Bloated Empire and the Financial Crash

A few - and only a few - prescient commentators have questioned whether
the U.S. can sustain its informal global empire in the wake of the most
severe economic crisis since World War II. And the simultaneous
quagmires in Iraq and Afghanistan are leading more and more opinion
leaders and taxpayers to this question.

But the U.S. Empire helped cause the meltdown in the first place.

War has a history of causing financial and economic calamities. It does
so directly by almost always causing inflation - that is, too much
money chasing too few goods.

During wartime, governments usually commandeer resources from the
private sector into the government realm to fund the fighting. This
action leaves shortages of resources to make consumer goods and their
components, therefore pushing prices up.

Making things worse, governments often times print money to fund the
war, thus adding to the amount of money chasing the smaller number of
consumer goods. Such "make-believe" wealth has funded many U.S. wars.

For example, the War of 1812 had two negative effects on the U.S.
financial system. First, in 1814, the federal government allowed
state-chartered banks to suspend payment in gold and silver to their
depositors.

In other words, according Tom J. DiLorenzo in Hamilton's Curse,
the banks did not have to hold sufficient gold and silver reserves to
cover their loans. This policy allowed the banks to loan the federal
government more money to fight the war. The result was an annual
inflation rate of 55 percent in some U.S. cities.

The government took this route of expanding credit during wartime
because no U.S. central bank existed at the time. Congress, correctly
questioning The Bank of the United States' constitutionality, had not
renewed its charter upon expiration in 1811.

But the financial turmoil caused by the war led to a second pernicious
effect on the financial system - the resurrection of the bank in 1817
in the form of the Second Bank of the United States. Like the first
bank and all other government central banks in the future, the second
bank flooded the market with new credit.

In 1818, this led to excessive real estate speculation and a consequent
bubble. The bubble burst during the Panic of 1819, which was the first
recession in the nation's history. Sound familiar?

Although President Andrew Jackson got rid of the second bank in the
1830s and the U.S. economy generally flourished with a freer banking
system until 1913, at that time yet another central bank - this time
the Federal Reserve System - rose from the ashes.

We have seen that war ultimately causes the creation of both economic
problems and nefarious government financial institutions that cause
those difficulties. And of course, the modern-day U.S. Empire also
creates such economic maladies and wars that allow those institutions
to wreak havoc on the economy.

The Fed caused the current collapse in the real estate credit market,
which has led to a more general global financial and economic meltdown,
by earlier flooding the market with excess credit. That money went into
real estate, thus creating an artificial bubble that eventually came
crashing down in 2008.
But what caused the Fed to vastly expand credit?

To prevent a potential economic calamity after 9/11 and soothe jitters
surrounding the risky and unneeded U.S. invasion of Iraq, Fed Chairman
Alan Greenspan began a series of interest rate cuts that vastly
increased the money supply.

According to Thomas E. Woods, Jr. in Meltdown,
the interest rate cuts culminated in the extraordinary policy of
lowering the federal funds rate (the rate at which banks lend to one
another overnight, which usually determines other interest rates) to
only one percent for an entire year (from June 2003 to June 2004).

Woods notes that more money was created between 2000 and 2007 than in the rest of U.S. history.

Much of this excess money ended up creating the real estate bubble that
eventually caused the meltdown. Ben Bernanke, then a Fed governor, was
an ardent advocate of this easy money policy, which as Fed Chairman he
has continued as his solution to an economic crisis he helped create
using the same measures.

Of
course, according to Osama bin Laden, the primary reasons for the 9/11
attacks were U.S. occupation of Muslim lands and U.S. propping up of
corrupt dictators there.

And the invasion of Iraq was totally unnecessary because there was
never any connection between al Qaeda or the 9/11 attacks and Saddam
Hussein, and even if Saddam had had biological, chemical, or even
nuclear weapons, the massive U.S. nuclear arsenal would have likely
deterred him from using them on the United States.

So the causal arrow goes from these imperial behaviors - and blowback
there from - to increases in the money supply to prevent related
economic slowdown, which in turn caused even worse eventual financial
and economic calamities.

These may be indirect effects of empire, but they cannot be ignored.
Get rid of the overseas empire because we can no longer afford it,
especially when it is partly responsible for the economic distress that
is making us poorer.