Economics is not rocket science. Neither is power.
Depressions are monetary phenomena caused by central bank issuance of excessive credit. In 1913, the newly created US central bank, the Federal Reserve, began issuing credit-based money in the US. Within ten years, the central bank flow of credit ignited the 1920s US stock market bubble; and shortly thereafter, following the collapse of the bubble in 1929, the world entered its first Great Depression in 1933.
Investment banks are the undoing of central banking. While all banks, central, commercial and investment, view credit as the opportunity to exploit society’s growth and productivity, investment bank exploitation of growth and productivity exposes society to extreme risks - for investment banks use society’s savings to make their volatile and speculative bets.
The speculative risks undertaken by investment banks is done by leveraging the savings of society; and, when investment bank bets are sufficiently large enough and the bets go bad - as they inevitably do as the luck of investment bankers is due more to their proximity to credit than to their ability to foresee the future - it is society that will bear the brunt of the pain in the loss of its savings.
Inevitably, investment bankers cannot resist the temptations of excessive credit and, like the buyers of teaser-rate home mortgages, they will always overreach themselves - an overreaching that will have disastrous consequences for the society whose savings they bet.
The leveraged overreaching by investment banks in the 1920s caused the Great Depression of the 1930s and their more recent overreaching in this decade, the 2000s, is about to cause another Great Depression in the next, the 2010s.
It is the proximity of investment banks to the pools of savings that allows investment banks to profit. By their access to society’s savings, investment banks use society’s wealth as the foundation of their highly leveraged bets in financial markets; and in so doing, they have now placed all of us in harms way.
GOVERNMENT THE DEVICE BY WHICH THE FEW CONTROL THE MANY
The collapse of financial markets in the first Great Depression led to the US Congress to enact laws that would hopefully insure that such a collapse would never again happen. To that end, in 1933 the Glass-Steagall Act was passed by Congress and signed into law.
Acknowledging the role that investment banks had played in the Great Depression, the passage of the Glass-Steagall Act in 1933 separated investment banking and commercial banking to insure that investment bank speculation would not again destabilize commercial banks as it did during the Great Depression leading to the loss of America’s savings.
What bankers hath joined together let no man put asunder
However, in 1999, the US Congress repealed the Glass-Steagall Act and America was once again vulnerable to the highly leveraged shenanigans of Wall Street. This time, however, it was not only the US but the entire world whose futures were to be bet and lost by Wall Street gamblers.
The globalization of financial markets had spread the dangers of US investment banking to banks, insurance companies, and pension funds around the world. Now, the savings of Europe and Asia as well as the US were to be impacted by the wagers of Wall Street who in the 2000s literally bet the house on the possibility that subprime CDOs were actually worth their AAA ratings.
Glass-Steagall, the law enacted in 1933 to prevent another Great Depression was repealed at the behest of bankers. While it is true that at certain times the US government will act in the best interest of society, usually (and usually in the guise of so doing) the US government is the pawn of the special interests that benefit from the trough of government largesse and regulation. The repealing of the Glass-Steagall Act in 1999 was therefore a reversion to the mean.
We are today in the initial stages of another collapse that will lead to another Great Depression. The safeguards put in place to prevent such from happening were not only disassembled in 1999; but, now in 2008, the US government has moved even closer to exposing its citizenry and indeed the world to the speculative carnage and folly of investment banking excess.
THE RULE OF LAW IS A WONDROUS THING - ESPECIALLY IF YOU WRITE THEM.
Bloomberg.com April 8, 2008
As credit markets seized up, the Fed gave the 20 primary dealers in U.S. government bonds the same access to discount- window loans that had previously been reserved for banks. The central bank now auctions as much as $100 billion to lenders a month, and has cut the cost on direct loans to just a quarter- point above the overnight rate on loans between banks.
The US Federal Reserve is now underwriting, i.e. subsidizing, the commercial activities of global private investment banks. The 20 primary dealers in US government bonds include the world’s largest investment banks - BNP Paribas Securities Corp. (French), Barclays Capital Inc (British), Banc of America Securities LLC (USA), UBS Securities LLC (Swiss), Dresdner Kleinwort Wasserstein Securities LLC (German), Daiwa Securities US Inc. (Japan) etc.
In truth, these investment banks are global entities and have no actual nationality no matter what jurisdiction in which they are legally domiciled. As such, they also have no allegiance except to their own self-interests.
QUESTION:
Why is the US government allocating public resources for the benefit of private international investment banks?
ANSWER:
US resources are subsidizing international investment banks through the Federal Reserve Bank, a quasi private entity which was given governmental powers in 1913 (some allege in violation of the US Constitution). That a quasi private bank is bailing out private banks with public monies does make sense. What doesn’t make sense is why the public allows it.
There is much discussion as to the justification and reasons for US, UK, European, and Japanese central banks bailing out private banks with public money. Issues such as moral hazard are now being raised in questioning the right and consequence of so doing.
In truth, such issues are irrelevant. Not that they are in themselves not important, but issues such as moral hazard will have no effect whatsoever on what is going to happen.
Intent is the underlying motive that explains what is about to occur. The intent of private bankers is not public stability, nor growth, nor productivity - it is the pursuit of private profit via the use of public credit and debt.
Today, most governments, especially the US and UK, are controlled by private bankers - which is why government policy continues and will continue to favor the interests of private bankers over the public good.
THE MELTDOWN OF MAMMON
I am sure that in some quarters of the Catholic Church objections were raised (perhaps even on theological grounds) about the torture used by the Church during the Spanish Inquisition; just as today, there have been objections raised by some in the US in regards to the use of torture in its "war on terror".
Objections are always tolerated by those in power as long as the objections do not rise to the level of action. The objection to central bank credit and influence in our monetary affairs is therefore rhetorical. The influence of private bankers and central banking in our monetary affairs will not change until their influence has run its course - which is now about to happen.
The present epoch of central banking will perhaps be known as the period when bankers roamed the earth. Just as during the Jurassic Age, when dinosaurs roamed freely eating whatever and whomever they encountered, bankers did much the same in the present epoch that is now about to end - profiting by the productivity of society and the public and private debts incurred as a result of bankers’ induced credit-based spending.
Bankers achieved their immense power during this era by exploiting flaws in human nature and systemic flaws in the economic system they constructed for their own benefit. But as with all flaws, human or economic, the consequences of so doing are exposed over time. That time has now arrived.
Money is not credit, nor is money created de jure by circulating paper coupons imprinted with a government stamp stating the coupons are now legal tender to be used in the settlement of debts.
The idea that central bank coupons/paper money, sic debt, can be used to settle another debt is astounding. That we have been led to accept it is so is even more astounding. Throughout history, every experiment with paper "money" as a settlement of debt has failed. Our experiment with paper money towards that end will be no different.
The recent correction in the price of gold and silver is just that, a correction in an otherwise direct repudiation of the on-going attempt by governments and bankers to substitute paper coupons for real money.
A paper yen, a paper euro, a paper dollar, when no longer backed and convertible to gold or silver is but a paper coupon masquerading as money - a coupon with an expiration date in invisible ink.
In truth, the bankers’ real gambit is not their bet that paper money can be substituted for gold and silver or that subprime mortgages can be passed off as AAA securities. Their real gambit is that central bank issuance of debt as money and their control of governments will never be discovered by the public.
HUBRIS FOLLY AND DISASTER
The world of credit and debt and all it has created has been made possible by bankers and their debt based system of money and central banking. Its cost, however, will be born by future generations who were not present when the debts were incurred.
Those who utter in pious simplicity those wonderful words, "our children are our future", have no idea what they have done to those very children and their future by spending today what future generations will have to earn tomorrow.
Here, in the US, an entire generation has grown up on the suspect promises of easy credit and paper money. That generation is now beginning to suspect that something is wrong, that the price of their gas, food and healthcare is rapidly rising and their dream of home ownership is a trap from which bankruptcy is increasingly their only escape.
Still, this generation has no idea of how terribly wrong it actually is and why it has happened; and their ignorance of such will give them little comfort during the Great Depression that lies directly ahead.
The chickens are coming home to roost; and they closer they come, the more they are looking like vultures.
coming depression will make 1929 look like a cake walk
Banks are closing more frequently now,the latest is the ANB , Arkansas
Association of banks have all closed their doors.
another development is that over 700,000 Chinese suppliers to Walmart are refusing to take American dollars.http://www.ft.com/cms/s/0/95f406ee-fc69-11dc-9229-000077b07658.html
Things will begin to come apart at a faster pace in American,as inflation spirals out of control.
the American dollar cant buy a square from a roll of toilet paper made in China.
America will need new money soon ,like the banana Republics in South America Americans will exchange their 10 dollar bills for 1 dollar bills all lower denominations will be illegal tender.Of course the Govt will have a rescue plan,The Amero the cost of this will be your freedom.
New York Investing meetup organizer Daryl Montgomery discusses the big banks that are most troubled as of September 10,2008. For more on this topic, please see our blog, The Helicopter Economics Investing
http://nyinvestingmeetup.blogspot.com./
The term FIAT MONEY is thrown around a lot these days. What is Fiat money?
Quote:
fiat money: Money which has no intrinsic value and cannot be redeemed for specie or any commodity, but is made legal tender through government decree. All modern paper currencies are fiat money, as are most modern coins. The value of fiat money depends on the strength of the issuing country's economy. Inflation results when a government issues too much fiat money.
A fiat money is a medium of exchange composed of some intrinsically valueless substance which the issuer does not promise to redeem in a commodity or a fiduciary money.
Because a fiat money has no direct legal connection to a commodity money (in terms of redemption) and, therefore, no real economic cost to its production, the supply of a fiat money can never be self-limiting; and the value of a fiat money is always largely a matter of public confidence in the economic or political stability of the issuer.
Historically every major fiat money have self-destructed in what is popularly called “hyperinflation” (that is, extreme decreases in purchasing-power) caused by either unlimited increases in the supply of that fiat money by the issuer or accelerating loss of public confidence in the continued value of the money or the economic or political fortunes of its issuer, or both.
Joined: 26 Feb 2007 Posts: 519 Location: Louisville KY
good post peter griffin. It is important that people understand what it is they are dealing with, especially amongst all the detailed words in use.
It is important to note, that every fiat currency established in history has failed.
In an interview with Peter Schiff I had seen, he claims that gold would possibly hit 5K USD an ounce in 4 years, if we continue on this path.
I will try and find it.
Lines at the ER, a television boom, emptying suburbs. A catastrophic economic downturn would feel nothing like the last one.
By Drake Bennett
November 16, 2008
OVER THE PAST few months, Americans have been hearing the word "depression" with unfamiliar and alarming regularity. The financial crisis tearing through Wall Street is routinely described as the worst since the Great Depression, and the recession into which we are sinking looks deep enough, financial commentators warn, that a few poor policy decisions could put us in a depression of our own.
Discuss
COMMENTS (28)
It's a frightening possibility, but also in many ways an abstraction. The country has gone so long without a depression that it's hard to know what it would be like to live through one.
Most of us, of course, think we know what a depression looks like. Open a history book and the images will be familiar: mobs at banks and lines at soup kitchens, stockbrokers in suits selling apples on the street, families piled with all their belongings into jalopies. Families scrimp on coffee and flour and sugar, rinsing off tinfoil to reuse it and re-mending their pants and dresses. A desperate government mobilizes legions of the unemployed to build bridges and airports, to blaze trails in national forests, to put on traveling plays and paint social-realist murals.
Today, however, whatever a depression would look like, that's not it. We are separated from the 1930s by decades of profound economic, technological, and political change, and a modern landscape of scarcity would reflect that.
What, then, would we see instead? And how would we even know a depression had started? It's not a topic that professional observers of the economy study much. And there's no single answer, because there's no one way a depression might unfold. But it's nonetheless an important question to consider - there's no way to make informed decisions about the present without understanding, in some detail, the worst-case scenario about the future.
By looking at what we know about how society and commerce would slow down, and how people respond, it's possible to envision what we might face. Unlike the 1930s, when food and clothing were far more expensive, today we spend much of our money on healthcare, child care, and education, and we'd see uncomfortable changes in those parts of our lives. The lines wouldn't be outside soup kitchens but at emergency rooms, and rather than itinerant farmers we could see waves of laid-off office workers leaving homes to foreclosure and heading for areas of the country where there's more work - or just a relative with a free room over the garage. Already hollowed-out manufacturing cities could be all but deserted, and suburban neighborhoods left checkerboarded, with abandoned houses next to overcrowded ones.
And above all, a depression circa 2009 might be a less visible and more isolating experience. With the diminishing price of televisions and the proliferation of channels, it's getting easier and easier to kill time alone, and free time is one thing a 21st-century depression would create in abundance. Instead of dusty farm families, the icon of a modern-day depression might be something as subtle as the flickering glow of millions of televisions glimpsed through living room windows, as the nation's unemployed sit at home filling their days with the cheapest form of distraction available.
The odds are, most economists say, we will yet avoid a full-blown depression - the world's policy makers, they argue, have learned enough not to repeat the mistakes of the 1930s. Still, in a country that has known little but economic growth for 50 years, it matters to think about what life would look like without it.
. . .
There is, in fact, no agreed-upon definition of what a depression is. Economists are unanimous that the Great Depression was the worst economic downturn the industrial world has ever seen, and that we haven't had a depression since, but beyond that there is not a consensus. Recessions have an official definition from the National Bureau of Economic Research, but the bureau pointedly declines to define a depression.
What sets a depression apart, most economists would agree, are duration and the scale of joblessness. To be worthy of the name, a depression needs to be more than a few years long - far longer than the eight-month average of our recent recessions - and it needs to put a lot of people out of work. The Great Depression lasted a decade by some measures, and at its worst, one in four American workers was out of a job. (By comparison, unemployment now is at a 14-year high of 6.5 percent.)
In a modern depression, the swelling ranks of the unemployed would likely change the landscape of the country, uprooting people who would rather stay where they are and trapping people who want to move. In the 1930s, this took the visible form of waves of displaced tenant farmers washing into California, but it also had another, subtler effect: it froze the movement of the middle class. The suburbanization that was to define the post-World-War-II years had in fact started in the 1920s, only to be brought sharply to a halt when the economy collapsed.
Today, a depression could reverse that process altogether. In a deep and sustained downturn, home prices would likely sink further and not rise, dimming the appeal of homeownership, a large part of suburbia's draw. Renting an apartment - perhaps in a city, where commuting costs are lower - might be more tempting. And although city crime might increase, the sense of safety that attracted city-dwellers to the suburbs might suffer, too, in a downturn. Many suburban areas have already seen upticks in crime in recent years, which would only get worse as tax-poor towns spent less money on policing and public services.
"You could have a sort of desurburbanization phenomenon," suggests Michael Bernstein, a historian of the Depression and the provost of Tulane University.
The migrations kicked off by a depression wouldn't be in one direction, but a tangle of demographic crosscurrents: young families moving back to their hometowns to live with the grandparents when they can no longer afford to live on their own, parents moving in with their adult children when their postretirement fixed incomes can no longer support them. Some parts of the country, especially the Rust Belt, could see a wholesale depopulation as the last remnants of the American heavy-manufacturing base die out.
"There will be some cities like Detroit that in a real depression could just become ghost towns," says Jeffrey Frankel, a Harvard economist and member of the National Bureau of Economic Research committee that declares recessions. (Frankel does not, he emphasizes, think we are headed for a depression.)
. . .
At the household level, the look of want is different today than during the last prolonged downturn. The government helps the unemployed and the poor with programs that didn't exist when the Great Depression hit - unemployment insurance, Medicaid, food stamps, Social Security for seniors. Beyond that, two of the basics of existence - food and clothing - are a lot cheaper today, thanks to industrial agriculture and overseas labor. The average middle-class man in the late 1920s, according to the writer and cultural critic Virginia Postrel, could afford just six outfits, and his wife nine - by comparison, the average woman today has seven pairs of jeans alone. So we're less likely to see one of the iconic images of the Great Depression: Formerly middle-class workers in threadbare clothes lining up for free food.
If we look closely, however, we might see more former lawyers wearing knockoffs, doing their back-to-school shopping at Target or Wal-Mart rather than Banana Republic and Abercrombie & Fitch. Lean times might kill off much of the taboo around buying hand-me-downs, and with modern distribution networks - and a push from the reduce-reuse-recycle mind-set of environmentalism - we might see the development of nationwide used-clothing chains.
In general, novelty would lose some of its luster. It's not simply that we'd buy less, we'd look for different qualities in what we buy. New technology would grow less seductive, basic reliability more important. We'd see more products like Nextel phones and the Panasonic Toughbook laptop, which trade on their sturdiness, and fewer like the iPhone - beautiful, cleverly designed, but not known for durability. The neighborhood appliance shop could reappear in a new form - unlicensed, with hacked cellphones and rebuilt computers.
And while very few would starve, a depression would change how we eat. Food costs remain far below what they were for a family in the 1920s and 1930s, but they have been rising in recent years, and many people already on the edge of poverty would be unable to feed themselves on their own in a harsh economic climate - soup kitchens are already seeing an uptick in attendance. At the high end of the market, specialty and organic foods - which drove the success of chains like Whole Foods - would seem pointlessly expensive; the booming organic food movement could suffer as people start to see specially grown produce as more of a luxury than a moral choice. New England's surviving farmers would be particularly hard-hit, as demand for their seasonal, relatively high-cost products dried up.
According to Marion Nestle, a food and public health professor at New York University, people low on cash and with more time on their hands will cook more rather than go out. They may also, Nestle suggests, try their hands at growing and even raising more of their own food, if they have any way of doing so. Among the green lawns of suburbia, kitchen gardens would spring up. And it might go well beyond just growing your own tomatoes: early last month, the English bookstore chain Waterstone's reported a 200 percent increase in the sales of books on keeping chickens.
At the same time, the cheapest option for many is decidedly less rustic: meals like packaged macaroni and cheese and drive-through fast food. And we're likely to see a move in that direction, as well, toward cheaper, easier calories. If so, lean times could have the odd effect of making the population fatter, as more Americans eat like today's poor.
. . .
To understand where a depression would hit hardest, however, look at the biggest-ticket items on people's budgets.
Housing, health insurance, transportation, and child care are the top expenses for American families, according to Elizabeth Warren, a bankruptcy law specialist at Harvard Law School; along with taxes, these take up two-thirds of income, on average. And when those are squeezed, that could mean everything from more crowded subways to a proliferation of cheap, unlicensed day-care centers.
Health insurance premiums have risen to onerous levels in recent years, and in a long period of unemployment - or underemployment - they would quickly become unmanageable for many people. Dropping health insurance would be an immediate way for families to save hundreds of dollars per month. People without health insurance tend to skip routine dental and medical checkups, and instead deal with health problems only when they become acute - meaning they get their healthcare through hospital emergency rooms.
That means even longer waits at ERs, which are even now overtaxed in many places, and a growing financial drain on hospitals that already struggle to pay for the care they give uninsured people. And if, as is likely, this coincided with cuts in money for hospitals coming from cash-strapped state and local governments, there's a very real possibility that many hospitals would have to close, only further increasing the burden on those that remain open. In their place people could rely more on federally-funded health centers, or the growing number of drugstore clinics, like the MinuteClinics in CVS branches, for vaccines, physicals, strep throat tests, and other basic medical care. And as the costs of traditional medicine climbed out reach for families, the appeal of alternative medicine would in all likelihood grow.
Higher education, another big expense, would probably take a hit as well. Students unable to afford private universities would opt for public universities, students unable to afford four-year colleges would opt for community colleges, and students unable to afford community college wouldn't go at all. With fewer applicants, admissions standards would drop, with spots that once would have been filled by more qualified, poorer students going instead to wealthier applicants who before would not have made the cut. Some universities would simply shrink. In Boston, a city almost uniquely dependent on higher education, the results - fewer students renting apartments, going to restaurants and bars, opening bank accounts, buying books, taking taxis - would be particularly acute.
A depression would last too long for unemployed college graduates to ride out the downturn in business or law school, so people would have to change career plans entirely. One place that could see an uptick in applications and interest is government work: Its relative stability, combined with a suspicion of free-market ideology that would accompany a truly disastrous downturn, could attract more people and even help the public sector shake off its image as a redoubt for the mediocre and the unambitious.
. . .
In many ways, though, today's depression would not look like the last one because it would not look like much at all. As Warren wrote in an e-mail, "The New Depression would be largely invisible because people would experience loss privately, not publicly."
In the public imagination, the Depression was a galvanizing time, the crucible in which the Greatest Generation came of age and came together. That is, at best, only partly true. Harvard political scientist Robert Putnam has found that, for many, the Depression was isolating: Kiwanis clubs, PTAs, and other social groups lost around half their members from 1930 to 1935. And other studies on economic hardship suggest that it tends to sap people's civic engagement, often permanently.
"When people become unemployed in the Great Depression, they hunker down, they pull in from everybody." Putnam says.
That effect, Putnam believes, would only be more pronounced today. The Depression was, famously, a boom time for movies - people flocked to cheap double features to escape the dreariness of their everyday poverty. Today, however, movies are no longer cheap. Nor is a day at the ballpark.
Much of a modern depression would unfold in the domestic sphere: people driving less, shopping less, and eating in their houses more. They would watch television at home; unemployed parents would watch over their own kids instead of taking them to day care. With online banking, it would even be possible to have a bank run in which no one leaves the comfort of their home.
There would be darker effects, as well. Depression, unsurprisingly, is higher in economically distressed households; so is domestic violence. Suicide rates go up in tough times, marriage rates and birthrates go down. And while divorce rates usually rise in recessions, they dropped during the Great Depression, in part because unhappy couples found they simply couldn't afford separation.
In precarious times, hunkering down can become not simply a defense mechanism, but a worldview. Grant McCracken, an anthropologist affiliated with MIT who studies consumer behavior, calls this distinction "surging" vs. "dwelling" - the difference, as he wrote recently on his blog, between believing that the world "teems with new features, new things, new opportunities, new excitement" and thinking that life's pleasures come from counting one's blessings and appreciating and holding onto what one already has. Economic uncertainty, he argues, drives us toward the latter.
As a nation, we have grown very accustomed to the momentum that surging imparts. And while a depression remains far from inevitable, it's as close as it has been in a lifetime. We might want to get a sense for what dwelling feels like.
The Coming Great Depression, by Charles Hugh Smith
I have been asked to address the coming Great Depression which is slowly but surely enveloping the globe. The irony of doing so in Thanksgiving week is not lost on me, and I want to preface my commentaries by saying that I do not tackle the subject cavalierly. There will be great suffering, on many levels, and the entire point of analyzing the situation is to lay the groundwork for alleviating the suffering by getting to the root causes of the financial, social and environmental disasters which are unfolding globally.
Let's start with the view of the U.S. from orbit. The first thing you notice from actual orbit (as opposed to "the long view" metaphor) at night is all the bright lights. In the daytime, you would see thousands of contrails from all the commercial airliners in the air.
The one key fact about all this energy usage is that about half comes from overseas; it is purchased from other nations and shipped great distances. This energy comes in the form of liquid petroleum, a highly energetic and easily transportable form of energy of which the "cheap and easy to get" kinds are now in permanent decline.
To those who don't believe in "Peak Oil," please note that regardless of all other conditions, estimates, theories, etc., the cheap-and-easy-to-get oil will soon be consumed. Every other form of fossil fuel will be costly to extract and refine.
Switching to a metaphorical "view from orbit," we see the primary fact of the U.S. economy is that it no longer produces a surplus. The nation consumes more than it produces, and has borrowed the difference for the past 27 years--more or less the time period of "The Great Bull Market" from 1982 through 2007.
These two facts are not unrelated; it was not mere coincidence that borrowing at every level of the U.S. economy increased in that time frame until it reached unimaginable quantities (and velocities) in the 2002-2007 timeframe.
From time immemorial, civilization has required a surplus to be earned from the labor and harvest of a tribe or people. If you consume the entire fruits of your collective labor, you have no surplus to trade with other peoples, no surplus to invest in roads, ships, additional fields, waterworks, armies, permanent structures (religious, communal or private), no "savings" for lean times, and certainly no surplus to pay anyone in the tribe to practice art or music.
An economy which creates no surplus cannot save any surplus to invest ("money" is nothing but a means of exchange and a store of surplus labor/energy). That economy is doomed to eating its seed corn, after which it collapses. Throughout history, ecological/environmental changes (unremitting years of poor rainfall and harvests) and/or regional conflict (unending wars which consume whatever surplus remained) have led to the downfall of great civilizations.
Now an empire has certain advantages over a tribe or city-state or even a nation. Through its power, both "hard" (military) and "soft" (financial, cultural influence, diplomacy, threats, etc.), the empire can coerce vassal states to sell their surplus goods and services at immense discounts to the empire, which then consumes the goods or re-sells them at enormous profits.
The empire can also create and sustain markets in vassal states for its goods and services, which it sells at a premium either directly or via the legerdemain of currency manipulation/control.
But when the empire consumes more than it gathers in surplus, then it too declines. It can mask the decline by stripping assets and surpluses from vassal states for a time, but eventually this exploitation reaches extremes which power revolutions and rebellions. With its surpluses gone and its populace weakened by decades or centuries of living off the fat of the land, the empire loses its military grip over the vassal states.
Once it has lost its ability to extract resources and goods at a discount and its markets for its own overpriced goods, the empire declines to mere nationhood or implodes into various political pieces (nation-states, client states, federations, etc.)
At home, the empire's populace has grown accustomed to consuming the surpluses of others. Creating surplus has been replaced with an obsession with consuming surplus, in ever more extreme and outlandish fashions. Both the refinement and brutality of human nature reach apogees in this blow-off of others' surplus; violent bloodsport games are enacted (in stadiums or via computer screens), absurd costuming and spectacles become commonplace, rare and exquisite foodstuffs are imported, prepared and squandered, and every excess in religion, art and sport is surpassed by an ever more outrageous waste of surplus.
Borrowing, either outright loans or via the legerdemain of depreciating currency, grows to the point where everyone is indebted to someone somewhere. Entire governments balance precariously on the high taxes extracted from the few remaining productive enterprises in the home empire, and on funds borrowed to pay the interest due on previous gargantuan loans. (See French and Spanish empires for examples.)
"Rights" abound in the empire doomed to implosion/decline: not just the right to free speech and the right not to be unduly harassed by authority, but the "right" to bread, shelter, entertainment, etc. When the bread runs short, the ugly mobs demand their "rights;" ironically, when bread becomes a "right" (a.k.a. an unearned entitlement), then it suddenly becomes scarce.
And when it becomes scarce, then the quality plummets, and those demanding their "rights to decent bread" ate issued weevil-riddled biscuits. And since there is no surplus, and no incentive to create surplus (whatever surplus is created is quickly appropriated by the debt-burdened government), then those lined up for their "rights" have to take the weevil-riddled bread and like it. Or not.
And then the mobs have to be controlled with a "whiff of grapeshot" (Napoleon) or they consume the crumbling bones of the empire piece by piece until nothing remains except resentments, unanswered demands, and eventually, either ruin or nostalgia.
That's how you get a global Depression.
Two totalitarian empires were attempted in the 20th century, both based on an unparalleled propaganda machine, unparalleled state control of every aspect of the economy and society, and the coercion offered by great military and secret-police organizations.
Both empires failed. Complete expropriation of rights and property is exploitation to such an extreme degree that it sparked resistance, and the old model of empire, i.e. one built on and sustained by wealth creation via trade and "soft power", had a great defender (the U.S.) Blessed with immense resources, a large and active populace and popular political principles, the U.S. created a "win-win" alliance which destroyed the Nazi empire militarily, and ground down the Soviet empire, which was doomed from the moment it failed to create any surplus on its own.
Now the U.S. empire faces unprecedented challenges, just at the point in time it has succumbed to all the temptations of debt and consumption of others' surpluses which brought down previous empires. The home populace of the empire is restive with demands for "rights" even as its own productivity (as measured by the surplus of production over consumption) has declined into deficits which require stupendous borrowing just to sustain current spending on "bread and circuses."
Even worse, an illusion of "growth" and "wealth" has been created by the FIRE (finance, insurance and real estate) economy in which shuffling paper and bits of data pass for actual productive activities when in fact they created nothing.
The cost structures of the unproductive parts of the economy (government, medical care, etc.) have skyrocketed at rates double or even triple the growth of the economy as a whole; the total tax burden (property taxes, payroll taxes, junk fees, permits, income taxes, business taxes, phone taxes, fuel taxes, sales taxes, etc.) have outraced both income and the overall economy, channeling whatever surpluses have been created into unproductive bureaucracies consumed with paper shuffling.
Like the frog being boiled alive, we do not seem to be aware of the heat rising. To take but one example: it now costs at least four year's pay to go to a hospital in the U.S. and have a medium-scale operation. The numbers are less important than the ratio, but those of you "in the business" know that if we take the median wage in the U.S. as $40,000, then a few days in the hospital is one year's pay (not intensive care, mind you, just a "regular" stay), the operation a year or two's pay, and another year for post-op care and medications. Intensive operations cost ten year's pay, of course, if not more. Did an operation and a few days in a hospital cost four year's pay in 1970 (the last gasp of the 25-year postwar Bull market)? No.
Now that we all have the "right" to operations which cost 4 to 5 or even 10 years' pay, where are all those decades of pay going to come from? The math is painfully simple. If we all get to have medical care which consumes (costs) 5 year's pay, then collectively we each need to save $200,000 or pay "medical care" taxes equivalent to $200,000 in order to pay for that consumption.
And if we also have the "right" to consume medications which cost another year's pay or two, then we better make it $300,000 each, or maybe $500,000 because we also have the "right" to unlimited MRI tests, etc.
But we as an empire have chosen the "easy way out" just as previous empires did: borrow the surpluses of others to consume, either directly via selling Treasury bonds, state and local government bonds, mortgage-backed securities, etc., or the appropriation of their wealth via management of our currency which they are forced to use.
Ironically (or not), once this care becomes a "right" (i.e. nearly "free" to consumers) it suddenly becomes scarce (expensive) and the quality goes down. Any system set up on this model eventually implodes under its own weight: cost structures with essentially no limit (no worker can be fired, no test denied payment, etc.) skyrocket, demands for "rights" increase, and the system collapses when there is no longer enough surplus wealth appropriated from abroad to pay the rising costs.
That collapse of high cost structures no longer supported by surplus wealth appropriated from trading partners is the essential cause of the coming Great Depression. Once the U.S. has to face its vast deficit between its saved/invested productive labor and its consumption, then the high cost structures will topple one after the other: first the auto makers, and eventually the entire Medicare/Medicaid industry.
The math is painfully simple: no cost structure can grow at two or three times the rate of the overall economy forever. We're about to experience the breaking point, and whether we in the home empire state like it or not, consumption will have to realign to match production minus savings for investment. Borrowing to fill the difference has worked for a long time, but it never works forever.
