THE ECONOMIC, MILITARY
and cultural reach of the U.S. may be unrivaled, but as an empire it's no strapping young buck. Those days are over, say Addison Wiggin and Bill Bonner in their new book, "Empire of Debt: The Rise of an Epic Financial Crisis." The authors describe with sardonic humor and no small amount of name calling how America has become an overfed, imperial has-been and economic basket case.
Ostensibly, America is the most prosperous nation on the planet. But it's also the world's largest debtor and biggest consumer, the "world's mouth," according to Wiggin and Bonner, who are respectively the founder and editorial director of Agora Financial, a Baltimore-based publisher of financial newsletters and web sites.
Meanwhile, as the country inches toward bankruptcy, Americans buy houses as investments, drain their homes of equity and spend what they don't have, say Wiggin and Bonner. Folks are living well above their means, yet drowning in an ever-rising sea of debt. A recession is imminent, predict the authors, and American hegemony will wane.
Any number of financial crises will contribute to the U.S. economy's demise, according to Wiggin and Bonner. But they figure the dangerously overvalued housing market will create the most damage. "We don't know what will cause a correction, but speculate here that the softening of the housing bubble is a likely candidate," says Wiggin.
Special pleasure is taken in blaming outgoing Federal Reserve Chairman Alan Greenspan for U.S. economic woes. Greenspan who's assigned such derisive sobriquets as, "the most famous bureaucrat since Pontius Pilate" and the "Great Deceiver" replaced the late 90's market bubble with another bubble in real estate and "overconsumption," says Wiggin.
SmartMoney.com spoke with Wiggin about U.S. economic troubles, his beef with Greenspan and ballooning debt.
SmartMoney.com: In the book you say that America's "empire of debt" depends on many "deceptions." What do you mean by that?
Addison Wiggin: We tried to demonstrate the development of empires over the course of the 20th century and the delusions people believe to make the system work. For instance, even though the dollar's not backed by gold, we believe we can print as many dollars as we need. Alan Greenspan has presided over the printing of more dollars in his tenure at the Federal Reserve than all other Fed chairmen combined. In response to all crises the Russian crisis, the Brazil crisis, the Asian crisis, the tech stock-market bubble each one has been met with more and more liquidity in the market, which has created what we call the great dollar standard. The entire financial system of the world is based on the dollar standard.
Right now we're approaching $8 trillion in federal debt. Eight-trillion dollars breaks down to an ongoing commitment of $24,000 per person in the country. [One estimate is that] by 2008, $8 trillion of U.S. debt will be owned by foreigners. That would represent 60% of the GDP. That's a mortgage on our future.
SM: What's behind the skyrocketing consumer debt?
AW: People treat their homes like ATMs. Generally what happens in a recession, people get a little less rosy picture of the future. They begin to repair their own balance sheets, try to pay off debt. But following the fall of the stock market in 2000, people spent at the same rate, racked up huge amounts of credit-card debt and refinanced their homes.
There was a time when people had mortgage-burning parties. [But now] they feel richer when they spend. They believe the future will reward them, make the debt less ominous and more manageable. We've become not a nation of savers, but a nation of monthly payers. People are more interested in consuming now. Over the long term, it's led to the enormous current-account deficit that we have.
SM: In the book, you point to low lending rates as the main culprit for consumer debt and people borrowing against their homes.
AW: In response to the crisis on Wall Street in 2000, a lot of people were speculating in dot-com and tech stocks. The Federal Reserve cut rates to historic lows and kept them there. [The Fed felt] it was important to target jobs and allow people to borrow against their homes. And that's what the Greenspan response was, and [Ben] Bernanke said he would continue what Greenspan's done.
What [Fed officials] are saying is that there's no inflation, except that the prices of everything people are paying for are going through the roof. I suggest we do what Paul Volcker, who was Fed chairman before Greenspan, did. He said it's not acceptable to have inflation; it's not even in the Fed's charter to allow inflation. Its job is to keep price stability, not worry about the jobs picture. He had to force a recession and hike rates up.
It's not politically expedient to do that. That's what recessions in the economy do, they help the economy repair their balance sheets, but no one has done that.
SM: How much impact does the American consumer have on this notion of "empire"? What can readers of your book do about it?
AW: We've achieved the influence of empires of the past. Generally they run their course. There's not a lot people can do about that. Likewise for readers of the book, they're not going to be able to do anything about federal spending. What can they do? They should be paying off debt. They need to not participate in the delusions that allow people to continue spending more than they make.
A lot of people believe stocks are the key to retirement. We want to show that stocks are an insiders' game, and most of the money made is made early on. The stock market has been trading sideways for the last couple of years; it's not a good way to build for your retirement. And a house is not the source for a cushy retirement. If you plan to cash in that money, you have to live somewhere else. And if everyone else on your street is doing the same thing, your house may not be worth that much. We try to work through the delusions, the myths of finances that have evolved out of the empire of debt.
SM: What's your beef with Alan Greenspan?
AW: Greenspan is kind of an enigma to us. Before he became a [part] of the Republican party, he was a devotee of Ayn Rand. He wrote that no government can ensure economic freedom without a hard asset like gold. If the dollar is backed by gold it requires the government to behave responsibly. He was an outspoken advocate of that and a famous popularizer of that in the '60s. Yet he actually became the Fed chairman to preside over the printing of more dollars than all chairmen combined. It's puzzling. It shows people come to believe what they must in order for the empire to go on.
SM: When the book was released last month, you sent it to every member of Congress. What's been the response so far?
AW: We sent out the book the day after the Senate hearings confirming Bernanke. We sent a letter explaining what happened since Greenspan took office. We asked senators they keep it in mind when confirming Bernanke. All the responses so far are form letters from senators. It was almost an experiment to prove what we're saying in book, that politics has come to such a state that even when they agree with us privately they can't do anything about it.