Fake Empire

"Tiptoe through our shiny cities
with our diamond slippers on.......
We're half awake in a fake empire."

--"Fake Empire" by The National


Between 1980 and 2008, America experienced growth in wealth far beyond anything ever dreamed of by other societies in other times. The extent of our fortune is even more clearly viewed through the rearview mirror, brought into sharper relief as we awake blinking in the dawn of a poorer era.

We tend to think that what caused the last twenty five years of explosive growth were American attributes like our superior capitalist system; our ingenuity; or perhaps American exceptionalism. These things played a part, no doubt. But, as John Judis explains,the kickstart to this explosive growth was actually an informal agreement between the U.S. and foreign countries like Japan and China that began in the early 1980s, an arrangement that has come to be called Bretton Woods II. Basically, foreign countries loaned us money so that we could buy their stuff. According to Judis, this arrangement came about during a time when the American economy was coming off a bad decade and was looking grim for the foreseeable future:

"The Reagan administration faced a no- win situation: Try reducing the trade deficit by reducing the budget deficit, and you'd stifle growth; but try stimulating the economy by increasing the deficit, and you'd have to keep interest rates high in order to sell an adequate amount of Treasury debt, which would also stifle growth. At that point, Japan, along with Saudi Arabia and other opec nations, came to the rescue."

In simple English, this foreign rescue allowed the United States government to run huge deficits. We could keep our taxes low while still spending a lot, providing social security, medicare, and the funds for a global military umbrella. And China, Japan and Saudi Arabia would make up the difference in our budget with loans.

And thus was the American economy saved not by the myth of our own greatness, but by the investment of the Japanese, Chinese and Saudi Arabia. Thus was the boom of the last thirty years built on fiscal irresponsibility; in fact, one could say the boom would have been impossible without it.

But, just as one would think, a boom built on fiscal irresponsibility was unsustainable in the end. The other key cog in the global wealth machine was the American consumer. With our taxes kept low over the last thirty years, the American consumer could afford to buy up enough stuff from the rest of the world to keep the whole Bretton Woods II feedback loop going--other countries could then afford to finance our deficits, keeping our taxes low, allowing us to buy more stuff, etc etc.

And that brings us back to the present day and what I see as the largest source of our troubles going forward: The American consumer is tapped out. We are up to our eyeballs in debt. We've seen the value of our houses and 401k's plummet, and we aren't likely to be stimulating anything anytime soon. And that's why my economic view is rather pessimistic going forward. Without the American consumer driving the world economy, will the Bretton Woods II system break down? What will replace the American consumer as the new engine for the global economy? Whatever it is, the transition will not be pleasant, nor will it provide the same level of material abundance we have become used to.

Many of us were lucky (or unlucky) enough to be born into an era of unbelievable wealth that we came to see as commonplace, as our birthright. The next generation may look back in wonder that we all lived like kings, basking in the wealth of our fake empire.