When the Money Runs Out… So Does the US Empire

When the Money Runs Out… So Does the US Empire

The Dow stabilized yesterday. Gold rose $22.

In 2006, we wrote a book with Addison Wiggin called Empire of Debt: The Rise of an Epic Financial Crisis. The idea of the book was as follows:

Empires are not the result of conscious thought; they happen when a group is large enough and powerful enough to impose itself on others.

But empires are expensive. They are typically financed by theft and forced tribute. The imperial power conquers…steals…and then requires that its subjects pay ‘taxes’ so that it can protect them.

The US never got the hang of it. It conquers. But it loses money on each conquest.

How does it sustain itself?

With debt.

It doesn’t take tribute from the rest of the world; it borrows from it. As far as we know, no other empire has ever tried to finance itself by borrowing.

But it is a special kind of debt. The US borrows in its own currency — which it can print as it chooses. If the burden of repayment is too high, in theory, the Federal Reserve can just print more dollars to satisfy its obligations.

Here is further insight from two foreign policy professors Flynt Leverett and Hillary Mann Leverett:

Since World War II, America’s geopolitical supremacy has rested not only on military might, but also on the dollar’s standing as the world’s leading transactional and reserve currency. Economically, dollar primacy extracts "seignorage" — the difference between the cost of printing money and its value — from other countries, and minimizes US firms’ exchange rate risk.

Its real importance, though, is strategic: Dollar primacy lets America cover its chronic current account and fiscal deficits by issuing more of its own currency — precisely how Washington has funded its hard power projection for over half a century.

In the 1950s and 1960s, this posed little risk to foreigners, because the US dollar was backed by gold. But in 1971 — on August 15 — President Nixon repudiated the greenback’s gold backing.

Nevertheless, the dollar reigned supreme. Foreign nations needed to stock dollars in order to settle up on their overseas financial transactions. The US printed dollars… Americans spent them on foreign goods…foreign central banks bought them from their local merchants and manufacturers, and reinvested much of them in US government debt.

The dollars went out…in exchange for valuable goods and services…and then they came back in exchange for — more pieces of paper!

Year after year, the US ran a trade deficit. Year after year, US paper dollars and Treasury debt stacked up in foreign banks. We haven’t done a recent calculation. But the last time we looked, net cumulative deficits were approaching the $10 trillion mark.

When foreign central banks took in dollars, they had to print local currencies to give to local exporters in exchange for dollars.

The owner of an export firm presented the dollars to the local bank; he needed yuan, yen or zlotys to pay his bills. The local central bank invested those dollars back in the US.

This is how the US credit boom led to an explosion of cash and credit all over the world. Foreign central banks had to increase their money supplies — by printing up local currencies — to use to exchange for the rush of dollars.

This is what led Ben Bernanke to refer to a ‘global savings glut’. Actually, these were not savings at all — but money created ex nihilo by central banks.

Our point is that all empires end when they are defeated by a more vigorous empire…or when their financing runs out.

And now we are seeing the beginning of the end. From the Leveretts:

America is increasingly viewed as a hegemon in relative decline, China is seen as the preeminent rising power. Even for Gulf Arab states long reliant on Washington as their ultimate security guarantor, this makes closer ties to Beijing an imperative strategic hedge. For Russia, deteriorating relations with the United States impel deeper cooperation with China, against what both Moscow and Beijing consider a declining, yet still dangerously flailing and over-reactive, America.

Economist Liam Halligan, writing in British newspaper The Telegraph elaborates:

Beijing has struck numerous agreements with Brazil and India that bypass the dollar. China and Russia have also set up ruble-yuan swaps pushing America’s currency out of the picture. But if Beijing and Moscow — the world’s largest energy importer and producer respectively — drop dollar energy pricing, America’s reserve currency status could unravel. That would undermine the US Treasury market and seriously complicate Washington’s ability to finance its vast and still fast-growing $17,500 billion of dollar-denominated debt.

When the money runs out…so does the empire. Perhaps with a whimper. Or maybe a bang.


Bill Bonner
For Markets and Money

From the Archives…

Stakes are Rising in Asia Pacific
28-7-2014 by Dan Denning

Join Markets and Money on Google+

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and MoneyDice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill's daily reckonings from more than a decade: 1999-2010. 

To have Bill's reckonings delivered straight to your inbox subscribe to Markets and Money for free here.

Read more

Leave a Reply

3 Comments on "When the Money Runs Out… So Does the US Empire"

newest oldest most voted
Notify of
slewie the pi-rat

plus, just because 300 rich people all start in with this currency rant, does that make it “true”?
the current data is divergent, imo.

the checks are in the mail.

slewienomics is of the opinion that everything already keeled over in the neoCon psychosis.
this is as good as it gets!

slewie the pi-rat

wait! the dollar just fell outa bed!

Convergence a`la King.
we are doomed!


Empire requires strong, above replacement fertility rates and a nation of young people not geriatrics, so that knocks Russia and China out of the Empire game.

Empire requires abundant respources to take, especially cheap energy so the Empire and its vassals can produce and transport food and other goodies, problem is, we are running out of cheap, portable, dense energy so that pretty much means the USA will be the last Empire for a long time.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au