The Shortest Lived Empire

A monumental fall from grace.

The financial apocalypse, the next American Revolution, the fall of democracy and the possible rise of fascism.

An economic trend analysis of the next 2 years for the US, and its consequences for the world.

The fall of the empire

The greatest financial crisis of all time, even greater than that of the 1929 great depression that is on its way. Like all of the great catastrophes that has happened in our time it all starts in America.

To understand the path that lay before us, we must first appreciate the path that lays behind us, and appreciate the repetition of history. So looking at the decline of other empires in the era is essential. We’ll concentrate on the fall of the Roman Empire.

There are many different and compounding reasons that historians would attribute to the demise of the Roman Empire. But a few stand out and are commonly agreed upon to be reasons for the empires fall.

  1. Corrupt emperors, Caligula, Nero were just a few. At Rome’s end, the emperors were killing his generals in fear of that general taking the throne. This in turn weakened the roman army from within.
  2. The influx of Germanic mercenaries into the legions, the resultant cultural dilution led to lethargy and loyalty to roman commander instead of government.
  3. Unsound economic played a key roll in the impoverishment and the decay of the roman empire, by the 2nd century AD the empire had developed a complex market economy in which trade was relatively free. Tariffs were low and laws for controlling food prices or foodstuffs and other commodities had little impact as they didn’t fix the prices significantly below their market equilibrium levels. After the 3rd century debasement of the currency led to inflation.
  4. The economy of the empire was a plunder economy based on looting existing resources rather than producing anything new. The empire relied on the booty from conquered territories or on a pattern of tax collection that drove small-scale farmers into destitution.
  5. Starting around 165 AD, waves of one or more diseases possibly smallpox and/or measles, swept through the empire, ultimately killing about half the population. The resultant fall in the population left the state apparatus and army too large for the population to support leading to further economic and social decline.
  6. Bryan ward-Perkins argues that the demise of the empire was caused by a vicious circle of political instability, foreign invasion, and reduced tax revenue.

The amount of parallels that can be drawn between the decline of the roman empire and the current conditions of today’s superpower is startling.

A financial apocalypse is on its way and there’s nothing any of us can about it.

In 2007-08 the American housing market bottomed out, to appreciate any form  forecasts its essential to understand the sequence of events that have lead to this point in time, so we must first understand what caused the economic bubble to inflate and burst in the first place.

It all started in the US after 9/11, at this time the US was already slumping into a recession as  the dot com bubble had burst, after a 5 year period of prosperity. The Federal Reserve [America’s central bank] in the period of 2001-02 it lowered the interest rates from 6.5% to 1.75% to stimulate consumer spending, keep business afloat and to keep unemployment rates low.

In the period 2002-04 interest rates were cut to 1% where it remained until 2005.investors in the US were anxious to invest in the economy as 1% is a very low return for the principal sum invested, on the other hand it made borrowing money very attractive as 1% interest rate is low for the principal sum borrowed. The low interest rates alongside trade surpluses made an abundance of cheap credit; this made borrowing money easy for banks. this in turn caused banks to spend more and take on more risk with leverage, leverage is borrowing money to amplify the outcome of a deal, ie. Why buy an asset for $10,000 selling it for $11,000 making a profit of $1000, when instead you can borrow an additional $990,000 more leaving you with a $1,000,000 (1 million) so you can buy 100 x assets selling each for $1000 making $1,100,000 (1.1 million) you would pay back the initial $990,000 + $10,000 in interest leaving you with a profit of $90,000 instead of the $1000 profit in the first instance.

So with the low interest rates wall st takes out a lot of credit makes great deals and grow tremendously rich.

The American Dream Down payment Initiative (ADDI) was signed into law on December 16, 2003 by George bush, which stated that families of lesser means (families with incomes 80% or below the median income) could apply for a government subsidised down payment on a home. This alongside low interest rates encouraged people to buy bigger homes. as it was thought the prices of homes could never depreciate (devalue) as in the period 2003-05 the prices of houses were increasing at  10% per year, so the very act of buying a home would make you rich even if your income was mediocre.

Investment houses wanting to profit from the housing boom, started buying mortgages from lending firms who owned the mortgages of individuals. So instead of the home owner making monthly repayments to the institution (bank) they had initially borrowed from, the repayments were going to the investment houses. With borrowed money (as the interest rate is low) the investment bank buys thousands if not millions more mortgages, that means each month the investment bank is receiving repayments of all the mortgages that institution owns.

Another means for investment banks to profit is to repackage these mortgages and sell them off as asset backed securities.

The credits rating agency which was responsible for determining teh amount of risk attached to  these securities. As in the financial industry the more risk attached to an investment the higher the return you would want on your investment. So the safe security had a 4%, the okay security had s 5-7% and the risky security had about a 10% return on it. Depending on what type of investor you were you’d by different types of securities, play it safe for a low return on your investment or risk allot for a high return.  What was never known was the fact that the sellers of the securities were paying the credit rating agency to positively rate the volatile securities.

As the investment banker is heavily invested in the housing market holding millions of mortgages if more and more home owners default on their repayments, his revenue stream decreases. That’s not so much of a problem as the house the investment bank owns now can just sell it on as, the house price has increased over time.

But because mortgage lenders and investment bankers got greedy lending money to individuals of lesser means (sub-prime mortgages) more and more home-owners default on their mortgages, now that the housing market is saturated, the supply outstrips demand this causes house prices to plummet. For home owners with a mortgage with of $500,000 and a home only worth $100,000 the sense in paying the mortgage is non- sensical so they can forsake repayments and default on their mortgage too.

Now because the investment banker, the investor and the mortgage lender all have in their possession worthless debt, the flow of credit within the financial sector freezes. The interconnectivity of all these transactions was what was so dangerous about this situation, if one institution went under they could take down another and another and a domino effect would have ensued.

The financial crisis of 2008 started in a way eerily similar to today’s situation. Current situations and events lay the path for future trends, and the current market circumstances taking key market indicators in the DOW, alongside interest rates, inflation rates, the US dollar index (USDX) and national debt as a percentage of GDP, point to a dire future for the American economy and world economy as a whole.

A new economic bubble

After the dotcom collapse and 9/11 the US government saved the economy by inflating a new economic bubble, the housing bubble. Today the world is trying to get out of the financial crisis by inflating a new economic bubble, except this bubble is much bigger. The bailout bubble.

Just like in 2001 the Federal Reserve lowered the interest rates, but this time to a rate of 0.25% to restore investor confidence and to encourage interbank lending; other central banks around the world are taking the same action. Economic bubbles are inflated under these circumstances, higher borrowing, low interest rates among other factors.

Currency wars

The US along with most other central banks are taking measures called quantitative easing, which is the increase in money supply by increasing the excess reserves of the banking system. This type of monetary policy is only invoked when all other methods to control the money supply has failed (interest rates, discount rates. etc) so this is the last resort if all else fails. But there is another motive, a hidden motive for the quantitative easing. Because like any other commodity the value of money is based on the laws of supply in demand, the increase in supply of money devalues the currency, this is known as inflation. Where the prices of goods increase thus lowering the buying power of  the currency (things getting more expensive).

At the moment in the worlds currency markets, America is waging a currency war, flooding the markets with excess liquidity and devaluing the US.$ against other currencies (Chinese yuan, british £, and the Japanese yen ). This is an intentional move by the US treasury to purposefully devalue the $. The advantages of devaluing a currency means that everything measured within that currency is also devalued making American exports cheaper and more competitive and thus creating jobs, it also devalues the real value of the debt US owes to the rest of the world.

But for this to work, other currencies have to rise against the dollar as the dollar falls. But as seen in china and brazil they aren’t letting their currencies rise by also taking measures of quantitative easing.  Without the proportional appreciation of foreign currencies againdt the dollar will only lead to inflation, first through rising oil and gasoline prices and then by other commodities that the western world need in order to keep running.

The Federal Reserve would argue that its measures of quantitative easing are to stimulate consumption, by having low interest rates leads to people spending freely.

This is not going to work, because current market and economic situations have never been seen before. Americans can’t afford to borrow anymore due to surmounting personal debt (credit cards etc). The Federal Reserve is using methods employed during the great depression of 1929. These economic methods and models being are far outdated and absolutely obsolete, for many reasons.

  • There were no credit cards in 1929
  • People weren’t home owners
  • There was no such thing as home equity loans
  • Car loan and student loan debts
  • Among a whole myriad of other circumstances

Banks and corporations in America were not spending the capital from the bailout package, but instead taking advantages of the low interest rates to sell more debt, hoard cash reserves, pay out dividends, buying back stock and acquiring companies, leading to a smaller more wealthier and powerful corporate base. Some companies are also investing massive amounts of capital in gold. Doing the very things that caused an inflation of economic bubbles and concentrating wealth.

The signs of the loss of confidence in the US dollar are already evident as more and more investors are forsaking investing in currencies and choosing a more robust investment, as they want to invest in “something that can’t be printed by governments”, causing a drop in real value in the process. This is why gold prices sky rocket at $1,332, as gold cannot be merely manufactured.

The only inevitable outcomes that can result with such fiscal irresponsibility are; spiralling commodity prices, such as oil, and other raw materials, increased inflation, if not hyperinflation. The world is either being forced to accept financial anarchy or more blunt US interventions.

What is happening in the American markets at the moment is nothing less than bank robbery, transferring massive amounts of wealth from the masses and concentrating it in the already rich few

Income inequality in the US

A recent UN report on the income inequality shows that the US has one of the largest wealth gaps amongst advanced economies equal to economies such as the Ivory Coast, Jamaica and Malaysia. Reports from publications from the CIA world fact book also show this point.

Ayur kapur, a strategist for deutsche bank and citi group in 2005, told clients that the US among other economies were developing into plutonomies, where the wealthy few powered the economic growth and consumed much of its bounty, while the poorer majority shared the leftovers. And that plutonomies only came about twice every century (Spain in 16th century, Holland in the 17th century and America in the 1920’s)

The clients response to this was “okay, this is interesting because you’re telling me what happened in the 1920’s is happening right now, and you obviously know what happened in 1929”[the great depression].

The average wage in 2000 was around $515 per/week and 9 years later its $500 or below. So wages has actually decreased. Whereas the earnings for top 1% highest earners of the population went from $91.2 million per year in 2008 to $518 million per/year in 2009, more than a 5 fold increase, that’s about $10 million per/week.

That means the top 74 earners in the US erned in one year the same amount as 19million people did in the same year.

Mark Thomas, a teacher of economics at Oregon University said “when we see income inequality rising, we ought to start looking for an economic bubble”

An economy based on consumption such as the US needs consumers, if too much of the wealth is concentrated ar the top, there may not be enough demand in the market to support growth. The economy needs a healthy middle income group to drive consumption of basic good.

The tolerance of this income inequality comes from the notion that “if i work hard, i’ll become rich” mentality that is so deeply embedded into the American psyche. Rags to riches tales makes the US a beacon to immigrants, even barrack Obama’s mother turned to food stamps at one point, yet obama still managed to aspire to office in the world.

But maybe it was for this very reason of barrack Obama came from poverty he was so popular with voters and the corporate base that supported his campaign to office. Could the American dream be dead and its people merely are the proverbial horse trying to take a bite of the carrot dangling on a chord yet never being able to reach it?

The growing income gap in the US may not in itself cause a financial crisis but it is widely seen as a contributing factor. And with current job markets along with rising debt levels the house of cards may be on verge of collapse.

Taking all market events and circumstances in the jobs market, national debt levels, along with personal debt  levels, saving and trade deficits, rising income inequality, the fragility of the international currency markets, rising gold prices coupled with an aggressive quantitative easing policy, the future of the US economy becomes very, very dire. Scary parallels can be drawn between the 1929 great depression and current events. I predict within i the next 2-3 years a total collapse of the US and world economy when the bailout bubble bursts.

2 Responses to “The Shortest Lived Empire”
  1. Jerri Simler says:

    Thanks for this post. I as well agree with what you are saying. I have been talking about this subject a lot lately with my father so most probably this will get him to see my point of view. Fingers crossed!

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