“Can you really run a great empire on borrowed money?” asked Richard Russell recently. We can give you the answer here…or you can simply read the news headlines. Either way, the answer is the same: yes, for a while.
America has been the world’s leading imperial power for only three or four generations. It took over from the British in WWI. Since then, American military and commercial power has dominated the planet.
But the empire business, like any business, has its good points and its bad points. On the good side, you get to boss people around and feel important. On the bad side, it can be costly – especially if you don’t know what you are doing. And on the really bad side, it almost always ends in bankruptcy and military disaster.
We explain this phenomenon in our books, Empire of Debt (with Addison Wiggin)…and Mobs, Messiahs and Markets (with Lila Rajiva). Empires – like other grand public spectacles – make the news twice, we recall writing, coming and going. Most likely, the US empire is on the ‘going’ side of the news. That is the meaning of Mr. Xu Jian’s comment that the US currency is yesterday’s world money.
The empire business is fundamentally a protection racket. The imperial power provides political stability and military protection. In return, the tributary or vassal states pay. But that is the fly in America’s imperial ointment. No one pays. The United States invaded Iraq. Cynics say it did so to get Iraq’s oil. At least, that would have made sense from an imperial finance point of view. Nothing uses more oil than the pentagon. And nothing is more costly than garrisoning troops all over the world and fighting ‘insurgents’ you’ve stirred up.
How to pay the expenses? Typically, an imperial power either forces subject nations to render up some form of tribute – gold, slaves, wheat – or, in the more modern variety, it insists on certain favourable trading terms.
But America never got the hang of empire; it invades countries but forgets to steal the treasure. It is so impressed with its own claptrap – “making the world safe for democracy”…“fighting terrorists” – that it forgets it has to pay the bills.
In its most modern form, the US empire has one great advantage: the rest of the world looks to the dollar as a universal currency. Until now, the United States has been able to finance its imperial aspirations largely by paying in dollars, which other nations accepted at par. But no law says they have to continue to take them. And now, fashion models and foreign governments – including an up-and-coming rival, China – are beginning to raise questions. And now the US dollar is in the news – going, along with the empire.
That is why, too, our old friend Jim Rogers says he going too. He’s selling out of America and putting his money in China. He’s even taught his daughter to speak Mandarin…
Jim is a visionary. He’s looking ahead, towards the next big imperial cycle. China is in the news too of course…it’s making headlines coming while the US is making headlines going.
Maybe we should do what Jim is doing. Maybe we should move to China. Maybe we should put all our money in the yuan…
Nah, we don’t know anything about the yuan. We’ll stick with gold.
But hasn’t gold gotten ahead of itself? Isn’t it ready for a correction?
Possibly. Many experts expect a big reversal in gold, even experts who think it will eventually go over US$1,000. They could be right.
But we don’t trade gold. We don’t even invest in it. We just buy it as a place to keep savings. We count our savings in ounces, not dollars.
Gold is like housing to us. We don’t buy houses as investments either. We buy houses we want to live in. We try to only buy ones that we want to live in for a long time. If their market prices go up or down, we don’t care. We have no intention of selling.
Likewise, we have no intention of selling gold. It is just a place to keep savings.
Where, then, do we invest? Ah, dear reader…you are asking tough questions today.
But what the heck, we will take you into our confidence. We don’t really believe in investing. That is, we don’t believe in the whole concept of getting something for nothing. Yes, we know people do it, but we’re not interested.
Markets and Money