End of empire

Is there now any doubt that the U.S. is, in fact, an empire? After resisting the charge by Marxists for years, even some right-wing commentators have begun to embrace the idea.

An empire is a nation that successfully projects its political, economic, and cultural might across an ever-increasing geographical area; empire is the logical extension of the concentration of power in the hands of the state. Most nation-states have either achieved it (then lost it), or attempted it; no nation seems immune to the allure of empire.

The U.S. is an odd empire though. Like others in history, the U.S. relies upon its military power, which rests upon its productive capacity. Unlike other empires, the U.S. relies heavily on debt, created by the capturing of the world’s money. No other country in history has been able to secure its sole position as the the supplier of the world’s money. The last empire to have a world currency -- the British pound sterling -- could hardly be described as the sole supplier of money, because the pound sterling was a convertible currency, redeemable for gold. In 1931, the United Kingdom became a fiat currency, due to increased pressure on the pound because of the inflationary creation of new money to pay off its debts from World War I. The monetary instability that resulted from the war and its aftermath certainly contributed to the conflagration of World War II. After the dust had settled, the U.S. stepped in to ‘rescue’ the pound sterling, backing the pound with the dollar. Thus the emerging empire began to take the place of its former colonial master. The US achieved dollar hegemony by lending to Europe and Japan, both of which were basically occupied by US military bases. The creation of the IMF and World Bank, who lend in US dollars, also established the demand as the reserve currency. Finally, the trading of oil on world markets created the ‘petro-dollar’, again providing a reason for all industrialized nations to require US dollars.

Once the world had become accustomed to the dollar as a ‘hard currency’, the stage was set to follow in the footsteps of the UK and sever the tattered connection between the dollar and gold in 1971. Contrary to popular opinion, the US was not on a ‘gold standard’ prior to 1971. That was effectively ended in 1933, when President Roosevelt made it illegal for US citizens to hold more than $100 in gold (about $1500 in today’s dollars).

Everyone in the world would like to be able to print their own money, gaining the ability to trade an item which can be produced with very little labor and expense for goods and services of much greater value. It’s the age-old attempt to get something for nothing.

And here we have achieved it. We can print dollars; other countries are obliged to hold them, if they want their currencies to remain stable. So other countries must set to work to provide us with cheap goods, the fruits of our empire. We ‘print’ dollars or Treasury securities, and the world takes them as payment for real goods and services, exchanging real value for illusory value, and the result is a current account deficit (where trade imbalances between imports and exports appear) and a capital account surplus (where imbalances in flows of financial assets appear). Since by definition the balance of payments, which includes both the current and the capital account must equal zero, this situation seems to be stable, and of course it has lasted for 30 years -- is it a coincidence that these imbalances began only a few years after the US severed the last link between the dollar and gold?

Though we have gotten something for nothing for a while, this is about to end, because the artificial strength of the dollar cannot last. One thing all empires share is hubris. The British came to believe that the value of the pound sterling must always be high, even as their own monetary inflation debased it. In the US, the sentiment is similar. Treasury secretary Paulson must utter the strong-dollar catechism, or risk disturbing sensitive international currency markets.

As Bonner and Wiggin argue in their excellent book Empire of Debt, the dollar is in a long historical process of mean reversion -- but the mean value of the dollar is clearly the value of the paper and ink upon which it is printed: close to zero. Markets can remain irrational longer than you can remain solvent, remarked Keynes; he could’ve added -- markets will not remain irrational forever.