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Book Review

Empire of Debt
by Bill 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 staggering $128,560.

     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.'

     Criticizing 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.

      Their 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.

     These “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 book.

     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 done.

     Bonner and 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.

 

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