PAUSE FOR THOUGHT - A VIEW OF OUR ECONOMIC CRISIS

CLAY KINGDOMS
by Bill Bonner

Here at The Daily Reckoning , we turn to Shakespeare for a more poetic view of the financial collapse: “Let Rome in Tiber melt, and the wide arch Of the ranged empire fall!”

So said Marc Antony as he drew the Queen of the Nile into his embrace. This is another way to look at the crisis of ‘08. You begin by noticing that it is centered in just two countries – Britain and America. Not coincidentally, those two countries are the twin capitals of the world’s only surviving empire, an empire built on a foundation of industry, technology and trade...but lately richly redecorated in an elaborate rococo style of modern debt and finance.

Beginning in the 19th century, factories in England and New England transformed the value of a working man. Instead of being equal to his counterpart in China or India – as he had been for a thousand years – he suddenly was superior; he could produce more. By the 21st century, the average day laborer in Britain and America earned 10 to 20 times more than his confrere in Asia.

Of course, the English speakers had rivals. They were challenged by other Europeans...and the Japanese. All learned that the same machines that produced wealth could destroy it even faster. The Germans were particularly tenacious competitors. By 1910, their factory output was greater than that of the UK. By 1940, they were trying to blow up England’s factories. But England and America ganged up against them. In a couple costly wars in the first half of the 20th century, the Teuton threat was finally crushed.

By 1945, The Anglo-American empire had only one challenger still standing – the Union of Soviet Socialist Republics. Militarily, the USSR was a real menace. But commercially, it was no more than a comic footnote in economic history. At first, the weakness in the Soviet’s system was not obvious...especially not to economists. The figures – put out by the USSR – showed rapid growth. But nobody flew to Moscow to buy the latest fashions nor bragged about his Soviet auto. Nor did people hasten to open accounts in Russian banks or seek heart transplants in Soviet hospitals. The Soviets had managed to create a rare thing – a value-subtracting economy. They took valuable raw materials out of the ground and turned them into worthless finished products. If he had a choice, no one would buy soviet-made goods. Every sale made the seller poorer. And the longer this went on, the poorer the Russians got. Finally, the whole system caved in – in 1989, leaving the Anglo-Americans masters of earth,

This next era, 1989-2007, was remarkably pleasing to almost everyone. Even former enemies rushed to stock the empire’s shelves and lend it money.

Overstretched, over-indebted and over-there... it had military bases all over the world. No swallow could fall nowhere in the world without it being captured and interrogated by the Pentagon or its proxies. Back in the homeland, the imperial race went a little mad. People spent too much money...distracted themselves with bread and circuses...and flattered themselves with delusions of mediocrity. It seemed perfectly normal to them that they consumed while the foreigners produced...and that they spent what the foreigners saved. Central banks encouraged the plebes to consume; the more they consumed, the poorer they got, but as long as they had someone else’s money to spend, they didn’t complain. The imperial youth studied gender sensitivity at school; rivals studied engineering. And as for the foreigners themselves, like gigolos complimenting an aging heiress, they barely suppressed a snicker: “Your hair is beautiful,” they remarked. “Have another drink of sherry.” And while the poor

Soon, competitors had more modern factories, more savings, better-trained workers – as well as lower costs. Then, the empire turned to a colossal conceit; that it could make its way in the world by financing things, rather than making them. Gradually, the Anglo Americans developed a value-subtracting society too – financing, derivatizing, borrowing, flipping, consuming – all at the expense of real production. Russians recognized the symptoms: the leadership was largely delusional, industrial capacity was largely archaic and dysfunctional, and the working class was largely broke.

The old Bolsheviks recognized the rot too. What the Romans called “consuetude fraudium” became business as usual...in the Soviet Union...and then in England and America. By 2006, practically every transaction was tainted with swindle. Banks sold each other packages of scammy debt, composed of mortgage contracts on houses sold to people who couldn’t afford them, fraudulently rated Triple A by the rating agencies, based on quack formulae invented by Nobel-prizing winning economists. This took place in a party atmosphere created by central bankers, who had put something in the water; they spiked the entire economy by under-pricing credit and then urged consumers to drink up, by buying SUVs (Fed governor Tier, 2002) and using sub-prime loans (Fed chairman Greenspan, 2005). The Russians would recognize the next stage too. After the collapse, the ruins are liquidated, picked over, and parceled out to the politically well-connected.

“Kingdoms are of clay,” said Antony, before killing himself.

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Comment by Joseph on December 31, 2008 at 6:49pm
The Barbarians are already inside. They just can't decide which tidbit to devour first. So, many choices and no one to stop them.
Comment by Jon Compton on December 31, 2008 at 11:42am
My favorite line: "flattered themselves with delusions of mediocrity." I can think of few things that sum up my experiences in academia or even wargaming any better than that.
Comment by Jim Werbaneth on December 31, 2008 at 10:54am
When the barbarians burst through the gates, they'll find us all at Walmart.
Comment by Smitty on December 31, 2008 at 10:53am
Shop to you drop!
Comment by Jim Werbaneth on December 31, 2008 at 10:52am
Well-said. I remember a bit of leadership in which someone I shall not name appealed to American patriotism, calling on people to do more shopping.

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