Saturday, May 06, 2006

O debt, where is thy sting?

Bill Bonner and Addison Wiggin have written a book, Empire of Debt: The Rise of an Epic Financial Crisis, to warn that the United States's delusions of grandeur, a national debt so large that it must be financed by selling U.S. Treasury bonds to other countries -- China, they say, lends the U.S. $300 billion per year -- and inflationary funny money are leading us to ruin.

Bonner is president and CEO of Agora Inc. ("one of the world's largest financial newsletter companies") and the "creator" (the book flap says) of the free online letter The Daily Reckoning. The Daily Reckoning's message is much the same as the book's, and it appears to be supported by paid links to other newsletters touting unorthodox money making strategies for building your own private ark against the imminent rain, er, ruin.

(Wiggin is bio'd on the flap as the "editorial director and publisher" of The Daily Reckoning; curiously, although the book's byline is "Bill Bonner and Addison Wiggin," Bonner's name is in larger type, something I have never before seen with an "and" double authorship. We can presumably take it that Bonner was the primary writer, and for the sake of simplicity I'll refer to him as the author.)

Empire of Debt has two main arguments: (1) that the United States has evolved from a republic that used to mind its own business into a worldwide empire that is minding everyone else's business, out of hubris and vanity; and (2) that it is financially rotten to the core. Bonner believes the two ideas are inextricably linked. I don't, and I think he undercuts his case for the second theme by writing a lot of of silly, if clever, cant about the first.

To hear Bonner tell it, the U.S. was chugging along nicely except for an occasional inconvenience like the Civil War until Congress passed an amendment permitting an income tax in 1913. That, he says, let the dogs out. The modest republic quickly took on the role of a power-drunken empire. First up, America's entry into World War I: "[President Woodrow] Wilson longed to get us into it and imagined that he could transform the war -- and the world that came out of it -- in his own image. ... The reasons were just fluff. The real reasons were the same sordid, complex instincts that always lure people to war and ruin."

You can argue, with the sharp vision of hindsight, that helping Britain and France win the '14-'18 war didn't accomplish much, since it failed to prevent the reprise that began in 1939. But who could have known that at the time? Now hear him on the second world war:
Few would argue that World War II was a case of needless intervention, since the U.S. fleet was attacked at Pearl Harbor. Still, had America wanted to stay out of it, she could have done so. Pearl Harbor was attacked because the U.S. Navy posed a threat to Japanese imperial ambitions. If the United States had not displayed imperial ambitions of her own and had no satellite state in the Philippines, she would have presented no danger to the Japanese imperial forces. Nor was there any particular reason to go to war against Germany. Though allied to Japan, there was no question of Germany intervening in the Pacific War.
As a summary of the United States's reasons for engaging in World War II, this is so egregiously ignorant and morally obtuse that it is tempting to think Bonner is just joking, but if so, I don't get the joke. He offers a similar judgment on the Cold War: "During the period of the Cold War -- from 1950 to 1989, including the hot periods in Korea and Vietnam -- the United States spent a total of $5 trillion protecting the free world from the Evil Empire. If it had not spent a dime, the outcome might have been exactly the same -- but we cannot know that." Oh, please.


Bonner's ideas about the U.S. role in global politics are dopey, but in compensation, delivered with style and genuine wit. A sample (about Woodrow Wilson again, whom he holds in utmost contempt): "In the private sphere, a delusional man is soon impoverished, friendless, powerless, and hopeless. All he can do at that point is run for public office: Because in public life, foolish arguments have fewer and less immediate consequences."

In turning to the economic side of his screed, Bonner can be just as acidly humorous. His diatribe against Thomas Friedman, an economics writer for The New York Times, occupies five pages (pp. 261-266, if you want to look it up) and is a classic of invective, worthy of Mencken. I'm reluctant to quote from it, because you really should savor the thing in its entirety, but here's a taste: "You might criticize the man by saying his work is without merit, but, too, that would be flattery. His work has negative merit. Every column subtracts from the sum of human knowledge in the way a broken pipe drains the town's water tower."

Almost every president in the past 80 years gets a share of the blame for the country's financial downfall. He especially puts the boot in Roosevelt, for what Bonner sees as the flim-flam of the New Deal and for prohibiting private citizens from owning gold; Nixon, for removing the gold standard from the dollar, allowing the Treasury to print a Niagara of paper money to finance "imperial" adventures (the "Pax Dollarium") and service the ever-growing national debt; and perhaps most of all, that conservative saint, Reagan:

"Reagan cut nominal tax rates, but government consumed more and more resources. The leech grew. Lower tax rates gave citizens the impression that they had more money to spend. Individually, they did. Collectively, they did not. The program was merely a monumental legerdemain. For every tax-cut dollar that a citizen spent, the federal government had to borrow as much as $1.18 (with interest)."

And when we look at the story today, it's much worse. At last, Bonner starts making considerable sense, and he's far from the only one in the financial press who's seriously worried about year after year of government deficits, a staggering national debt, and an economy that runs on credit. I think he's right that the United States is becoming a country that makes less and less that anyone in the world wants to buy, and that practically all we know how to do anymore is sell things made in places like Indonesia and China to Americans who buy them by borrowing and siphoning funds from their home equity. At some point, the house of (credit) cards has got to fall down.

Earlier generations of Americans took pride in planning and saving for the future. But then, as Bonner says, "people switched their attention from assets to cash flow, from balance sheets to monthly operating statements, from long-term wealth-building to paycheck-to-paycheck financing, from saving to spending, and from 'just in case' to 'just in time.'"

I recommend Empire of Debt as grand entertainment, and the chapters from number 13 on for their observations about our poisoned prosperity. Bonner writes, "The citizens of Squanderville, as Warren Buffett calls the United States, are a happy bunch. They believe happy things; it doesn't bother them that the things they believe are impossible. After 20 years of mostly falling interest rates, mostly falling inflation rates, and mostly rising asset prices (stocks and real estate), people have come to believe that this is the way the world works: Interest rates mostly go down, and house prices mostly go up; it goes on forever."

By borrowing and spending rather than saving and investing, Americans are creating a boom. The trouble is, the boom is elsewhere, for the people who make the things Americans don't and countries that buy our debt. Bonner has a worthwhile point to make: if those countries ever decide to unload all that debt rather than hold it, look out below.

Note to John Wiley & Sons, publisher of Empire of Debt: Hire yourself a copyeditor or two. The repetitiousness, poor syntax, and typos in this book are disgraceful.

UPDATE 11/7/08

Considering that their book was written two or three years before the present financial debacle, you have to give Bonner and Wiggins credit for prescience. What they said then has become conventional wisdom now.


David Foster said...

When it comes to savings, there's an interesting paradox. It's true that the US savings rate is low (although Mike Mandel of BizWeek has argued that the measurement is distorted and that expenditures on education, for example, actually represent a form of savings, not consumption.) But it's also been suggested (by Ben Bernanke, among others) that there is a global "savings glut." Certainly, there does appear to be a lot of money chasing investments and driving asset prices up and rates of return down, and there are some pretty large cash balances on corporate balance sheets, which would not be there if their custodians had good ideas as to how to invest them.

I suspect that the next phases of growth in China and India will gobble up some of this money...China, for instance, is planning to build a lot of hydroelectric dams, which ain't cheap. On the other hand, labor cost differences will make these things cost a lot less than they would here or in Europe.

It does seem unnatural for capital to low from rapidly-developing countries to developed countriesm, rather than the other way around. IIRC, much of the US industrial expansion 1850-1900 (steel, railroads) was funded by European investors.

FuturePundit said...


In inflation-adjusted terms from 1960 to today the spending per elementary and high school student in America more than tripled. At the same time, outcomes did not improve. If that's investment it has a declining ROR.

We could do more education more cheaply if we automated it. Record lectures and make them available via DVD, internet channels, and other methods 24x7 to anyone who has time to watch. Automate test-taking with software.


One quibble about Reagan: If he really did push the USSR into bankruptcy then he made possible a large cutback in military spending that is in percentage points of the GDP. Of course the money got shifted into social spending under Clinton. But that is not Reagan's fault.