This is a Prologue to a series of four articles called The Cost of Empire. The articles flow daily on the blog from here. The Whole Piece can be found here.-JT
Paul Krugman wrote an interesting piece yesterday on a subject I have been doing a lot of thinking on–The boom and bust nature of recent American capitalism.
These prolonged recession-like episodes probably reflect the changing nature of the business cycle. Earlier recessions were more or less deliberately engineered by the Federal Reserve, which raised interest rates to control inflation. Modern slumps, by contrast, have been hangovers from bouts of irrational exuberance — the savings and loan free-for-all of the 1980s, the technology bubble of the 1990s and now the housing bubble.
Ending those old-fashioned recessions was easy because all the Fed had to do was relent. Ending modern slumps is much more difficult because the economy needs to find something to replace the burst bubble.
The chart at the top of this post is the S & P 500 for the last ten years. As you can clearly see, if you had all of your money in an index fund you would be right back to where you started from ten years ago. So it appears that the only way America can grow wealth is by creating low interest-fueled financial bubbles. Because our consumer spending (chart at left for the last 20 years), which is 70% of our GDP flucuatates in the same boom and bust cycle.
The next 6 months will be the most severe test of our bubble-driven economy as the Fed’s ability to lower interest rates is constrained by the inflationary pressures of high gas prices and the falling dollar. Although some have asserted that the rush of fast money into commodities is creating yet another bubble, it is not one that can be enjoyed by the average citizen, the way Internet stocks or flipping condos did in the last ten years. This fact actually increases social tensions as can be seen in the numerous congressional hearing investigating commodity speculation.
In classic economic terms, an economy ought to create enough surplus wealth to grow without resorting to excess borrowing–we ought to be able to live on what we earn. But since 1983, we have been unable to do that. So what differentiates the American economy from the rest of the developed world since 1983? The only rational answer is in the chart below. This is such an important subject that I’m going to devote the next few days on a series called “The Cost of Empire.” Those are words that contemporary politicians refuse to utter, but the fact that the DOD’s own inventory of worldwide bases is more than 189 pages long cannot lead one to any other conclusion than the American taxpayer is supporting the infrastructure of empire.