ontheotherside—principallyinAsia—weretheproducers.Onesidemade,theothertook.Onesaved,theotherborrowed.Oneproduced,theotherconsumed.Thisisnotthewayitwasmeanttobe.WhenAmericafirststoopedtoEmpire,shewasarising,robust,energetic,innovativeyoungeconomy.Andforthefirstsixdecadesofherimperium—roughlyfrom1913until1977—sheprofitedfromhercompetitiveposition.Everycountrytowhichshewasabletoextendherpaxdollarumbecameacustomer.Herbusinessesmadeaprofit.Butgradually,hercommercialadvantagefadedandherindustriesaged.Theveryprocessofspreadingthesoftwarmthofherprotectionovertheearthseemedtomakeitmorefertile.Tough,weedycompetitorssproutedallovertheperipheryoftheempire—firstinEurope,theninJapan,andlater,throughoutAsia,evenareasshehadneverbeenabletodominate.Bytheearlytwenty-firstcentury,thecostsofmaintainingherroleastheworld’sonlysuperpower,anditsonlyimperialpower,hadriseninexcessof5percentofherGDP,or$558billionperyear.Notonlyhadsheneverfiguredoutagoodwaytochargeforprovidingtheworldwithorder,noworderwasworkingagainsther.Theperipheryeconomiesgrewfaster.Theyhadnewerandbetterindustries.Theyhadhighersavingslevelsandmuchlowerlaborrates.Theyhadfewofthecostsofbreadorcircusesandnoneofthecostsofpolicingtheempire.Theywerefreer,lighter,faster.Everyday,thecompetitorstookmoreofAmerica’sbusiness,assets,andmoney.Iftheempirewereanoperatingbusiness,accountantswouldsayitwaslosingmoney. TheempirenolongerpaysbecausetheentireWesternworld—includingJapan—haslostitscompetitiveedge.GlobalizationofthepaxdollarumeraservedtheUnitedStateswellafterWorldWarII.Americawastheworld’sleadingexporter.ButEuropealsothrivedinthe30yearsafterthewar—lestrenteglorieuses,astheFrenchcallthem.Then,inthe1980s,theJapanesetookoverastheleadingeconomyoftheadvancedworld.Andnow,thepaxwroughtbytheAmericanempireworksagainstAmerica.Asianfactoriesarenewerandmoremodern.Asianworkersareyoungerandcheaper.Now,everybusinessdaythatpasses,theAsiansgrabalittlemoreoftheU.S.market.AndeverybusinessdayputsAmericans$2billionfurtherbeholdentoitsmostlyAsiancreditors.“GMplanstocut25,000jobsintheU.S.”TheheadlineappearedonthefrontpageoftheInternationalHeraldTribuneinmid-June2005.ElsewhereinthepaperwasastatusreportexplainingthatChina’sCheryAutomobilesplannedtobeginexportingthefirstof250,000CheryCrossoverstotheUnitedStatesin2007.ForeveryjoblostbyAmerica’spreeminentindustrialcompany,Chinawasplanningtoexport10newcars.Scarcelyayearlater,attheendof2008,ChinawasactivelyconsideringbuyingallthreeofAmerica’sautomakers.Itwasnotjustmanufacturingthatwasmovingtoperipherystates.Theadventofhigh-speed,inexpensivecommunications,alongwithcheapcomputingpower,allowedAsianstocompeteinservicesectorsaswell.Anythingthatcanbedigitizedcanbeglobalized—architecture,law,accounting,administration,dataprocessingofallsorts,callcenters,recordkeeping,marketing,publishing,finance,andsoforth.Whatwasleftforthedevelopedeconomies?Whatcouldtheydo?HereiswhereEuropeanandAnglo-Saxoneconomiespartedcompany.TheEuropeansemphasizedhighvalue-addedproductssuchasluxurygoodsandprecisiontools.Theyclungrigidlytothewisdomoftheoldeconomists,refusingtoexpandconsumercreditandrefusingtousemassivedosesoffiscalstimulitoincreaseoveralldemand.HousepricesrosesharplyinParis,Madrid,andRome.Buttherewerefewsignsofspeculation.Houseswerenotrefinancedreadily.Theywere not“flipped.”Therewaslittlecreativefinance.Norwasthereabigrun-upinconsumerdebt,orabigrun-downinsavingsrates.Creditcardswerestillcomparativelyrare.Unemploymentwashigh,forEurope’spolicymanagerstoleratedneithermarginaljobsnormarginalcredits.Europewasrigidanddull,economically,butrelativelysolid,withapositivebalanceoftrade.TheAnglo-Saxoncountriestookadifferentroute.DuringatimewhentheBankofEnglandhasregularlymovedinterestratesupanddowntodealwithchangesineconomicconditions,theECBsatonitshands.ThegeneralconsensuswasthatEuropewouldbebetteroffifitactedabitmoreliketheAnglo-Saxons,bymanipulatinginterestratestoencourageconsumerdebt.Americaneconomistsimaginedthemselvescarefullyanalyzingthedataandcomingtoalogicalconclusion.Whattheydidnotrealizewasthattheirnumbers,conclusions,andviewsoftheworldhadbecomenothingmorethanstonesintheimmensepyramidofconsuetudefraudiumoftheadvancedempire.Thenumberswerefrauds.Ifyouweretolookatthepercentagesfairly,theEuropeaneconomyactuallylookednoworsethanitsAnglo-Saxoncompetitor—withasimilarrateofgrowth,higherunemployment,butbetterproductivityandlessdebt.AstheAnglo-Saxoneconomieslosttheircompetitiveedgeinmanufacturing,theytriedtomakeupforitbyencouragingconsumption.Thiswasthebiggestfraudofall.Atfirst,higherconsumptionfeelsgood.Itislikeburningthefurnituretokeepwarm;itfeelsgoodforamoment.Butthesenseofwell-beingisextremelyshort-lived.Whenpeopleborrowandspend,theyfeelasthoughtheyaregettingricher—especiallywhentheirhousesarerisinginprice.Theincreasedconsumptionevenshowsup,indirectly,intheGDPfiguresasgrowth.Butyoudon’treallybecomewealthierbyconsuming.Youbecomewealthierbymakingthingsyoucanselltoothers—ataprofit.Thepointisobviousbut,atthisstageofimperialfinance,itwasinconvenient.Thehomeland’slosses—measuredbyanegativebalanceoftrade—beganinthemid-1970s.Lessthan30yearslater,bothgovernmentandconsumerswererunningupdebtsatanalarmingrate.Whatelsecouldtheydo?Theonlyway Americanscouldcontinuetheirimperialrole—whichmeantmoretothemthanever,sinceitwasnowtheonlysourceofnationalpridelefttothem—wastoborrow(seeFigures10.1and10.2).Figure10.1NewBorrowingbyFederalGovernmentThehomeland’slosses—measuredbyanegativebalanceoftrade—beganinthemid-1970s.Lessthan30yearslater,boththegovernmentandconsumerswererunningupdebtsatanalarmingrate.TheonlywayAmerican’scouldcontinuetheirimperialrolewastoborrow.Source:FederalReserve. Figure10.2NewBorrowingbyPrivateHouseholdsSource:FederalReserve.Theglobaleconomicsysteminthepaxdollariumerawasperfectlybalanced.ForeverycreditinAsia,therewasanequalandoppositedebitintheUnitedStates.Andforeverydollar’sworthofdemandfromtheUnitedStates,therewasadollar’sworthofsupplyalreadywaitinginacontainerinHongKong.Butwhiletheimperialfinancesystemwasflawless,itsperfectionsweredevastating.Inmid-2005,Americanssalutedtheirimperialstandards.Theygratefullypastedtheflagtotheircarwindows,theirjackets,theirhats,theirbeermugs,theirshirts,andeventheirunderwear(neveronceinEuropehaveweseenanyonewithanationalflaganywhereexceptataparadeorapublicbuilding).Americansareproudoftheirempire—andshouldbe.Withoutit,theycouldneverhavegottensofarindebt.WhatcentralbankerwouldfillhisvaultwithArgentinepesosorZimbabwedollars?WhatdrugdealerorarmssellerwouldwantPolishzlotysin payment?WhatinsurancecompanywouldwanttobuyBolivianorKyrgzstanbondstocoveritslong-datedliabilities?Thedollarhasnotbeenconvertibleintogoldfor37years.Yet,peoplestilltakeitasthoughitwereasgoodastheyellowmetal—onlybetter.Ultimately,lendingmoneytoaforeigngovernmentisabetthatthegovernmentwillputthesqueezeonitsowncitizenstomakesureyougetpaid.TheUnitedStatesdoesn’tevenhavetosqueeze.Whenoneforeignloancomesdue,otherforeignerspracticallylineuptorefinanceit;itisasiftheywereofferingfreedrinkstoastreetbum,justtogawkandwonderwhenhemightpassout.HOWTHEPUBLICDEBTINCREASED“SincePrimeMinisterSirRobertWalpole’sintroductionofthefundingsysteminEnglandduringthe1720s,”writesH.-A.ScottTraskfortheMisesInstitute,“thesecretwasoutthatgovernmentdebtneedneverberepaid....Walpole’ssystemproveditsworthinfinancingBritishoverseasexpansionandimperialwarsintheeighteenthandnineteenthcenturies.Thegovernmentcouldnowmaintainahugepeacetimenavalandmilitaryestablishment,readilyfundnewwars,andneednotretrenchafterward.TheBritishEmpirewasbuiltonmore2thanthebloodofitssoldiersandsailors;itwasbuiltondebt.”ThenewsystemwasslowtocatchoninAmerica.Jeffersonwasagainstit.In1789,inalettertoJamesMadison,hewonderedwhether“onegenerationofmenhasarighttobindanother.”Hisanswerwas“no.”“Theearthbelongsinusufructtotheliving,”heconcluded.“Nogenerationcancontractdebtsgreaterthanmay3bepaidduringthecourseofitsownexistence.”Anintergenerationaldebtisanoddthing.Sayamanbuysahouse.Hemayleavethehousetohischildren,withamortgageowing.Thechildrenwerenotpartytothemortgagecontract,buttheytakethebequestingoodgrace.Thehousemayhaveamortgageoritmayneedanewroof.Agiftisagift,encumberedornot.Ifitistooheavilyburdenedwithdebt,theycouldsimplyturnitdown;theynevermadeadealwiththemortgagecompanyandareundernoobligationtopayit. Supposeitiscreditcarddebt.Saythemanusedthemoneytotakeatriparoundtheworld.Butthetripworehimout;nosoonerdoeshereturnhomethanhecollapsesofaheartattack.Arethechildrenunderanyobligationtopaythecreditcardbills?Notatall.Butcomesnow,“public”debt.Whatkindofstrangebeastisthis?Onegenerationconsumes.Itthenhandsthenextgenerationthebill.Theyoungergenerationneveragreedtothetermsoftheindebtedness.Theyarepartytoacontract—andonthewrongendofit,wemightadd—thattheynevermade.Indenturedservantsonlyhadtoworksevenyearstopayofftheirindenture.Thisnewgeneration,ontheotherhand,willhavetoworktheirentirelives.Sucharrangementsareoftenexcusedaspartofthe“socialcontract.”Butwhatkindofcontractallowsonepersontotakethebenefitswhilestickingthecoststosomeoneelse?Butdeadmendon’ttalk,andtheunborndon’tvote.PoliticiansinAmerica—justasthoseinBritain,Italy,andGermany—graduallycametoseethattheycouldgetthebenefitsofspendingmoneyinthepresent,whilepassingonthedebtstothenextadministrationandthenextgeneration.Then,asnow,warprovidedcoverforexcessspending.First,therewerethedebtsfromtheAmericanRevolution,whichwerepaiddownquickly.ThencametheWarof1812,MexicanWar,andtheWarbetweentheStates.Eachtime,spendingwasincreased,debtsweretakenon,andthen,afterthewar,thedebtwaspaiddown,orpaidoffcompletely.WorldWarIsawfederaldebtexplodefrom$3billionto$26billion.PresidentsHardingandHooverpaiditdownto$16billion.ButthencametheGreatDepression,Roosevelt,andWorldWarII.By1945,federaldebthadreached$260billion.Thencamesomethingnew.Thewardidnotend.ItcontinuedastheColdWar,andinsteadofthedebtbeingpaiddown,itwasincreased.UnderRonaldReagan,America’sdebtseemedoncourseforMars.Lessthan$1trillionin1980,itsoaredto$2.7trillionbeforeReaganleftoffice.OnemighthaveexpectedsomereliefaftertheColdWarwasover.Butthehabitofdebtis hardtobreak.BythetimeGeorgeW.Bushtookoffice,thedebthadrisento$5.7trillion.Mr.Bush,aconservative,mighthaveseizedtheopportunitytopaydownthedebt.Thenationwasatpeaceandexpectedhugebudgetsurpluses.HepromisedasmuchwhenhestoodbeforeajointsessionofCongressin2001andannouncedhisbudget.“Thatnight,”PaulO’NeilltellsusinthebookbyRonSuskind,ThePriceofLoyalty,“Bushstoodbeforethenationandsaidsomethingthatknowledgeable4peopleintheU.S.governmentknewtobefalse.”GenerationsofRepublicanshadpromisedbalancedbudgets.Onlywarhadpermittedthemtocontinuerunningupdebt.Withnowar,theRepublicanssquirmed.Butsince1917,warshadalwaysseemedtocomealongjustwhentheywereneeded,andnowtheyincludedaremarkableevent:9/11.Allofasudden,anotherstrangewarwasannouncedagainstanenemynoonecouldfindonamap—aWaronTerror.Now,thewar,thespending,andthedebtscouldgoonforever. Figure10.3HomeMortgagesOutstanding,U.S.ConsumerCreditperCapita,andAverageU.S.CreditCardDebtperHouseholdSources:FederalReserve;CardTrack.com. Inthefollowing24months,theBushadministrationaddedmoredebtfasterthanatanytimeinthefirst200yearsofthenation’sexistence.MAESTRO’SPERFORMANCEInFebruary2005,AlanGreenspangaveaspeechinhonorofthefirstmoderneconomist—AdamSmith.TheFedchairmanjourneyedtoFifeCollege,inKirkcaldy,Fife,Scotland,whereSmithwasbornin1723.There,hecommentedonSmith’swork:“MostofSmith’sfreemarketparadigmremainsapplicableto5thisday,”saidhe.Inparticular,theworldseemstohavediscoveredthatindependentbuyersandsellersarebetteratdeliveringthegoodsthangovernmentplanners.ThiswouldhavecomeasashocktoGeorgeOrwell.WritingatthebeginningofWorldWarII,Orwellexpressedthebeliefofmillions:“IbeganthisbooktothetuneofGermanbombs....Whatthiswarhasdemonstratedisthatprivatecapitalism—thatis,aneconomicsysteminwhichland,factories,minesandtransportsareownedprivatelyandoperatedsolelyforprofit—doesnotwork.It 6cannotdeliverthegoods.”Figure10.4IndividualLoansatCommercialBanksandCommercialandIndustrialLoansatAllCommercialBanksAstheempirematured,Americansembracednewideasandattitudes.Peopleswitchedtheirattentionfromassetstocashflow,frombalancesheetstomonthlystatements,frombuildinglong-termwealthtopaycheck-to-paycheckfinancing,fromsavingtospending,andfrom“justincase”to“justintime.”Source:FederalReserve. Figure10.5RealEstateLoansatAllCommercialBanksandU.S.CorporateDebtSource:FederalReserve. Figure10.6StateandLocalGovernmentDebtandAmountFinancedforNewAutoLoansConsistentwithspeculativebubblesthroughouthistory,thegreatTechWreckonWallStreetcircaAD2000—whichwasitselffinancedbycorporateborrowing—wasfollowedbyadramaticriseinspeculationonrealestate...also,onaborroweddime.Source:FederalReserve. Figure10.7NYSEMarginDebtandTotalFederalStudentLoansSources:NewYorkStockExchangeandTheCollegeBoard. Figure10.8FederalDebtHeldbyForeignersAsthegustsofcredit,debt,borrowing,andspendingblewacrossthenation,veryfewoftheoldattitudesandinstitutionswereleftstanding.Bytheearlytwenty-firstcentury,Americansborrowedmoneyforeverythingtheywanted:Theyborrowedtogotoschool,todriveinlatemodelSUVs,tofinancenewfootballstadiums,andtoconvertagingindustrialdistrictsintoshoppingmeccas.Howwasallthisborrowingmadepossible?Itwasmadepossiblebythekindnessofstrangers.Source:FederalReserve. Orwellwaswrong.Capitalismdeliveredthegoodsbetterthansocialism,afactthatevennearsightedjournalistsandcentralbankerswereeventuallyabletosee.ButevenafterthefalloftheBerlinWall,continuedAmerica’smostcelebratedcentralbanker,therewas“noeulogyforcentralplanning.”AdamSmithhadproposedausefulmetaphortohelpexplainhowasystemofprivate,individualdecisionmaking—whichmusthavelookedchaotictoatop-downobserver—actuallyfunctionedtothebettermentofall.Ariseinthepriceofpigs,forexample,sendsasignaltothehograiserstoproducemore.Thus,themarketisguidedbyan“invisiblehand”toproduceexactlyasmuchofathingaspeoplereallywantandcanreallyafford.Quick-wittedreaderswillalreadybegurglingwithindignation.Marketsworkbestwithouttheheavyhandofregulation,Greenspanacknowledged.Butheseemedtoexempt,conveniently,thecreditmarkets.Themaestro’sspeechhitafalsenote;ratherlikePresidentBush’sapproachtoevangelicaldemocracy,itseemedtomissthepoint.Insteadoflettinglendersofcreditanddemandersofitbeguidedbyan“invisiblehand,”foryearstheFedchief’sboneypawshavedrawnthemtogether.Mr.Greenspan’s“OpenMarketCommittee,”nottheopenmarket,haslargelydeterminedtherateatwhichlenderswilllend,shortterm,andatwhichborrowerswillborrow.Whyisitthatwhatisgoodforthegooseoflumbermarkets,stockmarkets,grainmarkets,laptopcomputermarkets,andalmosteveryothermarketunderHeavenisnotgoodenoughfortheganderofthecreditmarket?Theanswerisnotoneoflogic,butofconvenience.Mostofthetime,politicalleadersprefereasiercredittermsthanbuyersandsellerswoulddetermineontheirown.Insettingitskeyrate,theOpenMarketCommitteeislikelytosetaratethatistothepoliticians’liking.7NewYorkercolumnistJamesSurowiecki’sbook,TheWisdomofCrowds,makesthepointthattwoheadsarebetterthanone.Groupsofpeoplecanbesmarterthanindividuals.Amarket,theoretically,candoabetterjoboffindingtherightpriceforathing.Amarketissupposedtoaggregatetheprivateopinionsandindependentjudgmentsofthousandsofindividuals.Generallyitsucceeds.Butonoccasion,themarketslipsintocrowd-likebehavior—whippedtoexcessbythe financialmediaorthefinancialindustry.Andsometimes,thewholemarketisdeceivedbyitsowncentralplanners.Ratherthanallowlendersandborrowerstodecideforthemselveswhatratestheywouldaccept,thecentralplannersattheU.S.FederalReservedecidedforthem.Howtheycanknowexactlywhatlendingratesuchalargeandinfinitelycomplexeconomyneedshasneverbeenexplained.But,historically,fromtheFed’slowestratetoitshighest,thereareabout1200basispoints.Onthoseoddsalone,theyhavealmostcertainlychosenthewrongone.Therearetimes—indeedmostofthetime—whenpoliticalleadersprefereasiercredittermsthanbuyersandsellersdetermineontheirown.Insettingitskeyrate,theOpenMarketCommitteetendstosetaratemuchmoretothepoliticians’likingthantheoneofferedbyMr.Market.Alowerrate,thatis.ButasSchumpeterpointsout,anystimulusinexcessofactualsavingsisafraud.Thisartificiallylowrategivestheillusionthatthereismoremoneyavailablethantherereallyis.Hardlyanyoneevercomplains.Consumersfeeltheyhavemoremoneytospendthantheyreallyhave.Producerssenseademandthatreallyisn’tthere.Undeservingpoliticiansgetreelected.Andconnivingcentralbankersarereappointed.The“informationcontent”oftheFed’slowratemisleadseveryone.Theyproceedhappilyonthelong,slowprocessofruiningthemselves,unawarethattheyarerespondingtoanimposter.Onlymuchlaterdoesthedeceptionbecomeaproblem.FriedrichHayekexplains:Thecontinuousinjectionofadditionalamountsofmoneyatpointsoftheeconomicsystemwhereitcreatesatemporarydemand,whichmustceasewhentheincreaseofmoneystopsorslowsdown,togetherwiththeexpectationofacontinuingriseinprices,drawslaborandotherresourcesintoemploymentswhichcanlastonlysolongastheincreaseofthequantityofmoneycontinuesatthesamerate—orperhapsevenonlysolongasitcontinuestoaccelerateata8givenrate...wouldrapidlyleadtoadisorganizationofalleconomicactivity. Thewayitworksissimple:Aneconomyisgearedtoproduceforrealdemand.Oritismisledbyartificiallylowinterestratestoproduceforalevelofdemandthatdoesn’texist.Thedeceitcangoonforalongtime.But,eventually,someformofadjustmentmusttakeplace—usually,arecessionrestoresorderbyreducingbothproductionandconsumption.Generally,thecorrectionisequaltothedeceptionthatprecededit.ButtheBankofAlanGreenspanthoughtitcouldavoidtheseperiodicboutsofsanity.FedGovernorBenBernankeproposed“globalcooperation”inaNovember21,2002,speech.Then,inMay2003,hewenttoJapanurgingconcertedaction.TheFedwaspreparedtosacrificethesolvencyofAmericanconsumers,hetoldtheJapanese.Taxcutsandlowinterestratescouldstillinducethemtobuythingstheydidn’tneedwithmoneytheydidn’thave.ButJapanhadtohelpholddownU.S.interestrates—bybuyingupdollarsanddollar-denominatedassets,notablyU.S.Treasurybonds.Thisiswhathappenednext,accordingtoRichardDuncan:“In2003,andthefirstquarterof2004,Japancarriedoutaremarkableexperimentinmonetarypolicy—remarkableintheimpactithadontheglobaleconomyandequallyremarkableinthatitwentalmostentirelyunnoticedinthefinancialpress.Overthose15months,monetaryauthoritiesinJapancreated¥35trillion.Toputthatintoperspective,¥35trillionisapproximately1percentoftheworld’sannualeconomicoutput.ItisroughlythesizeofJapan’sannualtaxrevenuebaseornearlyaslargeastheloanbookofUFJ,oneofJapan’sfourlargestbanks.¥35trillionamountstotheequivalentof$2,500foreverypersoninJapanand,infact,wouldamountto$50perpersonifdistributedequallyamongtheentirepopulationoftheplanet.Inshort,itwasmoneycreationonascaleneverbefore9attemptedduringpeacetime.”WhydidtheJapanesecreatesomuchmoney?BecausetheyneededtobuyfromtheircitizensthedollarstheyhadaccumulatedbysellingthingstoAmericans.Hadtheynotdoneso,theircurrencywouldhavegoneup—makingtheirproductslesscompetitiveontheU.S.market.Hadtheynotdoneso,thedollarwouldhavefallenmuchfurtheragainstothercurrencies.Hadtheynotdoneso,theJapanesewouldnothavehadthedollarstobuyU.S.Treasurybonds.Andhadtheynot boughtsomanyofthem,U.S.interestrateswouldhaverisen,consumerswouldhavehadlessmoneytospend,andprobablythewholeworldwouldhavehadaneconomiccrisis.“Intentionallyorotherwise,”Duncancontinues,“bycreatingandlendingtheequivalentof$320billiontotheUnitedStates,theBankofJapanandtheJapaneseMinistryofFinancecounteractedaprivatesectorrunonthedollarand,atthesametime,financedtheU.S.taxcutsthatreflatedtheglobaleconomy,allthiswhileholdingU.S.longbondyieldsdownnearhistoricallylowlevels.“In2004,theglobaleconomygrewatthefastestratein30years.MoneycreationbytheBankofJapanonanunprecedentedscalewasperhapsthemostimportantfactorresponsibleforthatgrowth.Infact,¥35trillioncouldhavemadethedifferencebetweenglobalreflationandglobaldeflation.Howoddthatitwent10unnoticed.”FLIGHTTOHAZARDAstheempirematured,Americansdevelopednewideasandattitudestogowithit.Wehavealreadyshownhowtheytookonthebeliefsofanimperialrace,readytomindeveryone’sbusinessbuttheirown.Financially,theirbeliefschanged,too;peopleswitchedtheirattentionfromassetstocashflow,frombalancesheetstomonthlyoperatingstatements,fromlong-termwealth-buildingtopaycheck-to-paycheckfinancing,fromsavingtospending,andfrom“justincase”to“justintime.”Itwasaflighttohazardthatbecamemorehazardouswitheverytake-offandlanding.ItwasasifastrangenewtradewindhadbeenstirredupinthePacificandblewacrossthecountry.Yearafteryear,itblewstronger,untilpracticallyeverytreeandstreetsign,allacrossthecountry,leanedtowardempire.Gradually,allofAmerica’sinstitutionsandattitudeswerebentbythenewwind.ThefederalgovernmentranafairlytightshipuntiltheJohnsonandReaganyears, andthenthewindcaughtit.Soon,itwasunderfullsail,flyingtowardrecorddeficitsandunheard-ofdebts.TheFederalReservebraceditselfundertheironhandofPaulVolcker(1981-1987).Then,itwasAlanGreenspan’sturnatthehelm.Soon,theFedwasnotonlybentoveralongwitheveryoneelse,butactuallyflappingawayitself—increasingtheblow.Consumershadahardtimekeepingtheirfeetontheground.Everytimetheyventuredoutdoors,thestrongwindpushedthemtowardmoreandmoredangerousdebt.Whereoncetheyconsideredaheavymortgageariskything,theycametoseeitasnoriskatall.Thegushofairpickeduptheirhousesandlightenedtheload.Asinterestratesdropped,theycouldn’twaittorefinanceandthenrefinanceagain,eachtime“takingout”alittlemoreequity.Thewindbentconsumers’attitudestowarddebtandtwistedthelendingindustryintosuchcomelynewforms:Howcouldtheyresist?Inthespringof2005,Grant’sInterestRateObserverpausedtoobservesomethingunusual:Rarereventhanabankerwithaheart,ithaddiscoveredonewithabrain.ThelateVernonW.Hillwasabankerfromasmalltownthatmustbeinagully;thewindsofmoderndebt-financingdidn’tseemtoreachit.“WefeeltheU.S.isintrouble,withmajorweaknessesandunpleasantnessahead,”hesaid.“Whetherinflationordeflationliesahead,orsomekindofboth,webelievemanyborrowerswillbeunabletorepaytheirloansasscheduled.”NoneofthereasonsMr.Hillmentionedwereoriginal:littlesavings,littleinvestmentinproductiveindustry(muchofwhatwasinvestedwentintoshort-livedsoftware),andtheillusionofwealththataccompaniesrisinghouseprices.Withlittlerealinvestmentinnewfactoriesornewmethodsofproduction,fewgood-payingnewjobswerecreated.Insuchaneconomy,abankerwithoutabrainwalkedlightlyandlentheavily.ForthepresidentofMonroeCountyBank,ontheotherhand,yougottheimpressionthateverysteptowardanewloanwasuphill.Helentalmostreluctantly,wonderinghowborrowerswouldbeableto repay.Whileotherbankersweremovingmoreandmoreoftheirmoneyintorealestateloans,Mr.Hillwaswarilyreducinghisbank’sexposure—especiallytoresidentialproperty.Homemortgageswerelessthanathirdofcommercialbankloansin1980.Nowtheywerenearlytwo-thirds.Otherbankerslenttoanyonewhocouldsignhisname,providedhewasbuyingahouse.Mr.Hillwantedtoknowhowtheborrowerwouldbeabletopaybackhisloanif—heavenforfend—hishousedidn’tgoupinpriceby20percentperyear.ThesewerenotthesortofpracticesthatwouldmakeMr.Hill’sestablishmentthe“BankoftheYear”orgethisphotoonthecoverofBusinessWeek.Notintheyear2005.HiswasnottheBankofthePresent.ItmayhavebeentheBankofthePast.ThatitmightalsobetheBankoftheFuturewasinnobody’smind.NotonlywastheMonroeCountyBankoutofstepwithmostotherlendinginstitutions,itseemedtobemarchingintheoppositedirection—backtothefuture.WehadnevermetthemanorvisitedhisofficeinForsyth,Georgia.Buthadwetoenteredthebank,wewouldhaveexpectedtofindamanbehindanold-fashionedledgeratanoakdesk...andaspittooninthecorner.Werewetoaskforaloan,wewouldhaveexpectedadisapprovinglook,followedbyapolite,butsevereinquiryintoourpersonalfinances.No,thesewerenotthemethodsofthetypicalbankerintheeighteenthyearofAlanGreenspan’sreignattheFederalReserveSystem.NorwasMr.Hill’sapproachtothecreditindustryparticularlyprofitable.Headmittedhewouldhaveearnedmoremoneybydoingwhatotherbankersdid.Mostbankersborrowshortandlendlong.Aslongaslongratesarehigherthanshortrates—andhedoeshismathright—hewillmakemoney.Mr.Hill’sapproach,borrowinglongandlendingshort,wasacuriosityinthebankingindustry.Itforwentcurrentprofits,infavorofamoresolidbalancesheet.Andwhenlongratesrose,whichtheywilldo,soonerorlater—bothMr.Hillandyourauthorsweresureofit—Mr.Hillwouldhavethelastlaugh.Comparedwithmostbankers,itwouldbefareasierforhimtocollecthiscreditsandpayhisliabilities.Stocksarebuoyeduporthrowndownasthemarket’sviewofthefirm’svalue changes.Profit-makingenterprises’valuedependsonhowmuchprofittheymake,afiguresubjecttobothchangeandspeculation.Butthevalueofahousechangeslittleovertime.Yearafteryear,itisthesameroof,thesamewalls,thesamecozywarmthandconvenience.Thevaluethatanowner-occupiedhousegivescannotbeamended,jiggled,bent,writtendown,cookedup,orrestated.NocleverCFOcansmoothitsearnings.Nofast-talkingpromotercanhypeupnextyear’ssales.Itiswhatitappearstobeandnothingmore:homesweethome.Butwiththecomplicityoftheentirecreditindustry,exceptforonebankinForsyth,Georgia,Americanscametobelievethattheverysamedullandlifelessbrickstheyknewsowell—alongwiththefadingpaint,thestainedcarpets,theleakingtaps,andcrackingdriveways—hadanear-magicalquality;theycouldmakethemrich.Theybelievedthatthehousewasan“investment,”differentfromstocksonlyinthatitwassaferandmoreprofitable.Theyknewfromtheirown,directexperiencethatthehouseisnotaprofitcenter,butacostcenter.Eachmonth,theplacemustbemaintained.Moneymustbespentonit.Theyalsoknewthat—otherthantheaforementionedservicethehouserenderstoitsoccupants—thereisnooutput.Thereisnothingthatcomesoutthebackdoorthatcanbesold.Asabusiness,itisalosingproposition,andtheyknewit.Itproducesnothing;norevenuesarerealized.Noprofitsareearned.Andyet,thehomeowneralsobelievedthathecouldgotofriendlylendersfromtimetotimeand“takeout”cash—asiftheplacehadbeenaccumulatingearnings.Whathewastakingout,hebelievedwasmerelysurplusequity.Hefiguredthatiflastyearhehad,say,$200,000worthofhouse,thisyearhemusthave$250,000worthofhouse.Hecould“takeout”the$50,000extraandspendit—justasifthehousehadearned$50,000inprofit—andstillhavehis$200,000worthofhouse.Hedidnotaskhimselfwherethat$50,000camefrom.Hedidnotfinditatallextraordinarythatanitemheknewtobeacostcentercouldalsoproducemorein“profits”eachyearthanheearnsinincome!Nordidhewonderhowtherecouldbesomuchuntappedvaluelockedupinhishouse,whenheknewfullwellthatheandhisfamilyusedeveryroom.Mr.VernonW.Hillconsideredthiswealthanillusion,aswedid.Hebelieveditwouldleadtobigproblemsamongbothborrowersandlenders.Toavoidthebig problemspersonally,Mr.Hill,likeWarrenBuffett,livedinthesamehouseheboughtnearly40yearsago.Mr.Hillrequiredprospectiveborrowerstoshowhimtheirfinanceswithoutconsideringthehousetheylivedin.Whatevervaluethereisinthelived-inhouse,hesaid,is“inactive.”Itdoesn’treallyearnanymoneyforyou;ifyouweretosellit,youwouldjusthavetobuyanotherone.Andyoucan’tshipittoChinatopayforyourflat-screenTVsortoJapantopayforyourSUV.ItwasnotthatMr.Hillwasnecessarilyopposedtothegreatempire;hejustdidn’tseemtocare.Butaviewmoretypicaloftheaveragelender,andaverageeconomist,wasexpressedbyapairofeconomists,mentionedbrieflyearlier,writingintheInternationalHeraldTribune.Mr.DavidH.LeveywasformerlymanagingdirectorofMoody’sSovereignRatingsService.StuartS.BrownisaprofessorofeconomicsandinternationalrelationsatSyracuseUniversity.Thetwoarguedthat“U.S.HegemonyHasaStrongFoundation.”Thetwoweretalkingbig.Theyweretalkingmacroeconomics,withnotraceofMr.Hill’smodestinsights,orhisprivateknowledge,orhis37yearsofexperiencelendingmoney,orthekeenandimmediateattentionofhavinghisownmoneyatstake.WhatLeveyandBrownweretryingtotellusisthatwehadnothingtoworryabout.Yes,itwastruethatweAmericansspent6percentmoreeverydaythanweearned.Yes,$11.5trillionworthofU.S.assetswereinforeignhandsandournetinternationalinvestmentpositionhadgonenegativeatmorethan3trillion.Andyes,itwastruethatwesavednearlynothing.Butwecouldstillfeelgoodaboutourselves,theysaid.Thenumbersobscure“theUnitedStates’institutional,technologicalanddemographicadvantages,”theysaid.Whatwerethoseadvantages?Thetwoneverquitesaid.Butwhatcouldtheysay?Othercountrieshavedifferentinstitutions.Othershavedifferentdemographics.Othersusedifferenttechnologies.Whoknowswhichareanadvantageandwhichareahindrance?Youonlyknow—andthen,onlybyinference—afterthefact.Attheheightofitsbubblein1989,itwaswidelypresumedthatJapanhadalltheadvantages.Hardlyasingleissueofthebusinesspressfailedtomentionthem.Now,15yearsandamajorslumplater,Japanseemedtohaveallthedisadvantages,whilethe advantagessomehowcrossedtheBeringStraitintoNorthAmerica.Themainstreampresstoldushowdynamic,flexible,andopentheU.S.economywas.Attheendoftheirarticle,Messrs.LeveyandBrowntoldusthattheonlyrealthreatwasthat“protectionismandisolationismathomewillputanendto11thedynamism,opennessandflexibilitythatpowertheU.S.”Wecan’thelpbutrememberFrenchmilitarypolicyaftertheFranco-PrussianWar.LedbyColonelGrandmaison,theFrenchallowedwordstoreplacetacticsandstrategy.Élanwastheword.Itmeant“spirit”or“forceofwill.”WhenWorldWarIbegan,theFrenchattackedonhorseback,swordsglittering.Whatélan!Whatstyle!Whatblockheads.TheGermanmachinegunsopenedupandsoonthegroundwascoveredbyhandsomeyoungsoldiers.ÉlanprovedgreatforpoetsbutbadforFrance’smilitary.Onehundredyearslater,Americansputontheirowngaudytunics—soproudoftheir“dynamism,”their“flexibility,”their“openness.”Whocaredthattheyspentmorethantheycouldafford?Whoworriedthatwehadnosavingsandnowdependedonthekindnessofstrangerstomaintainourstandardsofliving?WhorealizedthattheChineseorJapanesecouldbringtheU.S.economytoitskneeswithasingleword?ButsowhatiftheChineseandJapanesesoldourbonds,westillhadourhouses!Thetwoeconomistsnotedthat“whenyouincludecapitalgains,401(k)retirementplans,andhomevalues,U.S.domesticsavingisaround20percentof12GDP,thesameasinmostotherdevelopednations.”TheyshouldhavetalkedtoMr.Hill.Theydidn’tseemtorealizethathomevaluesare“inactive.”Wehaveyettohearofafactorybuiltwithincreasesinhouseprices.Wehaveyettoseeadebtpaidfromarisinghouseprice—withoutanequaldebtarisingsomewhereelse.“Muchofourmeagersavingsandmassiveborrowinghasgoneintohousing,”saidtheMonroeCountybanker.“Howconvenientitwouldbenowifmansionsandsubdivisionscouldbeexported,toimproveourforeigntradebalance.Since theycannotbeexported,perhapstheforeignerswhoownourmassivedebtscanberepaidbycomingtoliveinourMcMansions,withhomeownersservingashouseboysandhousemaidstothevisitingJapaneseandChineseownersofourdebt.”“TheUnitedStateseconomyisgrowing,”saidPaulVolcker,“onthesavingsofpoorpeople.”Or,asMarshallAuerbackputit,wehadbecomea“BlancheDubois”economy—wehaddelusionsofgrandeur,andyet,wewerecompletelydependentonthekindnessofstrangersjusttokeepgoing.Poorpeoplemadethings,andthenfinancedtheconsumptionofthembyrichpeople.Americansdeceivedthemselveswiththefancifulnotionthatpeoplewholiveinhovels,eatdisgustinganimals,andearnlessthan1/20asmuchperhourwouldbewillingtofinanceournewhousesandnewwarsforever.Why?Oureconomyisso“dynamic”...so“flexible”...so“open”—thepoorpeasantscan’tresist!FRUGALTOAFAULTAsthegustsofcredit,debt,borrowing,andspendingblewacrossthenation,veryfewoftheoldattitudesandinstitutionswereleftstanding.ApartfromVernonHillandafewothers,lendersstoppedworryingaboutthequalityoftheirborrowers.Savingsandloanbusinessesmightaswellhavedroppedthewordsavingsfromtheirnames.Andcallinglendersthriftswaspracticallyalie;thewholeindustrybenttoanewtask—toloadupconsumerswithasmuchdebtaspossible.Therewasatimewhenthriftwasavirtue.“Apennysavedisapennyearned,”deadpeoplewhisper.Accountantswithsharppencilsevennoticedthatapennysavedwasmorethanapennyearned,40to50percentmore;itwasnotsubjecttostate,local,andfederalincometaxes.ButinAmerica,circa2005,thriftcametoberegardednolongerasavirtue,butasamentaldisorder.EvidencecamefromamagazinespottedonLongIsland,againthroughthe ever-observantGrant’sInterestRateObserver.Thepublication,entitledRealSimple,toldthestoryofapoorwomannamedMorningNaughton,34yearsoldintheflesh,hundredsofyearsoldinspirit.Ifthephonedidn’tringatanexpensivejewelrystore,itwasMs.Naughtonwhowasn’tcalling.IfnoonewasadmiringthenewSUVsinaNorthCarolinashowroom,itwasMs.Naughtonwhostayedathome.Ifyouweretocheckthecreditcardrecordsforsalesofexpensivevacations,fancyhotelrooms,extravagantfurcoats,ortoprestaurants,youwouldnotfindMs.Naughton’sname.Alas,saidRealSimple,thewomanhadarealproblem;shewas“frugaltoafault.”“Shehasneverhadcreditcarddebt,shepaysallherbillsontimeandshetypicallysaves$500eachmonth—onasalaryofabout$30,000,”wearetold.“Herhusband,JasonMichaels...worriesaboutherinabilitytoindulgeherself...orhim.”Theplotthickens.“Andhewondersifherscrimpingsendsthewrongmessagetotheirchild.”“Irealizeshecan’thelpherself,”saysJason.“Butherobsessionwithsavingcandrivemenuts.”ButneverwasthereaproblemunderthebrightsunofAmericathatdidn’thavesomesortoffraudcreepingintheshadowsbehindit.ReadingaboutMs.Naughton,economistssawathreat;ifotherconsumersweretodothesame,thewholeshebangwouldbeintrouble.Psychologists,ontheotherhand,sawanopportunity;somewouldprepare12-stepprogramstohelpovercomeit.Otherswouldofferdrugsandcounseling.Botheconomistsandpsychologistscouldrelax.Iffrugalityisadisorder,itwastooraretoworryabout.Theoddsofcomingdownwithitwereasremoteasintegrityinpublicoffice.Besides,thrift—evenifitwereadisorder—isonethatcomesandgoes.Ifpeoplearesavingtoomuch,ortoolittle,justwait;itwillgoaway.Ms.Naughton—throughnofaultofherown—tumbledintoanunusualsituation. Onegenerationcreates;thenextdissipates.Onegenerationearns;thenextburns.Onegenerationcomposes,thenextdisposes.MorningNaughtonwasmerelybornatthewrongtime.“Inthe1970s,”beganarecentletterfromareaderofourdailye-mail,theDailyReckoning,“Irecallseeingmanypeople,childrenoftheDepression,ravagedbyinflation.Theyrememberedthe‘badtimes’andwereloathtotakeondebt—evenifitwouldhavebeenprudenttoborrowandpaybackincheaperdollars.Inthefaceofrisingprices,theywouldslamtheirwalletsshutorbuyused,ratherthannew—‘I’dneverpaythatmuchforanewcar!’Theyheldtheirdollars,steadfastlyrefusinginflationhedges,andwatched,evenincreasedtheirdollarposition,astheinflationstormravagedtheirholdings.”“WhenMorningwas9,”continuestheRealSimpleanalysis,“herparentsdivorced,andshemovedwithherfathertoCapeCod.Herdaddidsomeconstructionworktomakemoney,buthewasanartistatheart....Sheworkedatamultitudeofoddjobs,includingbabysitting,tomakemoney.Atage10,sheopenedherfirstsavingsaccount.At13,shestartedpayingallthebillsbyfillingouttheinformationandhavingherdadsignthechecks....‘Mychildhoodleftmewiththisextremeanxietyaboutpartingwithmoney.Ialwaysneedasafetynet.’”ShemayhavebeentheonlyAmericanontwolegswhostillworriedaboutfalling.Butshecouldalwaystrytherapy.“Wereitnotforherhusbandandchild,Morning...mightnotbemotivatedtochange,”RealSimpleexplained.“Aftermorethan20yearsofbelt-tightening,Morningknowssheneedstorelax.‘Idon’twant[myson]SpencertogrowupwiththesamemoneyanxietiesIhave,’shesays.‘Beingsofrugalhasbecomeaburden,andIwanttochange.Butit’shardafteralifetimeofbeingthisway.’”Wewishedherluck.Butweofferedadvice:Don’tchangetoomuch.Oldhabitsmightturnouttobeuseful.Whoknows?Frugalitycouldmakeacomeback. THEOWNERSHIPSOCIETYAgreatempirecanbeviewedasavastpublicspectacle.Itbeginswithaboldcrime,developsintoafarce,withpettyactsoftomfooleryandfraudalongtheway,andendsinshame,regret,anddisaster.TheMedicareDrugBenefitprogram,enactedduringBush’sfirstterm,wasmeanttocost$400billionduringitsfirst10years.Turnsout,theofficialestimatesincluded2004and2005,thatis,twoyearsbeforetheprogramexisted.Thereal10-yearcostoftheprogramfloatedthroughthenewsmonthslaterat$720billion.AmericansvotedfortheirrepresentativesinCongressandtheWhiteHouse;thepoliticiansvotedforthefreedrugs.Thus,wasthedivinerightofthemajority—thebrutepowerofthemoretotellthefewwhattodo—purifiedbytheballotbox.Thepoliteformsoftheoldrepublicwererespected.Buttheessentialactwasasinandacrime.WhyshouldsomeAmericansgetdrugsatotherAmericans’expense?Isitnotlarcenyonthepartofoneandcomplicityonthepartoftheother?Andhowwillthose“others”payforit;weretheynotalreadyonthehookfor$44trillioninunfundedfederalobligations?Butnowthescamisthelawoftheland.GeorgeW.Bushwantedtocreatean“ownershipsociety.”Butitwasastrangeformofownership.MuchofwhatAmericansbelievedtheyhadtitletoactuallybelongedtosomeoneelse.Theirretirementsandhealthbenefits,forexample,mustbestolenfromotherpeoplebeforetheycouldbehandedout.Eventhingstheythoughttheypaidforwereactuallyonthebalancesheetofotherpeople.Moreandmorehouseswerereallyownedbymortgagefinancecompanies.CarswereownedbyGMACandotherautofinancers.Peopleexpectedtoretireontheequitylockedupintheirhouses.Buttheyownedlessoftheirownhousesthaneverbefore.AndSocialSecurity?AforensicaccountantcouldporeoverthebooksforathousandyearsandneverfindatraceofthecashsupposedlystashedawayforAmericans’retirement.Itdoesn’texist.Mr.Bushsaidhewantedtochangethat.HewantedAmericanstoowntheirownretirementfunds—withprivateaccountsinvestedinstocks.TheyounghadwiseduptoSocialSecurity.Therewasnowaytheycouldgetadecentreturnon investmentinSocialSecurity;theywantedout.Theoldwerealarmedtoo;theywereafraidthatthesomethingfornothingthey’dgrowntoexpectwouldturnouttobemorenothingthansomething.AndtheBushadministrationwantedvotesfrombothgroups.So,itdidwhatyouwouldexpect:Itdeceivedanddissembled.Itdoesn’tmatterwhatwethinkaboutit.Empires—likehistory—havethoughtsoftheirown,andawilltowardtheirownend.11ModernImperialFinanceAnewpieceofresearchfromPrinceton’sCenterforthestudyofthebrainwas1reportedinthepressinApril2005.Pokingaround,thescientiststhoughttheyfoundsomethingnewthatwouldexplainAmericans’reluctancetosavemoney.Decisionsaremadeintwopartsofthebrain,theresearcherstoldus.Thefirstpartisthelateralprefrontalcortex.Thisiswhereadvanced,logicalthinkingissupposedtohappen,suchaswhenapersondecideswhichinvestmenttomakeorwhichautomobileoffersthemostvalueforthemoney.Deeperdowninthegraymatterisanotherdecisioncenter,themoreprimitivelimbicsystem,whereheactuallydecideswhichcartobuy—usuallytheonethatbestsuitshisownprejudice.Ifhethinksheisamanlyman,hebuysabigAmerican-madetruck,ormaybeaHummer.Ifhepreferstothinkofhimselfasanintellectual,hegoesforaforeignmake,maybeanAudioraVolkswagen.BehindthewheelofaGermancar,hefeelsatonewithHegelandSchopenhauer.Or,ifheisahipenvironmentalist,hewillwanttoadvertisethat,too;inasleekhybridhewillfeelassmugasateetotalerinabeerhall.Researchersbelievethatthelimbicsystemdecidesourlikesanddislikes,andtellsushowtoreacttoimmediatestimuli.Whenadumptruckcutsyouoffintraffic,thelimbicsystemalmostautomaticallywantstocockyourrightarmandmiddlefingerinthetraditionalsalute,beforeyourlateralprefrontalcortexcanwarnyouagainstthegesture. Intheupperpartofthebrain,Americansrealizedthattheyneededtosavefortheirretirement.Butthelimbicsysteminsistedonbuyinganewwide-screenTVinstead.Thoughtheresearchers’reportwascirculatedinthemediaasthoughitmeantsomething,itleftusonlymorepuzzledthanbefore.WhendidAmericansacquirethislimbicsystem,wewondered?Upuntil1980,Americansavingsrateswerearound10percentofincomes.DidsomekindofevolutionarymutationoccurintheearlyyearsoftheReaganadministration?AndhowcometheChinesedidn’tseemtohavethesameproblem?Theysaved25percentoftheirincomes,whileAmericanssavedlessthan1percent.SomeoneoughttopryopenaChineseskullandtakeapeektoverifythis,butourguessisthattheChinesehavelimbicsystems,too.Atleastthescientistswerewiseenoughtorealizethatnoteverythoughtthatpassesthroughthehumanbrainmakesanylogicalsense.Themostpowerfulthoughts—strongenoughtoputtheaverageAmerican’sretirementfinancing,andevenhislife,injeopardy—arenotlogicalatall,butinstinctive,atavistic,andprimordial.GLOBALIZATIONANDITSDISCONTENTSTwothousandyearsago,St.Peterurgedacrowdto“turnawayfromthislostgeneration.”W.H.Audenspokeofthe“low,dishonestdecade”beforetheGreatWar.Couldourowngenerationbelow,dishonest,andlost?Wehadcometobelievethatthingswilllastforeverthatcouldn’tpossiblybetrueforevenaminute.Inthespringof2005,FedgovernorBenBernanketoldAmericansthattheyweredoingtheworldagreatfavorbyborrowingitssurplussavings.Theglobesuffersfroma“glut”ofsavings,saidhe.Americanscountedonoverseassaverstolendthemmoney.Theoverseassavers,saidBernanke,countedevenmoreonAmericanspendthriftstoborrowit.Thetroublewiththisanalysisisnotthatitisflawed;butthatitdidn’tgoquitefarenough.ThetransactionBernankedescribedisonlyhalfcomplete.Itislikeamanwhogetsdressedinthemorningbyputtingonhisshirt,butforgetshispants. Hegoesoutonthestreetandlooksridiculous.AnyonewholooksatBernanke’shalf-dressedexplanationwantstopointandgiggle.Hehasforgottentheessentialpart—howandwhenthelendersgetrepaid.Theborroweronlydoesthelenderafavorwhenheiscapableofrepayingitontheagreedterms.Ifhecannot,thetransactionbecomesabigdisappointmentforthelender.IncomesintheUnitedStatesarestagnant,oractuallyfalling.Wefacemoreandbetter-organizedcompetitionthanatanytimesincethebeginningoftheindustrialrevolution.Thepoolofpeopleintheworldwillingtoworkhardfor$3,000ayearisenormous.Givensuchcompetition,whywouldU.S.wagesgoup?Andwithouthigherwages,howwillAmericanseverpaybackwhattheyhaveborrowed?Buttheworld’sfinancialplumbinghadbecomesocuriouslyputtogetherthattheoddestthingshadbeenmistakenforcommonplace.Weturnedonthestoveandchampagnefizzedout.WeopenedthefaucetanditranwithKentuckybourbon;thewholethingwasstrange,butitdidn’ttakelongtolearntolikeit.TheU.S.economyhadbeensostrongforsolong,peopleallovertheworldhadcometoacceptitscurrencyasthoughitwererealmoney;theytookitandaskednothinginreturn.InexchangeforashipmentofTVsets,theJapanesetookawadof$100billsandcallediteven.Andhereisanotherremarkablething:Thebillstendedtostayoverseas—wheretheywereusedtobuyanotherformofU.S.paper,Treasurybonds.TheUnitedStatescouldprintasmany$100billsasitwanted.Socoulditissueasmanybondsandnotesasitpleased.Aslongaspeopledidn’ttrytoexchangethemforotherformsofwealth—allwaswell.Rev.AlSharptonisclean.Heisnotaneconomist.Hewasagainstoutsourcing.Thatthosequalificationsdidnotcinchthe2004Democraticpresidentialnominationforthemandisappointedmanypeople.Thathehadnotbeenoutsourcedhimselfdisappointedmanyothers.ForsurelyacleverfakircouldbefoundinIndiawhowouldbereadytomakeapublicspectacleofhimselfathalftheprice.Forthatmatter,allofWashingtoncouldbeoutsourcedtothebanksoftheGangesatafractionoftheprice,butnoonehasyetsuggestedit.JoinedbyDennisKucinichandRalphNader,SharptonbelievedtheUnitedStatesshoulddisavowfreetradealtogether.AslongaswearemembersoftheWorldTradeOrganization,explainedKucinichinadebate,wecannot“protectthejobs...thisisthereasonwhywehaveoutsourcinggoingonrightnow.We 2can’ttaxit.Wecan’tputtariffsonit.”Tobenonpartisanaboutit,allthecandidates’positionsonoutsourcingwerepreposterousorscurrilous.Therewerethosewhowantedtostopit.Andthosewhosawnoproblemwithit.Everyopinionwasfraudulent,delusional,ordumb.ItwaswidelybelievedthattheChinesewerestealingAmericanjobs.TheirfactorieshummedandbelchedsmokewhileU.S.factorieswentsilentandsentupweedsintheparkinglot.Theworldhasbeenglobalizedforalongtime.AnEnglishmanin1910couldsitinhisparloroffSt.JamesParkatthecenterofwhatwasthentheworld’sgreatestempireanddrinkteathatcameallthewayfromCeylonincupsthatcameallthewayfromChina.Then,puttingdownhisdrink,hecouldpickupaCubancigar,putittohislips...andperhapssprinkleafewashesonthecarpetthathehadboughtinEgyptortheleatherbootshehadorderedfromashopdownthestreetthatsoldItaliangoods.HecouldbuystocksinNewYorkaseasilyashecouldpickuporangesfromSpainorthelatestFrenchnovelstomaketheirwayacrossthechannel.Butglobalizationisnotwithoutitsdiscontents.In1910,Englandhadbeentheworld’snumber-onesuper-powerandtheworld’sgreatesteconomyfortwocenturies.ButglobalcompetitionhadrecentlyedgedtheBritishoutofthetopspot.AmericanGDPsurpasseditattheturnofthecentury.Germanymarchedbyafewyearslater.Relatively,England,that“wearyTitan,”wasindecline,andtheglobalizedeconomythattheBritishEmpirehelpedcreateworkedagainstit.Still,whywouldtheEnglishcomplain?Theylivedwell—perhapsbetterthananyoneelse.Eveniftheydidn’t,theythoughttheydid.Therestoftheworldwascontent.Peoplelikedbuyingandselling.PeopleinEuropelikedglobalization,becauseitbroughtthemorangesinthewintertime.Peopleinthewarmlatitudeslikeditbecausenowtheyhadsomeonetobuytheiroranges.Eventhen,peoplespokeofthe“annihilationofdistance”andassumedthatmoremileswouldbedestroyedintheyearstocome.Globalizationisnothingmorethantheextensionofthedivisionoflaboracrossinternationalboundaries.OneofyourauthorspassesmuchofhistimeinFrance. Inhislittlevillagearethevestigesofaself-containedcommunity.AsrecentlyastheendofWorldWarII,almosteverythingpeopleneededwasproducedrightthere.Thefarmsgrewwheat.Farmersraisedvegetables,cows,pigs,andchickens.Therewasamachineshop,aforge,andawoodworkingatelier.TherestillremaintheVersaillesboxes,inwhichlemontreeswereplanted.Theboxesallowedthetreestobemovedintoheatedspaceinthewinter.Otherwise,theywouldfreezeanddie.Butasdistancewasannihilated,commerceinlemonswasborn.Therewasnolongeranyneedtoplantlemontreesintransportablewoodenboxeswhenlemonscouldbeshipped,quicklyandcheaply,bythemillions.Onecountrycanproducelemons.Anothercanproducemachineguncartridges.Individuals,towns,enterprises,regions,candivideupthelabor,workmoreefficiently,andproducemorethingsatlowercost.Everyoneinvolvedgetsalittlericher.You’llrecallourdistinction,dearreader:Thereareonlytwowaystogetwhatyouwantinlife.Youcandosohonestlyordishonestly.Youcangetitbyworkingforitorbystealingit.Youcangetitbytradeandcommerceorbyforceandfraud.Youcangetitbycivilizedmethodsorbybarbaricones.Youcangetrichby“economicmeans”orby“politicalmeans,”asthegreatGermansociologistFranzOppenheimerputit.Globalizationismerelyanelaborationoftheeconomicmeansofgettingthings.Itrequirescivilizedrelationshipsfortradetowork;peoplemustgetalongwitheachother.Theymustrelyonothers—evenotherpeopleinstrange,farawayplaces—forimportant,maybeevenessentialitems.Theymustalsobeabletocountonthemediumofexchangefortradinggoodsandservices.Iftheycan’ttrusttheimperialmoney,theywillswitchtosomethingelse.Theendofhistoryhasbeenannouncedseveraltimes.Butitneverseemstoarrive.Peoplealwaystendtothinkthatwhatiswillremain,thatpresenttrendswillcontinueatleastindefinitely,andperhapsforever.Whenthegoingisgood,theytellthemselvesthattheoddsofanythinggoingwrongareliketheextremeedgesofabellcurve—vanishinglysmall.Butpeoplebadly“underestimatethepersistenceofhistory’straditionalside,theriseandfallofempires,therivalryofregimes,thedisastrousofbeneficentexploitsofgreatmen,”wroteFrenchhistorianRaymondAron.Thatistosay,theytendtoignorethepoliticalmeans thatshakethingsupandtherare“fattail”eventsthatmakehistoryinteresting.Fattailsarethoseuncommonthingsthatbunchupwayoutontheextremitiesofbellcurves.Theyarethingsthatshouldn’thappenveryoften,butthattendtohappenmoreoftenthanpeopleexpect.Thatiswhythetailendsofbellcurveshavelittlebulgesinthem—orfattails.Suchafattailhappenedin1914.AEuropeanwarcameafternearly100yearsofpeaceandprogress.Peoplethoughtthewarcouldnothappen.Andifitdidhappen,theysaid,itwouldbeshortandsweet.Aswehaveseen,theywerewrongonbothpoints.Again,inthe1930s,cameanother“fattail”event—agreatdepression.Andonceagain,globalizationenteredashrinkingphase.Someexpertsthinkglobalizationcanonlyflourishundertheprotectionofanimperialarmada,suchasthatofGreatBritaininthenineteenthcenturyandtheUnitedStatesinthetwentieth.Theyareplainlywrong.Sometimestradearrangementsareelaborated.Sometimestheyaretrimmedback.Thepresenceorabsenceofashelteringempireisafactor,butcertainlynotanessentialone.Switzerlandhasalwaysenjoyedhealthytradewithitsneighbors,despiteneverbeingpartofanimperialsystem.Andevenwithinanempire(suchaswithintheSovietUnion),trademightbemoredifficultthantradebetweenindependentstates.Still,inthefreeworlduntil1989,andnowalmosteverywhere,apaxdollariumgreatlyaidedthecauseofglobalizationthroughoutthesecondhalfofthetwentiethcentury.America—andmuchoftherestofworld—enjoyedagreatboomafterWorldWarII.Theywereyearsofhighgrowth,lowinflation,andhighemployment.TomWolfecalledita“magiceconomy.”Realincomesdoubledfromthelate1940stotheearly1970s.Sodidhouseholdincomeandconsumptionpercapita.Peopleweretwiceasrichbecausetheyproducedtwiceasmuchastheyhadaquartercenturybefore.Productivity,oroutputperworker,rose100percent.Butin1973—twoyearsafterRichardNixontookthenationoffthegoldstandard—theeconomylostitsmagic.Nooneknowsexactlywhy.Butthatdidn’tstoppeoplefromhavingopinionsaboutit.Conservativesthoughteconomicpolicyhadbeentoosocialistic;thereweretoomanyrules,toomany taxes,andtoomanygovernmentexpenses.Liberalsthoughtthereneededtobemorecontrols;economistsneededtomanagetheeconomybetter,liketheJapanesedid.Theyalsoblamedfreetrade,whichtheysawasathreattoAmerica’sdevelopedindustries.Ittookmanyyearstoachieve,butyearafteryear,alltheworld’sleadingindustrializednationsaddedlaws,regulations,andtaxesdesignedtomakethingsbetter.AndalltheseWilsonianimprovementscostmoney,reducedinvestment,ormerelysloweddowntheeconomicmachinery.Taxestookresourcesoutoftheproductiveeconomyandmovedthemintogovernmentspending—whichwasessentiallycurrentconsumption,withlittlefuturepayoff.Taxesalsodiscouragedinvestmentbyreducingrealratesofreturn.Thiswasespeciallyimportantasinflationratesrosebecausetaxesappliedtotheentirenominalgain,nottheactual,realprofit.Aninvestmentmightdoubleinnominalvalue.Butifthevalueofthecurrencyfellinhalfduringthesameperiod,theinvestorhadnotmadeadime.Still,theInternalRevenueServicewouldtaxhisnominalprofitasifitwerereal.Also,asthegovernmentbegansupplyingmoreandmore“bread”tothosewhoneededit—welfare,socialsecurity,healthbenefits,jobprotections,entitlements—peoplesawlessneedtostocktheirowncupboards.InSeptember2004,thepersonalsavingsrateamongAmericanswasjust0.2percentofdisposablepersonalincome.WhenRonaldReaganfirstenteredtheWhiteHouse,theratewasover8percent.“Grossnationalsavings”(calculatedbydeductingcapitalimportsfromtotaldomesticsavings)werenearly20percentofGDPin1980.Theyfellto15.6percentin1989andthentolessthan14percentin2007.Netnationalsavingsareevenworse.Yougetthenetfigurebysubtractingdepreciationofthecapitalstock.Astheeconomybecamemoreandmorereliantoncommunicationstechnology,therateofdepreciationincreased.Newcomputersystemsandcommunicationssoftwarejustdon’tlastaslongasanewautoplant.Netnationalsavinghadbeen8percentofGDPinthe1970s.Itaveragedonly3.4percentinthe1980s.Bythe1990s,itwasdownto3percent.Andin2004,thenumbersankto1.6percent. Withnosavingsoftheirown,thecountryreliedonforeignerstodothesavingsforthem.Butnotonlydidtheforeignershavetosave,theyhadtobewillingtobuyU.S.financialassets—mainlyTreasurybonds—denominatedinU.S.dollars.Iftheygrewtiredofit,orwaryofit,thedollarcouldcollapse.Theoddthingaboutthespurtofglobalizationinthefirstfiveyearsofthetwenty-firstcenturywasthatitwassolopsided.TheUnitedStatestook,butitdidn’tgive.Itborrowed,butitdidn’tpayback.Itbought,butitdidn’tsell.Itimported,butitdidn’texport.Theonlyreasonforeignersputupwithitisthattheyassumedtheirdollarswouldbeasvaluableinthefutureastheyarenow.Theyassumedthatthetrendsoftheprevious50yearswouldcontinueunchanged.Theyassumedthatnoterroristswouldknockoffanarchduke,thattheywouldneverwantforbread,andnofattailwouldplopitselfdowninthecurrencymarkets.Americansandtheirpoliticianspreferredtoseeneitheraglasshalfemptynoraglasshalffull,butonethatwasfulltothebrim.Ofsolittleinterestandimportancewasthetradedeficitthat,atthenation’stwopoliticalconventions,itwashardlymentioned.Everythingwasalmostperfect,saidtheRepublicans—andgettingbetterandbettereveryday.Everythingwasalmostperfect,saidtheDemocrats—buttheRepublicansweremakingamessofit.“Outsourcing”wasaproblem,allagreed.Thetradedeficit,ontheotherhand,didn’tmatter.BackwhenPaulVolckerwasattheFed,thecentralbank’srolewasto“takethepunchbowlaway”beforethepartygotoutofhand.Volckerdiditattheendofthe1970s—sendingTreasuryyieldsabove15percent.Thepartyanimalsweresomad,theyburntaneffigyofVolckerontheCapitolsteps.StilltheFedbroughtinflationundercontrolandpreparedthewayfortheboomofthe1980sand1990s.Butby2005,thepartyhadgottensowildthatpeopleweredancingontablesandputtinglampshadesontheirheads.AndBenBernankeandAlanGreenspanwerecreepingovertothepunchbowlwithgrinsontheirfacesandbottlesofginintheirhands. TAKEITAWAY,MAESTROInthespringof2005,theAmericaneconomyhadbeenin“recovery”forover37months.Itwasanoddrecovery.Noonewasquitesurewhatitwasrecoveringfrom.Therehadbeenarecessionin2001and2002.Butitwasacuriousrecession.GDPgrowthwentnegative.Yet,consumerspendingandcreditcontinuedtoexpand.Ifrecessionsweremeanttocorrectthemistakesofthepreviousexpansion,thisonewasafailure.Consumersshouldhavespentlessandincreasedsavings.Then,aftertherecessionwasover,theyshouldhavehadmoneytospendinthefollowingexpansionandapent-updesiretobuywhattheyhadnotboughtduringtherecession.Theexpansionwasdoomedfromthebeginning.Consumershadneverstoppedspending.So,whentheeconomyturnedaround,theyhadsavednomoney.Theonlywaytheycouldcontinuespendingwasbyborrowingmore.TheFedhelpfullydumpedmorealcoholinthebowl—loweringratestomakeiteasyforthem.Butbythistime,thewholeeconomyhadbecomesowoozythattheextraconsumerspendinghadmuchlesspositiveeffectontherealeconomythanhadbeenhoped.Americansborrowedandspent.But,inthenewglobalizedeconomy,muchofwhattheyboughtcamefromAsia—particularlyChina—whichcouldturnoutconsumergoodsatalowercostthantheUnitedStates.WhatAmericareallyneededwasnotaconsumerbinge,butacapitalspendingboom.Itneededtoinvestinnewfactories,newplants,andnewjobs.Thejobswouldhavegivenconsumersrealnewincome,withwhichtobuymoregoodsandservicesandsustaintheexpansion.Butgrossinvestment—whichhadaveraged18.8percentinthepre-Reaganyears—hadbegundroppingtheyearReaganenteredtheWhiteHouse.By2004,ithadfallento1.6percent—evendippingbelowzeroperiodically.Peoplewerespending,butonconsumption,notfutureproduction.ThegewgawsandgadgetsboughtfromChinamerelyputAmericansfurtherintodebt.Neitherjobsnorincomesimproved.Typically,atthisstageofarecovery(June2005),10millionmorenewjobsshouldhavebeencreated.Likewise,incomeswentup$300billionlessthantheyshouldhave,basedonthepatternofpreviousrecoveries.Manyeconomists—includingAlanGreenspan—maintainedthatthelackofjobs wasasignofsomethinggoodhappening.“Productivity,”theysaid,“accountsformostjoblosses,notoutsourcing.”“OverthelongsweepofAmericangenerationsandwavesofeconomicchange,”explainedthemaestro,“wesimplyhavenotexperiencedanetdrainofjobsto3advancingtechnologyortoothernations.”Couldsomethingbedifferentthistime?Couldthisbeakindof“newera”inAmericaneconomichistory?Theanswerwegiveis“yes”...butwewillgiveitlater.Here,ourburdenismoremodest,andourproofcomesmorereadilytohand.Forhere,weargueonlythatAmerica’sleadingeconomicandpoliticalpolicymakersareeitherrascalsornumskulls.Majortopsinthecreditcycleseemtocorrespondwithmajorbottomsineconomicthinking.Fromhighofficesalloverthenationcametheexplanations,excuses,rationales,andobiterdicta;wedon’tknowwhethertheywerecorruptormerelystupid.Butwhentheguardiansofthepublicfinancialmoresbeganurgingpeopletoactsofrecklessness,thecountrywasintrouble.Buymore,saidoneFedgovernor.Borrowmore,saidanother.Don’tworryaboutdebt,interestrates,orthelossofjobs,saidthecaptainofthemall.ItwasasthoughtheNationalCouncilofBishopshadcomeoutwithapublicstatementurgingwifeswapping.Theexperiencemaynotbeunpleasant,butitisunseemlyofthemtosayso.4“GooutandbuyanSUV,”urgedFedgovernorRobertMcTeer.Seventeenmillionpeopleheededhiscalleachyear,from2001to2005.OnFebruary23,2004,theFedchiefurgedAmericanstoswitchfromfixedratemortgagestoARMs—mortgageswithadjustablerates,whichleftthemmuchmoreexposedtointerestrateincreases,attheverymomentwhentheFedwasincreasingthem.IfanyonecouldbehelddirectlyandimmediatelyresponsiblefortherecordlevelofAmerica’sforeignanddomesticdebts,itwasAlanGreenspan.HehadbroughtaboutabingeofborrowingbyloweringinterestratesdowntoEisenhower-eralevels.Butspikingthepunchwasnotenough;hewasurgingconsumerstohaveanotherdrink. TheFedchairmanhadanuncannywayofarrivingatideasatatimewhentheywouldbeofmostbenefittohisowncareerandofmostdangertoeveryoneelse.ToGreenspan,theconservativeeconomist,thestockmarketlooked“irrationallyexuberant”inthemid-1990s,untilamemberofCongresspointedouttohimthathewouldbebetteroffkeepinghismouthshut.Agoldbuginthe1970s,Greenspanbecamethebiggestpurveyorofpapermoneytheworldhaseverseen.Similarly,largefederaldeficitsseemedatoddswithhiscreeduntilitsuitedhimtothinkotherwise.ThenewAmericanempireneededeasymoneyandalmostunlimitedcredit:AlanGreenspanmadesureitgotthem.Marketsmakeopinions,sayold-timeinvestors.Mr.Greenspan’sopinionsneatlycorrespondedwiththemarketforhisservices.Asthedebtsanddeficitsmountedup,Greenspanunderwentanintellectualmetamorphosis.AnarticleintheNewYorkTimesexplained:Manymainstreameconomistsareworriedaboutthesetrends,butAlanGreenspan,arguablythemostpowerfulandinfluentialeconomistintheland,isnotasconcerned:Inspeechesandtestimony,Mr.Greenspan,chairmanoftheFederalReserveBoard,ispiecingtogetheratheoryaboutdebtthatdepartsfromtraditionalviewsandevenfromfearshehashimselfexpressedinthepast.Inthe1990s,Mr.GreenspanimploredPresidentBillClintontolowerthebudgetdeficitandtacitlycondonedtaxincreasesindoingso.Today,withthedeficitheadingtowardarecordof$500billion,hewarnsmoreemphaticallyabouttherisksofraisingtaxesthanaboutshortfallsoverthenextfewyears.Mr.Greenspan’sthesis,whichisnotacceptedbyalltraditionaleconomists,isthatincreasesinpersonalwealthandthegrowingsophisticationoffinancialmarketshaveallowedAmericans—individuallyandasanation—toborrowmuchmoretodaythanmighthaveseemedmanageable20yearsago.Andherethearticlestrikesgold: ThisviewisgoodnewsforPresidentBush’sre-electionprospects.ItincreasesthelikelihoodthattheFederalReservewillkeepshort-terminterestrateslow.AnditcoulddefuseDemocraticcriticismthattheWhiteHousehasaddedgreatly5tothenation’srecordindebtedness.Outofconvenience,ratherthanideology,Mr.Greenspancametoseegoodnessinallmannerofcredit.SincehebecameheadoftheFederalReservesystem,debtlevelsrosefrom$28,892fortheaveragefamilyin1987to$101,386in2005.Mortgageforeclosurerates,personalbankruptcies,andcreditcarddelinquenciesrosesteadily.Mortgagedebtrose$6.2trillionduringhistenureattheFed.ByJanuary2005,ithadreached$8.5trillion,orapproximately$80,849per6household.ButnoneofthisseemedtobotherthechiefofAmerica’scentralbanknoritschiefpoliticians.WHATHATHALANWROUGHT?Foryears,wehavebeenworkingonGreenspan’sobituary.Asfarasweknow,themanisstillinexcellenthealth.Wedonotlookforwardtotheevent;wejustdon’twanttobecaughtoffguard.Maybewecouldevenrushoutaquickiebiography,explainingtothemassesthemeaningofMr.Greenspan’slifeandwork.WeseesomethinginAlanGreenspan’scareer—hiscomportment,hisbetrayalofhisoldideas,hispactwiththeDevilinWashington,andhisattempttoholdoffnature’srevengeatleastuntilheleavestheFed—thatisbothentertainingandeducational.ItsmacksofGreektragedywithouttheboringmonologuesorbloodyintrigues.EventhelanguageusedisGreektomostpeople.ThoughtheFedchairmanspeaksEnglish,hiswordsoftenneededtranslationandhistoricalannotation.Rarelydidthemaestromakeastatementthatwascomprehensibletotheordinarymortal.Somuchthebetter,weguess.Iftheaveragefellowreallyknewwhatwasbeingsaid,hewouldbealarmed.Andwehavenoillusions.Whoeverattemptstoexplainittohimwillgetnothanks;hemightaswelltellhisteenagedaughterwhatisinherhotdog. AlanGreenspanwasthemostfamousbureaucratsincePontiusPilate.LikePilate,hehesitated,butultimatelygavethemobwhatitwanted.Notblood,butbubbles.Greenspan’sroleintheempirewasmorethanthatofaConsuloraProconsul.HewasthePrefect.Hewasthequartermasterwhomadesuretheempirehadthefinancialresourcesitneededtoruinitself.Wedon’tknowhowheavenwilljudgehim.Accordingtothecentralbankers’code,Greenspanhascommittedneithersinnorcrime.Heisseenasaparagonofvirtue,notvice.Yet,asTalleyrandonceremarkedtoNapoleon,“Sire,worsethanacrime,youhavecommittedanerror.”Whenthewindsofimperialdebt-financeblew,Mr.Volckerplantedhisfeetandstuckouthisjaw.Hissuccessor,Mr.Greenspan,tumbledover.TheFedchairman’serrorwastooffermorecreditoneasiertermstopeoplewhoalreadyhadtoomuch.DuringGreenspan’sreignattheFed,morenewmoneyandcreditwascreatedthanunderalltherestoftheFedchiefscombined.Consumerdebtrosetoitshighestlevelinhistory,theratioofdebttoincomealsorosehigherthanithaseverbeen.TheeffectwastoinspirebubblesallovertheworldandtotransformtheUnitedStatesfromtheworld’slargestcreditortoitsbiggestdebtor.WhattheGreenspanFedhadaccomplishedwastoputoffanatural,cyclicalcorrectionandtransmogrifyanentireeconomyintoamonstrouseconomicbubble.Abubbleinstockpricesmaydolittlerealeconomicdamage.Eventually,thebubblepopsandthephonymoneypeoplethoughttheyhaddisappearslikeapuffofmarijuanasmoke.Therearewinnersandlosers.Butintheend,theeconomyisaboutwhereitbegan—unharmedandunhelped.Thehouseholdsarestillthereandstillspendingmoneyastheydidbefore.Onlythosewholeveragedthemselvestoohighlyinthebubbleyearsareinanytrouble.ButinGreenspan’sbubbleeconomy,somethingawfulhappened.Householderswereluredtotakeouttheequityintheirhomes.Theybelievedthatthebubbleinrealestatepricescreatedwealththattheycouldspend.Manydidnothesitate.Mortgagedebtballoonedintheearlyyearsofthetwenty-firstcentury—fromabout$6trillionin1999to$12trillionattheendof2008—increasingtheaveragehousehold’sdebtby$60,000.Americansstilllivedinmoreorlessthe samehouses.Buttheyowedfarmoreonthem.WehadgivenupallhopeofevergettinganhonestwordoutoftheFedchairmanonthissubjectwhen,inearlyFebruary2005,themaestroslippedup.HegavetheaforementionedspeechinScotlandentitled“CurrentAccount.”Jet-lagged,hisdefensesdown,thepoormanseemstohavecommittedtruth.“ThegrowthofhomemortgagedebthasbeenthemajorcontributortothedeclineinthepersonalsavingrateintheUnitedStatesfromalmost6percentin1993toitscurrentlevelof1percent,”headmitted.Thus,didhebringupthesubject.Then,hebeganaconfession:Therapidgrowthinhomemortgagedebt7overthepastfiveyearshasbeen“drivenlargelybyequityextraction,”saidthemanmostresponsibleforit.Bythistime,listenerswerebeginningtotakenotes.Andprettysoon,eventhedullesteconomistintheroomwasaddingtwoplustwo.Mr.Greenspanloweredlendingratesfarbelowwhereafreemarketincreditwouldhaveputthem.Withlittletobegainedbyputtingmoneyinsavingsaccountsandalottobegainedbyborrowing,householdsdidwhatyouwouldexpect;theyceasedsavingandbeganborrowing.Whatdidtheyborrowagainst?Therisingvalueoftheirhomes—“extractingequity,”touseMr.Greenspan’sjargon.TheFedchairmanhadmisledthemintobelievingthattheincreasesinhousepriceswerethesameasnew,disposablewealth.Buttheworld’smostfamousandmostreveredeconomistdidn’tstopthere.Hemusthavehadtheaudienceontheedgeofitschairs.Heconfessednotonlytohavingdonethethingbutalsotohavinghiswitsabouthimwhenhedidit.Thiswasnoaccident.Nonegligence.Thiswasintentional.“Approximatelyhalfofequityextractionshowsupinadditionalhouseholdexpenditures,reducingsavingscommensuratelyandtherebypresumablycontributingtothecurrentaccountdeficit....ThefallinU.S.interestratessincetheearly1980shassupportedhomepriceincreases,”continuedAmerica’s8answertoAdamSmith.“Lackinginjobcreationandrealwagegrowth,”explainedStephenRoach,“privatesectorrealwageandsalarydisbursementshaveincreasedamere4percentoverthefirst37monthsofthisrecovery—fullytenpercentagepoints shortoftheaveragegainsofmorethan14percentthatoccurredoverthefiveprecedingcyclicalupturns.Yetconsumersdidn’tflinchinthefaceofwhatinthepastwouldhavebeenamajorimpedimenttospending.SpurredonbyhomeequityextractionandBushadministrationtaxcuts,income-shorthouseholdspushedtheconsumptionshareofU.S.GDPuptoarecord71.1percentinearly2003—anunprecedentedbreakoutfromthe67percentnormthathadprevailed9overthe1975to2000period....”SincethefalloftheBerlinWall,nearlyeveryoneseemstoagreethatcentralplanningisbadforaneconomy.Thecentralplanners,asanyEconomics101studentcantellyou,doapoorerjobofdeliveringthegoodsthanthe“invisiblehand”ofMr.Market.JosephSchumpetersharpenedthepoint:“Ouranalysisleadsustobelievethatrecoveryisonlysoundifitdoescomefromitself.Foranyrevivalwhichismerelyduetoartificialstimulusleavespartoftheworkofdepressionundoneandadds,toanundigestedremnantofmaladjustments,newmaladjustmentsofitsown.”TheU.S.economyfacedamajorrecessionin2001andhadaminorone.Thenewbornslumpwasstrangledinitscribbythemostcarelesscentralplannerswhoeverlived.AlanGreenspancutlendingrates.GeorgeW.Bushboostedspending.Theresultantshockofrenewed,ersatzdemandnotonlypostponedtherecession,itpushedconsumers,investors,andbusinesspeopletomakeevenmoreegregiouserrors.Investorsboughtstockwithlowearningsyields.Consumerswentfurtherintodebt.Governmentliabilitiesrose.Thetradedeficitgrewlarger.Ontheothersideoftheglobe,foreignbusinessmenworkedovertimetomeetthephonynewdemand;Chinahasenjoyedacapitalspendingboomasexcessiveasanytheworldhaseverseen.OurownFedchairman,guardianofthenation’smoney,custodianofitseconomy,nightwatchmanofitswealth:Howcouldhedosuchathing?Heturnedafinancialbubbleintoaworldwideeconomicbubble.Notonlywerethepricesoffinancialassetsballoonedtoexcess,sowerethepricesofhousesandthedebtsoftheaveragehousehold.Andtheeconomyitselfwastransformed.By2005,thehousingbubblewasnolongeraninvestmentphenomenon,butan economiconeaffectingalmosteverybody.Insomeareas,halfofallnewjobswererelatedtohousing.Peoplebuilthouses;peoplefinancedhouses;peopleremodeledhouses;peoplesoldhousestoeachother;peopleputinsomanygranitecountertopsthatwholemountainshadbeenflattenedtoquarrythestuff.12SomethingWickedThisWayComesTheforceofacorrectionisequalandoppositetothedeceptionthatprecededit.AlanGreenspan,GeorgeW.Bush,andallthegreatnabobsofpositivismassuredusthattherewasnothingtofear.Ourfavoriteimperialcolumnist,ThomasL.FriedmanoftheNewYorkTimes,explainedthat“thenextbigthingalmostalwayscomesoutofAmerica...[because]...Americaallowsyoutoexplore1yourownmind.”FriedmanbelievestheworldwouldbeabetterplaceifAmericaweremoreaggressiveabout“empoweringwomen”and“buildingdemocracies.”HealsothinksthattechnicalinnovationsgiveAmericaapermanentadvantage.Americansarealwaysinnovating,alwaysfiguringthingsout.Heck,weeveninventedoutsourcing,saysFriedman:ThisisAmerica’srealedge.SureBangalorehasalotofengineeringschools,butthelocalgovernmentisrifewithcorruption;halfthecityhasnosidewalks;thereareconstantelectricityblackouts;theriversarechokedwithpollution;thepublic2schoolsystemisdysfunctional;beggarsdartinandoutofthetraffic...andsoforth.AmongthethingsMr.Friedmanseemstolackisafeelingforverbtenses.HegoestoBangaloreandnoticesthatitisbackward.Hisconclusionisthatitwillalwaysbeso.“Is”isforeverinFriedman’smind.“Willbe”hasnoplace.Itisasifhelookedatthestockmarketin1982.“Stocksarecheap,”hemighthavesaid.“Stockselsewhereareexpensive,”hemighthaveadded,withoutiteveroccurringtohimthattheymightchangeplaces.Andyet,whyelsewouldanyone outsourceworkfromBaltimoretoBangaloreunlessBangalorewasrelatively,thoughnotnecessarilypermanently,cheaper?LetusimaginethatBangalorehadnoelectricityblackoutsorpollutionorbeggars.LetusimaginethatitwaslikeBeverlyHillsorBocaRaton.Wemightjustaswellimaginethatstockswereexpensivein1982.Ofcourse,iftheyhadbeen,thereneverwouldhavebeenthebullmarketof1982to2000.Itisonlybecausetheywerecheapinthepastthattheyhadthepotentialtobeexpensiveinthefuture.AnditisonlybecauseBangaloreisaThirdWorldhellholethatitischeapenoughtotakeworkawayfromoverpaidAmericans10,000milesaway.Whetheritwill,neitherFriedmannorwecanknow.WealwaystrytogetourdayoffontherightfootbyreadingFriedman’scolumnbeforebreakfast.Thereissomethingsogloriouslynaïveandclumsyintheman’spensée,itneverfailstobrightenourmornings.Itrefreshesourfaithinourfellowmen;theyarenotevil,justmindless.Wehavenevermettheman,butweimagineFriedmanasahighschoolteacher,warpingyoungmindswithdrippythoughts.Buttosayhisideasaresophomoricorjuvenilemerelylibelsyoungpeople,mostofwhomhavefarmorecleverlynuancedopinionsthanthecolumnist.Youmightcriticizethemanbysayinghisworkiswithoutmerit,butthatwouldbeflattery.Hisworkhasnegativemerit.Everycolumnsubtractsfromthesumofhumanknowledgeinthewayabrokenpipedrainsthetown’swatertower.NotthatMr.Friedman’sideasareuniquelybad.Manypeoplehavesimilarlypuerile,insipidnotionsintheirheads.ButFriedmanexpresseshishollowthoughtswithsuchheavy-handedearnestness,itoftenmakesuslaugh.Heseemscompletelyunawarethatheisasimpleton.That,ofcourse,isacharm;heissodenseyoucanlaughathimwithouthurtinghisfeelings.Friedmanwritesregularlyandvoluminously.Butthinkingmustbepainfultohim;heshowsnoevidenceofit.Instead,hejustwritesdownwhateverhumbugappealstohimatthemoment,asunquestioninglyasamulegoesforwater.OneofthethingsFriedmanworriesaboutisthattheworldwill“godark.”Asnearaswecantell,hemeansthatthemanychangeswroughtafter9/11arechangingthecharacterofthenation,sothat“ourDNAasanation...has becomebadlydeformedormutated.”InclassicFriedmanstyle,heproposessomethingthatany12-year-oldwouldrecognizeaspreposterous:anothernationalcommission!“Americaurgentlyneedsanationalcommissiontolookat3allthelittlechangesthatweremadeinresponseto9/11,”hewrites.IfanationhadDNAandifitcouldbemutated,westillareleftwiththeenormouswonder:Whatdifferencewouldanationalcommissionmake?Wouldn’tthemembershavethenationalDNA?Orshouldwepackthecommissionwithpeoplefromothercountriestogetanobjectiveopinion—aU.N.panelandafewilliteratetribesmenforculturaldiversity?Friedman’soeuvreisalongseriesof“weshoulddothis”and“theyshoulddothat.”Neverforamomentdoeshestoptowonderwhypeopleactuallydowhattheydo.NorhasthethoughtcrossedhismindthatotherpeoplemighthavetheirownideasaboutwhattheyshoulddoandnoparticularreasontothinkMr.Friedman’sideasareanybetter.Thereisnotraceofmodestyinhiswriting—noskepticism,nocynicism,noirony,nosuspicionlurkinginthecornerofhisbrainthathemightbeajackass.Ofcourse,thereisnothingfalseabouthimeither;heisnotcapableofeitherfalsemodestyorfalsettoprinciples.WithFriedman,itisallalarminglyreal.Noristhereanyhesitationorbewildermentinhisopinions;thatwouldrequirecircumspection,aqualityhecompletelylacks.Friedmanfearshemaynotapproveofallthepost-9/11changes.Butsowhat?Whywouldtheentireworld“godark”justbecauseAmericastoopstoempire?Theideaisnothingmorethananothersillyimperialconceit.Americaisnotthelightoftheworld.Friedmancanstopworrying.ThesunshonebeforetheUnitedStatesexisted.Itwillshinelongaftersheexistsnomore.But,withoutrealizingit,imperialconceitsarewhatMr.Friedmanoffers,oneafteranother.Heknowswhatisbestforeveryone,allthetime.Butevenathisspecialty,Friedmanissecond-rate.Itisnotthathisproposalsaremuchdumberthananyoneelse’s,butheofferstheminadumberway.HesetsthemuplikeaTVnewscaster,unawarethattheymeananything,notknowingwhethertosmileorweep.HedoesnotseemtonoticethathisownDNAhasmutatedalongwiththenation’sinstitutions...andthathedoesnothingmorethanamplifythevanitiesandprejudicesthatpassfortheevening’snews.IstheretroubleinPalestine?Well,thePalestiniansshouldhavedonewhatwetoldthem. HavepeaceanddemocracycometoIraq?Ifso,itisthankstothebraveeffortsofourowntroops.Isthepriceofoilgoingup?Well,ofcourseitis;theUnitedStateshasnotyettakenupthecomprehensiveenergypolicyheproposedforit.Friedman’sworldissoneat.Sosimple.Theremustbenothingbutrightangles.Andnoproblemthatdoesn’thaveacommissionwaitingtosolveit.Itmustbeunfathomabletosuchamanthattheworldcouldworkinwaysthatsurpasshisunderstanding.Inourexperience,anymanwhounderstandsevenhisownthoughtsmusthavefewofthem.Andthosehehasmustbesimpleminded.ButweenjoyFriedman’scommentaries.Themanistooclumsytohideordisguisetheawkwardimbecilityofhisownlineofthinking.Thesillinessofitisrightoutintheopen,wherewecanlaughatit.ArabsoughttoshapeupandstartactingmorelikeNewYorkers,hebelieves.Iftheydon’twanttodoitontheirown,wecangivethemsomehelp.Hesayswecansend“caring”and“nurturing”troopsto“builddemocracies”intheseplacesand“protecttherightsofwomen.”Buthedoesn’tunderstandhowarmies,empires,politics,ormarketsreallywork.Americantroopscangivehelp,butitisthekindofhelpthatScipiogaveCarthageorShermangaveAtlanta.Armiesareabluntinstrument,notaprecisiontool.FriedmanurgedtheBushadministrationtoattackIraq.Butthemanhasasolutionforeveryproblemhecauses.“SohowdowegettheSunniArabvillagetodelegitimize[welovethesebigwords—everyoneofthemhidesawholedictionaryoflies,fibs,prevarications,malentendus,misapprehensions,miscalculations,guesswork,hallucination,conceit,andmendacity]suicidebombers?”Simple.Propaganda!“TheBushteamneedstobeforcefullydemandingthatSaudiArabiaandotherkeyAraballiesusetheirnewsmedia,government,andreligioussystemstodenounceanddelegitimizethedespicablemurderof4MuslimsbyMuslimsinIraq.”Thatoughttodoit.WhatwaswrongwiththeBushteam?Whydidn’ttheythinkofthat?“Forcefullydemand”thattheArabstatesdomorepropaganda.Yes,problemsolved. Bytheway,yourauthorshavenopositiononforeignpolicy.Weonlynoticethatthepeoplewhodohavethemareidiots.StillwearenotgoingtocriticizeFriedman.Thereisnosportinit.Thepoorfellowisevidentlyhandicapped.Heonlyseesthingsintwodimensions,likeadrawingbyafive-year-oldwithonlyoneeye.Heseemstohaveaone-eyedproposaleachweek:a“ReformRevolution”(whateveroxymoronicthingthatis);“nationbuilding”;“aManhattanprojecttodevelopahydrogen-basedenergyeconomy”;a“NationalCommissionforDoingThingsRight”;a“PatriotTax”of50centsagallonongasoline;a“ReformIndia”proposal;andmanyotherstoonumerousandabsurdtomention.Lookingattheissuewithtwoeyesandroundingonitabittogetabetterview,weseethatthingsarenotnearlyassimpleasFriedmanimagines.Thingsdonotrespondtocommissionsandgoodintentions.Peopledonotalwaysgetwhattheywant;sometimestheygetwhattheydeserve.America’sroly-polyempireofconsumercapitalism,paxdollarium,airbornediplomacy,anddebthasestablishedorderthroughoutmostoftheworld.ThatorderwasimmenselyhelpfultoAmericansinthefirst60yearsoftheU.S.imperium.Wemadethingsthatwecouldsellthroughouttheworld—ataprofit.Today,theworldstillturns,butmaybenotinourdirection.Thereisadarksidetothehumancharacter.Afterpeoplehaveenoughtoeatandaroofovertheirheads,theycaremoreabouttheirrelativewealththantheirabsolutewealth;theycaremoreabouttheirstatusthantheirsouls.ThepresentimperialorderbenefitsforeignersmorethanAmericans.RealwagesarerisinginAsia.IntheUnitedStates,theyarestagnant.Inrelativeterms,Americansarelikelytocontinuetogetpoorer,eveniftheyeliminatetheirtradedeficit.Thelogicofhumanjealousy—andimperialfinance—hasnowshifted.TheUnitedStatesshouldnotbewillingtocontinueprovidingapublicgood—order—fornootherreturnthantheopportunitytocompeteonalevelplayingfield.IndustriesintheUnitedStatesarenowlosingthatcompetition.Americansarebeginningtoresentit.Theyarelikelytoinsistthateitherweretire fromtheempirebusinessorwetilttheplayingfieldfurtherinourdirection.Lookedatthisway,theBushadministration’smanyactionsmakemoresense.WhyinvadeIraq?Becauseitcreateddisorder.Militaryadventuresareriskyanddestabilizing.Andtheyareashiftfromcivilizedmeansforgettingwhatyouwanttousingpoliticalmeans,whicharenotonlyinherentlydisorderlybutalsofavorAmerica’smilitarystrengthswhileminimizinghercommercialweaknesses.WhypressureChinatorevaluetheyuan?Becauseitcreateddisorder.Theyuanhadbeenstablefor10years—peggedtotheU.S.imperialdollaratafixedrate.TheUnitedStatesinsistedthattheyuanmoveupandthreatenedtoimposetariffsandtradebarriers.Why?Becausethetradebarriersdirectlyinterferedwiththeorderlygive-and-takeofcommerceandslowourcompetitors’growth.Whyrunuphugefederaldeficits?Whygiveawaymoneyatthecostofconsumerpriceinflation?Whysetthewholeworldeconomyoncourseforrecession?Allthesethingsaredeeplydisturbingtotheworldfinancialsystem;theybreeddisorder.WhatFriedmanhasnotseemedtonoticeisthatAmerica’sadvantageispasttense.IftheUnitedStatesreallyhadbeencreatingnewproductsandnewjobs,theevidencewouldbeinthefigures.America’stradefigureswouldnotbeprecededbyaminussign,butbyaplus,astheyhadbeenpriortoRonaldReagan’senteringtheWhiteHouse.America’sjobnumbers,too,wouldhavebeendifferent.Thenumberofnewjobscreatedinasinglemonth—say,February2004—wouldhavebeenmorelike200,000(whichwouldhavebeen“normal”forthatstageoftherecovery)ratherthanthemeasly21,000thatshowedup.Neverbefore,sincethebeginningoftheindustrialrevolution300yearsago,havetherebeensomanypeopleoutsidetheWesternworldready,willing,andabletocompetewithus.Neverbeforehavetheyhadsomuchavailablecapital.WhileAmericansspendalltheirmoney—andthensome,theaverageChineseworkersavesmorethan20percentofeverythingheearns.TherearemoreengineersinthecityofBangalore,inIndia,thanthereareinthestateofCalifornia.Theyworkwellandcheaply,takinghomeanaverageannualpayofabout$6,000.AndtheyseemtobejustasinnovativeastheirAmericancounterparts.ThesoftwareforDVDswasdevelopedinBangalore,notinSiliconValley,saystheFrenchnewspaper,Libération.Inthesevenshortyearsof itsexistenceinBangalore,thePhilipsresearchcenteralonehascomeupwith1,500newinventions.ForeignworkershavebeencuttingintoAmericansalariesformanyyears.AssemblylineworkersinTaiwan,Mexico,andotherplaceshaveunderminedfactorywagegrowthintheUnitedStates.Overthepast30years,realhourlyearningsontheshopfloorhavegonenowhere.Nooneparticularlycared—becauseAmerica’seconomywasshiftingtoserviceandconsumptionanyway.Factoryworkerswereoutoffashionandoutofluck.Butnowitistheaccountants,architects,andpapershufflerswhosejobsarethreatened.Evenlawyersareworried;lawfirmsareoutsourcingroutinelegalworktoIndia.ThesetrendsmightnothaveworriedDemocrateconomistsanymorethantheytroubledtheRepublicans,but2004wasanelectionyear,sotheycouldn’tpassupanopportunitytogettheirnamesinthepaper.Panderingtothelumpenmasses,theDemocratsofferedto“dosomething”to“protectAmericanjobs.”Alotofdopeythingsaresaidtovoterswiththecamerasrunning.ButnooneisgoingtolooktheAmericanworkerinthefaceandtellhimthatheearnstoomuchmoneyforwhathedoes.Apoliticianmightaswellpourgasolineoverhisheadandlightamatch;themediawouldscorchhiminamatterofminutes;hiscareerinpoliticswouldbeincinders.Everyempirebeginswithahumbug.Lateritdevelopsintomassillusion,self-congratulation,hallucination,farce,andfinallydisaster.Untilthedisastercomes,youneverknowquitewhereyouare.Becauseforeveryimbecilitythatcomesalong,therearedozensofeagerintellectualsreadytopromoteitandatleasthalfthepopulationisreadytobelieveit.Soitwasthatalmosteveryday,wesawapieceintheWallStreetJournalexplainingthattradedeficitswerenotrouble.Andatacertainlevel,theywerenotroubleatall.ItdoesnotmattertoGodwhooweswhattowhom.Orevenifitdoes,hekeepsquietaboutit.SomekibitzerspointedoutthattheUnitedStatesrantradedeficitsformuchofitsearlyhistoryandthatfast-growingcountriesalwayshavecurrentaccount deficits.Afterall,theyarebuildingsomethingforthefuture—factories,plants,machines—thattakescapital.Then,whenthefactoriesarebuilt,theyproduceearningsandprofits,whichareusedtopaybackthedebt.Inthisinstance,thedebtorcomesoutahead.Oh,thereverieofit!Butwhendidyoulastseeafactory,refinery,ormineunderconstructioninAmerica?ThelastonewerecallwasashinynewbreweryoutsideBaltimore—andthatmusthavebeen40yearsago.Sincethen,ithasgoneoutofbusiness.Manyeconomistsbelievedwenolongerneededfactories.Theythoughttheinformationrevolutionhadmanymoregoodthingstogiveus.We’renotawareofanybenefits,yet,fromtheinformationrevolution,butwe’repreparedtobelievetheremighteventuallybesome.Butinformationisnotoriouslylightonitsfeet.MoreandmoreU.S.taxforms—whicharenothingmorethaninformation—arebeingprocessedinIndia.AndAmericancompaniesareactuallyoutsourcingmoreandmoreofthe“information”componentofmodernproducts.TheynolongergotoTaiwanandaskthelocalsto“makethis.”Now,theygotoTaiwantoseewhatthelocalsaremakingthattheycansellbackhome.Moreandmore,U.S.companiesdon’tevenparticipateatthedesignstage.“Whatweareseeing,”wrotePaulCraigRoberts,isthe“rapidtransformationof5Americaintoa3rdworldeconomy.”Americanfirmsareincreasinglyleftwithonlybrandstomarket.Buteventhosewon’tlastforever,aftercustomersrealizethattherealinnovation,design,andmanufacturegeniusisoverseas.JustascarbuyerstookupnewbrandsasqualityincreasedinJapan,sowilltheysoontakeupnewbrandsinotherindustries.Soon,Americanswillnotonlywanttospendonforeign-madegoods,theywillhaveto.Thecycleistypicalofempiresintheirmaturestages.Evenindecline,peoplestilllooktothehomelandforfashioncues.Music,education,theater,dress,architecture,andmannersareexportedfromthecentertotheperipherylongaftercommerceinmorepracticalgoodshasreverseddirection.Eventoday,Viennaremainsaregionalculturalcenter—asdoParisandRome.ParentsfromformercoloniesstilldreamofsendingtheirchildrentoCambridgeandOxford. Meanwhile,theNewmanbrothers,DanandFrank,alsointheWallStreetJournal,pointedoutthattheoutflowofdollarswasnocauseforconcern,becausethedollarsjustcamebacktous.Buttheydidn’tcomebackasthesamegood-naturedworkingstiffstheywerewhentheyleft.Insteadtheycamebackfromabroadinfinerclothes,withfinermanners,andwithabetteraccent.Theycamebackasrentiers.Theywentoutasacreditandcamebackasaliability.Thenextthingweknew,theywereputtingtheirfeetonthefurnitureandactingasiftheyownedtheplace.Insteadofhelpingtheaveragemanearnaliving,theymadeitharderforhim.Interestmustbepaidondebtorcompoundedintomoredebt.Eitherway,daybyday,theburdenjustgrewheavier.Weknowfromexperiencethatourmoodscanchangefornoapparentreason.Oneday,wearehappierthanusual.Thenext,onexactlythesamesetof“facts,”wearegloomy.Oneday,wearepreparedtostartawar.Thenext,troubleisthelastthingwewant.Onedaywethink$20isafairpricetopayfor$1ofearnings.Thenext,even$10seemstoomuch.Oneday,weseethefacts,andtheyareawful.Thenext,theverysamefactsdon’tseemsobad.Thesemoodshappentoindividualsonaday-to-daybasisandtowholegroupsofpeopleoverlongperiods.Onegenerationisbullish.Thenextisbearish.Onegenerationwantswar.Thenextwantspeace.Onegenerationislost.Thenextisfound.Aspricesfall,ouropinionsfalltoo;webecomegloomy.Butsometimes,theoppositehappens;opinionsmakemarkets.Gloominesssetsin,fornoparticularorapparentreason,andthenpricesfall.Moodsandfacts,sometimesinharmony,butofteninopposition,struggletodominateourgeneration’szeitgeist.Until2007,bothwereinharmony.Thepublic’smoodwasridiculous.Butsowerethe“facts.”Neverbeforehadpeoplebeenexpectedtobelievesomanyimpossiblethings.But,perhaps,neverbeforehadsomanyimpossiblethingsseemedtrue. IVFINDEBUBBLEThere’ssomethingfunnygoingonoverthereatthebank.—JimmyStewartIt’saWonderfulLife13WelcometoSquandervilleThecitizensofSquanderville,asWarrenBuffettcalledtheUnitedStates,wereahappybunch.Theybelievedhappythings;itdidn’tbotherthemthatthethingstheybelievedwereimpossible.After20yearsofmostlyfallinginterestrates,mostlyfallinginflationrates,andmostlyrisingassetprices(stocksandrealestate),peoplehadcometobelievethatthisisthewaytheworldworks:Interestratesmostlygodown,andhousepricesmostlygoup;itgoesonforever.EventheprofessionalsinSquandervillehadneverbeenmorecertain:A2005pollofeconomistsworkingformajorbrokeragehousesfoundthat100percentofthemexpectedrisingstockpricesoverthenext12months.Andrealestate?Whobelievedhousepriceswouldfall?Almostnoone.Whileitisallverywelltothinkhappythoughtsandspendhappymoney,itissavingsandinvestmentsthatproducerealjobsandrealearnings.Astheyearsgoby,Squandervilliansmakelessandlessthattheycansellabroad,andconsumemoreandmorefromoverseas.So,whentheyspendmoney,muchofitgoestobuyproductsfromThriftville.(Buffett’sterm,perhapshehadAsia inmind.)TheindustriouspeopleofThriftvilleusedthemoneytohiremoreworkers,buildmorefactories,importmoretechnology,andimprovetheirproducts.Thus,didtheauthoritiesinSquandervillefindthemselvesinaremarkableposition:Theycouldstillusemonetaryandfiscalpolicytocreateaboom,buttheboomhappenedinThriftville!ThehappyresidentsofSquandervillehardlykneworcared.Thelatestjobnumberswerecelebrated;whobotheredtonoticethatthenewjobswerenotquiteasniceastheoldones?Whilecompanieslaidoffrelativelyhighlypaidpeopleinthemanufacturingsector,othercompanieshiredrelativelymorecheapemployeesintheservicesector.GeneralMotorsdeclined;Wal-Martgrew.Whatwouldhappenifrealestatepricesactuallystartedtogodown?Soon,thehomeownersofSquandervilleandtheirlendersmightbefacedwithabriefintervalofhorriblesanity.Theymightbeunhappy.THEWAYWELIVENOWAstheyear2005matured,thecorpusoftheworldfinancialsystembecameevenmoregrotesquethanithadbeenthedaybefore.Connectingthethighboneofbondyields...tothehipboneofAsianpurchasesofU.S.bonds...tothevertebraofcreditexpansion...westoodbackinaweandwondered:Whatkindofmonsterwasthis?ItlookedlikeacreationofFrankenstein.Whateveritwas,thiswasnoordinaryeconomy—ithadahunchbackandtwoclubfeet.Jobsthatoughttoexistdidn’t.Incomethatshouldbehelpingconsumerstospendwasn’tthere.Savingsthatwerevitallyimportanttoeconomicgrowthhaddisappeared.ThebestwaytounderstandAmerica’seconomicpredicamentistolookatitasasystemofimperialfinance.TheUnitedStatesisanoddandreluctantempire.Itsbodypartsfittogether,butonlyinanabsurdandcomicway;it’stheimperialbackbonethatgivesitshape.Onlyanempirecanrunsuchatradedeficitformanyyears.Onlyanempirecan maintainsomanyexpensiveoutpostsallovertheworld.Onlyanempire’smoneywillbeacceptedbysomanypeopleinsomanydifferentplaces.TheAmericanempire,circa2005,stillsetthetrendsinfashion,arts,style,andmanners—butitneglectedengineering,science,andhomeland-boundindustries.Itdependedontheperipherystatesforitssavingsanditsconsumergoods.Asanempirematures,itscenterweakensanditsbackbonebendsundertheweight.Eventuallyiteitherpassesoffitsimperialburdentoafriendlypowertowhichitbecomesbeholden—asEnglanddidtoAmericabetween1917and1950—oritsbackbreaks.LABUBBLEEPOQUEAfterinvestorshavelostalotofmoneyinonebubble,theypracticallycan’twaituntilthenextonecomesalong.Inthe1960sboom,anythingwith“onics”inthetitlesoldforfarmorethanitwasworth.Ifyouadded“onics”toyourcompanyname,youwerealmostsuretobearichmanthenextday.Intheboomofthe1990s,themagicsyllableswere“dot-com.”RememberDr.Koop.com?Furniture.com?Webvan?Somanyexamplescometomind.ItisliketryingtoselectthedumbestmemberofCongress;wedon’tknowwheretostart.Thedot-comsweresopopularwithinvestors—andminingcompaniessounpopular—thatatleastonefirmthatsupposedlyhadbeenmininggoldswitchedtosupposedlybecomingadot-comtotakeadvantageofit.Neartheendofthetechbubble,ane-tradingfirmrananarrestingadvertisement.Itshowedadoctorpeeringdownatatraderontheoperatingtable;thedoctorsays,“Why...he’sgotmoneycomingoutthewazoo!”Fiveyearslater,youcouldreplacethee-traderwithahouseflipper.Whethertheyweretradinghousesorstocks,Americansenjoyedthenewempireofdebt.Coasttocoast,moneywascomingoutofwazoosallovertheplace.InParadiseCove,California,evenpeoplewholivedinmobilehomesweregettingrich.Trailersdoubledinpriceeveryyearforthefirstfiveyearsofthetwenty-firstcentury.Someweresellingformorethan$1million.Andinanother Paradise,thisoneinNevada,housepricesrosefasterthananywhereelseinthenation.Bymid-2005,inParadise,Nevada,theywererisingatnearlya50percentannualrate.“Ifyoucanfogamirror,youcangetahomeloan,”saidamortgageanalysttotheLosAngeles(LA)Times.Inthepast,beingabletofogamirrorwasanecessaryrequirementforcredit.Onlynowhaditbecomesufficient.Ifthepresenttrendcontinued,soonlenderswouldnotevenbothertoholdupthemirror.Therewasnoparticularreasonwhythedeadshouldbedeniedmortgagecredit;theywouldprobablybeatleastasgoodrisksasmanyofthelivingwhoweregettingit.Maybebetter.Atleasttheydon’tskiptownorwearoutthecarpet.“Borrowupto$250,000,”saidanadvertisement.“Lessthanperfectcreditisokay....Noincomeverification....NoHomeEquityrequirement....24-hourapproval.”Between2001and2005,thepropertybubbleraisedhousepricesinCaliforniaby$1.7trillion.Thatwasequivalentto35percentofpersonalincome.Thewholeeconomynotonlyenjoyedarisingrealestatemarket,itdependedonit.Coasttocoast,peopleboughtbighousestheycouldn’tafford.Theyexpectedtosellthemtosomeoneelseformorethantheypaidforthem.Whattheydidnotexpectwastopayforthemthemselves.Howcouldthey?Whatwouldtheypayforthemwith?Nooneseemedinterestedinactuallyowningrealestate.Houseshadbecomelikefuturescontracts.Peopletradedonmarginandnevertookdelivery.Houseswerefinancialassetstobeactivelymanaged,justasthoughtheywerestocksorasailboat.Wheninterestratesdipped,newcreditwasunfurled;thehousewasrefinancedatalowerratewiththeborroweroftentakingoutalittlecashtospend.Ifratesseemedtobegoingdown,moresailclothwashoistedatanadjustableratetocatchthefavorablewind.Whatifratesrose?Whatiftheweatherturnedbad?TheCaliforniaAssociationofRealtorsreportedthatonlyoneinfivehouseholds inthestatehadenoughmoneytobuythehousethatoneintwoofthemlivedin;insomeareas,itwasonlyoneinten.TheaverageAmericanlivedinasuburbanhousethoughttobeworth$188,800.SincestocksbegantodeclineinJanuary2000,hisnetworthhadnotnecessarilydeclined,butithadbecomelessabstract;henowhadtoliveinit.EveninPhiladelphia.AhousingbubbleinPhiladelphia?Itseemedalmostimpossible.WhowouldwanttobuyahouseinPhiladelphia,muchlessatapremium?ButhousepricesroseinPhiladelphia,andeveninBaltimore.Parentsandgrandparentshadbeenloathtospendmorethan25percentoftheirincomesonrentoramortgage.Now,peoplewerespendingmorethan50percent.Bymid-2005,itwasreportedthatoneinfivenewhomebuyersspenthalftheirdisposableincomeonhousing.Therewasdisappointmentbuiltintothisdelightfulshow.Itisallverywellthattheworldfinancialsystemmatchesupborrowerswithlenders,butthematchmakingonlyworksifitproducessatisfyingresults.Ifyoumatchaprincesswithafrog,whenthepoorgirlbendsdowntogivetheamphibianakiss,somethingremarkablebetterhappenortherewillberegrets.Reproaches.Maybelawsuits.Justasatravelerisneverreallysurehe’shadagoodtripuntilhegetshome,youneverknowifaloanisagoodoneorabadoneuntilthemoneymakesitswaybacktothelender.Thatiswherethedisappointmentislikelytocome.Arelenderstoolenient?Wewillknowwhenthemoneygetsreadyforthereturnportionofthetrip.Ourguesswasthatnotasmuchwouldmakeithomeaspeopleexpected.Theamountowedinhomeequitylinesofcreditsoared42percentin2004alone.Andthemediandownpaymentslippedfrom6percentin2003toonly3percentin2004.“Theboomininterest-onlyloans—nearlyhalfthestate’shomebuyersusedthemlastyear,upfromvirtuallynonein2001—istheenginebehindCalifornia’s1surginghomeprices,”saidtheLATimes. CaliforniahousesaleshitanewrecordinFebruary2005.AndagaininMarch.AndagaininApril.Housingstartsnationwidewereata21-yearhigh.Alloverthe50states,peoplewerebuying,flipping,refinancing.2“ItisasifyouwerepaidtoliveinCalifornia,”saidaskeptictotheLATimes.Pricesrose22percentin2004.Itmeantthatanaveragehomeowner,withanaverage$400,000house,added$88,000tohisnetworth.Hedidthiswithoutliftingafinger.IntheBayArea,housesweresellingforhalfagainasmuchaspeopleaskedforthem.TheLATimesmentionedahouseofferedfor$980,000thatsoldalmostimmediatelyfor$1.5million.TheTimestoldofayoungwomanwhoboughtherfirsthousewithnomoneydownand“interestonly”payments.In2001,fewerthan5percentofnewhouseswerepurchasedwith“interestonly”mortgages.Bymid-2005,thetotalwasnearly50percent.Fromthenewspaperreport,thewomanappearedtobeheadedtowardafinancialcrisis.Homeownership,shebelieved,wouldbailherout.Shetoldthepaperthatsheintendedtouseherequitytopaydownhercreditcarddebt!MoreoftheTimesarticle:“Ihave$40,000instudentloansfrommymaster’sdegree,”shesaid.“Ihavehighcreditcarddebt.I’matypicalAmerican.Andyettheywantedtogivememoredebttobuyahouse.”“Ifyou’relikeme,you’resoincredulousthatanyonewouldgiveyouanymoneywhatsoever,youjustcloseyoureyesandsignthepapers....Iwouldhave3signedanything.”OntheEastCoast,thesituationwasnotmuchdifferent:AnexpertwasinterviewedbytheNewYorkTimes.Heremarkedthatinthepastrealestateinvestorsexpectedannualrentalreturnsof8percentto10percentofthepurchaseprice.Butsucha“historicalperspective”waswrong,hesaid.Itcausedinvestorstopassupgoodopportunities.Whattheyneededwasa“freshprospective”:“They’renotbeingfoolish;they’relookingatitdifferentlythan4peoplewhohavebeeninthemarketforalongtime.” Forgetthewisdomofthedead,inotherwords.Thiswasanewera.Peopleboughtpropertyastheyhadboughttechstocksfiveyearsbefore—withoutanyregardforearnings.Itwasallagreaterfool’sgame—bettingthatsomeonewouldcomealongwhowasanevenbiggernumskullthanyouwere.Thegamecontinuedsuchalongtimethatpeoplecametoseeitaseternal.Andthemoreconfidencepeoplehadinit,themorereasonstheyinventedforittogoon.Mostexpertscited“demographicfactors”asguaranteeinghigherresidentialpropertyprices.Thereweresupposedtobemanymorepeoplewhowouldneedaroofovertheirheadsintheyearsahead.Accordingtothetheory,thereweresomanynewimmigrantsandbabyboomerchildrenthatthehomebuilderscouldn’tkeepupwiththem.Priceswouldrise.Whythehomebuilderswouldbuildenoughhousestokeepupwiththedemandwasamatterofdebate.Howthenewbuyerswouldbeabletopayhigherprices—whenincomeswerefalling—wasnotcleareither.Amajorreasongivenforwhystockpriceshadtocontinuerisingin1999wasthatsomanypeoplewereputtingsomuchmoneyintostocksfortheirretirements.Thelogicwassupposedlyirrefutable:Thebabyboomersmustsavemoney.Theyhadnochoicebuttoputitintostocks.Stockshadtogoup.Thereasoningwasperfect—aslongasstockswentup.Butthensomethinghappened:Stockswentdown.Babyboomersfeltlittledesiretobuystocks.Butthe“demographicfactors”argumentwasstillperfectlyserviceableforthehousingmarket.Itwouldworkfinetoo—untilhouseswentdowninprice.Then,miraculously,themultitudesinneedofhousingjustvanished.OnApril10,2005,anarticleentitled“TheHunt,BecomingaMogulSlowly”appearedintheNewYorkTimes.Ittoldthestoryofa25-year-oldNewYorkerwhohadbeenmakingrealestatedealseversince2002.Drawingonthisdeepwellofexperience,theyoungTrumpofferedadvice.“Anapartmentismoreattractivetomewhenotherpeoplewantit.Whilethepricemightseemexpensivenow,itmightnotbeexpensivesixmonthstoayearfromnow.Weoverbidtocapturetheopportunity.”Bysomeinstinct,hehadcapturedthegistoftheefficientmarkethypothesis—andappliedittorealestate(discussedinChapter15).Whateverpricehepaidwasokay—becauseitwasthepriceotherswere willingtopay.TheTimesarticletoldusthat“hissuccesshasinspiredsixofhisyoung,former-renterfriends,tofollowinhisexperiencedfootsteps,”because“Imadeitseemlikeaverycoolthingtodo.”MeanwhiletherealDonaldTrumpsaidhe5wasgettingamilliondollarsapopjusttotellyoungmogul-hopefulshissecrets.Inmid-2005,youonlyhadtogetinacabtorealizethattherealestateboomhadbecomeabubble.Cabdriverswouldpointouthowmuchhouseshadgoneup.Whileoncetheygavetipsontechstocks,nowtheytoldyouwhichneighborhoodswerelikelytoexperiencethegreatestpriceinflation.Listencarefully,andyouwerelikelytooverheardriversontheircellphonestalkingtorealestateagentsabouttheirnewcondos.Thetrickwastofinda“fixer-upper,”doalittlecosmeticworkonit,andputitrightbackonthemarket.Somanypeoplewerelookingforfixer-uppersthatcannysellerswereconsideringdeliberatelymakingawreckoftheirhouses—soprospectivebuyerscouldhallucinateabouthowmuchmoneytheywouldmakeafterfixingthemup.Inthespringof2005,theFederalDepositInsuranceCorporation(FDIC)identified55areasinthenationthatitsaidwereundergoingaboominresidentialrealestate.Thesewereareaswherepricesrose30percentormoreovertheprecedingthreeyears.Notin30yearshadsomanypartsofthecountryexperiencedsuchaboom,saidFDIC.Eveninthelastboomofthe1980s,onlyhalfasmanyareasmetthetest.THESAGEOFTHEPLAINS“Alotofthepsychologicalwell-beingoftheAmericanpubliccomesfromhowwellthey’vedonewiththeirhouseovertheyears...,”saidtheSageofthePlains,WarrenBuffett,inApril2005.“Certainlyatthehighendoftherealestatemarketinsomeareas,you’veseenextraordinarymovement....Peoplegocrazyineconomicsperiodically,inallkindsofways.Residentialhousinghasdifferentbehavioralcharacteristics,simplybecausepeoplelivethere.Butwhenyouget pricesincreasingfasterthantheunderlyingcosts,sometimestherecanbeprettyseriousconsequences.”“Youhavearealasset-pricebubbleinplaceslikepartsofCaliforniaandthesuburbsofWashington,DC,”addedCharlieMunger.Buffett:“IrecentlysoldahouseinLagunafor$3.5million.Itwasonabout2,000squarefeetofland,maybeatwentiethofanacre,andthehousemightcostabout$500,000ifyouwantedtoreplaceit.Sothelandsoldforsomethinglike$60millionanacre.”Munger:“Iknowsomeonewholivesnextdoortowhatyouwouldactuallycallafairlymodesthousethatjustsoldfor$17million.Therearesomeveryextreme6housingpricebubblesgoingon.”“Flippingrealestate...withoutgettingburned,”isaheadlinefromtheweekend7SeattleTimes.There’ssomethingaboutabullmarketthatweakensbrainsandpermitssenselessmetaphors.TheTimescouldhavesaid,“Flippinghouseswithouthavingthemfallonyourhead”or“Hownottogetburnedinared-hotrealestatemarket.”ButthehacksinSeattledidn’tbothertothinkaboutit;whodid?Everybodyknewpropertywashot,andeveryoneknewyoucouldgetrich—fast.ByApril2005,thepresswasbeginningtoreportonpeoplewhohadquittheirjobstogetinonthehousebubblebeforeitwentsour,wemean,beforeitpopped.TheTimesarticlereferredto“30-somethinginvestors”whohadleftgainfulemploymenttoinvestinrealestate.Whattheyweredoinghadlittleincommonwithrealinvestment,butneithertheynorthereporterseemedtorealizeit.Thehousestheyboughtrarelyyieldedanyreal,netincome.Whattheywerereallydoingwasgamblingonrisingpropertyprices.Itwasmuchliketheendofthe1990swhenyounginvestorswerequittingtheirjobstoday-tradestocks.Aslongasstockswererising,thesetradersweregeniuses.Whenthestockswentdown,theywereidiots. “Ilostatonofmyportfolioin2001,”theTimesquotedarisingpropertymogul.Themanfiredhisfinancialplannerandputhismoneyinaself-directedIRAthathecoulduseforspeculatinginhouses,practicallyday-tradingthem.“Bytheend8oftheyearwe’llbedoingtwoorthreeamonth,”saidhe.DELUSIONSOFMEDIOCRITYAnothersimilaritybetweenthebubbleintechstocksattheendofthe1990sandthehousingbubblein2005wastheriseof“clubs”designedtohelpmembersspeculateinthecompanyofothers.Attheendofthe1990s,peoplejoinedinvestmentclubssotheycouldyakaboutstockswithotherpeoplewhodidn’tknowanythingeither.In2005,theyjoinedrealestateclubs.Therewereatleast177ofthembymid-year.Membersgottogethertotalkabout“techniques”and“strategies.”Fourofthese“strategies”wererecordedforthebenefitoffutureDonaldTrumps,andperhapshistory,intheTimesarticle:(1)Buyahouse,holdit,andsellitlater,(2)buyahouse,fixitup,andsellit,(3)flipthedamnhousebeforeyouactuallyhavetopayforit,and(4)rentthehouseformorethanitisworth,givingthetenanttherighttobuyitinthefuture.Weweretemptedtoaddexclamationmarksaftereachstrategy.Buttheitemsscreamsuchimbecilitythatamplificationseemsunnecessary.Theyremindedusofourowndictumaboutstockmarketspeculatorsofthelate1990s:Thereissmartmoney;thereisdumbmoney;andthereismoneysomoronicitpracticallycriesoutforcourt-orderedsterilization.TheysayonWallStreetthatnooneringsabellatthetopofthemarket,butsomanybellswereringinginthespringof2005wethoughtwewouldgodeaf—ormad.PlaymateoftheMonth,JamieWestenhiser,wasabandoningapromisingcareerasamodeltotakeuprealestateinvesting.Whatwouldmakeanicegirllikeherendupinplacelikethat?Maybeitwasthe12.5percentgaininrealestatenationwideintheprevious12months?Ormaybeitwasthe50percentincreaseinhousingpricesinfiveyears?Inhotmarkets—suchasCalifornia,Florida,andWashington,DC—priceshadgoneup60percentintwoyears. Itwasa“realestategoldrush,”saidthecoverofFortunemagazine.ButAmericansweresufferingfromdelusionsofmediocrity.Theytookfornormalwhatwasactuallyextraordinary.PricesofAmericanresidentialrealestate,inrealterms,rose66percentbetween1890and2004.Butalltheincreasehappenedinjusttwobriefperiods:rightafterWorldWarII,andafter1998.Otherthanthosetwoperiods,therealpriceofhousingwaseitherflatorfalling.ThebigdifferencebetweentheperiodfollowingWorldWarIIandthe’98-’06erawasthatafterthewartheU.S.economywasgrowingandhealthy.Americanotonlyhadapositivetradebalance,buthadthemostpositiveoneintheworld.Wagesweregoingup,sopeoplecouldaffordmoreexpensivehouses.Familieswereexpandingfasterthantheeconomy—sotheyneededmorehouses.Butbytheendofthecentury,incomeswerestableorshrinking.Thenationspentmorethanitearned;itdesperatelycountedonrisinghouseprices—andthesavingsofpoorpeopleinforeigncountries—justsoitcouldcontinuelivingbeyonditsmeans.AndPlaymatesoftheMonthweregivingupstruttingtheirstufftoinvestinrealestate.Thiswasnotanormalsituation.Othernewsstoriestoldoffriendswhowereteaminguptobuyhouses—theyhadbecometooexpensiveforasinglecoupletoaffordonitsown.Themaincauseofforeclosurewasdivorce,becauseneitherspousecouldaffordtokeepthemaritalhome.Imaginetwocouples.Youmightthinktheriskwoulddouble.Infact,itprobablyquadrupled—ormore.Eithercouplemightbreakup.Evenmorelikely,thetwocouplesmightdecidetheycan’tstandeachother.Alenderwouldhavetobebrain-deadtoagreetosuchadeal.Butin2005,manydid.Thisisthegreatcomedyofthefinancialmarkets.Theyputafooltogetherwithhismoneyjustsotheycangetagoodlaughbytakingitawayfromhim.These“investors”thoughttheyweregeniuses.Theythoughttheirtechniquesandstrategiesweremakingthemrich.Ofcourse,techstockspeculatorsalsothoughttheyweregettingrich.Then,theylost“aton”oftheirportfolios.Itisamazingthattheyhadatonleft.Butthatwouldgosoon. Aspricesrosein2005,CongresswantedtoknowiftheFedmightraiseratesfasterthananticipated.Itlookedasthoughthebubbleinrealestatewasgettingoutofhand.Don’tworryaboutit,saidtheworld’smostfamouseconomist;inflationwasnoproblem.“Theeconomyseemstohaveentered2005expandingatareasonablygoodpace,withinflationandinflationexpectationswellanchored,”AlanGreenspantoldthenoddingheadsontheSenateBankingCommittee.“Theevidencebroadly9supportstheviewthateconomicfundamentalshavesteadied.”Hemustnothavelookedoutthewindowthatday.Fortheverysameday,asheadlinesmadeclear,inflationandinflationexpectations—notablyinthehousingmarket—wereunderfullsailinhurricane-forcewinds.Thecostofhousing,inmanyareasofthecountry,wasnotjustinflating—itwasblowinguplikeafront-seatairbag.InAlanGreenspan’shome-town,Washington,DC,priceswererisingsixtimesfasterthanGDPgrowth.Buyerswerenotlookingforaplacetolive;theywerespeculating—bettingthattheirneighbor,theFedchairman,wouldcontinuegivingawayenoughmoneytomakethemrich.ThehouseflippersweredrivingaroundinnewMercedes,makingbigmoneybybuyingandsellingeachother’shouses.Onegeniusboughtacondobeforeitwasbuilt.Heflippedittoanotherinvestor,whoheldituntilitwascompleted,makingabundlewhenhesoldittoaprofessionalcouplewhointendedtostayfortwoyearsandthensell(atahugeprofit)tootherbuyers.Allofthemweremakingthesmartmoves—buyingwithlittlemoneydownandmakingminimummonthlypaymentsonadjustableratemortgages.Andallofthemweregettingricher—orsotheybelieved—aslongaspricescontinuedtorise.Theytalkedaboutitatcocktailparties.Theylookedattheirbalancesheetswithprideandpleasure,andiftheyneededcash,they“tookoutalittleequity”aseasilyascallingforapizza.Pitythepoorrenter.Hewasthesortofmanyouwouldn’twantyourdaughtertodate,letalonemarry.Hewasthepoorloserwhoforgottobuytechstocksinthelate1990sandnowwasmissingtherealestatebubble.Hewasthequiet,lonely dorkwhonevergotinvitedtopartiesandhadnothingtosay—exceptan“Itoldyouso”thathehadbeenholdingontoforyears,waitingfortherightmoment.AMERICANSGETPOORER...“Thisisthegreatestcrisisfacingthecountrythatpeoplecandosomethingabout,”wroteBenSteininForbes.Steinwastalkingaboutpeoplewhofailedtosaveenoughforretirement.“Withlessthan20percentofU.S.workersnowinemployerpensionplans(manyofthoseplansareonshakyfinancialfooting)andwithSocialSecuritytypicallyreplacinglessthan40percentofpre-retirementincome,personalsavinghasneverbeenmoreimportant,”continuedStein.Andyet,fewpeoplesaveanymoney.“Savingsrateshaveneverbeenlower,”Steinexplained.“In1999,thenationalsavingsratedippedbelow3percentforthefirsttimesince1959,accordingtotheU.S.CommerceDepartment.Ithasbeendecliningfurthersincethen,andin2004itwasatamere1percent.Thelowsavingsrate,coupledwithlargedeficitfinancingbyAsianbanks,isdangerousfortheU.S.Butit’smoredangerousforindividuals.”Peopleareforevercryingalarmaboutthisorthat.Thereisacrisisinhealth...acrisisinmoralvalues...acrisisintheMiddleEast...orinthenewspapertrade.Forallthewhining,thereisusuallylittlethatcanbedoneabouttheemergency,andifitisleftalone,itgenerallytakescareofitselfinitsownway.“Nearly28millionU.S.households—37percentofthetotal—donotownaretirementsavingsaccountofanykind,”continuedtheForbesarticle,“Amongthehouseholdswhoownedaretirementsavingsaccountofanykindasof2001,accordingtoa2004reportbytheCongressionalResearchService(CRS),theaveragevalueofallsuchaccountswas$95,943.Thatnumberwasdistortedbytherelativelyfewlargeaccounts,andthemedianvalueofallaccountswasjust$27,000. “Themedianvalueoftheretirementaccountsheldbyhouseholdsheadedbyaworkerbetweentheagesof55and64was$55,000in2001,”theCRSsays.Tothat,Steinaddedthat“just11percentofallAmericanshaveretirementsavings10of$250,000ormore.”Youcanjabbertopeopleaboutsavingmoneyuntilyourjawfallsoff;they’renotgoingtoputanextradimeinasavingsaccount—notwhenpropertypricesaregoingupat10percentperyearandtheFedisstillgivingawaymoney.Eventually,however,thethingsthatmusthappendohappen.Ofcourse,that’swhenpeoplewishtheyhadsavedmoney.That’swhentheyreallyneedit.That’swhenthewhiningreallybegins.Saving—likemanufacturing—isoneofthoseearly-empirevirtuesthatwasonceanimportantpartoftheAmericaneconomy...butseemstohavegottenexported.TheChinesenowmakeourproductsanddooursavingforus.Theysavemorethan25percentoftheirincome.AccordingtoBenBernanke,theyhadsomuchofsavings,theywerethankfultousfortakingitofftheirhands.Butwhatgoesaroundcomesaround.WhentheU.S.realestatebubblepopped,someofthatoldvirtuebegantomakeitswaybackhome.Americansstartedtosaveagain.Whereastheyputasideonlyapennyonthedollarin2005,soontheyarelikelytosetaside10centsormore.Thesavingscrisiswillbeover.Anewcrisiscanthenbegin:adepression.Intraditionaleconomictheory,peoplesave.Theirsavingsareborrowedbyentrepreneursandbusinesspeopletobuildnewenterprises,newfactories,andnewconsumeritems.Thisnewoutputisthensoldataprofit,whichcreatesnewjobs—andhigherincomes—thatgivepeoplemorepurchasingpower,moresavings,andsoforth.ButinAmerica’sfabuloustwenty-firstcenturybubbleeconomy,thingshappenedsomuchdifferentlythatwewondered.Isthetheorymistaken...orareAmericans?Hardlyadimewassaved.ButAmericansspentmorethanever.Somethingwaswrong.Thepicturewasgrotesque,unnatural...likeaprettywifewhorotatesherowntires—itisalmosttoogoodtobetrue. Theproblemwithnotsavingmoneyisthatyouwon’thaveany.Ifyouwanttodoanythingbeyondwhatyou’realreadydoing,youhavenothingsaveduptodoitwith.Evencurrentlevelsofconsumptioncannotbemaintained.Factorieswearoutandneedtoberebuilt.Competitorsraceahead.Thereisnostandingstill.Youareeithergoingforward...orfallingbehind.“Daybyday,alltheearthages,droopinguntodeath,”saiththeoldAnglo-Saxonpoets.Youneedareserveof“energy”—savings—togiveitlifeagain.THECOMINGCORRECTIONToutpasse,toutcassesaytheFrench.Everythinggoesaway.Everythingbreaksdown.Nothingisbornthatdoesnotdie.Nothingbeginsthatdoesnotend.Thereisnomorningwithoutanevening,andnosilverliningwithoutacloud.Empirescome.Empiresgo.Inthefinancialmarkets,the“going”phaseiscalledacorrection.Itisintendedtocorrecttheexcessesandmistakesoftheexpansionphase.Inabullmarket,therearecorrectionsthatbringextraordinarygainsdowntomoremodestones.Inabearmarket,corrections—whichsoftenextraordinarylossesintomoreordinaryones—areknownasrallies.Generally,theforceofacorrectionisequalandoppositetothedeceptionthatprecedesit.Andthepainitcausesisdirectlyproportionaltothepleasantdeceptionthatwentbeforeit.America’sempireofdebtrestsonmanyhugedeceptionsthatwehavedescribedinthisbook:•Thatonegenerationcanconsume—andstickthenextwiththebill.•Thatyoucangetsomethingfornothing.•ThattherestoftheworldwilltakeAmericanIOUsforever—noquestionsasked. •Thathousepriceswillforevergoup.•ThatAmericanlaborisinherentlymorevaluablethanforeignlabor.•ThattheAmericancapitalistsystemisfreer,moredynamic,andmoreproductivethanothersystems.•ThatothercountrieswanttobemorelikeAmerica,evenifitisforcedonthem.•ThatthevirtuesthatmadeAmericarichandpowerfularenolongerrequiredtokeepitrichandpowerful.•Thatdomesticsavingsandcapitalinvestmentarenolongernecessary.•ThattheUnitedStatesnolongerneedstomakethingsforexport.Inparticular,deceptionthatsentcreditexpansionsoaringbetween2001and2005cameeagerlyfromAmerica’sowncentralbank.Bysettingitskeylendingratebelowthecurrentinflationrate,theFedmisledalmosteveryone.Throughouttheboomyearsof2002to2005,theGreatDeceiver,AlanGreenspan,appearedbeforetheU.S.Senateanddissembled.Notonlydidinflationpresentnoclearandpresentdanger,neitherdidAmericans’debtloads,nordidthenegativenumbersinthecurrentaccount.Mr.Greenspan,whosurelymusthaveknownbetter,foundnothingtodislikeandnothingtoworryabout.So,westop,drawbreath,andwonder.Thedeceptionwassolarge,wewonderedhowitcouldeverbefullycorrected.WespeaknotmerelyofMr.Greenspan’sperjurybeforeCongress,butofthelargerdeception,inwhichMr.Greenspanplayedaleadingrole.ThepromiseofAmericancapitalismisthatitmakespeoplericher,freer,andmoreindependent.ButsincetheintroductionoftheFedandtheriseoftheempire,thecurrencyinwhichAmericanskeepscorehassoaddledthefigures,wescarcelyknowifwearewinningorlosing.Thedollarweknewasachild—in the1950s—isonlyworthatenthasmuchtoday.Theaveragehouseholdtodayhasfarmoreofthemthanwedid.In1950,U.S.householddebttodisposableincome,whichisbasicallyafter-taxincome,was34percent(ifdisposableincomewas$10,000,householdshad$3,400inoutstandingdebt).AlmosteveryAmericanbelievesheisricher.Certainly,comparedwiththeOldWorld,Americanshavenodoubtthattheriseoftheirempireimprovedeverysubject’slife.Isittrue?Wepausetodeliverashockingupdate.Peoplelovemyth,fraud,andclaptrap—especiallywhenitflattersthem.Maybetheirfood,lifeexpectancy,crimerates,transportation,liquor,women,andarchitecturearenothingtobragabout,sayAmericanstoeachother,butwhentheygrubformoney,theygrubgood.“OldEurope,”theysay,makingacomparison,“istoorigid,fossilized,hide-bound...amuseum.”Andyet,eventhisisafraud.DespiteLaffer’scurve,Greenspan’sBubbles,andReagan’srevolution,theU.S.economyhasdonenobetterthanEurope.TheEconomistexaminedtheevidencein2005:EverybodybelievedthatAmericagrewalotfasterthanEuropeovertheprevious10years.Butthefigures,intermsofGDP/personwereveryclose—2.1percentperyearforAmericaagainst1.8percentforEurope.TakeoutGermany—whichstruggledwithabsorbingitsformerlycommunistcousinsfromtheEast—andthetworegionswereexactlythesame.Andproductivity?AstudybyKevinDaly,aneconomistatGoldmanSachs,foundthat,afteradjustingfordifferencesintheireconomiccycles,trendproductivitygrowthintheeuroareahadbeenslightlyfasterthanthatinAmericaoverthe10-yearperiod.Whataboutjobs?Americaisthegreatestjobsmachineontheplanet,right?Again,excludingGermany,jobsintherestofEuropegrewatthesamepaceasinAmerica. It’struethatAmericansearnedmoreandspentmorethanEuropeans...buttheyworkedalotmorehours.Europeanssimplyenjoyedmoreleisure.Butwhataboutthepost-2001“recovery?”Wasn’titmuchmorevigorousinAmericathaninEurope?Well,onlyonthesurface.Spikedupbythebiggestdoseoffiscalandmonetaryjuiceinhistory,America’seconomyslightlyoutpacedEurope’s.Butthefiguresarehardtocompare.EuropecalculatedGDPgrowthmoreconservativelythanAmerica...andunderstatedthetruth,ratherthanoverstatedit,astheydidattheLaborDepartment.Moreimportantly,America’sjoltofgrowthcameatgreatcost.WhileEuropegotnonetstimulus,Americagotenoughtogiveittheshakes.“Super-laxpoliciesofthepastfewyearshaveleftbehindlargeeconomicandfinancialimbalancesthatcastdoubtonthesustainabilityofAmerica’sgrowth,”saidtheEconomist.“Fromapositionofsurplusbefore2000,thestructuralbudgetdeficit(includingstateandlocalgovernments)nowstandsatalmost5percentofGDP,threetimesasbigasthatintheeuroarea.Americahasacurrent-accountdeficitof5percentofGDP,whiletheeuroareahasasmallsurplus.Americanhouseholdsnowsavelessthan2percentoftheirdisposableincome;thesavingsrateintheeuroareastandsatacomfortable12percent.TotalhouseholddebtinAmericamountsto84percentofGDP,comparedwithonly50percentintheeurozone.”Barelyhadthetwenty-firstcenturybegunandAmericafounditselfinaremarkableposition.Ithadwhatitbelievedwastheworld’smostpowerfuleconomy...andtheworld’smostpowerfulmilitaryforce.LikethedefunctSovietUnion,ithadasickleinonehandandahammerintheother.Thesickle,alas,hadanawkwardbendinit.Since1990,incomefortheaverageAmericanhouseholdroseonly11percentwhileaveragehouseholdspendingjumped30percent. Howcouldpeoplespendsomuchmoremoneywithoutearningmore?Outstandinghouseholddebtdoubledtomorethan$10trillionbetween1992and2004,evenadjustedforinflation.Peopleweredeterminedtolivelargeandlivebetterthantheycouldafford.Theydidthisbywhateconomistscalledsmoothingincome.Anticipatinghigherincomesinthefuture,youngfamiliesspentthemoneyrightaway(e.g.,buyingbiggerhousesthantheycouldafford).Nationwide,housesizesgrew30percentsince1980,saidCornelleconomistRobertFrank.Evenpeopleintheir50sand60slookedforwardtohigherincomesormiracles.Someeconomistsreferredtothewholephenomenonasthe“democratizationofcredit.”“Innovationandderegulationhavevastlyexpandedcreditavailabilityto11virtuallyallincomeclasses,”saidtheFedchief.Hedidnotmentionhisownroleinthisdemocraticrevolution.Hewastoomodest.HewasaDantonandRobespierreputtogether.TheFedchairmanaccomplishedmorethanallthenation’sinnovatorsandderegulatorsputtogether.Droppingthepriceofcreditbelowtheinflationrate,heofferedtheentireworldsomethingfornothing.Thankstohim,everymancouldgethimselfintofinancialtrouble,notjustkings,speculators,andfinanciers.Hemadeitpossibleforlendinginstitutionstoextendsuchalongropeofcredittothecommonmanthatmillionsweresuretohangthemselves.Weturnedtothedeadforanopinion.Butitwashopeless;thecorpsesknewevenlessthanwedid.Theycouldn’tevenimaginewhatwashappening.Borrowagainstyourhousewhenyoudon’thaveto?Buyahouseasan“investment?”Takeout“equity?”“Dependonforeignerstobalanceyourbudget?”“LivebeyondyourmeansandexpectThirdWorldwageearnerstomakeupthedifference?”TheideasthatAmericansoncetookforabsurd,theynowtookforgranted.Thebabybornwhentheempirebeganin1913cameintotheworldwithnothing.Butheowednothing.Now,hecomesintotheworldowinghisshareofahugepublicdebt—onethatisgrowingbymorethan$1.8trillionperyear.Whatwouldthedeadsay? WHATWILLHAPPENTOAMERICANS’DEBTS?12“Hethatdiespaysalldebts,”saidShakespeare.Whopaysthesedebts?Andhow?Whenpeoplecannotpaytheirdebts,theydonotpaythem.Butthedebtsdonotceasetoexist.Theyaremerely“paid”bysomeoneelse—thecreditor.InthecaseofAmerica’sdebtstoforeignnations,thiscanbeachievedinthreeways:Thecurrencyinwhichthedebtisdenominatedcanbedevaluedagainstothercurrencies;thecurrencycanbemadelessvaluablethroughinflation;orthedebtcanberepudiated.Oneofthesethings—orallofthem—islikelytohappen.Repudiationhasalongandsqualidhistory.Ifamancangetawaywithoutpayinghisdebts,hewillgenerallyfigureoutwhyheshouldn’thavetopaythem.Inpubliclife,thereasonsareoftenverygoodones.Whenanewpoliticalregimetakesover,whyshoulditbestuckwiththebillsoftheoldone?WhentheBolshevikstookoverRussiain1917,theymadeTsaristbondsworthless.Whyshouldtheypaybillsthattheyneveragreedto?Whyshouldtheyhonorcommitmentsofonecapitalisttoanother?Theydidn’tpay.Andwhy,after1919,shouldthenewGermanrepublichavetopaytheKaiser’sbills?France,Britain,andtheUnitedStateshaddefeatedtheKaiser;letthempayhisdebts!Theideaofpublicdebtisanattractivenuisance.Afatherwouldnothavedinnerinafinerestaurantandsendthebilltohisson.Norwouldhesaytotherestaurateur:Holdthebillformyunborngrandson.Butsuchisthestateoffaithindemocracy,thatarelativelysmallgroupisnotonlywillingtostickitsheirsorenemieswithcoststowhichtheywouldneverconsent—butishappytodoso.Politicsisaperniciousandbarbarousoccupation.Generally,thepublichasonlythedimmest,mostremoteideaofthekindofobligationsthatarebeingcontractedonitsbehalf.Ifaskedaboutthemdirectly,many—ifnotmost—wouldsurelyobject.Butwhoasks?Besides,theunborndon’tvote.Andneitherdoforeigners.Orevenout-of-staters.InAmerica,severalstates—Michigan,Mississippi,Arkansas,Louisiana,andFlorida—totallyandpermanentlyrepudiatedtheirdebtsinthepanicsofthe 1840s.Inthe1880s,manySouthernstatesrepudiatedthedebtsthathadbeenrunupbyillegitimatecarpetbaggergovernments.ButtheUnitedStatesdoesn’thavetorepudiate.Itsdebtsaredenominatedinitsowncurrency—thevalueofwhichitcancontrol.Havingtheworld’sreservecurrencymeansyoucanstiffyourcreditorswithouteverhavingtosayyou’resorry.THEDEMISEOFTHEDOLLARAmongthemanyremarkablestoriesthatappearedinthepressinthebubbleyears,thestoryofMr.Asakawastoodout.TheUnitedStateseconomyhasbeensostrongforsolong,peopleallovertheworldhavecometoaccepttheimperialcurrency.By2005,noonehadmoreofitthanpoorMr.AsakawainTokyo.ThemancontrolledthebiggeststashofU.S.paperintheworld.Hislifehadcometoimitateapopularjoke.“Amanwhooweshisbanker$100,000can’tsleepatnight,”thejokebegins.“Butwhenamanoweshisbanker$1million,it’sthebankerwhocan’tsleep.”Mr.Asakawaisthecentralbank’sbanker.Attheendof2004,heheldanestimated$700billionworthofU.S.dollar-denominatedpaperassetsinhisvaultattheFinanceMinistry.Besidehisbedwasablueplasticmonitoringdevicethatwouldgoofflikeanalarmclockwhenthedollarfelloutofagiventradingchannel.Mr.Asakawa,needlesstosay,didnotoftensleepsoundly.Arelativelymodestdropinthedollar’svaluewouldmeanhugelossestoJapan’scentralbankandotherdollarholders.ButwhatcouldMr.Asakawado?Hisinfernalalarmalertedhimtodropsinthedollar/yenexchangerate.Buthemerelyaggravatedhimselfandhiswife.Hecoulddonothingaboutit.TheAsiansownedsomanyU.S.dollarassetsthatanyattempttosellwouldcausetheverythingtheymostworriedabout—adropinthevalueoftheirsinglebiggestasset.WeunderstoodwhyMr.Asakawawouldbealarmed.Whatbothereduswaswhynooneelseseemedtobe.Withasmuchas$100trillionoftheworld’swealthdenominatedindollars,howdidtheworldwatchsocomplacentlyasthevalueofitsmainassetwasmarkeddown?In2002,thedollarwentdownagainsttheeuroby10percent.Then20percent.Andthen30percent.WhenWarrenBuffett beganputtinghismoneyineuros,hecouldbuyoneforjust86cents.Byearly2005,theeurocostnearly$1.36.InEurope,thedollarhadlostabout40percentofitspurchasingpower.14StillTurningJapaneseThemostsuccessfuleconomyofthetwentiethcenturywastheUnitedStatesofAmerica.ThesecondwasprobablyJapan.Itrosefromthebombed-outruinsofWorldwarIItobecomeaworldwideexportpowerhouse,dominatingtheautoandelectronicequipmentindustries.Butattheendof2008,stockpricesinJapanhadfallentomorethanaquarter-centurylow.InvestorsinJapanesestocksmadenothingin26years.AsifthepoorJapaneseinvestorhadn’thadmiseryenough!He’sbeen,beatenupforthelast18years.HewaswhackedwhenJapan,Inc.,wentbustin1990.Hewassmackedwhenstocksfell70-90percentduringthe’90s.Hewasrackedwithpainwhenpropertycollapsedtoaslittleasone-tenthitslate’80svalue.HewasstarvedforyieldwhentheJapaneseCentralBankdroppeditspolicyratetozeroandkeptittherefor6years.Hewastorturedoveranentiredecadeashisgovernmentwasted$1trilliontryingtoforcehimtospendandinvest.Andhewashungbyhisthumbsinfourseparaterecessions.You’dthinkMr.Marketwouldhavethegracenottokickhimwhenhewasdown.Whenthesunroseon2008,thetypicalJapanesewasstillinafetalposition,withhisheaddownandhiswalletcloseduptightly.Butalongcamethesell-offof2008—andhegotthebootagain.TheNikkeifellanother50percent.TheJapaneseinvestorwhoboughtstocksin1982whenhewas35yearsoldwasnow61...andhisstockswerenotworthapennymore!AndnowhegetsthenewsthattheJapaneseeconomyisonceagaininrecession.Today,wefeelhispain—notsomuchbecausewesympathizewiththeNipponesethemselves,butbecausenowweareJapanesetoo. Whenpeopleapproachretirement,somethinghappenstothem:Theybecomeriskaverse.Ayoungman—with60yearsoflifeexpectation—willdothedamnedestthings.He’lldrinkahalfbottleofgoodscotchanddrivedownamountainroadasifhethoughthewasmakingamoonshinerun.Or,he’lljumpoutofaperfectlygoodairplane.Orenlistinthearmyjustwhenwarhasbeenannounced.Anoldermanhaslesstolose,butlikeashipwreckedsailordowntohislastpackofcigarettes,heguardsitcarefully.Hewon’tcrossagainstthelightandwon’tevenhaveacupofcoffeebeforegoingtobedforfearitwilldisturbhissleep.Imaginewhathappenstoaneconomywhenmillionsofpeoplegrowoldatthesametime.Well,youdon’thavetoimagine.YouhaveonlytolookatwhathashappenedinJapansince1989.Biologyandactuaryscienceconvergeataround50yearsofage.Theysoftenupaman’sbrainandhisstomach,andturnhimfromadynamicrisktakerintoafretfuloldcootwhowon’tpartwithapennywithoutacourtorder.Amanover50doesn’twanttowaitaquarterofacenturyforstockstocomebacktowhereheboughtthem.Ratherthantakethechance,hetypicallyshiftshisportfoliofromcapitalgainstoincome.Hisrisktolerancealsoshifts,fromreturnoninvestmenttoreturnofinvestment;andhissavingsstrategydrifts,too,fromjust-in-timetojust-in-case.AmosTversky,aStanfordUniversitypsychologist,foundthatpeoplewouldrathernotlosemoneythanmakeit.Thisconfirmedsomethingthatdidnotneedconfirmation,aself-evidentinsightfromtheeconomicsprofessionknownasthemarginalutilityhypothesis.Aspeoplegetmoreandmoreofsomething—whateveritis—eachadditionalunitisoflessandlessvalue.(Inthecaseofcalories,information,andheroin—afteracertainpoint,additionsarenotonlyworthless,theyarelessthanworthless.)Anextradollarmeanslesstoabillionairethanitdoestoapauper.Thisisanotherwayofsayingthatthelossofanadditionaldollarisoflesserconsequencethanthelossofaman’slastdollar.Thisisobviouswhenitisreducedtotheextremesituation—whereamanonly hasasingledollar.Ifhelosesit,hewillgohungry.Butifabillionairefailstomakeanadditionaldollar,itwillnotevenbenoticed.Thismeansthataspeculationwith50/50oddsisinherentlysenseless—butpeoplemakeworsespeculationsallthetime.Tverskyalsonoticedwhathecalledtheprospecttheory—thatinvestorsaremorereadytogamblewith“housemoney”thantheirown.InvestorstookthefalloftheNasdaqandthedeclineoftheDowwithgoodgrace.Butin2009,theyarenearlyadecadeolder—closertoretirementage—andtakinglosses,notjustofhousemoney,butofrealmoney:savingsthatwereintendedtocossetgrayheadsandwrinkledbrows.Thatthesemarginal,60-somethinginvestorswouldpanicoutofstocksseemedaforegoneconclusion.Andpanicoutofhouses,too.Andoutofthehabitofconsumption!WhenAmericansbeginsavingliketheJapanese,shoulditsurpriseusiftheU.S.economyalsoturnsalittleJapanese?Whowouldhavebelievedit?Japan’sproblemwasthatitspeopledidnotconsumeenough.America’sproblemwasjusttheopposite.Weweretoogoodatit.Weconsumedwithoureyesshut.Wewerethebestconsumersintheentireworld.Whenitcametobuyingthingswedon’tneedwithmoneywedidn’thave—noothernationcameclose.Ifonlyconsumptioncouldmakeyourich!Butduringthebubble,whowantedtohearit?Therewasnopointtotellingyourneighborthatrisinghousepriceswouldn’tmakehimrich.Youmightaswellhavetoldhimthathiswifewasfat;heprobablyalreadynoticedandwouldn’tappreciatetheobservationinanycase.Besides,whowasgoingtobelievehewasgettingpoorerwhenhishousewasrisingat20percentperyear?Andthen,whenitallbegantofallapart,evenseasonedhacksseemedtohavenoideawhatwasgoingon.Neitherpundits,ministersplenipotentiary,norWallStreetprospre-penitentiaryhadanexplanation.Barron’sisafinancialweeklypublishedsince1921.You’dthinkinallthattimethey’dgetalittleideaofhowthingsworked.Nope.Thebestadvice theycouldgivetoPresident-ElectObamawasthesameprogramthatdidn’tworkinJapan:Protectthedinosaurs...andspendmorepublicmoney.Butthecrisisthatbeganinthesummerof2007wasnotatypicalbusinesscyclerecession.Theidealizedbusinesscycledownturncameaboutafteraneconomy“overheated.”Laborratesroseandthecostoflivingwentup.Thisconsumerpriceinflationforcedthecentralbanktoraiserates,causingtheeconomyto“cooloff”again.Thiswasdifferent.CenteredinAmericaandBritain,itwasacreditcyclerecession.Investorsallovertheplanetweretakingabeating.Mr.Markethadtakenacudgeltostocks,property,consumerspending,andtheeconomy—justashedidinJapanduringthe“LostDecade.”Peoplewereafraidtolendandafraidtoborrow;theyworriedthatthemoneywouldbeknockedsenselessbeforeitfounditswayhome.Thistime,theeconomydidnotoverheat...nordidlaborratesgoup.Andwhenthebubblepopped,thepinwasnothigherlendingrates.Thisbustwascausedbytoomuchcredit,notbytoolittle.ItiswhateconomistRichardKoocallsa1“balancesheetrecession”alaJapaninthe’90s.Thatis,itisatimewhenbusinesses,investors,andhouseholdersrealizethatiftheydon’tcutbacktheycouldgobroke.Andunlikethemoretypicalrecession,thiswasaslumpthefedscouldn’tcontrolandcouldn’tcure.Theycouldoffereasiercredit;butmoredebtwasjustwhatbothlendersandborrowersweremostafraidof.Thefedscouldoffermoreprops,morehandouts,andmorepublicspending,too,justlikeJapan.Butalltheyweredoingwasretardingthecorrection.Mistakesofthebubbleeraneededtobefixed.Balancesheetsneededtobebroughtbackintobalance.Therewasnowayaroundit.Japanprovedit.Justafewmonthsbefore,investorsreachedforthehighestyieldstheycouldget.Now,theyfoldedtheirarms,clutchingtotheirbreaststhelowest-yieldingpaperontheplanet.Oncetheybelievedincapitalismanditsbonds.Now,theywantednothingthatdidnothavethesealoftheU.S.governmentonit.Atthedebutof2007,theysawnodanger.Bythecloseof2008,theysawnothingelse. Inanearlierbook,FinancialReckoningDay,writtenin2002,wesuggestedthatAmericawasfollowinginJapan’sfootsteps.ButinsteadofbeginningaJapan-stylecorrection,theU.S.economytookoffinanAmerican-stylebubble.In2007-2008,thebubblepopped.Whatnow?Wanttoknow?JustlookatJapan!RichardC.Koo’sargumentisnotfarfromtheonewemadesevenyearsago.Inthe1980s,Japanranupstockandpropertypricesinaspreeofdebtandleverage.Then,whenthebubblepopped,theusualmonetarystimulusdidn’twork.TheBankofJapancutratestoalmostzero...still,fewpeoplewerewillingtoborrow.Companies,banks,andindividualshadtopaydownthedebtthattheyhadaccumulatedintheboom;theydidnotwanttoborrowmoremoney,evenatzerointerestrates.Forsevenyears,from1998to2005,netbusinessborrowingwentnegative—meaning,businesseswerepayingoffmoredebtthantheyweretakingon.Theeconomydidnotrecover;instead,itgotworseandworse.By2005,stockshadlost72percentoftheirvalue,landwasdown81percent,andgolfcoursemembershipshadsunk95percentfromtheirpeak.Thiscameasashocktomoderneconomists.Japaneseofficialswereflummoxed.Ofcourse,Japantriedtofightthedownturn.Theytriedfiscalstimulus(governmentspending)andmonetarystimulus(centralbankpolicies).Theyrandeficitsof6percentofGDP—equivalenttoaboutatrilliondollardeficitintheUnitedStates.Andtheytookinterestratesdowntonearzeroandleftthemthereforyears.Whatelsecouldtheydo?U.S.economistsaccusedthemofnotactingswiftlyenough...ornothavingthestomachtoletthebigbanksfail.Butalmostnooneseemedtounderstandwhatwasreallygoingon.Theyshouldhave.IrvingFisherdescribeditbackin1933,observingthatwhenpeoplewhoaredeeplyindebtgetintotrouble,theyusuallysellassets.Hecalledita“stampedetoliquidity.”Investorsdumpstocksandpropertyforanypricetheycan2get—desperatetopayofftheirdebtsbeforetheyaredraggedintobankruptcy.Thisisthephenomenonknowntoeconomistsasthe“fallacyofcomposition.”Whatisgoodforeveryindividualinvestor—cuttingexpenses,payingoff debt—turnsouttobebadfortheeconomyasawhole.Becauseaseachmanpullsback,hetakessomethingawayfromtheotherfellowsaroundhim.Hepullshismoneyoutofastock;thepricefallsandtheothershareholdersarepoorer.Hewalkstoworkratherthantakingataxi,andthenthetaxidriverhaslessincome.Hetellshisson:“Ifyouwantapizza,youhavetogetonyourbicycleandgopickitupyourself...andgetthecheapestone.”Andthen,thepizza-deliveryservicehaslessmoney.Oneman’scost-cuttingaffectsanotherman’sincome.Revenuesfall.Assetpricesfall.Salesfall.Unemploymentrises.Theslumpdeepens.InJapan’scase,combinedcapitallossesfromlandandstocksgrewfrom1990until2002,atwhichtimetheyreached$15trillion—orthreeyearsworthofJapan’sGDP.WhatwouldhappeniftheUnitedStatesfollowedthesamecourse?Youcandothemathyourself,dearreader.America’sGDPisabout$14trillion.Multiplythattimesthreeandyouget$42trillion.Bythebeginningof2009,theUnitedStateshadlostonlyabout$4trillionor$5trillioninhousingprices...andmaybeanother$6trillioninstocks,foratotalofabout$11trillion,maximum.Alongwaytogo.ButtherearetwocrucialdifferencesbetweenJapanandtheUnitedStates.First,Japanhadahealthiereconomy,withapositivetradebalance,andhugesavings.Second,theUnitedStateshastheworld’sreservecurrency.Thesedifferencesininitialconditionswillmakeahugedifferenceintheoutcome.Japancouldeasilyspend6percentofitsGDPtryingtoreplaceprivatespendingwithgovernmentspending.TheJapanesesaved19percentofGDP.Thegovernmentcouldsimplyborrowfromitsownpeople—liketheUnitedStatesdidtofinanceWorldWarII.ButAmericacan’tfinancehugedeficitsinternally;itdoesn’thavethemoney.Itspeopledon’tsaveenough.Theyhaven’tenoughsavingstolendtheirgovernment.AnymoneythegovernmentgetsfromAmericanswillhavetocomeoutofcurrentprivatespendingoroutofotherinvestments.Obviously,thisisnotgoingtodomuchgood,sincethereisnonetincreaseinspendingorinvesting.NorcantheU.S.governmentexpecttobringinunlimitedfinancingfromforeignsources.Theforeignerssave,buttheyneed theirmoneytorescuetheirowneconomies.What’sworse,themoretheU.S.governmenthastocompeteforfundswithotherborrowers,themoreinterestrateswillgoup—worseningthepicturefortheeconomyasawhole.Theotherpointisvitallyimportant,too.NotonlydidJapanhaveacushionofcashtocomfortablysitoutthecorrection,ithadnoreasontodootherwise.Withmoneyinthebank,theJapanesewereneverthreatenedbyaneconomicbreakdown.Andwhatmoneytheyowed,theyowedtothemselves.Americahasneitherofthosetwocomforts.Millionslivepaychecktopaycheck,dependingoncreditcardstofillinthegaps.Whenunemploymentrisesabove10percent—maybeabove15percent—theywillhowlsoloudthegovernmentwillbeforcedtotakedesperatemeasures,whichcouldsendthedeficitto$3trillion.Then,crushedundertheweightofsomuchdebt,itwon’tbelongbeforethefedsrealizethatwedon’t“oweittoourselves.”Instead,weowetrillionstoforeigners.Foreigncentralbanksaloneholdabout$2.4trillionworthofU.S.governmentdebt.About$10trillionissaidtobethetotalofalldollar-basedobligationsinforeignhands.Thatisaburdenthatcouldbeeasilylightened...if,forexample,thedollarweren’tworthquitesomuch.TheUnitedStatesisanempireofdebt.Japanwasarepublicofcredit.TheJapaneseneverstoppedsaving.Theyneverstoppedmakingthings.Iftheyhadafault,itwasthesamefaultthattheChinesehavenow—theymadetoomuch.WhileAmericansunderinvestedinproductivecapacity,theJapaneseoverinvested.Theyhadsomuchcapacity,theworld’sconsumerscouldnotkeepupwithit.TheUnitedStatesisaverydifferentstory.Wehaveelaborateditinthisbook—thestoryofanempireofself-delusionandflattery.Americacanhaveasoft,slowslump,butnotalonghardone.Itcan’taffordit.LetusimagineforamomentthattheU.S.stockmarketdidfallasmuchasJapan’s—notjusttheNasdaq,whichhastrackedtheNikkeiDowratherclosely—butallU.S.stocks.Atitspeakin1989,theNikkeiwasat38,915.87.OnJanuary1,2009,theindexstoodatalittleover9,000—alossofnearly75percent.AndimaginethatresidentialrealestateweretofallintheUnitedStates asitdidinJapan:After1989,Japanesehousepricesdroppedfor13years.AndimaginethatconsumerswouldstopshoppingastheydidinJapanandthatpriceswouldfallfornearly10yearsinarow.Toputthatlastiteminperspective,rememberthatconsumerspendingis71percentoftheU.S.economy;inJapanitwasnevermorethan55percent.Now,askyourself...howmanyU.S.householdswouldstillbesolvent(seeFigure14.1)?Butpeoplewhohaveexpectedsomethingfornothingforsolongdonotgogentlyintothatgoodnight.Theyrantandrailagainstthefailingofthelight—anddemandactionfromtheirimperialrepresentatives.“Wewantinflation,”theywillsay.“Wewillnotbecrucifiedonacrossofstrongpaperdollars,”theywilladd,asatheatricalflourish.Figure14.1JapaneseInflationRate,1980-2004AftertheJapanesestockmarketbubbleburstin1989,consumersstoppedspendingandpricesfellfor10years.ImaginewhatwouldhappenifacollapsingcreditbubblesetinmotionasimilartrendintheUnitedStates.Consumerspendingisnow71percentoftheU.S.economy;inJapanitwasnevermorethan55percent.HowmanyU.S.householdswouldremainsolvent?Source:StatisticsBureau(Japan). InflationwouldbeanobviouswayofreducingthevalueofAmerica’sdebts.ThisishowGermanyreducedherdebtsafterWorldWarI.TheReichwasleftwithabillfor$33billioninreparationstobepaidtotheEntentepowers.ButGermanywaswornoutbythewarandhadnowayofmakingsuchlargepayments.Outofdesperation,sheresortedtotheprintingpress.A50percentfallinthevalueofthedollarwouldwipeouthalftherealvalueoftheU.S.debt—anamountgreaterthantheentiredollarcurrencyreserveholdingsofallAsiancentralbanksputtogether.Atsomepoint,America’sdebtswillprobablybeincineratedbyinflation.Whenthehowlsfromconsumersandvotersgrowloudenough,theFedswillpanic.Indesperation,Ben“PrintingPress”Bernankewillpointsouth,towardZimbabweorArgentina.“There...thatisouronlywayout,”hewillsay. 15TheMightyFallenThemerdebeganhittingthefaninthesummerof2007.“Weareseeingthingsthatwere25-standarddeviationevents,severaldaysinarow,”saidDavidViniar,CFOofthesmartestfinancialfirmintheworld,1GoldmanSachs.AccordingtoGoldman’smathematicalmodels,August,YearofOurLord2007,wasaveryspecialmonth.Thingshappenedinthatmonththatwereonlysupposedtohappenaboutonceinabluemoon.Eitherthat,orGoldman’smodelswerewrong.Werecalllookingoutourwindow.Outside,wesawasummerdaymuchlikeanyother.Andinside,whatwesawinthenewswasalsorathertypical—acreditcrunch.No,creditcrunchesdon’tcomealongeveryday,butnordo100,000yearsseparateonefromanother.Inrecenthistorytherewasthecrashofthedot-coms,thecrashofLongTermCapitalin’98,andthecrashof’87;outsideoftheUnitedStates,therehavebeenanumberofcreditcrunches,inJapan,Russia,Mexico,andvariousAsiancountries.Whenyoumakeloanstopeoplewhocan’tpaythemoneyback,troubleisonlyacoupleofstandarddeviationsaway.Duringthefirsteightmonthsof2007,some1.7millionhouseswerecaughtupinforeclosureproceedingsintheUnitedStates.Thatwasjustthebeginning.Atthatstage,theamountsofmoneyweren’tverylarge,notbyWallStreetstandards.Butwhenthemoneydidn’tshowup,ithadanalarmingeffect.Citigroupsaiditwas$13billionshort.MorganStanleywassaidtobefacing$8billioninlosses.MerrillLynchsetrecordswithestimatedlossesof$18billion.ThecatstillhadGoldmanSachs’stongue.Alreadyheadshadbeguntoroll.First,WarrenSpectorofBearStearnsgotaxed.Then,itwasPeterWuffliatUBS.HewasfollowedbyStanO’NealofMerrillLynch.O’Nealmadetheheadlineswhenhewaspushedoutofthecorporatejetwitha“goldenparachute”valuedat$160million.AfterO’Nealhittheground,CharlesPrinceofCitigroup,America’slargestbank,waschuckedout. Whatwentwrong?Thebusinessmodelseemedsopureandsimple.Yousimplyboughtupsubprimeloansfromtheknaveswhomadethem,andthenyoucutthemup,slicinganddicingthemintoakindofmortgagespam.Yougottheratingagenciestoblessthem...andthenyousoldthemofftonaïveinvestors.Theideawastoearnhugefeesupfront,whilelayingtheriskontothefoolswhoboughtthestuff.Whenthegoingwasgood,itlookedasthoughnobusinesscouldbebetter.Youwereprovidingavaluablepublicservice,helpingpeoplebuyhousestheycouldn’taffordbyredistributingtheriskfromthepeoplewhoincurredittopeoplewhohadnoideaitwasthere.Andintheprocess,youearnedsuchlargefeesyouwouldgetyourpictureinthepaper,buildahugemansioninGreenwich,Connecticut,andacquiresomeabominable,butveryexpensive,paintingstoputonthewalls.Whatcouldgowrong?Everything.TheFinancialTimesprovidedmoredetailonwhathappenedatCitigroup:Thebankreportedthat,attheendofSeptember,ithadaround$2.7billionofunsoldcollateraliseddebtobligations—poolsofdebtsecuritiesthatarerepackagedanddistributedtootherinvestors.Butitalsohad$4.2billionofsubprimeloansithadboughtinthepastsixmonths,andabout$4.8billionofloanstocustomerswhichweresecuredbysubprimecollateral.Inaddition,thebankhad$43billionofexposuretothemosthighly2ratedtranchesofCDOsbasedonsubprimemortgageassets.ItturnedoutCitiwasfoolandknaveatthesametime.Itsolddubioussubprimedebttoitscustomers.Butitboughtit,too,andtookitascollateral.GaryCrittenden,Citi’schieffinancialofficer,claimedthatthefirmwassimplyavictimofunforeseenevents.Thelosseswere“drivenbysomeeventsthathave happenedduringthemonthofOctober,”hesaid,referringtodowngradesbyratingagencies.Nomentionwasmadeofthepreviousfiveyears,whenCitiwasbusilyconsolidatingmortgagedebtfrompeoplewhoweren’tgoingtorepay—pronouncingit“investmentgrade,”mongeringittoitsclientsandstuffingitintoitsownportfolio—whilepayingitselfbillionsinfeesandbonuses.No,accordingtothemastersoftheuniverse,downgradesbyMoody’sandFitch’swerecompletelyunexpected,liketheeruptionofVesuvius;eventhegodswerecaughtoffguard.Apparently,asofSeptember30,Citigroup’ssubprimeportfoliowaswortheverypennyofthe$55billionCiti’smodelssaiditwasworth.Then,themoonturnedblue.CARTOONCAPITALISMMeanwhile,America’slargestmortgagefinancecompanies,FannieandFreddie,hadsomuchwaterintheirlungsitwasannouncedthatitwouldtakeatleast$25billionofthepublic’smoneytosavethem.Possibly$300billion.Wereituptous,wewouldhaveleftthemonthebeach.Instead,theU.S.Senatebentdownandpresseditsblubberylipsontothosegapingtrapsofthemortgagetwins,gurglingintothemacorruptbreathoflife.Sincethetwoheldoneoutofeverytwomortgagesinthenation,ineffect,CongresswasnationalizingtheU.S.housingstockitself.Henceforth,citizenswouldpaynotonlytheirtaxestothegovernment,buttheirmortgagepaymentstoo.AtaspeechinVancouver,JamesKunstlerseemedpositivelydelighted.Finally,gasolineover$4agallonwasdoingwhatgenerationsofartisticscorncouldnot:destroyFannieandFreddie’scollateral.Kunstler’scritiqueofAmericansuburbanvernaculararchitectureisthatitsproductsarenotrealhousesatall,but“cartoonhouses.”Theyhaveporchesthatlooklikerealporchesfromadistance,buttheyaretoonarrowtositon.Theyhaveshutters,too,nailedtothewall,makingthemcompletelyuseless.Theymayhave“picture”windows—lookingoutonnothing—ornowindowsatall.Andtheywouldn’texistatallwereitnot3forcheapcreditandcheapgasoline. Ofcourse,thesamemaybesaidofAmerica’s—andBritain’s—entireeconomiesduringtheprevious20years.Theloosecreditthatbuiltcartoonhousesalsoconstructedcartooneconomies;theylookedlikerealeconomies,buttheywereessentiallyperverse,consumingwealthratherthancreatingit.Forproof,youhadonlytolookatFannieandFreddie.HereweretwocompaniesthatappearedtobehelpingAmericansownhouses.Butsincetheywerecreated,homeowners’equity—thatportionofthehouseactuallyownedandpaidforbythehomeowner—fellfrom70percenttobelow50percent...toarecordlowinthefourthquarterof2008ofjust44percent.Bymid-2008,nearly9millionAmericanshadzeroornegativeequity—andhousepriceswerestillfalling.Howcamethistobe?Theanswerwassimple.Thelooney-tuneapproachtofinanceradiatedtoallpointsoftheeconomy.Peoplepretendedthattheyearnedmore—spendingmoreandmoremoneytobuymoreandmoregoodsandservices,whilewagesdidnotreallyincrease.Then,theyboughthouses—believingtheroofsovertheirheadswereinvestments,ratherthanconsumeritems.Withnodownpayment,noproofofincome,andzerointerestloans,formostofthenewbuyers,homeownershipbeganasadangerousconceit.Andnowthattheroofswerecavingin,itwasastaggeringburden.The“consumereconomy”wasalwaysamockery.Noseriouseconomisteversuggestedthatyoucouldgetricherbyconsumingwealth.Butthatdidn’tmakeconsumerismunpopular.Themorepeopleconsumed,themoreGDPwentup.GDPmeasuredoutput,notwealthcreation;butwhocouldtellthedifference?Besides,spendingmadepeoplefeelasthoughtheyweregettingricher.Then,whenevertheconsumerthreatenedtocometohissenses,thefedsrushedto“stimulate”him—bygivinghimmoreofwhatheleastneeded:morecredit.Morespendingkeptthecartooneconomyrunning—allowingtheconsumer,thebusinessman,andthespeculatortoaddtohisburdenofdebt.In1971,whentheUnitedStateswentoffthegoldwagon,householddebtwaslessthan50percent4ofGDP.By2008,itwasalmost100percent.Eventherentierswerebamboozledbytheirowncartoonclaptrap.Stocksrosefrom1982to2000,fellheavilyto2002,andbouncedback.Butfortheprevious10years,shareholdershadgottenlittlefortheireffort.InJulyof’98,theLondonindex,theFTSE,hitahighof 5,458.InJulyof2008,itfellto5,625.AndinAmerica,ifstockpriceswerequotedingallonsofgasoline,theDowwouldtakethedrivernofurtherin2008thanitdid40yearsbefore.Thecartooncapitalistsdiditallbackwards;theyweresupposedtoexploittheworkers,notbeexploitedbythem.Butwhileinvestorsweregoingnowhere,corporatemanagersandWallStreethustlersweregettingrich.ThetwobozosrunningFannieandFreddie,forexample,pocketedabout$32millionbetweenthemin2007—ayearinwhichthecompanieslostalmost$5.2billion—nottomentionthelossestoshareholders.AndonWallStreet,managerspaidout$250billioninbonusesinthefouryearsleadinguptothecreditcrunch.Thefirmsdeclaredaprofitandpaidbonuseswhenthebetsweremade;theydidn’twaittoseehowtheyturnedout.Thusdidthebigbanksandbigbrokersbecomecapitalistswithoutcapital,dependentonthegullibilityofinvestorstokeeptheminbusiness.Andwheninvestorsbegantowiseup,theyturnedtothepublicforcapitalsupport.Whatkindofscamwasthis?Itmaylooklikecapitalismfromadistance.Butthiswasnotrealcapitalism;thiswascartooncapitalism—runbyclowns,whosoldfreakinvestmentstochumpinvestors,andencouragedthelumpenhouseholdertoruinhimself.THEDUMBESTMENINAMERICAWheredidhegowrong?Thequestionprobablycrossedhismind,perhapsevenwhenhemountedthescaffoldonJanuary21,1793.TheBourbonshadbeenthemostsuccessfulfamilyinEurope.TheyhadruledEurope’sbiggestandrichestcountrysinceHenryIV.AndnowtheywereonthronesalloverEurope.ButinthelanguageoftheCity,Louis16thblewhimselfup.Hewassupposedtobeanabsolutemonarch.Ah...therewasthedynamite!Hebelievedit.HehadsurroundedtheParliamentwithtroopsandturnedthecountryagainsthimself.Andnow,hehadabsolutelynocontroloveranything.Noteventhepowertosavehisownskin.PoorLouis!Healreadyhadthebagoverhishead.Andthebladeathisneck.He musthavefeltlikethedumbestmaninFrance.DickFuldmusthavefeltprettydumbtoo.HisfirmhadsurvivedtheCivilWar,theRailroadBankruptciesofthelatenineteenthcentury,theBankers’Panicof1907,theCrashof’29,theGreatDepression,WorldWarII,theColdWar;LehmanBros.hadoutlastedspats,prohibition,anddiscomusic.Butitcouldn’tkeepitsheadthroughthebiggestfinancialboominhistory.JohnEdwardsclaimedthetitleofthe“dumbestmaninAmerica”whenthepressgotwindthathewastwo-timinghiswifeandrunningforpresidentatthesametime.Butin2007-2008,Edwardshadmorecompetitioneveryday.InJanuaryof2007,thefinancialindustryputavalueonLehmanBros.—acompanyitknewwell—of$48billion.OnSeptember15,2008,thebidwenttozero.Thencamemoredisquietingnews:Theworld’slargestinsurancecompany,AIG,wasfailing.MartinSullivanhadrunitintotheground,saidtheanalysts.Itneededan$85billionbailout.TherewasnoonetheretobailoutLouiswhenheneededit.Francewasnottoobigtofail;itwastoobigtobailout.Andeverythinghadbeengoingsowell!WhenJacquesTurgotwasController-General,hewasgettingridoftheinternalcustomsbarriers,liftingpricecontrols,andabolishingthetradeguildsandthecorvee(thesystemofforcedlaborusedtobuildroads).Thepoliticalsystemwasbeingreformed,too,evolvingtowardsaparliamentarydemocracy.ButalongcamethosepluckyAmericanstostiruptrouble.TheysuckedFranceintowarwithBritain.Francesuppliedmoney,materiel,andtroops—landing5,000soldiersinRhodeIslandandultimatelywinningthewarbyblockadingLordCornwallisatYorktown.“Thefirstshotwilldrivethestatetobankruptcy,”Turgotwarnedtheking.Hewasalmostright.By1786,theFrenchwereindesperatestraits,withhalfthepopulationofParisunemployedandanationaldebtequalto80percentoftheGDP.TheFrenchwerecountingontheAmericanstobeginrepayingtheir$7millioninloans,buttheUnitedStateswasbroke,too.Andsoon,Frenchcreditwassobad,thekingcouldnolongerborrowfromthemoneylendersinAmsterdamnorevenfromhisowncreditorsinParis.Havingborrowedtoomuch, Louisnolongerhadanyroomtomaneuver.Allhecoulddowastomarchupthescaffoldstepslikearealmonarch.Nearlytwohundredyearslater,theheadsrolledonWallStreet.Butwhowasthedumbest?SurelyDanMuddandDickSyronatFannieandFreddiewerestillintherunning.Evenwiththedeckstackedintheirfavor(theyborrowedmoneymorecheaplythantheircompetitorsbecauseeveryoneknewthegovernmentwouldn’tletthemgounder),theycouldn’tstayinthegame.Finally,asexpected,thefedshadtostepinandbailthemout.Theprevious15yearshadbeentookindtofinance.WallStreetwasessentiallyadebtmonger;andintheboom,nobodydidn’twanttoborrow.Financialprofitssoared.Since1980theprofitsoftheU.S.financialsectorasaportionofGDPwentup200percent.IndustryownersandmanagerscouldhavetakentheirmoneyoffthetableandretiredtoGreenwich.Butonthebackofthisoutsizesuccessgrewamonstroushumpofself-delusion;themastersoftheuniversebegantobelievetheirowngrotesqueguff.Thefinancialmarketswereperfect,saidtheacademics.All-knowingandall-seeing,theywouldn’tmakeamistake!Thechiefsatthebigfinancialfirmsmusthavethoughttheysuppedwiththegodsthemselves;theyhadthepaycheckstoproveit.Ofcourse,someWallStreetbossesweremorecunningthanothers.InsellingitselftoBankofAmerica,forexample,MerrillLynchdodgedthescaffold;butitbecomesawardofthestate,almostlikeFannieandFreddiebeforetheyweretakenovercompletely.TheoldregimeonWallStreetwasdominatedbyjustfivelargeinvestmentcompanies.Injustafewweeks,inthefallof2008,theirdebtbombsblewup...andtheentire,independentinvestmentbankingindustrydisappeared.NOBELPRIZELOSERSThefinancialindustrywaswidelycriticized.Butitwasjustdoingwhatitalwaysdoes—separatingfoolsfromtheirmoney.WhatwasextraordinaryabouttheBubbleYearswasthatthereweresomanyofthem.Thereisalwayssmartmoney inamarketplace...anddumbmoney.Butin2007thereweretrillionswithnobrainsatall.WhatotherkindofmoneywouldpayAlanFishman$19millionforthreeweeks’workhelpingWashingtonMutualgobust?Butbehindthedumbmoneyweresomeofthesmartestpeopleintheworld—withbogusstatistics,theclaptraptheories,andtheswindlescience.“SixNobelprizeswerehandedouttopeoplewhoseworkwasnothingbutBS,”saysNassimTaleb,authorofTheBlackSwan.“Theyconvincedthefinancialworldthatithadnothingtofear.”Thetheoristsconvincedthemselvesoftwothingsthateveryoneknewwereuntrue.First,that“economicman”—themantheyweresupposedtoknowsowell—hadabrainbutnotaheart.Hewassupposedtoalwaysactlogicallyandneveremotionally.Buttherewastherub,rightthere;theyhadthewrongguy.Thesecondwasthatyoucouldpredictthefuturesimplybylookingattherecentpast.IfthegeniuseshadlookedbacktothefallofRome,theywouldhaveseenpropertypricesindeclineforthenext1,000years.Iftheyhadlookedback700oreven100years,theywouldhaveseenwars,plagues,famines,bankruptcies,hyperinflation,crashes,anddepressionsgalore.Instead,theylookedbackonlyafewyearsandfoundnothingnottolike.Iftheyhadjustlookedback10years,saysTaleb,theywouldhaveseenthattheir“valueatrisk”modelsdidn’twork.ThemathwasputtothetestintheLongTermCapitalManagement(LTCM)crisis,andfailed.Theirmodelswentsourfasterthanmilk.Thingstheysaidwouldn’thappeninatrillionyearsactuallyhappenedwhileBillClintonwasinstillintheWhiteHouse.Intherealworld,Talebexplains,thingsarestableforalongtime.Then,theyblowup.Then,allthetheoriesandregulatorsproveworthless.Theseblowupsareinevitable,butunpredictable...andtooraretobemodeledorpredictedstatistically.“Andtheyarealmostalwaysmuchworsethanyouexpect,”saysTaleb. THEBRIGHTSIDEOFTHEBREAKDOWNButwhocouldhonestlysayhewasn’tenjoyingthefinancialcrisis?Itunhorsedcavalierfundmanagers;itturnedthemastersoftheuniverseintoservilewaiters;itmadeNobelPrizewinnerslooklikemorons.Therich,theproud,thepompous,thevain,theincompetent—surelytherewasaGod,an“invisiblehand,”givingthemallawhackonthehead!Andthereweretheregulators,too!Undertheirverynosesthebiggestscamsinhistorywentunnoticed.America’sSecuritiesandExchangeCommission(SEC)alone—tosaynothingofthecountlessothercopsonthefinancialbeat—had3,371employeesplayingthepianoin2006.Ifyoucanbelieveit,notasingleoneofthemnoticedwhatwasgoingoninthebackroom.EvenafterrummagingthroughBernardMadoff’sbackofficetwiceinthreeyears,theystilldidn’tknow.Theymusthavebeenlikepetswatchinganorgy,withnoideawhattomakeofit,butwaggingtheirtailsandvaguelywantingtogetinontheaction.IntwodaysjustbeforeChristmas,2008,Madoff’smanagedaccountswerethrownintoa“spiralofhorror”saidonefundmanager.Tippedoffbyhisownsons,thefedswenttoMadoff’sapartment.Theygraciouslyaskediftherewasperhapsamisunderstanding.No,repliedMadoff,“therewasnoinnocent5explanation.”Soon,thepress...investors...regulators...wereallhowlingforBernieMadoff’shead.Buthewasaherotous.Hedidtheworldagreatfavor,givingusallaremarkableandvividlessonininvesting,inpyramidschemes,inthemarkets,andWallStreet.Asaresultofsucheye-openinginstruction,BernieMadoffwillsavemoreinvestorsmoremoneythantheSECeverwill.They’llthinktwicebeforegivingmoneytofriendstoinvestforthem.They’llraisetheireyebrowsandtheirdoubtswhensomeonepromisesthemconsistent,highratesofreturns.ThefedschargedMadoffwithrunninga$50billionPonzischeme.CharlesPonzitookmoneyfrominvestorsandthenusedtheirmoneytopayoutprofitstoearlierinvestors.Aslongasthenewmoneykeptcomingintothesystem,itworkedlikeacharm.Sowhat’sthedifferencebetweenMadoff’sPonzischemeandthe schemerunbyWallStreet—inwhichalltheinvestmenthouses,theratingagencies,themortgagecompanies,FannieMae,FreddieMacandtheregulatorsthemselveswereallcomplicit?Aslongasnewmoneywascomingintothesystem,whocomplained?ReportssaidMadoffpromisedinvestorssteady10percentreturns.Howcouldhedothat?Ofcourse,hecouldn’t.Stockshadgonenowhereforthelast10years.Theaveragerateofreturn?Zero.Promising10percentwasclearlyanexaggeration.Deliveringitwassurelyacrime.Butinvestorsmusthaveguessedthathewasswindlinghisretailtradingcustomersinordertodeliversteady,above-marketreturnstohisinvestmentaccounts.Theymaynothaveunderstoodhowitworked,buttheydidn’twantittoend.Nobodyisaseasytoscamasascammer,andMadoffscammedthemall.Ofcourse,heshouldgetthegallows;wedon’tdisputeit.But,often,there’snotalotofdistancebetweenthehangedmanandmobthatislynchinghim.ThepeoplewhomostwantedtoseeBernieswingwerethepeoplewhoinvestedmoneywithhim.Mostwereverysophisticatedinvestors.Theyknewperfectlywellthatthereisnomagicwaytotransformazero-returnmarketintoa10percentreturnmarket.Iftheyweretoget10percent,theyknewtheyhadtotakeabigrisk.Theyjustdidn’tknowwhattheriskwas.ItturnedouttobetheriskthatBernieMadoffwaslying.Andwhataboutthebubbleeconomyitself?Wasn’titalsoagiantpyramidschemewithahuge,hugeriskattached?Itpromisedspeculatorsenormousprofits,buthowcoulditdeliver?Itpaidoutmoneyfromnewparticipantstotheoldparticipants.Withoutnewmoneycomingin,itwouldimplode.AsformerCitigroupCEO,ChuckPrince,putit:Aslongasthemusicwasplaying,theyhadtodance.Butdidn’ttheyknowthemusicwouldstop,leavingtheminanawkwardandembarrassingposition?Wasn’titasobvioustothemas6itwastous?Andwhatabouttheinvestors?Weren’ttheytryingtogetsomethingfornothingoutofthebubbleeconomy?Andtheratingagencies?Theymusthaveknownthat subprimedebtwasdangerous.Evenweknewit.WhydidtheygiveitTripleAratings?AndwhatabouttheSEC?Ithasthousandsofsmartanalysts,accountants,andinvestigators.Howcouldtheyallbesostupidastomissthebiggestinvestmentbubbleinallhistory...rightundertheirnoses?AndwhataboutAlanGreenspan,whoactuallyencouragedhouseholdstotakeoutsubprimemortgageloans?Weren’ttheyallinonthescam?Weren’ttheyallcomplicit?Madoff’scharmwasthatheout-foxedthefoxesandout-scammedthescammers.Heout-PonziedCharlesPonzi.Heout-PrincedChuckPrince.HecouldhavetaughttheEgyptianshowtobuildpyramids.Inthehistoryofhigh-stakesgrifting,heout-didthemall.ARobinHoodwithAlzheimers;hestolefromtherich.Ifhe’donlyrememberedtogivetothepoor,he’dbeaherotoeveryone!Besides,howhardwasittogiveawaynewhousestopeoplewhodidn’thaveanymoney,orgetpeoplewhodidn’tspeakEnglishtosigntoxicmortgagedocuments?Child’splay,really.Andtheexecutiveswiththeirmillionsinbonuses,andhumbuggerslikeRichardFuld,theirmarksweremostlyordinarystockmarketinvestors;low-hangingfruitcomparedtothecoconutsMadoffplucked.Ratherthangoafterthewidowsandorphans,heswindledthesmartestmoneyintheworld:moneymanagedbyfamilyoffices,theoldJewishmoneyfromNewYorkandsouthFlorida,London’sManGroup,Switzerland’sUnionBancairePrivee.Heevenflim-flammedthehedgefunds,andtookbillionsfromhisoldestanddearestfriends.Arealdemocrat,hetookmoneyfromhisowntribe,hisownclan,andhisowngolfclubbuddies.Billionsofit.Evenmoreimpressive,hediditnotwithhyperbole,butwithrelativemodesty.Hepromisedonly10percentperyear,whichdidn’tseemlikemuchduringtheBubbleEpoque.Andnow,historianslookbackandwonder:Howcouldpeoplehavebeensostupid?Theanswerissimple:Inabubble,itpaystobestupid.Youbuysomethingatalame-brainedprice,anditgoesup.Notonlydidstupiditypay,itpaidwell.Runningasuicidalbankpaidbetterthanrobbingone.Hedgefundmanagersgotpaidmorethancontractkillersorstick-upmen.But“whenthetidegoesout,youseewho’sbeenswimmingnaked,”saysWarren7Buffett.Bytheendof2008,investorshadn’tseenthetidesolowinmanyyears;theviewwasnauseating,hideous.Morethan$30trillionhadbeenlost—somuch thatitthreatenedtoturnthelightsoutontheentireworldeconomy.THEFIXISIN“TheyareintroubleinNewYork,”saidJ.P.MorgantoBishopLawrence.InOctober,1907,J.P.Morganwas70yearsold,andattendingachurchmeetinginRichmondwhentheimportanceofthesacredwasdisturbedbytheurgencyoftheprofane.TelegraphskeptarrivingfromNewYork;theywarnedofadisaster.AccordingtoDun’sReview,8,090companieshadfailedinthefirstninemonthsof1907.Then,afailedtakeoveroftheUnitedCopperCompanycausedapanic.“Acorrectionisequalandoppositetothedeceptionthatprecededit,”Morganwouldhavesaid,ifhe’dthoughtofit.Sincehedidn’t,itfallstous.Morganhadbeenaroundtheblockwhenitcametomoney.Hehadtakenoverhisfather’sbankingbusinessdecadesearlier.He’dseenpanics,crashes,bankruptcies.And,now,itmusthaveseemedthathiswholelifehadbeenspenttrainingforthisonetest.HereturnedtoNewYork;crowdsofinvestorslookedtohimtosavetheday.Andhedid.Heputhisownmoneyonthelinetohelpshoreuptroubledcompanies.Heralliedfriends,colleagues,andcompetitorstodolikewise.Atrustwasintrouble,thentheNewYorkStockExchangeitself,thentheCityofNewYork—oneafteranother,Morganbroughtinthefinanciers,cameupwiththemoney,bulliedandcajoled,untilthestormhadpassedandtheycouldallenjoyagooddrink.Andwhenitwasover,SenatorNelsonW.Aldrich,realizingwhatMorganhaddonesaid:“Somethinghasgottobedone.WemaynotalwayshavePierpont8Morganwithustomeetabankingcrisis.”Asitturnedout,PierpontMorganwasaghostfouryearslater.Butinthatsameyear,1913,theU.S.FederalReservewassetuptofillhisbigshoes.In2009,it’stheFedthatisbeingtested.ArmageddonseemedtoarriveinManhattanonMonday,September29,2008, notjustinNewYork,butinMoscow,HongKong,London,andFrankfurt,too.Germanyhastenedtosuccorbankaccountholders.InRejkavikthepandemoniumwassohotitseemedtomelttheice.Then,onTuesday,plaguesandlocustswereloosedontheworld:TheU.S.stockmarketfellhardagain.Japanwassinkingintothesea.Brazil’smarketwasdown51percent,yeartodate.Centralbankswerecuttingrateslikepulpwood.Evenso,unemploymentwasonstilltherise.Consumerspendingwasfalling.Housepricesweregoingdown.Ofcourse,theworldimproverscouldn’tsitidlywhentherewassomuchinneedofimprovement.Theysoonbeganintervening,intheusualclownishways.Shortsellingwasblamedformoreaccidentsthanalcohol.Andeverywhere,theauthoritiesweregettingreadyforshowtrials,perpwalks,andpublichangings.Wasitfair,CongressmanHenryWaxmanwantedtoknow,thatRichardFuldshouldbepaid$480millionforhisroleinbankruptingthe158-yearoldLehman9Bros.?CongressmanWaxmanseemedtothinkthatsomethingneededfixing.Butthatjustgoestoshowhowlittleheappreciatedthefreemarket.InvestorshandedFuldthatmoneyoftheirownfreewill;theygotexactlywhattheydeserved.Thesystemwasfixingitself.Wheninvestorshadthewindatthebacks,theywerereadytobelievethemostoutrageousthings:thatthefinancialsectorcouldgetrichbylendingmoneytopeoplewhocouldn’tpayitback,andthatawholeeconomycouldflourishbyluringconsumerstospendmorethantheycouldafford.Thesehallucinationscreatedanimmenseworldwidebubbleofdebtanddollars.Butnow,thewindhadswungaround.Ahugeanti-bubblewasforming—equalandopposite,intrueNewtonianform—afinancialwhirlpoolmarkedbyexaggeratedthrift,debtdestruction,andsweaty-palmedinvestors.AndwherewasMorganwhenweneededhim?WherewastheFed?Tenyearsbefore,thegianthedgefund—LTCM—hadoverdoneit.Asin1907,accordingtoRogerLowenstein’saccount,“Rushingfortheexits...[traders]posedadangernotonlytothemselves,buttotheentireworldfinancialsystem.”So,theFederalReserveBankofNewYorkcalledinthebigfinancialhousestohelpwiththerescue.Itworked.Thecrisiswasaverted.LTCM’spositionswereliquidatedinanorderlyway,justthewayMorganwouldhavewanted. Butthistime,thefixerswereatwork,butthefixdidn’tseemtostayfixed.Badpositionscouldn’tbeunwoundinanorderlymanner;thereweretoomanyofthem.Anditwasnotjustahandfulofspeculatorswhoweregettingwhacked—itwashalfthepopulationoftheUnitedStatesofAmericaandGreatBritain.Trillionsofnewcashandcreditwerebeingpumpedin.TheFedwasbuyingtrillionsworthof“assets”youwouldthrowoutofyourrefrigerator.Hermajesty’sgovernmentbecameproprietorof50billionpoundsworthofbankingshares;thegovernmentofGeorgeW.Bushwaspreparingtoenterthebankingbusiness,too.Butastrillionswentin,trillionsmoreleakedout.Stockpriceswerestillgoingdown.Propertypricesweregoingdown.Jobswerebeinglost.Shipswereidlinginport.Itwasnotjustafewinvestmentdecisionsthatwerebeingcorrected,inotherwords,itwasthedelusionsofanempire.“Thesepricesmakenologicalsense,”saidaWallStreettrader,referringtomortgage-backedderivativesatWal-Mart-stylediscounts,andmissingthepoint.Marketsarenotscientific.Theyarepoetic.Aftertheliquiditycomestheliquidation.Aftertheoutsizedrecklessnesscomestheappropriateregret.Aftertheempirecomethebarbarians.HELPISONTHEWAY“Theprivatemarkethasscreweditselfup,”explainedRepresentativeBarney10Frank,“andtheyneedthegovernmenttocomehelpthemunscrewit.”(HeleftouttheextenuatingcircumstancethattheU.S.moneysupply,theshortesttermlendingrates,FannieMae,FreddieMac,theFed,theFederalHousingAgency,theSEC,andawholeplethoraofcommissionsandmeddlers—aswellasoneofoutofeveryfourdollarsspent—wereallundergovernmentcontrolallalong!)OnSeptember19,2008,theU.S.Congressputitsbacktosavingtheempire’sfinancialsystem.“We’renotgoingtoChristmastreethisbill,”washowSenatorChrisDodddescribedhowCongresswoulddealwithTreasurySecretaryHenryPaulson’sproposedbailoutplan.Wehadneverheard“Christmastree”usedasaverb.ButleaveittoaWashingtonhacktoturnChristendom’ssentimentaliconintoa lobbyists’grabfest.Assoonasthebillarrived,theboysonthehillbegandecoratingit,hangingbaublesoneverylimb.Theyagreedonthemajorissues;buttheywerestillgoingtotakeafewdaystogetthethingalltrimmedoutbeforeitbecamelaw.TheDowshotupasinvestorswaitedforthelightingceremony.Theplanwassimpleenough,butthechutzpahofitwasbreathtaking.Hewasproposinga$700billionprogram,inwhichthegovernmentwouldbuyupWallStreet’smistakes—otherwiseknownas“cashfortrash.”HenryPaulsonsaidhehadnochoice:“Wedidthistoprotectthetaxpayer,”saidtheformerGoldmanchief.Everyonewasgettingintheact,condemningthemarketsandofferingadvice.Politicians,investors,comics...eventheclergy.Yes,thearchbishopofCanterburysaidthatmenhadputtoomuchfaithinthemarket,andthatthisfaithhadbecomeasortof“idolatry.”Hethoughtgovernmentshouldbeheldinhigheresteem,whilethedecisionsandplansoffreemenshouldbecurbed.Moreregulationisneeded,saidhe,praisingBritain’sbanonsellingfinancialfirms11short.ThepoorChurchofEnglandhadafoolasitstopman.Butyoucouldhardlyblameamanoftheclothforbelievingthatmarketshadfailed;theideawasaswidespreadasanSTD;heprobablygotitthesameway,thatis,simplybyhangingaroundwiththewrongcrowd.TypicalwasthisfromGarrisonKeillor:[T]hat’swhyweneedgovernmentregulators.Gimlet-eyedmenwithsteel-rimglassesandcrepe-soledshoeswhocheckthenumbersandhavethepowertosay,“Thisisascamandahustleandyoueitherceaseanddesistoryouspenda12fewyearsinaminimum-securityfederalfacilityplayingbackgammon.”Outontheprairie,onecouldimagineallsortsofthings.Butit’snotasiftherewerenobureaucratsonthejobbetween2000and2007.Howdidoneimaginethatthesesameregulators,whomissedthebiggestbamboozleinmarkethistory, werenowgoingtobeabletocleanitup?Howwouldabureaucrat—chargedwithprotectingthepublic’smoney—recognizeascammorereadilythananinvestorwhoseownmoneywasontheline?Whatinformationdoeshehavethatisnotavailabletothepublic?Whattheorydoeshefollowthatisunknowntoinvestors?Whatmeatdoesheeat,whatwinedoeshedrink,thatpreventshimfromfallingpreytothedelusionsandtemptationstowhichallfleshisheir?ThisiswhatHayektermedthe“fatalconceit,”thatpublicofficials—armedwiththepowertoforcepeopledotowhattheysay—willdoabetterjobofrunningthingsthanpeoplecandoforthemselvesvoluntarily.Themarketshadfailed,orsoeveryonesaid.Butwhathadnotfailed?NeitherthemastersoftheuniverseonWallStreet,northegeniusesattheratingagencies,northesaintsattheSEC—andcertainlynotthepoorlumpeninvestor—understoodwhatwasgoingon.Nonehadgimleteyes.Instead,alltheireyesbulgedwithadmirationatthefinancialengineers’handiwork,andwithgreedathowmuchmoneytheycouldmake.Andyetthenewplanput$700billioninthehandofGS14s,clerks,hacks,andappointees.Whataretheysupposedtodowithit?Buy“assets”thatWallStreetwantedtodump.Howweretheysupposedtoknowwhattheassetswereworth?Iftheypaidtoomuch,thegovernmentwouldtakeabigloss.Iftheypaidtoolittle,atleastaccordingtothedimlightcomingfromtheChristmastreers,itwouldn’tbailoutWallStreetenoughandtheeconomymightsinkintoadeeprecession.Sowhatwerethesederivativecontractsreallyworth?Nooneknew.ValueshadbecomelikethefaceofGod,orthemeaningof“is.”Theyfloatedintheether;theyplayedcardswithJimmyHoffa.Butohhappydayforthepublicsector,thatgreatuntappedreserveofinvestmentwisdom.HerewasanopportunitytobuyupthosepearlsthattheswineonWallStreetdidn’twant.Andnotonlyhadtheytodosomething,theyhadtodoitfast.“Ourentireeconomyisindanger,”saidthechiefexecutive.“Thetimehascometosavecapitalismfromthecapitalists,”wroteLuigiZingales13oftheUniversityofChicago. Couldanyscriptwriterhavecomeupwithsuchapreposterousstory?Couldanydirectorhavefoundsuchaclownishcastofcharacters?Itwasonlyafewmonthsearlierthatalltheleadingmenandwomenofthisdramaclaimedtobelieveinfreeenterprisesoferventlytheywerewillingtospendhundredsofbillionsofdollarsforcingitonothers.Itwasfreeenterprisethatseparatedusfromthebarbariansandmadethecountryrich,theysaid.Butnow,theywereturningmanyofthesefreeenterprisesovertothebureaucratstorun,anddesperatelytryingtomakesurethattheothersdidn’tgobroke.Itwasastrangekindoflaissez-faire—capitalismwithoutthecreativedestruction.Capitalismwithoutbankruptcy.ItwasliketakingthealcoholoutofGuinness;whatwasleftwasbitterandpointless.Butanepochalshifthadbegun—fromcapitalismtostate-sponsoredsocialism,fromwhitecollargrifterstostick-upmen,fromsubtleswindletonakedlarceny.Andthen,onSeptember19,2008,BenBernankeandHankPaulsonappearedbeforeCongressandwarnedthatifCongressdidn’tputup$700billionoftaxpayers’moneypronto,thewholeworldeconomycouldmeltdown.“Ifwedon’ttakeactiontorescuetheeconomy,”saidMr.Bernanke,“wemaynothaveaneconomyonMonday.”Ofcourse,thisalarmturnedouttobeassillyastheirpreviousassurances.Mondaycame.Tuesday.Wednesday.Theeconomydidnotstopfunctioning.Itwasn’texactlybusinessasusual...exceptintheU.S.Congress,wheretheChristmastreedecoratingpartycontinued.Tothebailoutbillwereattachedtheseandotherbaubbles: 14 TOOBIGTOBAIL“BankruptcyofNeo-Capitalism,”shoutedaheadlineintheParispress.ScarcelysinceHitlerblewhisbrainsouthasthetypebeenbiggerinFrance,orthecontentmentbroader.Meanwhile,thecoordinatedtakeoverofWallStreet,puttogetherbyGeorgeBush’sapparatchiks,lefteventhehardenedleftiesatFrance’sLiberationinshockandawe:“Thisenormousstatistintervention...istheworkofthemostideologicalandextremistadministrationthattheU.S.haseverhad.”Howheartwarmingitwastoseethemeddlersandworld-improversgetasecondwind.Itwaslikedrivingaroundina’33Chevy,orthrowingrocksatthegendarmes.Theold,graycommiesfeltyoungagain!Impetuous!Brainless!Andeverycapitalistwasbehindthebailoutprogram,too.Allovertheworld,marketswereout;state-sponsoredmeddlingwasin.Freemarketprinciplesarefine—untilpricesstartgoingdown!EvenRussiagotintotheact.Newtocounterfeitcapitalism,itwasgettingthehangofitfast,pledging$20billioninthefighttokeepstockpricesfromfallingtowhattheyarereallyworth.Then,nottobeleftbehindinthehystericalabsurdity,SEChonchoChristopherCoxannouncedalistof799financialstocksonwhichshortingwastobebanned.InBritain,theFSA’sbanonshortingfinancialshareslastedinto2009.ButPakistangottheKingCanuteMemorialPrize:Bylawinthatbenightedland,stockscouldn’tgobelowtheirAugust27,2008,close.Butallthewhinersandworldimproversweremissingtheelegantmischiefofcapitalism.Themarketswereworkingfine.Capitalism,in2007-2008,wasdoingjustwhatitshoulddo:Itwasseparatingfoolsfromtheirmoney.Inthespaceofsixmonths,itscratched10,000Porsches,destroyedmoremonumentsthanCromwell,andsqueezedtherichharderthanMitterand.It wouldhavetakenanarmyofdrearyBolsheviksdecadestoredistributesomuchwealth;anditwouldn’thavebeenhalfasmuchfun.SAIDTHEJOKERTOTHETHIEFWhatabunchofnumbskulls:Greenspan,Paulson,andBernanke!Everywordtheysaidwasfinancialpoison.ThiswasthesameAlanGreenspanwhohadlobbiedtoallowthebankstoenterthesecuritiesbusiness20yearsbefore.FromtheNewYorkTimes,November19,1987:Mr.Greenspansaidopeningnewbusinesstobankswouldimprovetheirprofitabilityandlong-termprospects,providedthatsafeguardsassuredthattheirdepositswerenotusedtofinancesecuritiesoperations.Healsosaidtheproposalwoulddrawmoreneededinvestmentintothebankingindustry.“RepealofGlass-Steagall,”Mr.Greenspansaid,“wouldrespondeffectivelytothemarkedchangesthathavetakenplaceinthefinancialmarketplacehereandabroad.”By2003,evidencewasbeginningtosurfacesuggestingthatthederegulationofthemarketswasnotwithoutrisk.Inparticular,thederivativesmarketwasgoingwild.ButMr.Greenspanseemednottonoticethedanger:“Whatwehavefoundovertheyearsinthemarketplaceisthatderivativeshavebeenanextraordinarilyusefulvehicletotransferriskfromthosewhoshouldn’tbetakingittothosewhoarewillingtoandarecapableofdoingso,”hetoldthe15SenateBankingCommittee.Then,in2005:“Greenspanrelaxedabouthouseprices...,”reportedthe16Financialimes.“Mostnegativesinhousingareprobablybehindus...,”said 17thesamesageinOctober2006.“Webelievetheeffectofthetroublesinthesubprimesector...willbelikely18limited...,”saidhissuccessor,BenBernanke,inMarch2007.Then,asmoresignsappearedthatAmerica’ssystemofimperialfinancewasbreakingdown,themoreitsleaderswentblind.19“Idon’tthinkwe’reheadedtoarecession,”saidGeorgeW.Bush.“Idon’tthinkI’veseenanyscenariowheretheAmericantaxpayerneedstobesteppingin20withmoretaxpayerdollars,”addedHenryPaulson.Then,onMarch11,thetreasurysecretarywentontoexplainthatthefalloutfromsubprimemortgages21was“largelycontained:”FromthereportintheWallStreetJournal:“Paulson,aformerchiefexecutiveofGoldmanSachsGroup,repeatedhisviewthattheU.S.economyisfundamentallyonsoundfootingandwoulddodgearecession.”Theverynextday,BearStearnsCEOAlanSchwartztoldtheworldthathisfirmfacednoliquiditycrisis.InanexclusiveinterviewwithCNBC,hesaidtherumorswereunfounded:“Wefinishedtheyear,andwereportedthatwehad$17billionofcashsittingatthebank’sparentcompanyasaliquiditycushion,”hesaid.“Astheyearhasgoneon,thatliquiditycushionhasbeenvirtually22unchanged.”Thatsameweek,SECChairmanChristopherCoxaddedthathisagencywascomfortablewiththe“capitalcushions”atthenation’sfivelargest23investmentbanks.Fourdayslater,thecushionsseemtohavemiraculouslydisappeared.BearStearnsfacedbankruptcybroughtonbycollapsingsubprimeprices.Inadesperatemeasure,thefirmsolditselftoJ.P.Morganthenextdayfor$2ashare—a98percentdiscountfromitshighof$171.ButbyJuly,severalthingswereclear:Thesubprimeproblemwasnotcontained,thebanksdidnothaveenoughcash,andeveryofficial—publicorprivate—whoopenedhismouthwaseitherajokerorathief.OnJuly16,FedChairmanBernanketoldCongressthattroubledmortgagegiantsFannieMaeandFreddie24Macwere“innodangeroffailing.” OnSeptember6,theU.S.governmentnationalizedbothFreddieMacandFannieMac,wipingouttheshareholders.“Ibelievecompaniesthatmakebaddecisionsshouldbeallowedtogooutof25business,”opinedGeorgeBush.ButbythemiddleofSeptember,thefinancialauthorities—whoneithersawnoevilnorheardany—wereonthecase.OnSeptember19,U.S.TreasurySecretaryPaulsontookaimattheproblemheneversaw,callingonCongresstoanteuptheaforementioned$700billion.Whencecomeththe$700billionfigure?“It’snotbasedonanyparticulardatapoint,wejustwantedtochooseareallylarge26number,”saidaTreasuryDepartmentspokeswoman.“Igottotellyou,”saidPaulsononNovember13,“Ithinkourmajorinstitutions27havebeenstabilized.Ibelievethatverystrongly.”Twoweekslater,America’slargestbankanditslargestautomaker,desperate,stoodonaledge,preparingtojump.O!BAMA!THEWHOLEWORLDTURNSITSWEARYEYESTOYOU...Andsoitwasthatthepresidentialcampaignof’08washeldagainstthebackdropofcrashingimperialfinances.Underpressurefromtheknuckle-headsinhisownparty,Obamapickedupababblinghackashisrunningmate—andranrightintohisownfraud.JoeBidenwastoObamawhatMonicaLewinsky’sbluedresswastoBillClinton—thedumbthingthatrevealedthespokenlie.Bidendemolishedhisownpresidentialcampaignin1987bypretendingtobeBritishLaborpoliticianNeilKinnock.NotonlydidhereciteKinnock’slinesaboutbeingthefirstinhisfamilytogotouniversity,healsostolehisidentity,claimingthathisfatherhadworkedinthecoalmines.Hisownfatherwasactuallyapolo-playingcarsalesmanfromBaltimore.Butifthemediahadn’tstoppedhim,hewouldprobablybecollectingKinnock’spensionbynow.Apparently,thebetteryouknowBiden,thelessyoulikehim.Inhishomestate, 97percentofvotersrefusedtobackhiminthepresidentialprimary.ButthatwasBideninthe’80s.Inthe’00s,Bidenwas,supposedly,ontheticketbecauseheknewwhoSaakashviliwas.Intruth,hewastherebecausetheoldnagsintheDemocraticPartywantedsomeonetheycouldtrustontheticket—arealgo-along,get-alongbackslapper.TheyturnedtoBiden,inotherwords,notforchange,buttoavoidit.Americansdon’tmindaliarinhighoffice,butweresuspiciousofonewhocan’tkeephisliesstraight.Forafewweeks,Obama’ssupportsoftened.Butthen,itwasMcCain’sturntostumbleoverhisownscam.ThecandidatewhowassoconcernedaboutnationalsecuritychoseabaroquewomanfromAlaskaashis#2.Votersimaginedherhandsonthenuclearbuttonandshuddered.Andsotheelectoratespoke.Anditsaid“GiveusObama.”AnditcametopassthatthemancalledObamawasgivenuntothem.Mr.Obamabecamethepresident-electofalltheAmericans.Noman’scoffeetastedbetteronWednesdaymorningthanitdidonTuesday;nowoman’sperfumesmelledsweeter.Butallovertheworld,peoplefeltbetteraboutthemselves,asifthehumanracehadachievedsomethingimportant.Commentatorsdrewallthewrongconclusionsandmadefoolsofthemselves.SomethoughtitmeantAmerica’sredemptionfromthesinofslavetrade.Otherssawahistorictransformationthattheycouldn’tputinwordsandshouldn’thavetried.28“AnewWorldDawns,”proclaimedBritain’sDailyMirror.“Theydidit.Theyreallydidit,”wrotetheGuardian.“...theAmericanpeopleyesterdaystoodintheeyeofhistoryandmadeanemphaticchoicefor29change....”It’sthe“EndoftheNationalNightmare,”saidTIMEmagazine.PeoplelookedatObamaandtheythoughttheysawayoungKennedy;theythoughttheymightbeabletorerunthetapefromanearlierperiodinU.S.history,anddoalittleediting.TheylongedfortheNewFrontierwithouttheVietnam War,aCamelotwithoutLeeHarveyOswald.AmidtheeffervescencecametheFrench.Obama’svictory“arousesawildyetreasonablehope,”claimedBernard-HenriLeviintheFinancialTimes.Mr.Obama’selectionwillaffectusin“atleastthreeconcreteways,”hecontinued...adecisiveturningpointindealingwiththe‘racialquestion’intheU.S....hopeforanAmericathatbegandoubtingits‘famousmission’...andwithObamarepresentingtheUSA,anti-Americanism...willhaveahardertimesurviving30anditwillbeforcedtorevisititssalespitch.”Theyshouldn’tletFrenchphilosopherscommentonAmericanpolitics;theytakethewholethingfartooseriously.Besides,youneverknowwhattheyaretalkingaboutanyway.NobodyknowswhatAmerica’s“famousmission”is—certainlynottheAmericansthemselves.Andifthosearehis“concrete”ways,we’regladMr.Leviisnotbuildingbridges.TherewasnothingconcreteaboutthehopesMr.Obama’svictoryaroused.Justthecontrary:Theywereallgas.ButLeMondesawitclearer.NotonlywasthepaperhappytoseetheUnitedStatesfinallyrinsethestainofracismoutoftheStarsandStripes,itwasgladtoseeAmericansgivefreemarketcapitalismtheflush,too.Obamawillbe“revivingtheroleofregulationintheU.S.;[devising]taxpoliciestosmoothoutincreasinglywidesocio-economicdivides;planningahealth-care31systemappropriatetothecountry’swealth,”saidthepaper.Inotherwords,hewillbeputtinginasystemofstate-directedcapitalism,justliketheyhaveinFrance.NoneofthecommentatorsreallyunderstoodObama’striumph.Theysawinitayearningfortruthandastretchforprogress.Itwasnothingofthesort.Thelastthingvoterswantisthetruth;theywillrejectitifitisputinfrontofthem.Instead,whattheywantisdiversionfromtherealworld.Whattheyhopetogetfromtheirleadersissomethingfornothing.Iftheycouldonlygetfrompoliticswhatwasrightfullytheirsfromtheirownlabors,whatwouldbethepointofvoting?No,votersalwayshopeforsomethingmore:afantasy.Somethingtocheerthemupwhentheyaredown.Orsomethingtogivethemafrightwhentheyareup. Thelastperiodofgreatnationaltrial,1914-1945,withitswars,epidemics,DustBowls,hyperinflation,GreatDepression,massmurders,bankruptcy,andrevolutions,wastheerainwhichAmericanselectedFranklinRoosevelt.Hetoldthemtheyhad“nothingtofearbutfearitself.”Itwasallintheirheads!Itwasawhopper,butitwasthewhoppertheywantedtohear.IntheUnitedStatesofAmerica,inthelateimperialperiod,theBushAdministrationworkedhardtomakepeoplefearful—withitstorturechambersandpreposterous“threatlevels.”Buttheterroristswouldn’tcooperate;theyfailedtoblowupevenatrashtruck.Then,inthefallof2008,themobbegantosweatforreal.Peoplewereafraidoflosingtheirhouses,theirjobs,andtheirretirements.That’swhyObamawon;ithadnothingtodowithnationalredemptionorSarahPalin.Whentheworldwassafeandplush,themobwantedtofeelthefrissonofdanger.WhatthepublicwantedinNovember’08wassafety:amoviewithahappyending,notahorrorflick.Obamaappearedthecalmer,moreintelligent,candidate.Voterscouldimaginehimasthe“blackRoosevelt”givingsoothingfiresidechatsandtellingtheliestheymostwantedtohear.Andso,inthenationalnarrative,onecockamamiebamboozletooktheplaceoftheonethatwentbefore.Americansweresupposedtohavebeenracists;nowtheyweresupposedtocolor-blind.Theyweresupposedtohavebeenfearful;nowtheyweresupposedtobeconfident.Theyweresupposedtodefendfreemarketcapitalismtotheirlastbreath;nowtheyturnedtothestateandbeggedittoprotecttheirlastdime.THESEFIREFIGHTERSAREPYROMANIACS!Inthepreceding100yearstherewereonlytwofiressimilartotheinfernothatbeganinthefallof2008.Thefirstconflagrationwasin1929,centeredinNewYork.Thesecondwasin1990,whenTokyowentupinflames.Inbothinstances,rescuerstookextraordinarymeasures.Andinbothcases,theynotonlyfailedtosavetheeconomy,theyscorcheditevenmore.Obviously,feweconomistssharethisanalysiswithus.Thefewwhodoareprobablyeitherinsolventorinsane,orperhapsboth.So,theburdenofproofisonus. Webeginbycallingaghostasanexpertwitness:Liquidatelabor,liquidatestocks,liquidatethefarmers,liquidaterealestate....Itwillpurgetherottennessoutofthesystem...valueswillbeadjusted,andenterprisingpeoplewillpickupthewrecksfromlesscompetentpeople....ThatwastheadvicefromU.S.TreasurySecretaryAndrewMellon.InOctoberof2008,scoresofcommentatorswenttothecemetery.NotonechanneledMellon.Instead,theysummonedtheshadowofFranklinRoosevelt.He“understoodthathisfirstjobwastorestoreconfidence,”wroteDavidBrooksintheNewYork32Times.OverintheFinancialTimes,MartinWolfevenquotedRoosevelt’s33puerileremarkthat“theonlythingwehavetofearisfearitself”.Whatabout25percentunemployment,onemighthaveasked?[W]emighthavedonenothing.Thatwouldhavebeenutterruin.Insteadwemetthesituationwithproposals...ofthemostgiganticprogramofeconomicdefenseandcounterattackeverevolvedinthehistoryoftheRepublic....Someofthereactionaryeconomistsurgedthatweshouldallowtheliquidationtotakeitscourseuntilwehavefoundbottom....Wedeterminedthatwewouldnot34followtheadviceofthebitter-endliquidationists....ThatquotationcomesneitherfromPaulsonnorBernanke,butfromanotherghost.HerbertHooverhasgottenthereputationforbeinga“donothing”president.Woulditwereso!WhenHerbertHooverpassedthebatontoRoosevelt,hiscan-domeddlinghadalreadyhelpedturnafinancialcrisisintoaGreatDepression.Yousee,ghostsareoftenmoronstoo.PoorAndrewMellonwasshoulderedasideintheearly’30s.Then,Hoovergottowork.Hisfirstimprovementisknowntousbytwoblunder-buddieswhoturned itintolaw:MistersSmootandHawley.TheideawastoprotectU.S.businessbyimposinghighertariffsonforeigntrade.Agroupof1,000economists,bankers,andothernotablesrealizedthatblockingtradeattheonsetofaneconomicslumpwouldbesuicide.Theyurgedhimtovetothebill.ButHooverbelievedintariffsashebelievedinalmostallotherformsofgovernmentinterference.Hesignedthebillwithapproval.HecalledontheFedtoprovide“anamplesupplyofcreditatlowratesofinterest,”andinitiatedaprogramofpublicworks,includingtheHooverDam,amassivelumpofconcretethatblockstheColoradoRiver.HethreatenedfederalregulationoftheNewYorkStockExchangeandattackedshortselling.Hoover’schiefconcernseemedtobetoholdupthepriceoflabor.Hecutoffimmigration,inanefforttokeepoutwagecompetition.Then,hegotthebusinesscommunitytopledgethatitwouldnotreducewages.Sincethecostoflaborwasthentoohighforthecloselyshavedprofitmargins,businessescouldnothire.Unemploymentrose.Rooseveltwasabetterpolitician,whichistosay,hewasmoreshameless.HeattackedHooverforspendingtoomuchmoney,wonthepresidency,andthenspentmore.Hebegansomanyagenciesandprojects—fromtheAAA(AgricultureAdjustmentAct)totheCCC(CivilianConservationCorps)totheSSA(SocialSecurityAct)—thathepracticallyranoutofalphabet.Healsoimposedwageandpricecontrols,aswellaslimitstoexecutivesalaries.Inhisclassicbookonthesubject,America’sGreatDepression,MurrayRothbard,onceprofessorattheUniversityofLasVegas,nowamongtheforgottendead,explainsthataproperlyfunctioningeconomyisbalanced.Oneindustryenjoysanexpansion,anothersuffersacontraction.Butsometimesthereisa“clusteroferrors”thatcausesamajorboom.Whencecomeththeseerrors?Whoisresponsibleforthem?Rothbardidentifiestheculprit:“monetaryinterventioninthemarket,specificallybankcreditexpansiontobusiness.”IfRothbardwerestillamongthequick,he’dprobablybepointinghisfingeratAlanGreenspan,thearsonistwholoweredthekeyU.S.lendingratetoan“emergency”levelof1percentandheldittherelongaftertheemergencywasover.Then,he’dprobablypointatBenBernanke,whocontinuestoaddkindling...andtoHankPaulson, wholedGoldmanSachswhileitcreatedtrillionsofdollarsworthofasset-backedexplosivesandsoldittofinancialinstitutionsallovertheworld.“Theboom...isthetimewhenerrorsaremade...,”Rothbardcontinues.“The‘depression’isactuallytheprocessbywhichtheeconomyadjuststothewastesanderrorsoftheboom....Farfrombeinganevilscourge,[thedepression]isthenecessaryandbeneficialreturnoftheeconomytonormal....Evidently,thelongertheboomgoesonthemorewastefultheerrorscommitted,andthelongerandmoreseverewillbethenecessarydepressionreadjustment.”Butherecomethefirefighterswithyetmoredrywood!Afterstokingtheflameswitheasycredit,theybringmore.ProfessorRothbard,reviewingtherecordofthepost-’29rescueteamcametothisconclusion:Theauthorities“metthechallengeoftheGreatDepressionbyactingquicklyanddecisively...[using]everytool,everydeviceofprogressiveand‘enlightened’economics,everyfacetofgovernmentplanningtocombatthedepression.”Yet,theconflagrationdidn’tgoout.Itintensified.Anexpectedrecoveryin1931wentupinsmoke,saysRothbard,thankstogovernmentinterference.Insteadofapanicandquickrecovery—ala1921—theU.S.economywentintoalong,hardon-again,off-againdepressionthatputaquarteroftheworkforceoutofajob.Itmighthavelasteduntilthe’50shaditnotbeenforthebiggestpublicworksprogramofalltime:WorldWarII.“TheguiltfortheGreatDepression,”Rothbardwrites,“must,atlonglast,beliftedfromtheshouldersofthefree-marketeconomyandplacedwhereitproperlybelongs:atthedoorsofpoliticians,bureaucratsandthemassof‘enlightened’economists.Andinanyotherdepression,pastorfuture,thestorywillbethesame.”Sixdecadesandhalfaworldaway,theJapaneseprovedhimright.InJanuary,1990,asparktouchedofftheNikkeiDow.Soon,Japan’smiracleeconomywasintrouble.Bankruptciesrose.Profitsfell.Banksteetered.ButtheJapanesehadtheireconomists,too.Andsoon,theyweredoingwhatHooverandRoosevelthaddonebeforethem.Astomonetarystimulus,theBankofJapan’skeylendingratewascutfrom5percentdownto“effectivelyzero.”Andtherewereplentyof fiscalstimulitoo.Japan’sgovernmentdidjustwhatKeynesrecommended—itspentmoney.Keynes’sideawasalready2,000yearsoldwhenhethoughtofit.ItcamerightoutoftheBiblestoryofthesevenfatyearsandthesevenleanyears.Pharaohknewpeoplewouldn’tbesmartenoughtosavegrainforthemselves.They’dmakeamistake—they’deatitall.Sohestockedupgraininthefatyears,thenreleasedittothepeoplewhentheleanyearscame.Keynessaidthegovernmentshoulddothesame:runsurplusesinthegoodyearsanddeficitsinthebadones.Sincethen,ofcourse,governmentshaveprovenveryableatrunningdeficits,eveninthefatyears.It’sthesurplusestheyhavetroublewith.So,insteadofgivingoutstored-upgrain,theygiveoutgrainthathasn’tevenbeenplantedyet.TheJapanesegovernmentwentonaspreeofwhatAlanBoothcalls“statesponsoredvandalism”inthe1990s,takingthebudgetdeficittoaremarkable535percentofGDPin2002.Roadstonowhere,concreteshorelines,bridgesanddams.Japan,persquaremileofavailableterritory,covered30timesasmuchsurfaceinconcreteasinAmerica.TheJapanesewerespendingbeaucoupmoney;in1996,theShumizuCorporationevenannouncedplanstobuildahotelonthemoonusingspeciallydevelopedtechniquesformakingcementonthelunarsurface.Onceagain,theseheroiceffortsproducednothingmorethanfarcicalconsequences.TheJapaneseeconomyisstillbarelyonspeakingtermswithprosperity.AndtheNikkeiDowclosed2008at9,043—30,000pointsbelowthehighitset20yearsearlier.GONOCOMETH“Itwashorrible!Horrible!Likelightninghadstruck.Noonewasprepared.Youcannotimaginetherapiditywithwhichthewholethinghappened.Theshelvesinthegrocerystorewereempty.Therewasnothingyoucouldbuy36withyourpapermoney.” In1993,FriedrichKessler,lawprofessoratHarvard,describedaneventfromhispast:theWeimarRepublic’shyperinflation.Hemighthavebeendescribingthefuture,too.Bythebeginningof2009,allovertheworld,theinflationpumpswererunninghot.InAustralia,thegovernmentannouncedastimulusprogram.Checksof$1,000perchildwillbesenttodeservingparents.Seniorcitizenswillget$1,400.TheJapanesehada5trillionyenrescueprogram...andthen,twoweeksbeforeChristmas,theythrewin4trillionmore.Europeanswereinfor$1.8trillion.ButintheUnitedStates,thepumpswerepracticallyburningup.TheAmericansputup$8.5trillion,including$120billiontobailoutagroupofforeigncountries,aswellasthehomeland.AndthatwasbeforeaddinginObama’sbailouts.“IamconfidentthattheFedwouldtakewhatevermeansnecessarytopreventsignificantdeflationintheUnitedStates,”BenBernankeassuredCongress,addingthat“adeterminedgovernmentcanalwaysgeneratehigherspendingand37hencepositiveinflation.”SodeterminedwastheU.S.Fedsince1970thatthedollarlostmorethanthree-quartersofitspurchasingpower.Butnow,allovertheworld,priceswerefalling.Inflationwasnolongerasurething.Forthefirsttimesincethe1930smuchoftheworldrantheriskthatinflationrateswillturnnegative.BenBernankewaswrongaboutmanythings;butastotheFed’sabilityanddeterminationtodestroythedollar,hewillalmostcertainlybeprovenright.Havinginflatedsomanybubbles—includingthemonsterinprivatedebtthathadjustblownup—theFedchiefwasconfidentthathewouldhavelittletroubleinflatinganotheroneinpublicdebt.Andthen,whenthatblowsup,itwillwipeouttwoproblemsatonce.Americanswillbeeagertospendtheirmoneyagain,ratherthansaveit,andtheirdebtswillgoupinsmoke.Thefedswerebailingoutthebankers,theinsurers,themortgagelenders,theautomakers,andhalfofWallStreet.Butwhowouldbailoutthefeds?Whatwouldhappenwhenthefeds’creditgotmarkeddown?Aswewrite,atthedebut of2009,thatstorywillhavetowaitforalaterbook.Still,wewilltakeaguess:Inthefirestormthatiscoming,eventhedevilwillsweat.Forthe15yearsleadingupto2009,theU.S.moneysupplyhasgrownabouttwiceasfastasGDP.Federalgovernmentliabilities,meanwhile,grewthreetimesasfast.In1929,America’sdebtwasequaltoaboutoneandahalftimesitsgrossdomesticoutput.Duringthe’30s,outputfellandthedebtpeakedoutat2.5timesU.S.GDP.By2008,totaldebthadrisentoarecord3.5timesGDP.Meanwhile,themoneysupplygrewata15percentannualratebetween2007and2008—almostfourtimesthegrowthinGDP.Andbytheendoftheyear,2008,U.S.moneysupplywasgrowingata10percentannualrate,whileoutputwasactuallyshrinking.Whiletheempireisalreadyeffectivelybroke,nevertheless,thedebitsidesofitsledgersgrowheavierandheavier.Thedeficitforfiscalyear2008addedhalfatrillioninnewdebt.Andestimatesofthebailoutcostsaregrowingrapidly.Wherewillthegovernmentgetthatkindofmoney?Therewereonlytwopossibilities—onehonestanddepressing,theothercorruptandalarming.Werecallthatthereareonlytwowaystogetwhatyouwant:bycivilizedmeans...orbybarbaricones.TheU.S.Treasuryisconfrontingthatchoiceaswewrite.Itcanborrowhonestly.Oritcanprintmoney.Ifitborrows,theworldenjoysnonetincreaseinfinancialresources.Borrowingforbailoutsmerelytakesresourcesfromprojectsthatmighthavebeenworthwhileanddivertsthemtothelosers.Interestratesrise,asaconsequenceoftheextraborrowing;higherratesgenerallyworsentheeconomicpicture.If,ontheotherhand,theU.S.governmentprintsthemoney—orifitcreatedit“outofthinair,”touseLordKeynes’shandyphrase—theresultswillbeevenworse.Inflatingthemoneysupplywithnewcurrency,alaArgentinaorZimbabwe,wipesoutdebts.ButitdestroysfaithinthedollarandbringsdowntheU.S.-dollarbasedimperialmoneysystem.Whywouldtheydosuchathing?Becausetheyhavenochoice.Theempire’sdebtsaretoogreat.Theycan’tbepaid...theymustbeliquidated.Ifthiswereanearlierphaseoftheimperialcycle—suchasin1920—Americanswouldhavetakentheirlosses,liquidatedtheirmistakes,andbouncedbackstrongerthanever. Ifithadbeeninthe’30sAmerica—oreveninJapan60yearslater—theloserswouldhavetakentheirlosseswithgoodgrace,occasionallyjumpingoutofaskyscraperorsteppinginfrontofabullettraintoobliteratethedisgrace.Thegovernmentwouldhavecontenteditselfwithhonesttrickeryandtheusualharmfulbumbles:loweringinterestratestozeroandborrowingmassiveamountsofmoneytospendonwastefulpublicworksprojects.Butthisis2009...not1920...nor1929...nor1989.AnditisAmerica,notJapan.TheFed’skeylendingrateisalreadyatzeroandtheempiretottersonspindlyoldlegs.Ithasgrowntiredandhasbeenburdenedwithsomanyfixes,rules,privileges,andsafetynetsthatitcannotcompeteinmanykeyindustries.Itisalreadytheworld’sbiggestdebtorwithtotaldebtof$33trillion—aburdenthatisexpectedtoincreasebyabout$7billioneveryworkingday.Atthisstage,Americansdonotboldlyfacethefuture—theywantprotectionfromit.Capitalismisseparatingthefoolsfromtheirmoney,butfoolsvote.Andinthelatestageofanempire,theyvoteforbread,circuses,andbailouts.TherearemoredebtorsthancreditorsintheUnitedStatesofAmerica;andso,thefedsflexeveryflabbymuscletryingtoprotectthem.How?Bydestroyingtheircurrency.Inthefallof2008,itwasasifthelawsofnaturehadbeensuspended.ExhibitA:acorporatebondfromInternationalPaperCompanythat,inNovemberof2008,hadayieldofnearly10percent.ComparethattotheyieldonU.S.Treasurypaper.A91-dayT-billyieldedpracticallynothing.Evenyieldsonthe10-yearTreasurynotesweresinkingtolevelsneverbeforeseen—approaching2percent,abouthalftheofficialrateofconsumerpriceinflation.The“spreads”betweencorporatebondsandU.S.governmentbondswerewiderthanatanytimesinceAmerica’sGreatDepression.Why?Thecostoftheworld’sbailouteffortswassoaring.Yet,themorebondstheU.S.governmentsoldtofinancetherescueefforts,themorethedemandforthemgrew.Themoredeterminedthefedsbecometopropuplosingbets,inotherwords,themorepeoplelineduptolendthemmoney.NeverbeforewereU.S. bondyieldssolownorconfidenceinAmerica’screditsohigh.Itviolatedcommonsense...aswellasthelawofsupplyanddemand.Remarkably,thefurtherindebtgovernmentwent,themorethedebtwasworth.Ifthefedscangetawaywiththis,gravitywillbethenexttogo.Butnothingismoreremarkablethanthecredulityandgullibilityoftheworld’spatsies.BernieMadoff’soldestfriendswouldcomeuptohimandpracticallybeghimtotaketheirtrustfunds.PeoplejoinedhisPalmBeachcountryclubjusttogetcloseenoughsotheycouldstufflargewadsofcashinhispockets.Andnow,investorspracticallytripoveroneanotherintheireagernesstolendmoneytoworld’sbiggestdebtor.Onceabubbleinonesectorhasburst,youcan’treinflateit.Allyoucandoistoinflateotherbubbles.Afterthebubbleinthetechsectorpoppedin2000,forexample,thefedsmannedthepumps.Buttheycouldn’tgetthetechstocksreinflated.TheNasdaqneverrecovered.Instead,theypumpedupahugebubbleinprivatedebt—withgassybulgesinhousing,finance,commodities,emergingmarkets,andmanyothersectors.Nowthatbubblehasburstandthefedsare,onceagain,workingupasweattryingtoreflateit.Thistime,they’reblowingupthebiggestbubbleinpublicdebttheworldhaseverseen.EvenLeMondenoticed:Thegovernmentsoftheentireworldarebeginningtocreatemountainsofdebtsinordertofinancetheirbailoutplans,theirstimulusprogramsandtheirbudgetdeficitscausedbytherecession.Evenso,therateatwhichtheU.S.andEuropeancountriesborrowonthefinancialmarketsisnearthelowestinhistory.Itisonlybarelyabove2%for10-yearloanstoAmericaandslippedunder3%fortheGermanequivalentattheendof2008....Someeconomistsaskthemselvesifabubbleingovernmentdebtisn’tintheprocessofforming...andtheyask38themselveswhatwillhappenwheniteventuallyexplodes....Wethinkweknowwhathappens.Thewholesystemofimperialfinancegets flattened.Inabroadsense,thesocialwelfareeconomiesofalltheadvancedWesternnationsarenothingmorethanPonzischemes.TypicalistheSocialSecuritysystemoftheUnitedStatesofAmerica.Itsurvivesonlyaslongasthereareenoughnewcontributorstocoverthepromisesmadetotheoldones.AsinanyPonzischeme,thefirstonesintothesystemdoverywell.Theveryfirstbeneficiariesputinlittleandgotalotout,dependingonhowlongtheylived.Butastimegoesby,thedealgoesbad.Middle-agedpeopletodaywouldbebetteroffwithaprivatepensionsystem,andtheyoungareunlikelytoseeanybenefitsatall.JohnLawneverlivedtoseeAmerica’ssystemofpublicfinanceatwork.NordidCharlesPonzi.Butevenwithoutapaternitytest,eachwouldhaverecognizeditashisown.BernieMadoffisstillaliveasofthiswriting.Heistheworld’sreigningchampion,titleholderinthePonzileague.Yet,comparedtoAmerica’ssystemofpublicfinance,hisschemewaspennyante...chickenfeed.Thenatureoftheschemeismosteasilyunderstoodbylookingforwardratherthanbackward.PresidentObamaannouncedtwoweeksbeforehewassworninthatAmericansfaced“trilliondollardeficitsforyearstocome.”Already,theestimateofthedeficitfor2009was$1.18trillion.Someexpertspredictedadeficitover$2trillion.Atleastoneguessedthatitwouldcomeinover$3trillion,ifnotin2009thenthefollowingyear.Thesehugedeficitsdidnotseemtodisturbthesleepofthehomelandboundcitizens.Atrillion-dollarannualdeficit,overfiveyears,wouldaddabout$50,000toeachfamily’sburdenofdebt.ButsomeintuitionassuredAmericansthattheywillneverhavetopayit.Byinstinctalone,theyknewitwasaPonzischeme.Ofcourse,everyPonzischememustend.ThedayislongpastwhenAmericanscouldsay“weoweittoourselves.”AlargepartofU.S.borrowingistakenupbyforeigners.AtleastaquarterofAmerica’spublicdebtisinthehandsofnon-U.S.citizens.Chinaalonehasboughtatrilliondollars’worthofit.Andifthe foreignersdon’tcontinuetoponyupthedough,theUnitedStateswillrunoutofmoney.WhydotheforeignersbuyU.S.debt?Theydosointhehopeofgettingthemoneyback,withinterest.ButhowcantheUnitedStatespaybackthemoneyitborrows?Ithasnoearnings.Ithasnosurpluses.Instead,itmustborrowmoretoservicepastborrowings.Itmustdependonbadmoneytocomeinsothegoodmoneycangobackout.ItisaschemeJohnLawwouldlove,Ponziwouldbeproudof,andBernieMadoffcanenvy,foritsorganizersnevergotojail.Aswewrite,foreignlendershavestillnotwisedup.Butthey’vegotlessnewmoneytolose.Americansarenotbuyingthewaytheyusedto;worldtradeiscontractingfast.Trentonnolongertakes.SoTianjinnolongermakes.AndTianjin’sentrepreneursnolongerturnupatthecentralbankwithpilesofdollarstoexchangeforyuan.WhichleavesChina’scentralbankwithfewerdollarstobuyupU.S.Treasurydebt.Thewholesystemisbreakingdown.Mostlikely,itcannotberepaired.Theempireofdebtiscollapsing.Centralbankers,aseveryonenowknows,arerascalsandscalawags.GideonGonoisnoexception.Butthereissomethingheroicallyimbecilicabouttheman.Whilemosteconomistshedgeandweasel,Mr.Gonogoesboldly,recklesslyforward—wherenocentralbankerhasdaredtogo,atleastnotsincetheworstdaysoftheWeimarRepublic.Mr.Gonostandstall...acolossusoferror...anOlympusofbunglement.ItiseasytocriticizethechiefofZimbabwe’snationalbank.Infact,itishardnottocriticizehim.Keyneswarnedthat“thereisalotofruin”inanation.Mr.Gono’scontributiontoeconomicsistoshowhowmuchruinthereis.WhatGonowrought—asreportedbythepressintheautumnof2008—soundedlikeHell:ThetrashpiledupinHarareandthewatersystemnolongerworked.Vendorssoldbottlesofwaterfor$25U.S.Cholerabrokeout,andanthraxtoo.Shopswereempty.Peoplewerehungry.Nothingworked.Eventheforcesoflawandorderwentontherampage,breakingwindowsandlooting whatlittleremainedintheshops.Thesoldiersandpolicehadnotbeenpaid,atleast,notwithrealmoney.BetweenAugust2007andJune2008,theZimbabweanmoneysupplyincreased20milliontimes.Naturally,thisledtothekindofspectacularincreasesinconsumerpricesthatmoderneconomistshadonlyseenonnews-reels.Consumerpriceinflationwasclockedat2millionpercentinmid-2008.Bytheendoftheyear,itwassaidtohavespedupto230millionpercent.Ofcourse,Mr.Gonorolledoutalltheusualinflationfightingmeasures—all,thatis,exceptfortheonethatworks.Priceswerecontrolled.Mr.Gonopersonallywentaround,foundshopownerswhohadillegallyraisedprices,andhadthemarrested.Bankwithdrawalswerelimitedto500,000Zimbabwedollarsperday.Ifyouwantedtobuy2kgofsugar,forexample,you’dhavetostandinlineforfourdaysatanautomatedteller.ButattherateofconsumerpriceinflationinNovember2008,youcouldstandinlineattheautomatictellerseverydayforeternityandnevergetenoughmoneytobuyadrinkofwater.StillwesaluteGideonGono.Hemaybeamoron,butatleasthe’sausefulone.Betterthananotherbadtheory,hehasprovidedabadexample.Inanagewhencentralbankersallovertheworlddesperatelytrytoavoidadeclineinthecostofliving,Mr.Gonohasproventhatthereareworsethings.ButdespitethenewsfromZimbabwe,Gonoismisgainingadmirersintherestoftheworld.Becausetheold“hairofthedogthatbithim”techniqueisn’tworking.Theworldhashadtoomuchcredit;thefedswanttogiveitevenmore.With$10trillionin“stimulus”effortsallovertheplanet,theyarenotgivingonlyahairofthedog,theyarethrowinginthewholedamnedkennel.Butyoucan’thelpanobesemanbygivinghimanotherhelpingofdessert.Andyoucan’tcureanalcoholicbyofferinghimfreedrinks.Inshort,youcan’thelpsomeonewhoisdeeplyindebtbylendinghimmoremoney.So,centralbanksaretryingnewtechniques.BenBernankeisnotyetdroppinghundreddollarbillsoutofhelicopters,asheoncepromised,butthatcannotbefaroff. Surely,GideonGonomustfeelhischestswellingwithpride.HemustbeinlineforaNobelPrize...orahanging.Wequotehisapprovingwords:Banks,includingthoseinUSAandBritainarenotnowjusttalkingof,butactuallyimplementflexibleandpragmaticcentralbankprogramswherethesearedeemednecessaryintheirnationalinterests.Thatispreciselythepaththatwebeganonlyfouryearsagoinpursuitofournationalinterestandhavenotwaveredfromthatcriticalpathdespitetheuntoldmisunderstandings,vilificationanddemonizationwehaveenduredfromacross39thepoliticaldivide.MostdeservingofGono’spraiseistheFed’snewpolicyof“quantitativeeasing”or“crediteasing,”asBernankecalledit.Thesearecodewordsforprintingmoney.Ratherthanrecapitalizethebankers,thecentralbanksbuydebtdirectlyfromthegovernment.Thispermitsthegovernmenttofinanceitsstimulusplanswithoutputtingpressureonthedebtmarket.Italsoactslikeagushofwindonastackofdollarbills.Whencentralbanksbuytheirowngovernment’sdebt,theycreatemoneyoutofthinairforthepurchase.Themoneysupplyincreases.Iftheydoenoughofthismoneycreation,thequantityofmoneyoverwhelmsthequantityofgoodsandservicesthatitcanbuy.Result:inflation,sometimesmodifiedbytheprefix“hyper.”Thatisthefeds’goal.Iftheycancausethevalueofthedollartodropagainstconsumergoodsandinvestmentassets,theywillspurpeopletogetridofdollarsquickly.Thiswill,accordingtothetheory,notonlyreducetheburdenofdebtforindividualsandthegovernment,itwillincreaseeconomicactivity.Asofthiswriting,theyhaveonlybegunthisprocess,andnotbeenverysuccessful.Butwehavefaith;intheend,they’llgetthehangofit. THELINTAGEWhenBenBernankegavehisspeechtotheLondonSchoolofEconomicsonJanuary13,2009,afriendwasonscene.TerryEastonputatoughquestiontoAmerica’scentralbanker:Aren’tyourinterventionsjustmakingthesituationworse,hewantedtoknow.Amidtheblah...blah...blah...ofBernanke’sresponsewasthis:Thetendencyoffinancialsystemstoboomandbust...isaverylongstandingproblem...butIthinkit’sveryimportantforustotrytoputoutthefire...then40youthinkaboutthefirecode.Inhis1988book,TheCollapseofComplexSocieties,JosephTainterarguedthatallsocieties,likeallorganisms,aredoomed.TainterstudiedancientRomeaswellastheMayancivilization.Henoticedthatproblemsalwaysblazeup.Eachone—whetherclimatic,political,oreconomic—ringsthefirehallbell.Andeachsolution—andreadersmaysubstitutetheword“bailout”forsolution—bringsmorechallengesandtakesmoreresources.Finally,theavailableresourcesare41wornout.Tainterobservesthatwhenthecostsbecomehighenough,peopleseemtogiveup.BytheendoftheRomanera,forexample,theburdensofempireweresoheavythatpeoplesoldthemselvesintoslaverytogetfreeofthem.Somanypeopledidsoatonepointthattheauthoritieshadtocomeupwithanothersolution;Theyoutlawedthepractice.Henceforth,Romancitizenswererequired42bylawtoremainfree!Anearlierphilosopher,GiambattistaVico,writingintheeighteenthcentury,putthebeginningofthedeclineofRomeroughlyatthetimeoftheGreatFireduringNero’sreign.Nero,partlytopayforhispost-firereformsandreconstruction,begantakingthegoldandsilveroutofthecoins.Allcivilizationsgothroughthreestages,Vicosaid:divine,heroic,andhuman.Thedivineperiodisruledby thegods.Theheroicperiodismarkedbyvictoriesandstatues.Thencomesthehumanera.(Here,wepermitourselvestoaddafootnotetoVico’soeuvre:Thecoinoftherealminearlyperiodsisthegods’money:gold.Later,peopleswitchtomoneyoftheirowninvention:thekindofmoneyyoumakefromtrees.)Thislaststage,saysVico,iswhenpopulardemocracyarises,alongwithrationalthinkingandwhatVicodelightfullycallsthe“barbariedellareflessione”[thebarbarismofreflection].Inearliereras,peopledowhattheirgodsandleadersask43ofthem.Inthefinalera,theyask,“what’sinitforme?”Evenaslateastheearly’60s,JohnF.Kennedycouldstillappealtoheroicurgewithoutdrawingalaugh.“Asknotwhatyourcountrycandoforyou,”hesaidinhisinauguraladdress,“askwhatyoucandoforyourcountry.”But11yearslater,RichardNixon,likeNerobeforehim,begantheprocessofdebasingthemoney.Thatwasasolution,too;theUnitedStateshadspenttoomuch.Nixonwouldworryaboutthefirecodelater.Firstheopenedupwiththefirehose:HedefaultedonAmerica’spromisetoexchangedollarsforgoldatthestatutoryrate.BarackObamatriedaKennedyesqueappealtocivichigh-mindednessinearly2009.Weneedto“insistthatthefirstquestioneachofusaskisn’t‘what’sgoodforme?’but‘what’sgoodforthecountrymychildrenwillinherit?’”saidthe44president-elect.Butnow,likeDoriccolumnsinatrailerpark,thewordsareornamental,notstructural.Theyarethehomagethatoneagepaystoabetterone.Weareinthetwenty-firstcenturynow.Barbarousreflectionsriseuplikeswampgas.Thewholeplacestinksofthem.BernankeandObamaoffersolutions.Buttheirplanstosavetheworldfromacorrectionarelittlemorethanaswindleofthenextgeneration.Theyoffertobailoutthemistakesofonegenerationwithdebtlaidontothenext.“Regardingthecurrentfinancialmeltdown,”writesRonyTeitelbaum,“itisveryclearthattwomainfactorsunderliethepoliticalreactionstothecrisis,thefirstbeingpressureoriginatingfromtiesbetweenthefinancialandthepoliticalelect,manifestedbytaxpayerbailoutsoflargeinstitutionsthatcontinuetodeliverbonusestotheexecutivesanddonatetopoliticalcampaigns.Forthoseofuswho arenotblind,theseareclearsignsofpoliticalcorruptionwhichwouldhavemadetheworstRomanemperorblush.Thesecondfactorispoliticalpressureoriginatingfromthemasspublic.Thekindofsolutionsofferedsofar,andImayaddwhichwerereceivedwithverywarmenthusiasm,weretaxrebatesandgasolinetaxholidays.Theseareactionsaimedatapublicwho‘impatientlyexpectedquickandobviousresults,’toquoteCary’sdescriptionofRoman45societyinAD300.[AHistoryofRome].”Circa2009,thereishardlyasoulintheentireworldwhohasnotbeencorruptedbythebarbariedellareflessionneofthelateimperialperiod.Bothpatriciansandplebesareforbailouts.Bothbusinessandlaborbackstimulusprograms.Thetaxpayersandthepoliticianswhorulethemareofonemind.Liberal,conservative,rich,poor,Republican,Democratallspeakwithasinglevoice:‘Screwthenextgeneration!”TheGoldenAgeofAmericancapitalismisover,inotherwords.Inthespaceofhalfacenturyitpassedfromgold,tosilver,topaper...andisnowsomewherebetweenplasticandnavellint.THETRIUMPHOFOSAMABINLADENFinally,weturnbacktothedead.“Beenthere,donethat,”theshadeswhisperagain.“Youthinkyou’resosmart...,”theycontinue,andthenthespookslaughsohardtheycan’tfinishthesentence.Thereareanumberoftheoriesofhistory.Hegel,Vico,Spengler;destiny,dialectic,theclashofcivilizations.Theyareapennyadozen,andstilloverpriced.46“Thehistoryoftheworldisbutthebiographyofgreatmen,”wasThomasCarlyle’ssmall-changeadditiontothegenre.Hethoughtindividualmenhadadecisiveeffect.Butnotonlydopeoplecometothinkwhattheymustthinkwhenthenneedtothinkit,theyalsodowhattheymustdo.Then,theyimaginethatitistheywhocontrolhistory,andnottheotherwayaround.“Encourageyourenemytoexpendhisenergyinfutilequestswhileyouconserve yourstrength.Whenheisexhaustedandconfused,youattackwithenergyand47purpose.”ThisisfromanancientChinesetextknownastheThirty-SixStratagemsor36StrategiesfirstpublishedinthewesternworldbyHarrovonSenger.OsamabinLadenmusthavereadthebook.InareportthatappearedintheGuardianinNovemberof2004,theAlQaidaleaderoutlinedhisstrategy:“BleedingAmericatothepointofbankruptcy”waswhathewasupto,hesaidinavideotape.Heevendidthemath.“Everydollarspentbyal-QaidainattackingtheU.S.hascostWashington$1million(£545,000)ineconomicfalloutandmilitaryspending,”saidthereport.“We,alongsidethemujahideen,bledRussiafor10years,[inAfghanistan]untilitwentbankruptandwasforcedtowithdrawindefeat....Sowearecontinuing48thispolicyinbleedingAmericatothepointofbankruptcy.”HowmanymencanboastofbinLaden’striumph?Hebroughtdownnotjustoneempire,buttwo.HisbandofterroristsleechedtheSovietssowell,theyfainted.Hiscampaign,withCIAsupport,putnearlyahalf-millionSovietsoldiersoutofservice,mostlybecauseofillness,anddestroyedbillionsworthofirreplaceablemilitarymateriel.ItwasnocoincidencethattheSovietslostAfghanistaninthesameyeartheirempiredisintegrated.Then,Osamaturnedontheworld’sonlysurvivingempire.ThestoryofOsama’sattackontheUnitedStatesofAmericawillbemorefamiliartoreadersthanitistous.ItsucceededbeyondOsama’swildestimagination.Withabandofjust19suicidalfanatics,hewasnotonlyabletobringdowntwoofAmerica’siconicbuildings,butpanictheempireintoslittingitsownwrists.In2003,America’swarinIraqandotherexpensescreatedadeficitof$377billion.Atthetime,thetotalU.S.debtwas$7.4trillion.Now,thecostofthewar inIraqinitselfisestimatedtomountupto$2trillion.BinLaden—thesonofabillionaire—hadfoundtheweakestsectionoftheempire’swalls:itsfinances.Theterroriststrikescouldhavebeenturnedovertotheusualgumshoes—theFBIandlocalgendarmes.Theactualperpetratorswereincinders;still,goodpoliceworkandthecooperationofforeignlawenforcementagencies,mighthavebroughtmoreperpstojustice,atnegligibleadditionalcost.ButtheempirehadGeorgeW.BushinchargeofitsmilitaryandAlanGreenspaninchargeofitsmoney;thesetwoexterminatingangelswerereadyforthejobaheadofthem.Besides,ithadbeenslappedintheface!Americadidn’thave$2trilliontospendonapointlesswar.ButbinLadenhaddeliveredachallengetotheempire’samourproper.Ineffect,hesuckeredthefattestmanonearthintohavinganotheréclair.Twotrillionwasjustthebeginning.TheattackontheWorldTradecenterinducedahysteria.ItfollowedthecollapseoftheNasdaqandcoincidedwithacyclicaldownturnintheU.S.economy.Inthegeneralpanic,theBushadministrationbelievedthattheU.S.economyneededtobegoosedup,atallcosts.Thusitwasthatthegreateststimuluspackageofalltimewasunleashed,asdescribedinthisbook—amassiveturnaroundinpublicspending,frompositivetonegative—alongwiththemostaggressivecutsininterestratesinmanyyears.ThebubbleintheNasdaqwassoonreplacedbymuchbiggerbubbles:inhousing,finance,derivativedebt,art,privateequity,studentloans,andotherformsofprivatedebt.Theexplosionofthosebubbleshasnowblownupthewholesystemofimperialfinance.Now,forthefirsttimein25years,globaltradeisshrinking.TheU.S.tradedeficitisdeclining,alongwithChina’sexports.Economiesnaturallyexpandandnaturallycontract.Inanexpansion,worldtradeincreases.Inacontraction,itdiminishes.Typically,bigincreasesinglobaltradecorrespondwiththeriseofimperialpowers—armedforceslargeenoughtoprotecttraderoutesguaranteethesafetyofmerchantsandenforceauniform,reliablecommercialcode.TradeexpandedgreatlyduringtheRomanEmpireandthencontractedsharplywhenitfell.TheMongolEmpire,too,createdahugefreetradeareainEurasia.Then,theBritishandotherEuropeanpowersexpandedtheirspheretradealongtheshippinglanes,throughoutmostoftheworld,untiltheywererolledbackfrom muchofEurasiabytheadvanceofotherhostileempires—theSovietUnionandChina.ThelastmajorboominworldtradecamewiththeReaganAdministration.Thefree-marketersinthe’80s—bothinEnglandandAmerica—loweredtaxesandreducedbarrierstocommerce.Then,aremarkablethinghappened:TheSovietUnioncollapsed,leavingitsmemberstatesandclientcountriesfreetoenterintotradewiththeWest.Chinaalsorealizedthatitsricebowlwouldbefullerifit,too,begansellingtotheWest,ratherthanthreateningit.ThatGoldenAgeofebullientworldtradeisnowover,too,becausetheempirethatnurturedhaspeakedout.Andnow,Mr.binLaden,holedupinhisgrimrefuge,cancherishhisownconceits:thatheistheherowhoslayedtwoempires...ratherthanjustanotherlunkheaddoinghistory’sdirtywork.“Kingdomsareofclay,”saidMarcAntony,beforekillinghimself.16WhattoDoWhentheBarbariansArrive“Dere’sdemdat’ssmart...an’dere’sdemdat’sgood,”saidUncleRemus.Manyyoungpeopletodaycan’tevenidentifyUncleRemus.Someoftheireldersmightwanttoarrestyouforquotinghimintheoriginaldialect.Butthemanwasagenius.Whenwewereyoung,wewerealotsmarter.Butastheyearsgoby,manyofthethingswethoughtweresmartdon’tseemsosmartanymore.Andnowwerealizethatnomatterhowsmartwethinkweare,weareneverquitesmartenough.Wethinkstocksaregoingup,wethinkwecanbuildabetterworldinMesopotamia,wethinkwecantellthefellowdownthestreethowtodisciplinehischildrenordecoratehishouse.Butwhatdoweknow?Itiseasiertobesmartthantobegood;that’swhytherearesomanysmartpeople, andsofewgoodones.Smartmengetelectedtohighoffice.Theyrunmajorcorporations.Theywriteeditorialsforthenewspaper.Pitythepoorgoodman;hegoestopartiesandhasnothingtosaythatisnotmockingandcynical.Otherstalkabouttheirsmartdeals,theirsmartideas,theirsmartplansandsuccesses.Womencrowdaroundthem;asmartmangrowstallerashespeaks.Thegoodmanshrinks.Butineconomicsandinvesting,itisvirtue,notbrainpower,thatreallypaysoff.“Alltheworldismoral,”saidEmerson.Itismoralinthesensethatifyouarecarelessenoughtosteponahoe,thehandlewillhityouintheface.Onegenerationtakesthevirtuouspath.Thenextislikelytoslipoff,honoringtheoldvirtuesinspeech,butnotinact.TheoldestgenerationofAmericansrememberstheGreatDepression.Theyborrowedreluctantly,savedeagerly,andmadetheUnitedStatesthegreatestpoweronearth.Theirchildrenstilltalkedtheirparents’talk,butdidn’tmindwalkingoffinadifferentdirectionwhenthewindwasattheirbacks.Andtheirgrandchildren?Thenewestgenerationseemstohavenoregardwhateverforthevirtuesoftheirgrandparentsorthefuturesoftheirgrandchildren.Theydisregardthewisdomofthedead,andloaduptheunbornwithdebt.Theendoftheempiremaybenearorfar.Wedon’tknow.Washingtonwillprobablynotbesackedanytimesoon.Buttheimperialmoney—thedollar—isingravedanger.America’scentralbankersnotonlyfailtoprotectit,theyinvitethebarbarianstodestroyit...slowly.Itisasifthepolicehadnotonlygoneonstrike,butstartedholdingupliquorstoresandmuggingpedestrians.Sincethecentralbankwon’tprotectyourwealth,you’llhavetodoityourself.How?Intheold-fashionedway—bypackingheat...holdingreservesofyourown.Traditionally,whatthecentralbanksholdinreserveisgold.Mr.JamesSurowieckiwroteawiseandmoronicpieceongoldintheNewYorker.Hiswisdomiscenteredontheinsightthatneithergoldnorpapermoneyaretruewealth,butonlyrelativemeasures,subjecttoadjustment. “Goldornot,we’realwaysjustrunningonair,”hewrote.“Youcan’tberich1unlesseveryoneagreesyou’rerich.”Inotherwords,thereisnolawthatguaranteesgoldat$450anounce.Itmightjustaswellbepricedat$266anounce,asitwaswhenGeorgeW.Bushtookofficeforthefirsttime.Sincethen,amanwhocountedhiswealthinKruggerandshasbecome200percentricher.Butgoldwasn’tbornyesterday,orfouryearsago.Mr.Surowieckinoticedthatthemetalhasapast,justasithasapresent.Heturnedhisheadaroundandlookedbackaquarterofacentury.Theyellowmetalwasnotagreatwaytopreservewealthduringthatperiod,henotes.Asaresult,heseesnodifferencebetweenapaperdollarandagolddoubloon,orbetweenabullmarketingoldandabubbleintechnologyshares.“Intheend,ourtrustingoldisnodifferentfromourtrustinapieceofpaperwith‘onedollar’writtenonit,”hebelieves.Andwhenyoubuygold,“you’rebuyingintoacollectivehallucination—exactlywhatthosedot-cominvestorsdidinthelatenineties.”Pityhedidnotbothertolookbackalittlefurther.Thisisthemoronicpart.WhileMr.Surowieckilookedatabitofgold’spast,hedidnotseeenoughofit.Bothgoldandpaperdollarshavehistories,butgoldhasfarmore.Bothgoldanddollarshaveafuture.But,andthisistheimportantpart,goldislikelytohavemoreofthat,too.Theexpression,“asrichasCroesus,”isofancientorigin.ThekingofhistoricLydiaisremembered,eventoday,forhisgreatwealth.Croesuswasnotrichbecausehehadstacksofdollarbills.Instead,hemeasuredhisrichnessingold.Noonesays“aspoorasCroesus.”Wehavealsoheardtheexpression,“notworthaContinental,”referringtoAmerica’spapermoneyduringtheRevolutionaryWarera.Wehaveneverheardtheexpression,“notworthaKruggerand.”Likewise,whenJesussaid,“RenderuntoCaesarthatwhichisCaesar’s,”hereferredtoadenarius,acoinofgoldorsilver,notapapercurrency.ThecoinhadCaesar’simageonit,justastoday’sAmericanmoneyhasapictureof Lincoln,Washington,orJacksononit.Deadpresidentsweregoldenbackthen.Eventoday,agolddenariusisstillaboutasvaluableasitwaswhenCaesarconqueredGaul.America’sdeadpresidents,whoseimagesareprintedingreeninkonspecialpaper,lose2percentto5percentoftheirpurchasingpowereveryyear.Whatdoyouthinktheywillbeworth2,000yearsfromnow?AfewyearsbeforeJesus,Crassus,whohadmadehisfortuneonrealestatespeculationinRome,decidedtoputtogetheranarmytohustletheeast.Alas,suchprojectsalmostalwaysmeetwithdisaster;theattemptbyCrassuswasnoexception.HewascapturedbytheParthiansandwasputtodeathinanunusuallycruelandcostlyway.Hedidnotendhisdayswithpapermoneystuffeddownhisthroat,andcertainlynotdollarbills.No,theypouredmoltengolddownhisgullet—orsothestoryhasit.Goldhasalonghistory.Andduringitshistory,manywasthetimethathumansweretemptedtoreplaceitwithotherformsofmoney—whichtheybelievedwouldbemoreconvenient,moremodern,andmostimportantly,moreaccommodating.Goldishardtofindandhardtobringupoutoftheearth.Byitsnature,thequantityofgoldisalwayslimited.Papermoney,bycontrast,offersirresistiblepossibilities.Thelistofbrightpaperrivalsislongandcolorful.Youwillfindhundredsofexamples,fromassignatstozlotys,andfromimperialpurpletobeersudsbrown.Butthestoryofpapermoneyisshortandpredictable.Sincetheinventionoftheprintingpress,anewpaperdollarorfranccanbebroughtoutatnegligiblecost.Nordoesitcostmuchtoincreasethemoneysupplybyafactorof10or100—simplyaddzeros.Itmayseemobvious,butaddingzerosdoesnotaddvalue.Still,theattractionofbeingabletogetsomethingfornothinghasalwaysbeentoogreattoresist.Thatiswhatmakesgoldbugssoirritating:Theyarealwayspointingitout.Evenworse,theyseemtoenjoysaying“Thereain’tnosuchthingasafreelunch,”whichcomesasabigdisappointmenttomostpeople.Oncepeoplewereabletocreatemoneyatvirtuallynoexpense,nooneeverresisteddoingittoexcess.Nopapercurrencyhaseverhelditsvalueforverylong.Mostareruinedwithinafewyears.Sometakelonger.Eventheworld’s twomostsuccessfulpapercurrencies—theAmericandollarandtheBritishpound—haveeachlostmorethan95percentoftheirvalueinthepastcentury,whichisespeciallyremarkablesincebothwerelinkedbylawandcustomtogoldformostofthoseyears.Forthedollar,thefinallinktogoldwasseveredonly34yearsago.Somepapercurrenciesaredestroyedalmostabsentmindedly.Othersareruinedintentionally.Butallgoawayeventually.Bycontrast,everygoldcointhatwaseverstruckisstillvaluabletoday;mosthavemorerealvaluethanwhentheyfirstcameoutofthemint.Centralbankersreportedinearly2005that70percentofthemwereincreasingtheirreservesofeuros.Asfortheworld’serstwhileandpresentreservecurrency,thedollar,theyseemedtohave,notgrowingreserves,butgrowingreservations.Wealsohavereservationsaboutthedollar.Whateveritisworthtodayortomorrow,wearesureitwillhavelesswortheventually.Thatitisnotregardedasworthlessalreadyisremarkable.Theaveragedollarisnothingmorethanelectronicinformation.Itexiststhanksonlytotheabilityofdigitaltechnologytokeeptrackofit.Relativelyfewdollarsevermakeittopaper,andmanyofthemendupinthepocketsofRussiandrugdealersandAfricanpoliticians.Mostdollarsinmostpeople’saccountsarenotevengracedwiththeimageofadeadpresident;whentheendcomes,theywon’tevenbeusefulforstartingfires.Itisimperialvanitythatkeepsthedollarinbusiness.Anditisvanitythatwillmakeitworthless.Economistswantmoneytheycancontrol.Centralbankerswantmoneytheycandebase.Andpoliticianswantmoneytheymightgettheirmugon.Thetroublewithgoldisthatitturnsitsbackonworldimprovers,empirebuilders,anddo-gooders.Itismoneythatnocentralbankpromotesandnonedestroys.Itismoneythatexistsonlyinatangibleform,arealmetal—anumberontheperiodictable.“Goldgoesupanddown,justlikeotherkindsofmoney,”sayeconomists.Whichistrue.“Youcanprotectyourselffrominflationinotherways,”saythespeculators.Trueagain.“Goldpaysnodividendsorinterest,”saytheinvestors.True. Norwillgoldcurebaldnessoraddinchestoyourmostprivatepart.Evenasmoney,goldmaynotbeperfect.Butitisbettermoneythananythingelse.GoldwasaroundmillionsofyearsbeforetheU.S.dollarwasinvented.Itwillprobablybearoundabillionyearsafter.Thislongevityisnotinitselfagreatrecommendation.Itislikebuyingasuitthatwilllastlongerthanyoudo;thereisnopointtoit.Butthereasonforgold’slongevityisalsothereasonforitsgreatvirtueasmoney:Itisinert;ityieldsneithertotechnologynortovanity.Theworldimproverswillalwaysbewithus.Theywillspendmorethantheyhave,bossotherpeoplearound,andgenerallymaketheworldaworseplacetolive.TheywillofferproposalslikethoseofThomasL.Friedman.Thenicethingaboutgoldisthatitissounresponsive.Itneitherlaughsnorapplauds.Goldismoneythatnocentralbankpromotesandnonedestroys.Papermoneyisahandytoolfortheworldimprovers.Theyuseitlikepoliticiansusecivilservicejobsandgeneralsuseheavybombers—togettheirway.Whateverthevapididealdujour,ittakesmoneytopursueit.Givenenoughmoney,thepoorcanbefedandhoused.Themiddleclassescanbegivenfreemedicalcareandlow-costloansforhouses.Theupperclassescanbegivencontractsandfavors.Enemiescanbesummonedup,bombed,andreconstructed.Bread,circuses,war—theimperialprogramcostsmoney.Howtogetmoremoneyforthesegreatnewprograms,thesemarvelouslyworthwhileideals,thesefabulouspublicspectacles?Goldflatlyrefusestocooperate.Itdoesn’tevengiveareason.Instead,itstaysasmuteandreticentasadeadmaninfrontofatelevision.Nomatterhowpersuasivetheadvertising,themanisnotgoingtogoforit.Papermoney,ontheotherhand,barelyneedsencouragement.Startupthepresses!Lowertheinterestrate!Relaxreserverequirementsandlendingstandards!Sellmorebonds!Createmorepaper!Papermoneyisreadytogo alongwithanything.LikeGeorgeW.Bush,itnevermetaboondoggleitdidn’tlike.Soonerorlater,itendsupasworthlessastheprojectsitwasmeanttopayfor.Goldismerelythesubversiveinvestor’swayofprotectinghimself.Is.Was.Willbeagain.Ifthingsremainedthesame,therewouldbenoneedforverbtenses.Butthingsdonotremainthesame,theychange.Afteralongwhileofremainingthesame,investorsbegintounderpricechange.Aspeculatorcanmakemoneybybettingagainstthepresenttense.Butnotalways,notwhenthepresenttenseonlycameintobeingrecently.Forthatcase,investorsstillpricethingsbasedonthepast.Butafteralongspell,investorsbegintobelievethatthatwhichiswillbeforever.Theymaketheirbetsonafalsepremisebyunderpricingrisk,underpricingchange,andoverpricingstability.Everythinginlifehasabeginning,amiddle,andanend.Eachdaythatpassesinwhichpresenttrendsdonotcometoanendbringsusadayclosertothedaywhentheywill.“Stabilityleadstoinstability,”saideconomistHymanMinsky.Thelongerthingsremainstable,themorepeoplebecomeconvincedthattheywillneverchange.Aslongasthecamel’sbackdoesn’tbreak,whynotheapmorestrawonit?Weknowthepasttense—howAmerica’sempireofdebtwasbuilt.Whatwedon’tknowisthefuturetense—howandwhenitwillend.Itislikeourowndeath;weknowitwillhappen,butwedon’twanttothinkaboutit.Still,itisthesortofthingyouwanttobepreparedforallthetime.Asensiblemanmaynotknowthehourortheplaceofhisdemise,buthedoesnotdoubtthatitiscoming.Ifheissmart,heisreadyfordeathanydayoftheweek.Soisasensibleinvestorreadyforthedayagreatempirecollapses.Hedoesn’tknowwhenitwillhappen.Andthelongeritdoesn’thappen,themorehe believesitmayneverhappenatall.Butnaturesmilesneitheronvacuumsnormonopolies.Empiresareamonopolyonforce;theydon’tlastforever.WhatispeculiarandpromisestobeentertainingabouttheU.S.debtempireisthatitismoreabsurdthanmost;whichistosayitislesslikelytolastverylong.ThatdoesnotmeanthattheUnitedStateswilldisappear.Butyoushouldbepreparedforawrite-downofitsdebtanditsdollaratanymoment.Youdonotwanttogotoyourgraveaftersayinganunkindwordtoyourmother.NeitherdoyouwanttowakeuptoadollarbustwithapileofTreasurybondsandpiecesofgreenpaper.Thereisneveragoodtimetodie.Noristhereagoodtimeforadepressionandmonetarycollapse.Still,deathhappens.Beprepared.Saysomethingnicetoyourmother.Offerabumadrink.Andbuygold. NotesIntroductionSlouchingtowardEmpire1ClaesG.Ryn,“AppetiteforDestruction:NeoconservativesHaveMoreinCommonwithFrenchRevolutionariesThanAmericanTraditionalists,”AmericanConservative,January19,2004.2JohnChuckman,“America’sImperialWizardVisitsCanada,”December6,2004,http://www.countercurrents.org/us-chuckman061204.htm.3RamsayMacMullen,CorruptionandtheDeclineofRome,YaleUniversityPress,1990.Chapter1DeadMenTalking1MargaretWilsonOliphant,TheMakersofVenice,Doges,Conquerors,PaintersandMenofLetters,Burt,1897.2Ibid.3EdwardGibbon,TheDeclineandFalloftheRomanEmpire,Everyman’sLibrary,1993.4Seenote1.5EdmundRandolph,1787ConstitutionalConvention.6JamesMadison,“TheFederalistNo.10:TheUtilityoftheUnionasaSafeguardAgainstDomesticFactionandInsurrection(continued),”DailyAdvertiser,November22,1787.7ConstatinoBresciani-Turoni,TheEconomicsofInflation:AStudyofCurrencyDepreciationinPost-WarGermany,Routledge,reprinted.,2003.8KarlTheodorHelfferich,DasGeld,AdelphiEnglished.,1927,p.650.9Seenote7. 10http://chinese-school.netfirms.com/abacus-Sir-John-Templeton-interview.html.11NassimNicholasTaleb,FooledbyRandomness:TheHiddenRoleofChanceinLifeandintheMarkets,2nded.,Texere,2004.12Ibid.13Ibid.Chapter2EmpiresofDirt1PaulRatchnevsky(ThomasNivisonHaining,trans.),GenghisKhan:HisLifeandLegacy,Blackwell,reprinted.,1993.2“ChangingPerceptionsofGenghisKhaninMongolia:AnInterviewwithDr.Ts.TsetsenbilegbyYuanWang,”HarvardAsiaPacificReview,http://hcs.harvard.edu/~hapr/winter00_millenium/Genghis.html.3http://khubilai.tripod.com/mongolia/id3.html.4http://en.wikipedia.org/wiki/Genghis_Khan.5FrancisFukuyama,TheEndofHistoryandtheLastMan,FreePress,1992.6http://www.rain.org/~karpeles/armadadis.html.7http://www.angelfire.com/ok3/chester/maindir/armarda.htm.8AlfredThayerMahan,TheInfluenceofSeaPoweruponHistory,1660-1783,DoverPublications,1987.Chapter3HowEmpiresWork1EmilyEakin,“IdeasandTrends;AllRoadsLeadtoD.C.,”NewYorkTimes,March31,2002.2RobertKaplan,WarriorPolitics:WhyLeadershipDemandsaPaganEthos,Vintage,2003. 3RogerCohen,“Globalist:Rumsfeld’sBluntStyleMayBackfireinChina,”InternationalHeraldTribune,June11,2005.4PaulKennedy,“TheGreatestSuperpowerEver,”NewPerspectivesQuarterly,Washington,winter2002.5ThomasCahill,HowtheIrishSavedCivilization,Anchor,1996.6Ibid.7DeepakLal,InPraiseofEmpires:GlobalizationandOrder,PalgraveMacmillan,2004.8Ibid.9RudyardKipling,TheWhiteMan’sBurden,1899.10StephenHowe,Empire:AVeryShortIntroduction.OxfordUniversityPress,2002.11RamsayMacMullen,CorruptionandtheDeclineofRome,YaleUniversityPress,reprinted.,1990.12Ibid.13Ibid.14http://www.antiwar.com/justin/j112299.html.15Aristotle,Politics,NuvisonPublications,2004.16JohnPerkins,ConfessionsofanEconomicHitMan,Berrett-KoehlerPublishers,2004.17NiallFerguson,Colossus:TheRiseandFalloftheAmericanEmpire,Penguin,reprinted.,2005.18JohnQuincyAdams’Address,July4,1821.19FloydNorris,“FloydNorris:WillChinaBeSettingU.S.Rates?”InternationalHeraldTribune,May13,2005. 20GrandfatherEconomicReportSeries,http://home.att.net/~mwhodges/debt.htm.21ChinaDaily,http://www2.chinadaily.com.cn/english/doc/2004-12/15/content_400251.htm.22Seenote19.23CIA:TheWorldFactbook,http://www.odci.gov/cia/publications/factbook/geos/us.html#Econ.24InstituteforInternationalEconomics,http://www.iie.com/publications/papers/paper.cfm?researchid=26.25Seenote23.26NiallFerguson,“TheEndofPower:WithoutAmericanHegemonytheWorldWouldLikelyReturntotheDarkAges,”WallStreetJournal,June21,2004.Chapter4AsWeGoMarching1JohnT.Flynn,AsWeGoMarching,AyerCompany,reprinted.,1972.2Ibid.3Ibid.4Ibid.5Ibid.6Ibid.7JoseOrtegayGasset,TheRevoltoftheMasses,W.W.Norton&Company,reissueed.,1994,Chapter7.8Seenote1. 9Ibid.10Ibid.11Ibid.12SolBloom,ChairmanoftheHouseForeignRelationsCommittee,1926,tocolleagues.13“ArmingforPeace,”NewYorkTimes,October31,1951,p.27.14FinanceandDevelopment,http://www.worldbank.org/fandd/english/0696/articles/0100696.htm.15GaretGarrett,inhispamphlet“RiseofEmpire,”1952.16Ibid.17GaretGarrett,ThePeople’sPottage,TruthSeekerCo.Inc.,TSed.,1992.18Ibid.19Ibid.Chapter5TheRoadtoHell1MalcolmGladwell,Blink:ThePowerofThinkingwithoutThinking,LittleBrown,2005.2Ibid.3Ibid.4Ibid.5WarrenHarding,InauguralAddress,1921.6H.L.Mencken,1880-1956.7JudgeLearnedHand,speechat“IAmanAmericanDay”ceremonyinCentral Park,1944.8SigmundFreud,WilliamC.Bullitt,ThomasWoodrowWilson:APsychologicalStudy,TransactionPublishers,1999.9WoodrowWilson,AddresstoCongressAskingforaDeclarationofWar,April2,1917.10TheRaabCollection,http://raabcollection.com/detail.aspx?cat=0&subcat=34&man=344.11http://www.ieru.ugent.be/palo.html.12Seenote9.13Ibid.14AdamGopnik,“TheBigOne:CriticsRethinktheWartoEndAllWars,”TheNewYorker,August23,2004.15ViscountEsher,1852-1930.16WinstonChurchill,MIT’s“Mid-CenturyConvocation,”April1949.17Ibid.18Seenote8.19Seenote9.20HewStrachan,TheFirstWorldWar,VikingAdult,2004.21WinstonChurchill,lettertohiswife,July28,1914.22StefanZweig,TheWorldofYesterday,VikingPress,1970.23RandolphBourneinhisessay,“TheState,”http://www.bigeye.com/rbquotes.htm.24TheInternationalSchoolofToulhouse,http://194.3.120.243/humanities/ibhist/war/wwi/europe_1914/germany/germany_ before_1914.htm.25Seenote9.26JohnF.Kennedy,InauguralAddress,January20,1961.27RichardNixon,InauguralAddress,January20,1973.28DavidLloydGeorge,WarMemoirs,1934.29LudwigvonMisesInstitute,http://www.mises.org/fullstory.aspx?control=224&id=74.30HistoryNewsNetwork,http://hnn.us/articles/10108.html.31EdwardChancellor,DevilTaketheHindmost:AHistoryofFinancialSpeculation,Plume,reissueed.,2000.32RodMickleburgh,“HeDidtheBestHeCouldThatDay...HeSurvived,”TheMemoryProject,TorontoGlobeandMail,http://www.theglobeandmail.com/special/memoryproject/features/fox.html.33Seenote29.Chapter6TheRevolutionof1913andtheGreatDepression1JohnT.Flynn,TheDeclineoftheAmericanRepublicandHowtoRebuildIt,Devin-AdairPublishers,1955.2CivilWarCurrencyFacts,http://www.civil-war-token.com/civil-war-currency-facts.htm.3TheLudwigvonMisesInstitute,http://www.mises.org/etexts/rootofevilb.asp.4Ibid.5RepresentativeRobertAdams,January26,1894.6Seenote3. 7PresidentWilliamH.Taft’sMessagetoCongress,June16,1909.8AmendmentXVI,1913.9ArticleVoftheConstitutioninitsoriginalform.10JohnDickinson,June7,1787,ConstitutionalConvention.11JamesMadison,“TheFederalistNo.63,TheSenate(continued),”IndependentJournal,Saturday,March1,1788.12C.H.Hoebeke,“DemocratizingtheConstitution:TheFailureoftheSeventeenthAmendment,”Humanitas,VolumeIX,No.2,1996.13JohnKennethGalbraith,AShortHistoryofFinancialEuphoria,PenguinBooks,1990.14UnitedStatesConstitution,TenthAmendment.15FranklinDelanoRoosevelt,“FiresideChat,”March9,1937.16Ibid.17Seenote1.Chapter7MacNamara’sWar1KenHagler’sRadioWeblog,RecitationoftheBattleofCamerone,April30,2003.2LeFigaro,May7,2004.3Ibid.4Ibid.5WilliamJ.Duiker,“HoChiMinh,”Theia,September27,2000.6Ibid. 7VoNguyenGiap,“WhenaNationWasBorn,”VietnamNewsAgency,2000.8CharlesW.Eliot,TheCongressionalRecord.9OliverCromwell,lettertothesynodoftheChurchofScotland,August5,1650.10RobertS.MacNamara,JamesBlight,RobertBrigham,ThomasBiersteker,andHerbertY.Schandler,ArgumentwithoutEnd:InSearchofAnswerstotheVietnamTragedy,PublicAffairsPress,2000.11Theinfamousdominotheory:“Youhavearowofdominoessetup;youknockoverthefirstone,andwhatwillhappentothelastoneisthatitwillgooververyquickly,”PresidentEisenhower,April7,1954.12LyndonB.Johnson,speech,October21,1964.13MemorandumfromthePresident’sSpecialAssistantforNationalSecurityAffairs(Bundy)toPresidentJohnson,enroutefromSaigontoWashington,February7,1965.14Seenote10.15LyndonB.Johnson,PublicPapers,1963-1964,p.952.16WalterHellerOralHistory,1965,intheJohnsonLibrary.17“TelltheVietnamesethey’vegottodrawintheirhornsorwe’regoingtobombthembackintotheStoneAge,”GeneralCurtisLeMay,May1964.18Seenote10.19BrucePalmer,TheTwenty-fiveYearWar:America’sMilitaryRoleinVietnam,UniversityPressofKentucky,2001.20Seenote10.21Ibid.22MartinLutherKing,speech,NewYorkCity,April4,1967.23LyndonB.Johnson,conversationwithMcGeorgeBundy,May27,1964. 24Seenote10.Chapter8Nixon’stheOne1RichardDuncan,TheDollarCrisis:Causes,Consequences,Cures,JohnWiley&Sons,2003.2GardnerAckley,memotoLyndonB.Johnson,July30,1965.3LyndonB.Johnson,StateoftheUnionAddress,January12,1966.4JosephCalifano,TheTriumphandTragedyofLyndonJohnson,TouchstoneBooks,1992.5Ibid.6Ibid.7Ibid.8TheColumbiaElectronicEncyclopedia,copyright©2005,ColumbiaUniversityPress.Chapter9Reagan’sLegacy1ClaesG.Ryn,“AppetiteforDestruction:NeoconservativesHaveMoreinCommonwithFrenchRevolutionariesThanAmericanTraditionalists,”AmericanConservative,January19,2004.2RossMacKenzie,“TheReaganLegacy:HeLedaRevolution.WillItSurvive?”Economist,June10,2004.3RonaldReagan,InauguralAddress,January20,1981.4MurrayN.Rothbard,“RepudiatingtheNationalDebt,”LudwigvonMisesInstitute,postedFriday,January16,2004,http://www.mises.org/fullstory.aspx?control=1423&id=74. 5RodMartin,ThankYou,PresidentBush:ReflectionsontheWaronTerror,DefenseoftheFamily,andRevivaloftheEconomy.WorldAheadPublishing,August30,2004.6Ibid.7JudeWanniski,“AChinese/AsianCurrencyZone?”http://www.wanniski.com/showarticle.asp?articleid=4529.Chapter10America’sGloriousEmpireofDebt1DavidH.LeveyandStuartS.Brown,“TheOverstretchMyth,”ForeignAffairs,March/April2005.2H.A.ScottTrask,“PerpetualDebt:FromtheBritishEmpiretotheAmericanHegemon,”LudwigvonMisesInstitute,postedJanuary27,2004.3ThomasJeffersontoJamesMadison,September6,1789.4RonSuskind,ThePriceofLoyalty:GeorgeW.Bush,theWhiteHouse,andtheEducationofPaulO’Neill,Simon&Schuster,2004.5AlanGreenspanattheAdamSmithMemorialLecture,Kirkcaldy,Scotland,February6,2005.6GeorgeOrwell,“TheLionandtheUnicorn:SocialismandtheEnglishGenius,”essay,1941.7JamesSurowiecki,TheWisdomofCrowds,Anchor,2005.8F.A.VonHayek,“ThePretenceofKnowledge,”NobelMemorialLecture,December11,1974.9RichardDuncan,“HowJapanFinancedGlobalReflation,”ANDONGKIM,May20,2005.10Ibid.11Seenote1. 12Ibid.Chapter11ModernImperialFinance1http://www.princeton.edu/pr/news/03/q2/0612-brain.htm.2“DennisKucinichonFreeTrade”OntheIssues,http://www.issues2000.org/2004/Dennis_Kucinich_Free_Trade.htm.3AlanGreenspanattheAdamSmithMemorialLecture,Kirkcaldy,Scotland,February6,2005.4RobertMcTeer,Dallas,2001.5EdmundL.Andrews,“GreenspanShiftsViewonDeficits,”NewYorkTimes,March16,2004,sectionA,column1,page1.6http://www.census.gov/prod/www/abs/decennial.html.7Seenote3.8Ibid.9StephenRoach,“Global:ConfessionTime.”GlobalEconomicForum,MorganStanley,February7,2005,http://www.morganstanley.com/GEFdata/digests/20050207-mon.html.Chapter12SomethingWickedThisWayComes1ThomasFriedman,NewYorkTimes,March8,2004.2Ibid.3Ibid.4“OutrageandSilence,”ThomasL.Friedman,NewYorkTimes,May20,2005.5PaulCraigRoberts,CounterPunch,March16,2005,http://www.counterpunch.org/roberts03162005.html. Chapter13WelcometoSquanderville1DavidStreitfeld,“They’reIn—ButNotHomeFree,”LosAngelesTimesstaffwriter,publishedApril2,2005.2Ibid.3Ibid.4JoyceCohen,“TheHunt:BecomingaMogul,Slowly,”NewYorkTimes,April10,2005,lateedition—final,section11,column1,page12.5Ibid.6WarrenBuffettandCharlieMunger,BerkshireHathawayshareholdersmeeting,April30,2005.7JaneHodges,“FlippingRealEstate...WithoutGettingBurned,”SeattleTimes,May3,2005.8Ibid.9TestimonyofChairmanAlanGreenspan,FederalReserveBoard’ssemiannualMonetaryPolicyReporttotheCongressbeforetheCommitteeonBanking,Housing,andUrbanAffairs,U.S.Senate,February16,2005.10DanAckman,“RetirementDoomsday,”Forbes,May4,2005.11AlanGreenspan,attheFederalReserveSystem’sFourthAnnualCommunityAffairsResearchConference,Washington,DC,April8,2005.12WilliamShakespeare,TheTempest,Actiii,Scene2.Chapter14StillTurningJapanese1RichardC.Koo,BalanceSheetRecession:Japan’sStrugglewithUnchartedEconomicsandItsGlobalImplications,JohnWiley&Sons(Asia)PteLtd,Singapore,2003,p.284. 2WilliamBonnerandAddisonWiggin,FinancialReckoningDay:SurvivingtheSoftDepressionofthe21stCentury,JohnWiley&Sons,2003.Chapter15TheMightyFallen1PeterThalLarsen,“GoldmanPaysthePriceofBeingBig,”FinancialTimes,August13,2007.2CitigroupInc.,Q3EarningsCallTranscript,October16,2008.3JamesHowardKunstler,speechinVancouverforSFUurbanstudiesprogram,“ChallengestoCitiesandAgriculturefromPeakOil,”January24,2008.4Economagic:EconomicTimeSeriesPage,http://www.economagic.com/em-cgi/data.exe/var/togdp-householdsectordebt.5RobertPlummer,“MadoffMillionsVanishintoThinAir,”BBCNews,December15,2008.6“Citigroup’sChuckPrinceStopsDancing,”Wcomimportuser1,Time.com,November4,2007.7“KeepYourShirtOn,”Economist.com,August5,2007.8RonChernow,TheHouseofMorgan:AnAmericanBankingDynastyandtheRiseofModernFinance,GrovePress,2001.9AndrewClarkandElanaSchor,“LehmanBrothersChiefExecutiveGrilledbyCongressoverCompensation,”Guardian.co.uk,October6,2008.10ChristineHarper,“MorganStanleySaidtoBeinTalkswithChina’sCIC(update2),”Bloomberg.com.September18,2008.11RuthGledhill,“TheArchbishopofCanterburySpeaksinSupportofKarlMarx,”Times-Online,September24,2008.12GarrisonKeillor,“GarrisonKeillor:WhereWeretheCops?”InternationalHeraldTribune,September25,2008. 13“WhyPaulsonIsWrong,”LuigiZingales,RobertC.McCormackProfessorofEntrepreneurshipandFinance,UniversityofChicago,September21,2008,http://www.voxeu.org/index.php?q=node/1670.14HR1424LibraryofCongress.15NathanielC.Nash,“LetBanksEnterSecuritiesField,GreenspanSays,”NewYorkTimes,November19,1987.16AndrewBalls,“GreenspanRelaxedaboutHousePrices,”FinancialTimes,May21,2005.17JessicaHolzer,“GreenspanSeesaSoftLanding,”Forbes.com,October26,2006.18SpeechbyChairmanBenS.BernankeattheFederalReserveBankofChicago’s43rdAnnualConferenceonBankStructureandCompetition,Chicago,Illinois,May17,2007.19DavidJackson,“Bush:U.S.IsNotHeadedintoaRecession,”USAToday,February28,2008.20MichaelM.PhillipsandGregIp,“HenryPaulsonDismissesMortgageRescuePlans,”WallStreetJournalOnline,February29,2008.21GabrielMadway,“Paulson:SubprimeMortgageFallout‘largelycontained’,”MarketWatch,March13,2007.22“BearSternsCEO:NoLiquidityCrisisforFirm,”CNBC.23StephenLabaton,“Agency’s’04RuleLetBanksPileUpNewDebt,”NewYorkTimes,October2,2008.24JeannineAversa,“Bernanke:Fannie,FreddieinNoDangerofFailing,”USAToday,July16,2008.25GeorgeW.Bush,SpeechtotheNationonFinancialCrisisandEconomicRecoveryPlan,September24,2008.26BrianWingfieldandJoshZumbrun,“ThePaulsonPlan:BadNewsfortheBailout,”Forbes.com,September,23,2008. 27“PaulsonDefendsFederalFinancialRescueEffort”(transcript),NewsHourwithJimLehrer,PBS,November13,2008.28AntonAntonowicz,“BarackObama’sVictoryChangestheWorld,”TheMirror,November6,2008.29“U.S.ElectsPresidentObama,”editorial,TheGuardian,November5,2008.30Bernard-HenriLevy,“ObamaArousesaWildYetReasonableHope,”FinancialTimes,November5,2008.31Ibid.32DavidBrooks,“RevoltoftheNihilists,”NewYorkTimes,September30,2008.33MartinWolf,“CongressDecidesItIsWorthRiskingDepression,”FinancialTimes,September30,2008.34MurrayN.Rothbard,America’sGreatDepression,FifthEdition,TheLudwigvonMisesInstitute,2000.35AlexKerr,DogsandDemons:TalesfromtheDarkSideofJapan,HillandWang,2001.36RalphT.Foster,FiatPaperMoney:TheHistoryandEvolutionofOurCurrency,FosterPublishing,CoinandStamp,2008.37RemarksbyGovernorBenS.BernankebeforetheNationalEconomistsClub,Washington,DC,November21,2002.38“LesBoursesdeParis,LondresetFrancfortclôturentenfortebaisse,”LeMonde,January14,2009.39http://www.rbz.co.zw/pdfs/2008%20MPS/AprilMPS2008.pdf.40TheCrisisandthePolicyResponse.RemarksbyBenS.Bernanke,ChairmanBoardofGovernorsoftheFederalReserveSystemattheStampLecture.LondonSchoolofEconomics.London,England.January13,200941JosephTainter,TheCollapseofComplexSocieties,CambridgeUniversity Press,1988.42Ibid.43GiovanniBattista(Giambattista)Vico,ScienzaNuova(TheNewScience),1725.44CNNPolitics,“Commentary:Obama’sLoftyIdeasLackSpecifics.”http://edition.cnn.com/2009/POLITICS/01/08/campbell.brown.obama/.45“DoAssetMarketsReallyProvideLifetimeBuyingOpportunities?”TheGloom,Boom&DoomReport,apublicationofMarkFaberLimited,January2009.46E.D.Hirsch,TheNewDictionaryofCulturalLiteracy,ThirdEdition,HoughtonMifflinCompany,Boston,2002.47Thirty-SixStratagems,publishedinEnglishbyHarrovonSenger,1992,2000.48“BinLaden:GoalIstoBankruptU.S.,”CNN.com.November2,2004.Chapter16SubversiveInvesting1JamesSurowiekci,“WhyGold,”NewYorker,November29,2004.