America — The End Of An Empire

Let me sketch out something before I head into the meat of my post. This isn’t another thought experiment or a hypothetical. This is what I see in the next 1-4 years and beyond. Part of my post is a prediction, and the rest is a bit of a doomsday scenario. But I’d definitely like to hear from my co-contributors, and readers, to see if you think I’m crazy.

The housing boom was largely funded by creatively-financed mortgages to subprime borrowers. Most of these loans seemed like no-brainers in the bull real estate market, but as interest rates rise, prices have stagnated in some markets, and outright dropped in others. This asset bubble was largely caused by an enormous credit expansion, and the ability to underwrite these loans was made even easier by the fact that the risk could be offloaded onto the mortgage-backed securities and derivatives markets.

Right now, with a sagging housing market, rapidly increasing default rates, high housing inventories, and a slowdown in the building and construction industries, we’re seeing trouble. We’re in a state where recession looks incredibly likely. My sketch is largely borne off what I’ve personally witnessed in the 2001 recession in the technology industry.

So here’s what I see. The slowdown in the subprime mortgage and building industries will increasingly push the default and foreclosure rate up. As a result, the mortgage-backed securities market and other housing-based stocks, which are reaching insane levels of “irrational exuberance” and are often highly leveraged (particularly derivatives), will crater, increasing the pressure. I think recession is on the way, and perhaps worse.

The above doesn’t sound very pretty. I don’t see any way out of it, though. The problem occurs with what happens after this, which is where it has the potentially to get really ugly. As I said, what I wrote above is what I predict. What sits below is a worst-case assumption of what might happen.

After the 2001 recession, when the government was coming off small surpluses, we had very low interest rates, and the political will to cut taxes, we were able to protect against a major economic crisis. We don’t have the same situation now. The government is running enormous deficits (and has added several trillion to the debt), the politicians are debating raising taxes, and interest rates likely won’t be able to hit the rock-bottom levels we had in 2002.

What does this mean? I don’t think we can spend our way out of this. I don’t see any way for us to have liquidity in a stagnant housing market and a tight credit market. In a tighter credit market, with rising interest rates, the cost of borrowing to cover deficit spending will not be feasible for the government. I don’t see an engine for economic growth appearing to cover the recession. There’s only one way for this liquidity to arrive, and that’s for the government to print money. Loads and loads of money. Helicopter drops of money. And the result is stagflation. This is quite possibly the worst thing our government can do, but I don’t trust any politicians to take the tough medicine– I expect them to print money.

Further, if things get bad, you can expect a quick increase in the level of socialism in this country. In an effort to placate both American big business and American voters, you’ll see the government take over health care. As a result of the inflation government will cause, you’ll quickly see them try to institute price controls and wage controls, like the 1970’s. All the while, they’ll blame scapegoats like outsourcing companies, while their own inflationary policies are causing the problem.

Wait, though, it gets worse. America isn’t an empire in the conventional sense of the word, but we are an economic empire. The dollar is the currency of the world, from middle eastern oil to the reserve currencies of countless nations. During the Great Depression, or during the stagflation of the 1970’s, other nations were stuck with the dollar, because nothing else was suitable. But if the dollar starts dropping in a major inflation, they now have options. And if they drop the dollar, it’s all over. All of a sudden, America won’t draw on the world for our own stability. Considering the actions of our politicians, that’s a bad, bad thing.

We may be witnessing the end of America as the world’s superpower. It may be the end of our status as the economic empire of the world. Some across the globe, of course, will cheer. After all, they feel like America is the premier force of evil in the world. For all the bad that we’ve done, though, we’ve been a pretty stable force, and worked to prevent the spread of fascism and communism, across the globe. America’s economic system has been the safe-haven for the world. When a position of power is vacated, what typically fills it is rarely positive. The end of the American empire will likely result in more instability worldwide.

What sort of instability? Well, the political will to police nuclear proliferation will likely disappear. The ability to call on America to send peacekeepers to Darfur, or mediate between Israel and the Palestinians. In fact, you can likely expect Israel and the Palestinians to reach full-scale war, as the lack of American support will embolden Iran and the Arab world to start hostilities, and Israel to fight for survival. China moves on Taiwan, obviously, and starts rattling sabers with Russia for lands in Eastern Siberia. Militant Islam secures its foothold in South Asia and Africa. More of South America succumbs to socialism. In short, a lot of bad things.

All in all, this paints a very bad picture of our potential future. I can’t say that I consider this outcome likely, but at the same time, I don’t see it as an impossibility. Right now, it’s one of those things that I’m just thinking about contingency plans in case things get really bad. I’m not going to suggest to anyone here that they start building a bunker and stockpiling canned goods. But I am going to suggest that you keep your eyes open, and make sure you know what to do to either handle this sort of instability, or profit from it. At least if you see it coming, you’ll know which way to dodge.

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  • http://www.freedomdemocrats.org/ LoganFerree

    Brad, I’m a little less pessimistic about the chances of keeping inflation under control. I think that the rest of the world has shown its readiness to move on without us economically, I think that any slowdown of the American economy will have little impact on the rest of the world. That may be one avenue out of the slowdown, if we can restructure our economy to compete effectively with the rest of the world, we can perhaps work to turn this around. The traditional leftists will no doubt push for the government taking over health care, but I think that a more free market approach could focus on regulatory and tax reform.

  • Michael

    I find it very hard to believe that anyone would find it probable that the owners of the fed (the group who actually prints the US currency is, after all, a private organization) are going to allow anything to come between them, and their plans to have one world government which is run by the banks of the world. Acting through the NeoCons (who are Zionists), they have moved their pieces into place. Placing a buffer between Syria and Iran, they believe that redrawing the Middle Eastern map will allow them to obtain this ultimate goal. I do not know if they really care about the United States, it is hard to say anything about such people as to their rathers, but I can tell you with some confidence that if need be; they will drop a nuke or two. I read recently that we are starting to develop new nukes now, which does not surprise me now, and leads me further into believing this (what I thought to be) crap that I had been reading in the past year. That said, I cannot say that I totally disagree with the Neoconservatives in their philosophy. The whole religious Zionism crap is just that. However, that people are controlled by an intellectual few; that is not so much crap. It is justifiable for a “prince” to use less than good means to create, or maintain a state; so long as the ends justify the means (I am of course paraphrasing Niccolo Machiavelli).
    I am kind of stuck between the wanting of final peace, and the means necessary to obtain it; insomuch that it may be necessary to control freedoms which we take for granted (mostly because they are) in the United States. Freedoms like free speech, freedom from/of religion, life liberty and property, etc. are likely inhibitors of total peace.
    I have my own philosophy on how to obtain peace, but the feasibility of implementation is such that it would be near impossible. I find it very hard to believe that anyone would find it probable that the owners of the fed (the group who actually prints the US currency is, after all, a private organization) are going to allow anything to come between them, and their plans to have one world government which is run by the banks of the world. Acting through the NeoCons (who are Zionists), they have moved their pieces into place. Placing a buffer between Syria and Iran, they believe that redrawing the Middle Eastern map will allow them to obtain this ultimate goal. I do not know if they really care about the United States, it is hard to say anything about such people as to their rathers, but I can tell you with some confidence that if need be; they will drop a nuke or two. I read recently that we are starting to develop new nukes now, which does not surprise me now, and leads me further into believing this (what I thought to be) crap that I had been reading in the past year. That said, I cannot say that I totally disagree with the Neoconservatives in their philosophy. The whole religious Zionism crap is just that. However, that people are better controlled by an intellectual few; that is not so much crap. It is justifiable for a “prince” to use less than good means to create, or maintain a state; so long as the ends justify the means (I am of course paraphrasing Niccolo Machiavelli).
    I am kind of stuck between the wanting of final peace, and the means necessary to obtain it; insomuch that it may be necessary to control freedoms which we take for granted (mostly because they are) in the United States. Freedoms like free speech, freedom from/of religion, life liberty and property, etc. are likely inhibitors of total peace, but are seemingly necessary for a holistic lifestyle.
    I have my own philosophy on how to obtain peace, but the feasibility of implementation is such that it would be near impossible.

  • Michael

    sorry for the double paste, I wrote it in word.

  • http://kponly.blogspot.com Ryan

    Pardon me if I’m wrong, but I believe the Fed is a quasi-government organization. The president appoints the head of it, and though it is techincally not a government agency, it still has very close ties to the government.

  • http://thelibertypapers.org/2005/11/22/a-bit-about-kevin/ Kevin

    Brad,

    I’m nowhere near as pessimistic as you in the short term, however, I’m not optimistic for the long term.

    The housing boom was largely funded by creatively-financed mortgages to subprime borrowers. Most of these loans seemed like no-brainers in the bull real estate market, but as interest rates rise, prices have stagnated in some markets, and outright dropped in others. This asset bubble was largely caused by an enormous credit expansion, and the ability to underwrite these loans was made even easier by the fact that the risk could be offloaded onto the mortgage-backed securities and derivatives markets.

    The housing “bubble” is at the end of the day a local phenomenon. For example, while some parts of the country are seeing their housing markets collapse; other parts of the country are still booming. Also, some of the homebuilders have shifted over to the New Orleans area to aid in Katrina rebuilding, an area that will be rebuilding for the next 5-10 years at least. Finally, interest rates have now stabilized and as the economy continues to slow down, rates will come down. Housing will be fine and won’t bring about a recession. For a bonus, when Congress finally passes comprehensive immigration reform this year, another 12-20 million homebuyers will enter the market to revitalize the inner cities.

    Having said that though, I think we may be in for a mild recession. The reason, higher energy prices due to increased instability in the Middle East and Latin America. The higher energy prices mean that it will cost more to fill up cars and we’ll be paying higher prices for everything from food to TVs. This will decrease consumer spending and start a chain reaction across the economy with retail and the service industries hardest hit with all sectors feeling the punch. Again, the hit will vary from location to location.

    Further, if things get bad, you can expect a quick increase in the level of socialism in this country. In an effort to placate both American big business and American voters, you’ll see the government take over health care.

    I agree, but this is a fait accompli. We will see some sort of socialized healthcare system within five years. The only difference is whether it will resemble Canada’s system or RomneyCare in Massachusetts. This will kill any recovery that begins in 2008 and 2009, along with the tax increases required to fund the new system.

    As a result of the inflation government will cause, you’ll quickly see them try to institute price controls and wage controls, like the 1970’s. All the while, they’ll blame scapegoats like outsourcing companies, while their own inflationary policies are causing the problem.

    I don’t think people will go along with naked price controls, instead, we’ll see more “price gouging” laws on the Federal and state level to impose price controls via the backdoor.

    What will ultimately begin the end of the United States, and this will happen soon, are the following:

    1) Continued war. The wars in Iraq and Afghanistan have cost at least a half a trillion dollars so far. There is no end in sight in Afghanistan and Iraq will continue to require billions after American troops withdraw. In addition, I expect Hugo Chavez and his lapdogs to begin turning their attention to their neighbors to impose Chavez’s Bolivarian socialism on the rest of Latin America. Finally, Pakistan will collapse and the U.S. will have to deploy troops to try and keep the nukes from falling into Al-Qaeda’s hands. Iran and the Sunni Arab states will settle into a Cold War around the Middle East with Iraq, Lebanon, and “Palestine” serving as proxy battlegrounds, pushing oil higher and higher.

    2) The Entitlement Timebombs: They start going off in a few years. Along with wars around the world and paying down debt, this will severely limit non-entitlement spending and leave no room for tax cuts to bail out the economy. The economy would be starved of much needed cash from the reductions in government services and the confiscation of more money from the private sector.

    3) Increasing protectionism: The loons who call for more “fair trade” will get their way. Tariffs will be increased against bogey nations like China, India, Mexico, and others. This will push up the cost of goods and cause worldwide chain reactions.

    Combine these three factors and you have a nation on the verge of collapse. High unemployment, a worthless currency, high taxation for those still working, and possibly starvation and hunger will be the norm. The U.S. will begin its final slide to tyranny…and collapse.

    The straw that breaks the camel’s back will come from the outside, just like with Rome. Whether it be a hurricane hitting the Atlantic or Gulf Coasts, an earthquake in California or the central U.S., a major tsunami on the West Coast, a global pandemic, or a major terrorist attack on a major city begins the final collapse. In its final days, the government grows outright tyrannical to try and maintain control but enough Americans resist to cause trouble. The civil war ends the United States as we know it. The states begin breaking away from the central government to save themselves while outlaws and gangs take control of the inner cities and the countryside. As America goes, the world goes. There won’t be a single free government left in the world. Israel will be destroyed without U.S. support, Europe explodes into religious warfare, the Middle East and the Indian subcontinent breaks out in warfare, and Africa stays anarchic.

    Terrifying future, but it can be prevented.

    Finally:

    I’m not going to suggest to anyone here that they start building a bunker and stockpiling canned goods.

    But I would recommend being prepared for anything, so I would get the plans for the bunker and lay in a supply of food and water, no matter what. If you need another reminder to be prepared, watch some footage of post-Katrina New Orleans to show how fragile the line between order and anarchy are.

  • http://thelibertypapers.org/2005/11/22/a-bit-about-kevin/ Kevin

    Pardon me if I’m wrong, but I believe the Fed is a quasi-government organization. The president appoints the head of it, and though it is techincally not a government agency, it still has very close ties to the government.

    You are correct, Ryan. I consider those who say the Fed is a private entity bent on global rule for the Jewish/Zionist evil banking cabal to be the ultimate moonbats.

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  • Andrew Nolan

    I think history shows us that the system fights to achieve balance and carry on surviving. The housing bubble/easy finance is not just a US phenomenom – any internet search will show you that the same is happening in Canada, Australia, UK and Republic of Ireland at least.
    The system will rebalance in a few years by housing price growth slowing and wages catching up. Inflation caused by high living costs will further damp growth in the form of increased interest rates. Some governments will facilitate the release of cheap land for housing. Subprime lenders will have their wings clipped, tightening the finance for speculation.
    If I believed in a conspiracy theories (I think I am allowed to do so by the title of this page) one such would be to say that high housing costs are an indirect but contrived form of taxation with financial institutions acting as collectors, to fund the war. Others might fill in some missing details here.

  • http://www.digitalmoneyworld.com Mark Herpel

    Its a great article and very true, I’m sorry to say. All those people who’s house price went up and they took out second and third mortgages then blew the money ARE really at risk now of losing their homes. That is about 40% of American home owners. This is very sad because they can’t live in their cars, they are financed also.
    Mark

  • Mark Lytle

    I also think the U.S. empire is about over for a number of reasons. I have read that only about 20% of Baby Boomers have any sort of 401K or savings and the average amount in these is only about $50,000. Most of these people also have a house note, quite a bit more than that, so they have basically no savings. A whole slug of these people will retire in the next 3-5 years, so at that point close to 1/4 of the U.S. population will loose their incomes as they retire, and have no savings to replace it.

    It’s not rocket science what happens after that.
    Massive money printing, which will produce Weimar effects, a final economic collapse, and then some sort of martial law/tyranny and perhaps the “regionalization” of the U.S.

    Bye,Bye Miss American Pie.

  • http://unrepentantindividual.com/ Brad Warbiany

    Kevin,

    I don’t quite share your belief that this will be a mild recession. High energy prices, high debt, low consumer spending will either be a reason why a mild recession will remain so for a long, long time, or will be the trigger that starts a worse outcome.

  • http://thelibertypapers.org/2005/11/22/a-bit-about-kevin/ Kevin

    High energy prices, high debt, low consumer spending will either be a reason why a mild recession will remain so for a long, long time, or will be the trigger that starts a worse outcome.

    Probably the latter. The American economy and the private sector are still strong enough to bounce out of a mild recession, like what we had in 2001. Plus, as foreclosures are purchased by real estate investors, more renters and those with bad credit will have the opportunity to own their own homes, and this will jump start the real estate markets in parts of the country.

    Now what will be the trigger in my opinion is international instability, ie. more war around the world as various scum regimes and governments take advantage of a weakened America and its broken military.

  • Watercloset

    The best way is to own nothing and then there is no mortgage or bad credit to worry about. As Shakespeare said, “Neither a borrower nor lender be.”

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  • http://www.BoilerD.com BoilerD

    An interesting topic, Brad. While I agree with the overall premise that we are living the age of the demise of American empire, I don’t really agree with the proposed cause.

    Conceptually, I can entertain your ‘doomsday’ scenario with a degree of acceptance, but it’s the details that bug me — especially considering the size of the American economy. The idea that a nation’s wealth could vanish virtually overnight ignores the shear size of that wealth. America’s GDP is over 11 TRILLION dollars. The only nation that comes anywhere near that number is China and we can’t really be sure the available data are accurate — from what I read China is headed toward a 14 trillion dollar GDP. Of course, they have nearly 4 times the population of America so per capita is still vastly smaller than this nation. The next closest nation is Japan coming in at a “mere” 4 trillion dollars.

    The underlying point is the amount of wealth held in this country. A secondary point is the individual wealth. I think the trouble with your doomsday scenario is that it assumes one’s wealth is defined by savings, home ownership, or other “balance sheet” numbers. Where on the balance sheet is represented the ability to swing a hammer, dig a ditch, or build a microchip?

    Recall, I did start this response by stating I accept the premise — I do, in fact, believe we are witnessing the demise of American empire. I just don’t like your proposed reason ;-)

  • http://www.BoilerD.com BoilerD

    Secondary response regarding housing market.

    I enjoyed the conspiracy theory proposed by Andrew — higher housing prices being used to fund the war. Interesting thought.

    Of course, I think the housing boom that started right around 2000 is the result of one thing: Investors shifting their money out of a plummeting stock market into something more concrete such as property. Perhaps a simple and obvious answer, but no less true.

    I personally witnessed this “phenomenon” (and might have even participated myself): In the late 90’s, especially within the booming IT market, there were multitudes of people making killing in the stock market…often off stock speculation. It was almost a game in those days for people to invest money into the latest IPO with the hope it would boom overnight (and many did). I worked with many Average Joe’s in those days who were literally owned hundreds of thousands, sometimes millions, of dollars in stock and they created that wealth through compound investing. This was a common scenario. Around 2001 I visited a friend in Austin, Texas for a long weekend. He took me out to eat in his new BMW SUV and he bragged (in a good way) to me that he bought the car entirely off his Cisco stock.

    When that stock market started falling and all those people lost tens of thousands of dollars they couldn’t pull their money out fast enough…but what to do with hundreds of thousands of dollars? Property. Vacation homes. Rehabs. Property speculation simply replaced stock speculation. So wealth didn’t vanish (though some was lost in falling stocks)…it simply shifted.

    If there IS such a thing as a housing bubble that will pop like stocks (I doubt such a thing exists) we won’t see wealth vanish…it will simply shift as financial survival skills kick in.

    By the way, these same buddies of mine that go back 10 to 15 years, you know where they are putting their money now? Foreign property. Specifically, Central American property. More specifically, Costa Rica property.

  • http://unrepentantindividual.com/ Brad Warbiany

    BoilerD,

    I’ve heard the same about Costa Rica. Also watch Nicaragua, it’s the “next Costa Rica”, from what I’ve heard.

    I also believe that people pulled money of stocks and shoved it into real estate in the wake of the recession and 9/11. It has created an asset bubble in the housing market, and eventually that bubble has to burst and the money will chase the next thing.

    But I think you’re misunderstanding the cause. I’m not saying people’s wealth will suddenly drop by all that much. While you talk about $11T, they say the country’s aggregate wealth is about $54T. I think to some extent, that will decline when the housing market bursts and takes some of the stocks with it. But it’s not the loss of wealth that is key. That’s just going to have to happen, because (as you point out) we’ve got an overvalued asset class that needs a correction. It’s possible, though, that it will avoid some of the nastiness of other asset classes bursting, because people need places to live. Real estate is a better store of value than a lot of other assets.

    The key is other countries divesting their dollar holdings as our nation prints its way out of debt. That’s where it gets scary and our economic empire comes to a screeching halt. If we can avoid that, we’ll have a nice little recession as the economy adjusts, and then we’ll be fine. I just don’t see our politicians having the self-control not to do that (unless Ron Paul gets elected).