The Hindu Business Line : The great bubble of world economics

Consumerist excesses have made the US the great bubble of the world of economics. As the book Empire of Debt rues, running an empire is a disastrously expensive business — "You pay in cash. You pay in blood. And you pay with your own so ul." D. Murali wonders if the US will go the Japan way.

YOU PROBABLY know the story of emperor's new clothes. Even as his royal majesty marched by, "nobody wished to let others know he saw nothing, for then he would have been unfit for his office or too stupid," Hans Christian Andersen (1837) is narrated on http://hca.gilead.org.il. "Never emperor's clothes were more admired... ' But he has nothing on at all,' said a little child at last."

The little child speaks again, through Bill Bonner and Addison Wiggin, in Empire of Debt, from Wiley (www.wiley.com) even as Uncle Sam marches by and George Orwell's `hollow dummies' watch on. The book's dust-jacket speaks about horrors such as "unfettered deficit spending, gluttonous consumption, and fearless military adventurism" which make the nation slouch "ever more precariously towards bankruptcy." And, the back cover rues about `the great bubble in the world of economics' thus: "Running an empire is a disastrously expensive business. You pay in cash. You pay in blood. And you pay with your own soul."

An empire is a monopoly on force, but nature abhors a monopoly, write the authors. "Nature will tolerate it for a while, but sooner or later, the imperial people must revert to being normal people," they caution. "Expensive foreign wars, expensive bread, expensive circuses — these are what bankrupted almost every empire from Rome to London," they narrate.

Bonner and Wiggin write that the US pays the direct costs of globalisation through "a military budget greater than the combined military spending of all of the rest of the world combined." It could cut the spending by 75 per cent and "still have the biggest, most advanced army in the world," inform the authors. The country also pays the indirect costs of globalisation in the form of "$700 billion or so per year in trade deficit," caused by `consumerist excesses'.

Thus, more than $1 trillion every year, or 10 per cent of GDP, is what it costs the empire, compute the authors. With no serious challenge beyond the borders, the US `had to become its own worst enemy', rue the authors, whose earlier work, Financial Reckoning Day, was about `surviving the soft depression of the 21st century'. The book on hand has 16 chapters divided into four sections, beginning with `Imperia Absurdum'.

Corpses have no voice

First, hear `dead men talking', and imbibe lessons of the Fourth Crusade (1202-1204). "Though the initial conquest was fairly easy and glorious, subsequent events were less so," recount the authors, turning the pages of history. "Avoid foreign entanglements," was the caution of George Washington.

"But corpses have no voice and no vote, neither in markets nor in politics," reads a wry comment of the authors, when they rue the `tyranny of the living'. What we have access to is `undistilled information', from "newspaper headlines, TV babble, cocktail chatter, the latest innovation, the latest business secret, the latest fashion", but that is only "public information, backed by no real experience or private insights," and therefore useless, note the authors. "It is worse than useless, for it misleads people into thinking they know something."

Helpful insight is cited from Nassim Nicholas Taleb's book, Fooled by Randomness: "Mathematically, progress means that some new information is better than past information, not that the average of new information will supplant past information, which means that it is optimal for someone, when in doubt, to systematically reject the new idea, information, or method."

Poorer at $80 million per hour

A chapter titled `Empires of Dirt' shocks with numbers. That "in the first half of 2005, Americans got poorer, not richer — at the rate of $80 million per hour." Each year, Asians produce more of what Americans buy, and Americans produce less of what anyone buys, state the authors. The chapter also speaks of `the most successful empire builder of all time', Genghis Khan. It seems he was so successful "that a recent DNA study of 2,123 men from across Asia permitted scientists to estimate that he may have as many as 16 million male descendants spread out from Manchuria to Afghanistan."

Do you know that "his campaigns killed as many as 40 million people based on census data of the times"?

How do empires work? A whole chapter provides the answer. "Between 1917 and 1971, the country (the US) was transformed from a simple republic that mostly minded its own business to a grandiose empire with imagined interests and real troops nearly everywhere." Fifty years ago, "90 per cent of the federal government's borrowings came from domestic investors," but the present-day empire works on global debt and foreigners' savings. "From less than 5 per cent of Treasury bonds in overseas hands in 1952, the total now approaches 45 per cent, while the percentage of lending coming from domestic sources has been cut in half."

Aren't they still growing their own wheat? Yes, they do, "but the trucks to move it may be manufactured in Europe or Asia, and the pans its cooks in are probably made in China." Plus, "they get their electronic paraphernalia from Taiwan, clothes from Malaysia, and automobiles from Japan." Also: "They get scientists from India and classical musicians from Korea. And, money comes from all over the Eastern Periphery to keep it all going."

A chapter titled `The Road to Hell' notes how historians glorify national leaders: "Like crooked butchers, they advertise our biggest mutton-brains as prime beef and push their thumbs down on the scales of history to give them extra weight." Thus, though Lincoln, Wilson, and Franklin Roosevelt are rated high by historians, the authors say that all of them might just as well have been charged with `dereliction, gross incompetence, and treason' for having "betrayed the Constitution, got the country into a war that probably could have been avoided, and practically bankrupted the nation."

Economists and Guantanamo guards

Let me leave out chapters such as `The Revolution of 1913 and the Great Depression', `MacNamara's War', `Nixon's the One', `Reagan's Legacy' and so on for history-lovers to catch up with, but it is tough to skip the discussion of `Glorious Empire of Debt', which is about an edifice standing "not as a solid pyramid of trust, authority, and power relationships but as a rickety slum of delusion, fraud, and misapprehension."

While `petty agents spreading deceit and misinformation' are at the bottom of the pyramid, up the steps are "whole legions of analysts, economists, and full-time obfuscators." An interesting analogy is that "economists at the Bureau of Labour Statistics do to numbers what guards at Guantanamo did to prisoners". How? "They rough them up so badly, they are ready to say anything."

The Fed is "another caste of loyal liars". This is why: "Alan Greenspan and his fellow connivers not only urge citizens to mortgage their houses, buy SUVs, and commit other acts of wanton recklessness, they also control the nation's money and make sure it plays along with the fraud." There is more on Greenspan: that like Pontius Pilate, he hesitated and ultimately gave the mob what it wanted — "not blood, but bubbles." Judging the ex-central banker, the authors write: "As Talleyrand once remarked to Napoleon, `Sire, worse than a crime, you have committed an error'."

A great empire "begins with a bold crime, develops into a farce, with petty acts of tomfoolery and fraud along the way, and ends in shame, regret, and disaster." Then, `something wicked this way comes,' a chapter in which you read a snatch from Thomas L. Friedman, the authors' `favourite imperial columnist': "Sure Bangalore has a lot of engineering schools, but the local government is rife with corruption; half the city has no sidewalks; there are constant electricity blackouts; the rivers are choked with pollution... " Bonner and Wiggin take a good dig at Friedman, saying that he expresses his hollow thoughts with such heavy-handed earnestness. "He is so dense you can laugh at him without hurting his feelings... There is no trace of modesty in his writing — no scepticism, no cynicism, no irony, no suspicion lurking in the corner of his brain that he might be a jackass."

The authors point out that there are more engineers in Bangalore than in the state of California. "The software for DVDs was developed in Bangalore, not in Silicon Valley, says the French newspaper, Libération. In the seven short years of its existence in Bangalore, the Philips Research Centre alone has come up with 1,500 new inventions." Perhaps, Friedman has made amends for his earlier gaffes with `The world is flat'.

Tout passé, tout casse

The last part of the book is on `The Essential Investor', inviting with `welcome to Squanderville' a.k.a. the US (using Warren Buffett terminology that you can see in a 2003 article available on www.freerepublic.com). "The American empire, circa 2005, still sets the trends in fashion, arts, style, and manners — but it neglects engineering, science, and homeland-bound industries," caution the authors.

"People buy property now as they bought tech stocks five years ago — without any regard for earnings. It is all a greater fool game — betting that someone will come along who is an even bigger numskull than you are." Between 2001 and 2005, household net worth rose by about $6 trillion. The great comedy of the financial markets, according to the authors, is that "they put a fool together with his money just so they can get a good laugh by taking it away from him." Is a correction coming, wonder the authors, citing quite philosophically the French saying, `Tout passé, tout casse,' meaning `everything goes away'?

Will the US go the Japan way, and suffer a long, slow, soft slump? Possible, postulate the authors, but there is a difference, they say. "The US is an empire of debt. Japan was a republic of credit. The Japanese never stopped saving. They never stopped making things. If they had a fault, it was the same fault that the Chinese have now — they made too much."

A book to ideally wrap up the year's last weekend but it can keep you awake through the night!

Economics@TheHindu.co.in