The Decline and Fall of the American Empire

Does the hypochondriac who is ultimately diagnosed with a real, physiological illness have the right to say “I told you so”?

Well, maybe. Sometimes a “hypochondriac” might be ill all along, but those diagnosing him just did not conduct the right test, or look at the right data. Medical science and diagnostics are nothing like as advanced as we like to hope. There are still thousands of diseases and ailments which are totally unexplained. Sometimes this means a “hypochondriac” might be dead or comatose before he ever gets the chance to say “I told you so.”

Similarly, there are are many who suggest that their own nations or civilisations are in ailing decline. Some of them might be crankish hypochondriacs. But some of them might be shockingly prescient:

Is Marc Faber being a hypochondriac in saying that the entire derivatives market is headed to zero? Maybe. It depends whether his analysis is proven correct by events. I personally believe that he is more right than he is wrong: the derivatives market is deeply interconnected, and counter-party risk really does threaten to destroy a huge percentage of it.

More dangerous to health than hypochondria is what I might call hyperchondria.


This is the condition under which people are unshakeably sure that they are fine. They might sustain a severe physical injury and refuse medical treatment. They brush off any and all sensations of physical illness. They suffer from an interminable and unshakeable optimism. Government — or, at least, the public face of government — is littered with them. John McCain blustered that the economy was strong and robust — until he had to suspend his Presidential campaign to return to Washington to vote for TARP. Tim Geithner stressed there was “no chance of a downgrade” — until S&P downgraded U.S. debt. Such is politics — politicians like to exude the illusion of control. So too do economists, if they become too politically active. Ben Bernanke boasted he could stanch inflation in “15 minutes“.

So, between outsiders like Ron Paul who have consistently warned of the possibility of economic disaster, and insiders like Ben Bernanke who refuse to conceive of such a thing, where can we get an accurate portrait of the shape of Western civilisation and the state of the American empire?

Professor Alfred McCoy — writing for CBS News — paints a fascinating picture:

A soft landing for America 40 years from now?  Don’t bet on it.  The demise of the United States as the global superpower could come far more quickly than anyone imagines.  If Washington is dreaming of 2040 or 2050 as the end of the American Century, a more realistic assessment of domestic and global trends suggests that in 2025, just 15 years from now, it could all be over except for the shouting.

Despite the aura of omnipotence most empires project, a look at their history should remind us that they are fragile organisms. So delicate is their ecology of power that, when things start to go truly bad, empires regularly unravel with unholy speed: just a year for Portugal, two years for the Soviet Union, eight years for France, 11 years for the Ottomans, 17 years for Great Britain, and, in all likelihood, 22 years for the United States, counting from the crucial year 2003.

Future historians are likely to identify the Bush administration’s rash invasion of Iraq in that year as the start of America’s downfall. However, instead of the bloodshed that marked the end of so many past empires, with cities burning and civilians slaughtered, this twenty-first century imperial collapse could come relatively quietly through the invisible tendrils of economic collapse or cyberwarfare.

But have no doubt: when Washington’s global dominion finally ends, there will be painful daily reminders of what such a loss of power means for Americans in every walk of life. As a half-dozen European nations have discovered, imperial decline tends to have a remarkably demoralizing impact on a society, regularly bringing at least a generation of economic privation. As the economy cools, political temperatures rise, often sparking serious domestic unrest.

Available economic, educational, and military data indicate that, when it comes to U.S. global power, negative trends will aggregate rapidly by 2020 and are likely to reach a critical mass no later than 2030. The American Century, proclaimed so triumphantly at the start of World War II, will be tattered and fading by 2025, its eighth decade, and could be history by 2030.

Significantly, in 2008, the U.S. National Intelligence Council admitted for the first time that America’s global power was indeed on a declining trajectory. In one of its periodic futuristic reportsGlobal Trends 2025, the Council cited “the transfer of global wealth and economic powernow under way, roughly from West to East” and “without precedent in modern history,” as the primary factor in the decline of the “United States’ relative strength — even in the military realm.” Like many in Washington, however, the Council’s analysts anticipated a very long, very soft landing for American global preeminence, and harbored the hope that somehow the U.S. would long “retain unique military capabilities… to project military power globally” for decades to come.

No such luck.  Under current projections, the United States will find itself in second place behind China (already the world’s second largest economy) in economic output around 2026, and behind India by 2050. Similarly, Chinese innovation is on a trajectory toward world leadership in applied science and military technology sometime between 2020 and 2030, just as America’s current supply of brilliant scientists and engineers retires, without adequate replacement by an ill-educated younger generation.

Wrapped in imperial hubris, like Whitehall or Quai d’Orsay before it, the White House still seems to imagine that American decline will be gradual, gentle, and partial. In his State of the Union address last January, President Obama offered the reassurance that “I do not accept second place for the United States of America.” A few days later, Vice President Biden ridiculed the very idea that “we are destined to fulfill [historian Paul] Kennedy’s prophecy that we are going to be a great nation that has failed because we lost control of our economy and overextended.” Similarly, writing in the November issue of the establishment journal Foreign Affairs, neo-liberal foreign policy guru Joseph Nye waved away talk of China’s economic and military rise, dismissing “misleading metaphors of organic decline” and denying that any deterioration in U.S. global power was underway.

Frankly — given how deeply America is indebted, given that crucial American military and consumer supply chains are controlled by China, given how dependent America is on foreign oil for transport and agribusiness — I believe that the end of American primacy by 2025 is an extraordinarily optimistic estimate. The real end of American primacy may have been as early as 9/11/2001.

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Why the Republican Party Needs Ron Paul

From the Washington Post:

Simply, Ron Paul is just too popular to ignore. Republicans will find it very hard to win with him running as an Independent. If anything, a three-way split might play out even more strongly for Paul, as he can bash both the incumbent and the Republican as emblematic of the establishment — an establishment that more and more is failing America.

Of course, many forces are deeply opposed to Ron Paul, because for better or worse, his small-government anti-Federalist policies are a drastic change from the status quo, and embarrass big-government Republicans like Newt Gingrich, Rick Perry and George W. Bush who claim they want to balance the budget and end up spending a heck of a lot more.

So Paul supporters can expect a deluge of negative claims: claims that he is a racist, claims that his foreign policy is dangerous, claims he wants to return to segregation, claims that he cannot win and is unelectable.

Ultimately, everyone knows that it is the status quo that is more unsustainable than anything else. America is now the most indebted nation in the history of our planet, bogged down in expensive wars and its role as global policeman, and increasingly in denial of her constitution and the principles of her founders. Congress and Obama — as well as extending the reactionary and unconstitutional Patriot Act — have recently signed some of the most reactionary and illiberal legislation ever in the NDAA of 2011, which allows for the indefinite detention of American citizens without due process. Americans voted for Obama hoping for change from the big-spending interventionist corporatism of George W. Bush, and got much more of the same.

Paul’s non-interventionist foreign policy, his civil libertarianism, his strict adherence to the constitution, his rejection of banking bailouts and his willingness to cut spending are not what every voter is looking for, but are a tonic to the disastrous policies of the status quo that are sucking down the American economy.

Of course, many Americans fear radical change. That’s why establishment contenders like Cain, Gingrich, Bachmann and Perry have rapidly risen in the polls and fallen, as voters scrabble around hunting for a viable alternative to the status quo. Paul’s gains have been slow, steady and consistent. This has been in spite of an earlier campaign of media ignorance, and now a campaign of media smears, including the charge that he is either or a racist, or has associated himself with racists.

These media attacks will prove ineffective. Voters are turning to Paul because of his policies, and the fact that he represents a radical departure from what to many Americans is a disastrously failed status quo. He could be the Grand Wizard of the KKK, a shapeshifting Reptilian from Alpha Draconis, or a cross-dressing drug addict, and that would not change a thing because Ron Paul will ultimately be judged on the content of his policies, not superficial smears that have nothing whatever to do with policy.

Voters — middle class voters, poor voters, factory workers, the unemployed — like the idea that the President will cut the debt. Voters like the idea that the President will respect a strict interpretation of the constitution, instead of passing authoritarian legislation like the NDAA, SOPA and the Patriot Act. Voters like the idea that the President will end wars, close foreign bases, and defend America, instead of practicing expensive nation building in the middle east and central Asia. Voters like the idea of not pledging future tax dollars to bailing out badly managed and corrupt banks.

While some of his stances are unpopular with some segments of the population, there is no other declared candidate from either of the major parties who offers any of the above. None. Ron Paul’s rise is just a symptom of the establishment not delivering to the people what they want, need and deserve.

Jeffrey Goldberg Calls For War With Iran?

Jeffrey Goldberg, foreign policy hawk, is making the case for some more “liberal” interventionism.

From Bloomberg:

An Iran with nuclear weapons may be unbearable for Israel. It would further empower Israel’s terrorist enemies, who would be able to commit atrocities under the protection of an atomic umbrella. It would mean the end of the peace process, as no Arab state in the shadow of a nuclear Iran would dare make a separate peace with Israel. And it isn’t too much to imagine that some of Iran’s more mystically minded leaders, mesmerized by visions of the apocalypse, would actually consider using a nuclear weapon on Israel — a country so small that a single detonation could cripple it permanently.

The Israeli prime minister, Benjamin Netanyahu, who once told me he believes that Iran is led by a “messianic, apocalyptic cult,” is correct to view Iran as a threat to his country’s existence.

[President Barack Obama] has said, repeatedly, that an Iran with nuclear weapons is unacceptable to the U.S. Many Israelis, and many Americans, think Obama is soft on such matters. But I believe, based on interviews inside and outside the White House, that he would consider using force — missile strikes, mainly — to stop the Iranians from crossing the nuclear threshold.

We’ve been here before.

From Goldberg’s 2002  New Yorker piece calling for American intervention in Iraq:

Saddam Hussein never gave up his hope of turning Iraq into a nuclear power … There is some debate among arms-control experts about exactly when Saddam will have nuclear capabilities. But there is no disagreement that Iraq, if unchecked, will have them soon … There is little doubt what Saddam might do with an atomic bomb or with his stocks of biological and chemical weapons.

The trouble is, no evidence was ever found that Saddam Hussein had any weapons of mass-destruction. But that didn’t stop the military-Keynesians who steamrollered into Baghdad before embarking on almost a decade of wasteful, expensive occupation at cost to the American taxpayer.

In a late 2002 debate in Slate, Goldberg described Hussein as “uniquely evil” and advocated an invasion on a moral basis:

There is consensus belief now that Saddam could have an atomic bomb within months of acquiring fissile material. … The administration is planning today to launch what many people would undoubtedly call a short-sighted and inexcusable act of aggression. In five years, however, I believe that the coming invasion of Iraq will be remembered as an act of profound morality.

Yes — profound morality.

Because, of course, war, imperialism, torture and mutilation are “profoundly moral” acts.

For those with strong stomachs, here’s some more explicit pictures of that “profound morality” guiding American “liberal” interventionism.

Goldberg was wrong about Iraq, and he’s wrong about Iran. Far from plunging the middle east into the throes of war, an Iranian nuclear weapon could very well stabilise the region under the shadow of mutually-assured destruction — the same force that stabilised relations between the Soviet Union and America.

The big difference, though is that with Iraq there was no threat that any “liberal” interventionism would spill over into a wider regional war.

Japanisation & the Zombie Apocalypse

America and Japan’s responses to their housing blow-ups have been eerily similar. So too have been the results.

As I wrote in August:

Essentially, in both the United States and Japan, credit bubbles fuelling a bubble in the housing market collapsed, leading to a stock market crash, and asset price slides, triggering deflation throughout the respective economies — much like after the 1929 crash. Policy makers in both countries — at the Bank of Japan, and Federal Reserve — set about reflating the bubble by helicopter dropping yen and dollars. Fundamental structural problems in the banking system that contributed to the initial credit bubbles — in both Japan and the United States — have not really ever been addressed. Bad businesses were never liquidated, which is why there has not been aggressive new growth. So Japan’s zombie banks, and America’s too big to fail monoliths blunder on. Policy makers “saved the system”, and ever since then have gradually dealt with slowdowns through monetary and fiscal easing.

Today Zero Hedge provide some empirical evidence for just how similar these events have been.

Stocks have followed broadly the same crisis-bailout-crisis-bailout pattern:


Money velocity has slouched at a similar rate:


Equity values relative to earnings have not recovered in either nation:


Some of those among us may say that all of this shows that Japanisation really isn’t that bad: with an ageing population, and powerful vested interests demanding consistently high government spending in spite of falling real incomes and falling real estate values, we’re about to head into a 15-year deflationary tunnel. “It won’t be pretty”, they say, “but it will be liveable.”

I think they’re wrong.

So what’s the key difference between America and Japan?

Look at the difference between Hurricane Katrina, and Fukushima.

From NewsFlash.org:

Reuters reported that Yakuza gangs have been sending trucks from the Tokyo and Kobe regions to deliver food, water, blankets and toiletries to evacuation centres in northeast Japan, the area devastated by the March 11 earthquake and tsunami which have left thousands of people dead and missing.

Not to glorify the Yakuza by any means, but compared to the looting and violence in New Orleans that followed Hurricane Katrina in August 2005, this speaks volumes about the enormous difference between Japanese and Americans in coping with natural crises or disasters.

Shortly after Hurricane Katrina left, some residents of New Orleans who remained in the city started looting stores in search of food and water that were not available to them through other means. There were also reports of carjacking, murders, thefts and rapes in the city, although many of these reports were found inaccurate due to the confusion. Then Louisiana Governor Kathleen Blanco had to temporarily deputize members of the National Guard and other federal troops to quell the looting and rioting. The governor said: “They have M16s and are locked and loaded. These troops know how to shoot and kill and I expect they will.”

Essentially Japan’s culture is a (largely) moderate, deferential, conformist, self-negating and (most importantly) united nation.

America is (largely) individualistic, greedy, bitchy and (most importantly) disunited.

From Colin Woodard’s sensational series of posts about America for Bloomberg:

The U.S. is wracked by internal discord between two blocs formed by seven of its 11 regional nations — the conservative bloc that includes the Deep South, Tidewater and much of greater Appalachia, pitted against the more liberal alliance of Yankeedom, New Netherland, the Midlands and the Left Coast. Increasingly, through American history, the conflict between these two blocs has been driving the nation apart.

The country has been exhibiting the classic symptoms of an empire in decline. Kevin Phillips — the political strategist who, back in 1969, used regional ethnography to accurately predict the ensuing 40 years of American political development – – has pointed out parallels with late imperial Holland and Britain. Like its superpower predecessors, the U.S. has built up a staggering trade deficit and sovereign debt while overreaching militarily. As financial services have come to account for a larger and larger share of national output, religious extremists have come to play a bigger and bigger role in political life.

Once a great exporter of innovations, products and financial capital, the U.S. is now deeply indebted to China, on which America relies for much of what it consumes and, increasingly, for the scientists and engineers who are needed by research and development firms and institutions. The U.S. citizenry is divided along regional lines. The country’s military has been mired in expensive and frustrating counterinsurgency wars in Mesopotamia and Central Asia, while barbarians have stormed the gates of Washington and Wall Street, killing thousands in the surprise attacks of September 2001.

Add in the damage to public confidence in the electoral system caused by the 2000 election, the near-total meltdown of the financial sector in 2008, and extreme political dysfunction in the capital, and it’s clear the U.S. hasn’t started the 21st century auspiciously.

Simply, America will blow up into secessionism, class warfare and civil unrest before standards of living for the middle class drop by anything like they have in Japan. The people will get mad as hell, and they just won’t take it anymore. They only hope for America is some kind of real recovery, coupled with new growth, and less dependence on foreign energy and goods. But with a zombified Japanised economy consisting largely of bailed-out uncompetitive failures there is little hope of that.

Civil unrest, followed by secessions, followed by a Second American revolution, is a far more likely scenario.

The Excesses of Crony Capitalism

That when government tries to play kingmaker in the markets is often disastrous is well known. Why is that the case? Well misallocation of capital is one reason: very often, the companies that government anoints are not very competitive. Another reason is false security: with the seal-of-approval of government, companies can excuse themselves for spending to high heaven on things they don’t need.

One anecdotal case is Solyndra.

From Bloomberg:

The glass-and-metal building that Solyndra LLC began erecting alongside Interstate 880 in Fremont, California, in September 2009 was something the Silicon Valley area hadn’t seen in years: a new factory.

It wasn’t just any factory. When it was completed at an estimated cost of $733 million, including proceeds from a $535 million U.S. loan guarantee, it covered 300,000 square feet, the equivalent of five football fields. It had robots that whistled Disney tunes, spa-like showers with liquid-crystal displays of the water temperature, and glass-walled conference rooms.

“The new building is like the Taj Mahal,” John Pierce, 54, a San Jose resident who worked as a facilities manager at Solyndra, said in an interview.

The building, designed to make far more solar panels than Solyndra got orders for, is now shuttered, and U.S. taxpayers may be stuck with it. Solyndra filed for bankruptcy protection on Sept. 6, leaving in its wake investigations by Congress and the Federal Bureau of Investigationand a Republican-fueled political embarrassment for the Obama administration, which issued the loan guarantee. About 1,100 workers lost their jobs.

The sad reality is that had Obama not intervened, Solyndra might still exist. If it had not ramped up production with the government’s help, it might have realised that its manufacturing process was no longer cost effective, and modified it to be so. If it had not received the loan guarantees, it would have constructed its factory more frugally, significantly lowering overheads and lowering the chances of insolvency. Spending the government’s money that you haven’t earned on flashy facilities is very easy. Spending the money of investors — who are expecting a return, and will watch your every move (and sue you for misfeasance) — is considerably harder.

I am still very optimistic about solar energy. Last month I wrote:

The solar energy hitting the earth exceeds the total energy consumed by humanity by a factor of over 20,000 times. More solar energy hits the world in a day, than we use in fifty years, at current rates.

So for me, solar is the future. Of course, there will be failures along the line. The story of capitalism is very much one of trying and trying and trying some more until a viable solution, product or system emerges. That’s why it’s a highly empirical and practical system.

But it is not for the government to take the risk, and taxpayers that take the hit. Nor is it for government’s denizens to create palaces of the absurd.

If Solyndra had failed in a less public and obnoxious fashion it would be just another startup that didn’t work out. Now, it might just stigmatise the solar industry in America for years to come. Companies that want investment for solar technologies will now find it harder to raise capital.

I hope the next administration learns that while investing in basic science and a level playing field for ideas is fine, picking winners and losers in markets is dangerous and damaging.

European Leaders Scrabble For Agreement

From the BBC:

The outline of a large and ambitious eurozone rescue plan is taking shape, reports from the International Monetary Fund (IMF) in Washington suggest.

It is expected to involve a 50% write-down of Greece’s massive government debt, the BBC’s business editor Robert Peston says.

The plan also envisages an increase in the size of the eurozone bailout fund to 2 trillion euros (£1.7tn; $2.7tn).

European governments hope to have measures agreed in five to six weeks.

The bizarre thing is that the real issue is not whether or not some agreement can be reached, but whether or not any agreement will really have any real effect on the state of the European financial system. I am extremely dubious that the thrifty Scandinavian and Germanic nations will commit huge swathes of their wealth to save the Mediterranean ones. But even if an expanded EFSF can be brought together to successfully bail out Greece and recapitalise European banks who have to write down significant chunks of Greek debt, there is no guarantee whatever that any of these measures will address the underlying fracture in European budgeting. Namely, that European governments are spending like they are monetarily sovereign — in other words, behaving as if they can print as much money as they want to cover debts — when they are not.

Of course, there is no real guarantee that Europe will even effectively stabilise its banking system.

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Economy Tanking, Precious Metals in Liquidation

Silver is getting pummelled:


So is gold:

What does this mean?

Hedge funds and speculators who were long gold are trying to get a buffer of cash to soak up hits from the coming default cascade.

What does that mean for gold’s long term fundamentals?

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