The Overstretched American Empire

O! Bama! Whither takest thou us?

There are two broad theories concerning the great men of history. One says that history is made by great men. The other says great men are made by history. But here at The Daily Reckoning we think they're both wrong. In our book, great men don't really exist. They are merely invented by the historians. History needs heroes. Sometimes tragic heroes... sometimes comic... the historians take what they've got to work with and set them spinning. But if you look at their leading characters closely, they look little different from the rest of us... just fellow passengers on the big bus.

Poor Obama. He seems like such a likable fellow. He would probably make a good college president. Or a good butcher. You'd enjoy going into his shop to buy cutlets.

But now the poor man finds himself in what has to be one of the tightest spots in history. At least in economic history. The crash of '08-'09 clipped stock market investors for half their nominal wealth. The bear market in property has put one out of every four homeowners underwater. And now the recession/depression threatens to knock the stuffing out of the rest of the economy.

How can he get us out of this jam? He hasn't a clue. So, he turns to his advisors... his hacks... his pollsters and his hangers-on...

..and what do they come up with?

"U.S. deficit four times last year's record," comes the press report. "Federal government will borrow almost 50 cents of every dollar it spends this year."

This news would have taken our breath away. If we had any breath left. But after so many wonders, each one more breathtaking than the last, our lungs are all squeezed out. We can't even give an audible sigh. Hold a mirror up to our nose and you would think we were dead.

You'll recall that President Obama announced that he had found budget savings of $17 billion. We were exhaling on that for a moment until we realized that it represented less than 36 hours' worth of federal spending. Then came news a week later that instead of cutting the budget, the latest estimates showed it going up by some $89 billion.

Let's face it, at this point $89 billion is chicken feed. Here at The Daily Reckoning we carry that much in our wallet. We pass it out to subway bums and use it to tip cab drivers. So, we're not about to get excited about such a trivial amount.

But coming on top of a budget deficit already estimated at four times the record deficit set last year...and we begin to think of straws and camels.

The idea of spending twice as much as you earn should take even a camel's breath away. An ordinary man...hearing that fact...would feel like breaking the glass and pulling the alarm. "You can't do that...you'll go broke," he would say. Basic arithmetic reveals the trap. In one year, you've built up debt equal to all of next year's revenue. In two years, you've got debt of 200% of annual revenues. In 10 years, you've got debts equal to 1,000% of your annual receipts. Let's see...say you only pay 5% interest...then, the interest alone takes up HALF your revenues. What creditor would lend you money?

The feds have their own projections, of course. According to them, they won't continue this hell-for-leather spending much longer. Their estimates show the deficits declining in future years. Ten years out, they show a fairly modest total of $7.1 trillion in accumulated deficits.

It is a measure of how breathtaking the financial news has been that $7.1 trillion can in any way be regarded as modest. It is half America's total GDP. It is also a measure of how out-to-lunch the federal estimators are. Their projections imagine a "worst of worlds" that would be a "best of worlds" to most people. In the Great Depression, national output went down by some 30%...and continued for a decade (depending on how you figure it). In Japan, the on-again, off- again slump has gone on for 19 years. Yet, the official guess is that this downturn in the US will take output down by only 1.2% and that it will be over in a few months...with a return to growth of 3.2% in 2010.

No one knows how bad it will become. The last report showed GDP declining at a 6% rate. And our friend Nassim Nicholas Taleb says it will be "vastly worse" than the '30s.

But give a man enough education and he's ready to believe anything. He can even convince himself that such reckless spending is a "stimulus" effort...that it merely "replaces" spending that would have been done by the private sector (if the private sector were stark raving mad)...and that it will bring about a "recovery" in the entire economy.

You could even glance at the latest financial news and say: "Look...it's working!"

The Dow lost 155 points yesterday. A minor setback in what has been an agreeable interlude. Oil, the dollar, and gold stayed about where they were yesterday.
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More soon, but first we turn to Ian in the City of Baltimore for some news...

"Today's forecast: Thunderstorms for the credit card companies," writes Ian Mathias in today's issue of The 5 Min. Forecast.

"According to the government stress tests, credit card losses just for the 19 banks under scrutiny could exceed $82.4 billion by the end of 2010. That's more than the market caps of Citigroup, American Express, Capital One and Discover... combined. Hmmmm...

"And that number is unquestionably light. The $82 billion loss would be a consequence of the Treasury's worst-case scenario, which we've noted before is surprisingly rosy. Even worse, the government tests only examined credit card obligations held on bank balance sheets... not the tens of billions of dollars worth of loans packaged into bonds and sold to sucker investors, a la the mortgage-backed securities of 2008.

"Factoring in those loan-backed bonds and a nastier market, consulting firm Oliver Wyman forecasts losses twice as large... up to $186 billion for the whole credit card industry.

"Strip away the fancy accounting and forecasts and give us your gut reaction to this question: Would you expect more credit card losses during this recession (aka the credit crisis) or the tech bust?"

"While the current fiasco has managed to surpass the tech bust in nearly every regard, credit card losses are still a long way from 2001 highs. Hell, we're barely above 2006 levels, when the economy was in the midst of a faux-boom. And as you can see, the steepest losses have shown up toward the end of the last two recessions... some very dark clouds hovering above the credit card biz."

Each day, Ian Mathias writes for The 5 Min Forecast, a daily executive series e-letter that provides a quick and dirty analysis of economic and financial developments - in five minutes or less. It's a free service available only to subscribers to Agora Financial's paid publications. One such newsletter, Wayne Burritt's Easy Money Options, offers a "bread and butter" technique for discovering the most lucrative gains around...like 150% plus in as little as two weeks. Click here to learn more.

And now, back to Bill in London...

Our thoughts return to Mr. Obama. He is surely the man of the hour. He is the fellow historians will take for the leading man. Will he be a tragic hero? A comic hero? One of America's greatest presidents? A black Lincoln? A Roosevelt with two good legs?

Like Lincoln and Roosevelt, he is a man with no apparent convictions that will stand in his way. Perhaps he is just the man the U.S. of A. needs - a man capable of bankrupting the nation with a smile.

Yes, Dear Reader, the 'great man' always seems to come along when you need him. Longtime Daily Reckoning readers will recall our theory:

After the Berlin Wall came down... America had no enemies worthy of the name. She had a monopoly franchise on the world's money - the dollar was the undisputed queen of the planet's reserves. And she had a monopoly on military power too - the undisputed king of the hill, with a Pentagon budget nearly as large as all other nations' military spending put together.

But nature abhors a vacuum and detests a monopoly. Lacking a suitable challenger, America had to become her own worst enemy. Lacking a rival who could destroy her, she had to destroy herself.

And so, when Americans went to the polls in November of 2000, they elected a president who was up to the job: George W. Bush. Eight years later, the Clinton surpluses had turned into the biggest deficits ever...an immense bubble had impoverished the middle class...and the country was engaged in two unwinnable, unnecessary, and hugely expensive wars.

Mission accomplished!

But it's not over. The millstones of history may grind slowly...but they grind exceedingly fine... The American empire is clearly overstretched and over-indebted. If it is to save itself, it should scale back immediately...cutting the Pentagon budget in half, for example, and eliminating all unnecessary expenses (which is most of them). Instead of spending $3 trillion, it should spend...say...$1 trillion, and run a surplus.

What about the depression, you might be wondering. Isn't this the time to increase government spending, rather than decrease it? Ah...if you are even asking the question, you are the victim of a dead economist. Keynes' theory was that the state should run contra-cyclical surpluses and deficits - to offset the ups and downs of the business cycle. But that is too soggy a bog for us to trod in today. Instead, we will skirt it with another of our dicta:
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People come to believe what they must believe when they must believe it.

When an empire is new and fresh and growing...people believe in saving, hard work, and small frugality.

When an empire is old and decaying...they think the government should spend "whatever it takes" to take care of them. This attitude helps destroy the empire...thus making room for the next one.

But if America really wanted to protect its wealth, its power, and its position in the world, it should fight the depression in an entirely different way. Instead of bailing out failed businesses it should let them go bust. Instead of coddling the executives who mismanaged their companies, it should turn them loose. Instead of shoring up reckless banks, it should help knock them down.

And instead of spending money on stimulus programs...it should give money back to the taxpayers so they can stimulate the economy, or not, as they choose. Taxes should be cut in line with government spending. This would boost savings, reduce debt, and... gradually...increase investment and consumer spending too.

But that is not the road Americans have chosen. Instead, they found a president willing to go along with history. Instead of scaling down, he is scaling up. Instead of reducing America's indebtedness, he is increasing it. Instead of going for safety, he's going for broke.

No one knows how this will turn out, of course. None of us get to read the history books before they are written. But our guess is Mr. Obama will emerge from the tomes as another 'great man.' Doing history's dirty work...he is continuing the destruction of America's monopoly position on money and power.