Empire of Debt
Bonner & Addison Wiggin
reviewed by Marco den Ouden
Originally published in The Break Out Report - March 19, 2006
I recently got two books for
my birthday, both requested. They are opposites in approach and conclusions. One
is pessimistic about the economy. The other is optimistic. One predicts doom and
gloom and says we should buy gold. The other preaches pie in the sky – a Dow of
40,000 by the end of the decade and says we should buy stocks, or at least the
indexes. In this issue I review the naysayers.
America is in hock up to its
ears and is perfectly set up for a fall claim Bill Bonner and Addison Wiggin in
their new book, Empire of Debt. And they may have a good case. The book
is loaded with facts and figures and offers a spirited argument for their
thesis. Indeed, it is not just the U.S. government that is running up an
unimaginable debt, but the average Joe as well. Fueled by a bubble in housing
prices, many Americans are re-mortgaging and taking equity out of their homes
and spending it. The folly of it all clearly appalls the authors.
But they argue more
than just economic folly. They make a political case as well. America has fallen
philosophically from a constitutionally limited republic that minded its own
business into a nosy parker empire that can’t keep its nose out of anyone
else’s business. And like the empires of the past, Rome, Austria, Napoleonic
France, the British Empire and the Soviet Empire, argue the authors, America too
must ultimately meet its demise.
The American Empire
started in 1913 with the creation of the Federal Reserve System, the addition of
the 17th Amendment which weakened state power in favour of federal
power and the addition of the16th Amendment which authorized an
income tax. And the bad boy who accelerated America’s road to ruin was Woodrow
Wilson who led the United States to join World War I, a stupid non-sensical war
if ever there was one, according to the authors.
This busy-bodyism took
another turn with Franklin Roosevelt who greatly augmented the size and power of
the federal government and yet another turn when Richard Nixon severed all ties
between the American dollar and gold. That set the stage for the modern form of
imperialism that the authors say is now sweeping the globe – the pax dollarium.
The US dollar is now the world’s reserve currency. And the United States is
using it to further its influence and to export inflation.
Now for the scary
numbers. When Ronald Reagan took office, the United States had an accumulated
debt of less than one trillion dollars. But his tax cuts and military build-up
swelled that debt to $2.6 trillion. Today it is over $8 trillion. And if
you add in unfunded liabilities such as social
security, that swells to $37
trillion. Every baby born in the United States is already on the hook for a
The news just gets
worse. To finance this debt, the United States exports treasury bills to foreign
governments, particularly in Asia. 45% of US government debt is now held by
foreigners with Japan and China the largest creditors. If they call in their
chits, they can bring America to its knees.
And while public debt
soared, the private sector followed suit. Household debt also soared. In 2005
Americans spent $20 for every $19 they earned. In January 2005 the nation
overspent at a rate of $2 billion a day. They are taking the extra cash out of
their home equity. Homeowner equity has dropped from 70% in the late 1970s to
less than 55% today. Household debt today is 113% of annual income. Before 1980
it was 58%. Some Americans are even leaving good jobs to become full time real
estate speculators – like the notorious flippers of the early 80s who got bitten
badly when interest rates soared and house values plummeted.
And security for the
future is less secure than ever. In 1983, two-thirds of older households earned
a pension. By 2001 it was less than half. 37% of American households do not own
a retirement account. And the average value of those that do is just $95,943
with the median level just $27,000. The median level for retirement accounts of
those between 55 and 64 was a paltry $55,000 in 2001.
And American saving has
dropped to negligible levels, just 1.2% of income (borrowed since they’re
spending more than they make.) Meanwhile the Chinese, newly exposed to the
wonders of capitalism and wealth creation, are saving at a rate of 25.5%. In
India the savings rate is 24.3%. The great irony is that the poor nations of
China and India are saving and investing while the United States stagnates. They
are financing American spending through the purchase of American T-bills and
stocks. It is through the good grace of thrifty poor people that Americans can
spend like gluttons.
This, Bonner and Wiggin
argue, is a formula for disaster. They expect the American Empire to collapse
under its debt load, or at best fade away. Asia will be the new economic
powerhouse of the future.
Bonner and Wiggin are
not just sounding the alarm, calling out that the emperor has no clothes like
the little boy in the story. They are morally outraged as well. They argue that
this empire of debt is built on deceptions:
the belief that one
generation can consume and stick the next with the bill
that you can get
something for nothing
that foreigners will
happily keep buying US debt
and that house prices
will go up forever
The authors argue that
the United States is lagging the Japanese by about ten years. After 1989 the
Nikkei Dow fell from 38,915.87 to just 11,329 in June 2005. Japanese house
prices dropped for 13 years in a row. In fact, prices in general in Japan fell
for ten years as deflation set in. Even dropping interest rates to zero couldn’t
get the Japanese spending again. A similar scenario but worse awaits America.
How can one protect
oneself? They really offer only two suggestions – invest like Warren Buffett,
that is use the time honored methods of value investing and avoid expensive
over-priced stocks. And
buy gold. Of course, the
book also implies that individuals should save more and spend less. They should
be cautious with their money and invest wisely, not speculatively.
The book is a tour de
force filled with facts, figures and cogent argument and worth reading.
If there is a downside
to the book it is in the author’s style. While they aver that they are paragons
of humility (“no one is more humble than we are”), they are actually
self-righteously snotty and disdainful of anyone that disagrees with them. As
early as page 6 they say, “If you deny that the United States is an empire, you
are as big a fool as we were.” In other words, if you don’t agree with them,
you’re an idiot. They refer to the average investor as a “lumpen investor”
borrowing from the Marxist term lumpen proletariat. According to Marx
the term refers to
the 'refuse of all classes,' including 'swindlers, confidence tricksters,
brothel-keepers, rag-and-bone merchants, organ-grinders, beggars, and other
flotsam of society.'
the opinions on foreign policy of New York Times columnist Thomas L. Friedman,
they proclaim that they themselves “have no position on foreign policy. We only
notice that the people who do have them are idiots.” In other words, if you have
an opinion on foreign policy, you’re an idiot.
I have an
opinion on foreign policy. I think the United States should never have attacked
Iraq. I guess that makes me an idiot even though, despite their protestations to
the contrary, I suspect Bonner and Wiggin share that view.
disdain for foreign policy positions begs the question – how can we improve or
change bad foreign policy without offering an alternative, even if that
alternative is is simply isolationism? Their claim to have no opinion is evasive
or a lie because their opinion jumps out at you from almost any page in the
book. They are anti-imperialist.
“humble” fellows also drop in lots of foreign phrases such as the latin “panem
et circensis” instead of bread and circuses further demonstrating their
superiority over the “lumpen” reader. Bonner and Wiggin revile the reader by
implication as an idiot “lumpen” fellow if he dares to disagree. This is a
classic argument from intimidation and is unworthy of an otherwise excellent
And if they
insult the reader, they positively slag their explicit enemies. Their snotty
pseudo-humility is belied by the self-righteous anger and invective they hurl at
their opponents. One example is their assault on Friedman. There is
considerable irony in that some of what they say about the man could equally be
applied to them. Take the following paragraph where I have replaced Friedman
with the authors.
“Never for a
moment do they stop to wonder why people do what they do. Nor has the thought
crossed their minds that other people may have their own ideas about what they
should do and no particular reason to think Bonner’s and Wiggin’s ideas are any
better. There is no trace of modesty in their writing – no skepticism, no
cynicism, no irony, no suspicion lurking in the corner of their brains that they
might be jackasses. There is no hesitation or bewilderment in their opinions;
that would require circumspection, a quality they completely lack.”
You get the
drift. They don’t just have an opinion on these matters, they have an inside
track to “truth”. And all those “lumpen” idiots who don’t see that truth deserve
to get smacked upside the head good and hard. Their desire to see the “idiots”
punished or “get what they deserve” as they put it, comes across in a number of
passages. It is unfortunate that they take a superb and convincing treatise and
undermine it with a self-righteous swagger that will alienate many readers.
So how doomed
is America? By their own evidence, the Clinton administration managed to wrestle
the debt problem down. (See chart on page 225). From 1992 to 2000, Clinton
reduced the deficit to zero in his first two years in office. He started paying
down the debt in the remaining six he served. It has only been under George W.
Bush that America started revving up the spending again. Here in Canada, the
Liberal governments of Chretien and Martin ran large surpluses year after year.
Our debt situation was arguably worse than the U.S. situation is now. It can be
Wiggin invoke an element of economic determinism, suggesting that the fall of
America is inevitable. Let us hope it finds its way again and their doom and
gloom scenario does not play out! The doom and gloomers were wrong in the 80s
and 90s, wrong with Y2K and maybe they are wrong again.