Geo-Strategy #3: How Empire is Destroying America

So in this class this semester I'm making three big predictions. First is that Trump will win in November. Second is that the United States will go to war against Iran.And the third big prediction is that the United States will lose this war, which will forever change the global order. Last class we looked at one reason why the United States would invade Iran, which is the Israel Lobby, and in today's class we'll look at another reason, which is the defense of empire. America is an empire and it must defend its imperial

So let's examine what an empire means for America. From 1950 to 1980, America's economy was mainly focused on manufacturing, factories. Manufacturing as a share of GDP was 40%, it made 40% of profits and employed 30% of the workforce. During World War II America had a lot of factories produce weapons, and after World War II these factories produced consumer goods, cars, electronics, to sell to the world, and made the American workers the wealthiest and most well-educated middle class ever in human history. If you were a factory worker from 1950 to 1980, you had a really good life. You worked 40 hours a week, you had health insurance, you could buy your own house, your wife didn't have to work, you could have three to four kids, you could have two cars, every year you could go on vacation to some place nice, you could eat out once a week, and then you retired and had a very good pension.

So it was really the best life, and so workers from 1950 to 1980 in America were really the luckiest people on the planet. You were better off actually being born into the middle class in America than being born rich in Africa or Asia or South America.

But then after 1980 was something called the Reagan Revolution and the introduction of what we call neoliberalism, and remember that we studied neoliberalism before. Neoliberalism is an economic philosophy that believes in the primacy of free markets and deregulation. So after that we now live in what we call a financial economy. The economy has been financialized. What does that mean? It means that right now financial services account for 22% of all GDP in America. Manufacturing has gone down to 10%, so it went down from a high of 40% to now a low of 10%. Financial services is now twice as much as manufacturing. Financial services is 40% of all profits, and financial services employs of the total American workforce.

Now let me explain what these numbers mean. What you're seeing behind these numbers is a radical shift, overhaul, transition in American society. Let's just look at politics, governance. From this period, 1950 to 1980, American workers had a lot of political power because they were middle class, they were confident, they participated in politics through unions. Today most of this power has shifted to financial services, which basically means Wall Street, and working for Wall Street are what we call the professional manager elite. These are people who live on the coast, San Francisco, New York, Washington DC, Boston. They went to elite schools, the Ivy League, and they're multicultural, and right now they're the most powerful political group in America, and this has led to massive political divisions within the country. So it's the first major consequence. Before, it was workers who had a large say over American politics, and now it is Wall Street, the financial sector and the coastal professional management elite. And so government shapes policies that favor this multicultural elite, financial elite, at the expense of workers. So that's the first major shift.

But then you look at education, and what I mean by that is that if you went to a good school, a good university, in the 1950s and 1960s, your ambition was to become a professor or maybe a scientist or maybe an entrepreneur or a corporate executive.

Nowadays most people who graduate from these top schools all want to go to Wall Street, and that's it. Why? Because you make more money on Wall Street than anywhere else. So you're talking about these PhDs in statistics and artificial intelligence who should be working for IBM developing the latest technology. Instead they're on Wall Street working for a hedge fund, gambling with other people's money. So basically the economy has gone from one that is productive or creative to one that is entirely speculative. Remember that financial services, all it does is take people's money and gamble with it or invest in it to make more money. It's not actually productive, all it is is speculative, and the smartest people in America, the most well educated, are all focused on this sector.

And then you look at the economy, and what has clearly changed is that the economy in America has become much more unstable. In 2001 there was the internet crash, the dot-com crash.

In 2008 there was the financial crisis, the subprime crash, and then after that you have these banks going bankrupt. I think this past week three banks went bankrupt in America. This should not be happening, and the reason why this is happening is all these bubbles. In other words, all assets right now in America are overpriced, housing, stock market, and people are gambling that these asset prices will only go higher, which creates bubbles, and when these bubbles burst you have volatility and instability and uncertainty. So this is bad for the economy. And then if you look at profits, if you look at wealth generation, the top 1% make much more money than everyone else, and this inequality is only increasing. So in other words, the financialization of the American economy has been really bad for America, and you can make the argument that it's actually destroying the fabric of American society. It's making politics much more divisive, it's making the economy much more volatile, the smartest people are engaged in speculative activities, young people don't want to work, they just want to buy Bitcoin. And you can also make the argument that you're creating a rentier economy, and a rentier economy just means that if you are young you can never afford to buy a house, you can only rent, which means that you yourself have no more social mobility.

So this overall is really bad for America.

Now the question then is how did America get to this point? How did it transition from a manufacturing economy to a financial economy? There are different theories out there. There are some economists who say that this is just late-stage capitalism, this is the natural evolution of capitalism. There are some who argue that it is the neoliberalism or the Reagan Revolution that caused this, when you cut back the role of government, when you emphasize markets, then you have this situation, the over-financialization of the economy. What I want to show you today is that the real reason is the transition to empire. There's a really simple explanation for why this is happening, and the reason is that after the end of the Cold War in 1991, America became a global empire. It could now set the rules of the game, and it set the rules of the game so that it would always win, and then all money flowed to America, which created all these asset bubbles.

So that's the argument I'm making to you today. Are we clear about what's happening? Any questions so far?

Now I want to explain to you how America became an empire, in fact the most powerful empire in human history, because even though Rome was powerful it didn't really control the world, whereas the American Empire today controls the entire world. To understand how America became an empire, you have to go back to the founding of America. In 1776 America declared independence from Britain, and at that time they had something called the Declaration of Independence. If you read the document it's very clear, what the Founding Fathers of America said is that we are founding a new society in America based on God. Now the Founding Fathers were Christians, but they were a special type of Christians who believe in the idea of deism, and deism is the idea that yes, there is a God and God created everything, but God is not interested in managing human affairs. God leaves us alone, which means that we as humans are empowered to create the world we want to create.

The Founding Fathers wanted to create a new society based on the idea of God, and what they believed is that God gave human beings fundamental rights that all governments must respect. The famous phrase is, do you guys know the famous liberty and the pursuit of happiness. That is the mission of America, to ensure that every American would have life, liberty and the pursuit of happiness, and that's really the goal, the role of government. Life, to make you safe, to provide security against enemies. Liberty, the right to say whatever you believe, the right to believe whatever you believe, so the tolerance of all creeds, religions. The last is the pursuit of happiness. What does pursuit of happiness mean, you guys know? Thomas Jefferson wrote the Declaration of Independence, and when he wrote the pursuit of happiness he had a very specific idea in mind. What does the pursuit of mean, which is what? Wealth. So in America your fundamental right, the fundamental purpose of your life, is to make as much money as you can, to amass as much wealth as you can. And the idea here is that in this society, this new experiment called America, if we allow everyone to pursue the creation of wealth, then America will become powerful.

That's the idea, and it turned out that this was absolutely correct. In a very short amount of time America industrialized very rapidly, and at the end of World War II America became the most powerful country in the world.

After World War II it decided that it can now export its philosophy to the rest of the world. So in 1944 there's something called the Bretton Woods conference. In 1944 everyone knew that Nazi Germany would be defeated and Japan would be defeated, which would make America the most powerful nation on the planet. Now the Soviet Union was a competitor, but they didn't really matter, they had their own sphere of influence. So America got together with its allies in Europe and they decided what the new global financial system would look like, and the idea was that with Bretton Woods they decided that the US dollar would become the global reserve currency, which basically meant that you could buy anything with the US dollar. Now there are some people at Bretton Woods, some economists, who were afraid that this would cause problems.

If you have a government which was in control of the global reserve currency, that would basically make the government God. If they could just print as much money as they wanted, they could become like Midas, if they touched something it would become gold. So some people thought it was dangerous, and so the compromise is that the US dollar had to be backed by gold. In other words, the US dollar was basically like a receipt for gold. If you had a million dollars, you could go to any American bank and get a million dollars' worth of gold for it. Does that make sense? So that's what we call the gold standard, and for the longest that this Bretton Woods system led to tremendous prosperity in America and in Europe and Japan.

Then in 1971 Richard Nixon did something really radical. He basically said we, America, are going to go off the gold standard. Remember that America had spent too much money on the space race, on Vietnam, on domestic expenses, so they needed to transition out of the gold standard. But if you transition out of the gold standard, then how do you ensure the US dollar is worth something?

How do you ensure the intrinsic worth of the US dollar? So they transitioned from the gold standard to what, do you guys know? Oil. Do you understand this? What we call the petrodollar. The idea here is that look, every economy needs oil to run. You need oil as the basis of your economy, and so after America went off the gold standard, these countries in the Middle East, meaning Saudi Arabia but other countries as well, agreed that you could buy oil using US dollars. So the idea is, before, if you had a million US dollars you could convert that to gold, and now you can convert it to oil, and this is what we call the petrodollar, and this is really the basis for the value of the US dollar.

So then what happened is that in 1991 the Soviet Union fell and now America was in charge of the entire global economy basically. And so America at that time said to everyone, listen, let's focus on trade, because trade will make everyone rich. So let me explain the theory of this. America basically wanted everyone to trade.

And the idea of trade, this is like Russia, China, South America, the idea of trade is that each country would focus on its competitive advantage. What are you good at? And then you would sell this competitive advantage to other countries for what they're good at. The theory here is that if you do it this way, then all countries will become rich. So let me explain why. Let's look at the US and China. What China's really good at is labor. What the United States is really good at is technology. So the idea is that the United States and China trade. China makes all these cheap goods for American consumers, but unfortunately Chinese consumers don't have enough purchasing power to buy American technology. So what happens is that America gives China US dollars instead, trillions and trillions of US dollars. Now in theory what's supposed to happen is this money trickles down to the average Chinese, so that the average Chinese worker's wages go up, and when his wages go up, what he can do now is buy US products, iPhones, and so over time trade evens out. Does that make sense? That's a theory.

That's the first theory. The second theory is how capital moves, and the idea here is that capital is going to go to places which allow it to grow the most. So the idea is that when you have a globalized world, then what happens is capital from the United States moves to China, because if you invest in China your capital grows the most. You can buy a million-dollar house in the United States or you can buy 10 houses for the same money in China, so you're better off buying houses in China. So these are the two theories. One is that trade will make everyone rich, and second is that capital will move from rich countries to poor countries. When you actually go to university and you study economics, like jackwell, then you actually have to learn these theories. But in reality these two theories aren't true. Why not? Why aren't these two theories true?

The first theory is that if two countries trade, over time wealth trickles down to everyone in that country, which makes everyone richer. Is that true for China? No, it's not. Workers' wages have not gone up for the past 30, 40 years.

Why? Because of the idea of elite capture. Elite capture, so all the money is captured by an elite group of people. When that happens, they can't spend it, they can't buy US goods, so the only thing they can do is invest it. Now according to this theory they should invest it back in China, because investment in China should allow for more growth than investment anywhere else. But in reality, where do they put the money? In the United States. And why would they do that? Why exactly? You don't put your money where you make the most money, you put your money where it's the most safe. That's why we have banks. Because the United States controls the US dollar, and because people's wealth is expressed in US dollars, it makes the most sense to put your money in the United States. And this is not just true for China, it's true for most countries in the world, and that's why starting in the 90s you have all this wealth amassing in the United States. Does that make sense? So everything in the United States became overpriced, everything became a speculative bubble. Let me give an example. Let's look at equities.

Stock market, stocks. In the year 1900, if you look at all the world stock markets, the largest was the UK, because obviously the UK was the most powerful country in the world at that time. So the UK stock market as a percentage of the entire global stock market was about 25%, 24 to 25%. The United States was second at 14.5%, then you had Germany at about 13.3%, France at 11%. So that was the situation of wealth in the year 1900, and this makes sense, these four countries are industrially extremely powerful.

Today, the year 2024, the United States has 60% of all the world's stock wealth. Who's second, can you guys guess who would be second? Japan. And what is the percentage of global stock wealth? Can you guys guess a number? The United States has 66%, 60%. How much does Japan have? Can you guess a number? 10% is a good guess, right? It's 6%. Do you see the disparity? Number one is 60%, Japan number two is 6%. It's a huge disparity. How much is China, the world's second largest economy?

You understand, right? So all this wealth that's being generated around the world can only end up in one place, the United States. And that's what's pushed the financialization of the US economy, because this wealth goes to the United States and someone has to manage this wealth, and this is the financial services sector. So people on Wall Street, and this is very important, people on Wall Street make their money based on how they manage this wealth, not on whether or not they make money out of this money, you understand? They charge a management fee. So in other words, they're not incentivized to be conservative and make sure that this money grows. What they're incentivized to do is design riskier and riskier assets and investment opportunities to attract more investment, because then they can take a management fee, a cut. Does that make sense? And that's what's led to so much financial over over the past 20 years in America.

One of America's biggest problems is the growing national debt. The government is paying for a lot of government services just by printing money. So right now the US national debt is about 34 trillion, and this $34 trillion debt, half of it is owned by foreigners.

Japan has about a trillion, China has about 800 billion, so they buy US treasuries. America owes Japan a trillion dollars, America owes China $800 billion, and then half of it the government owes to its people. The two largest expenses are the military and the pension system. So $34 trillion is a lot of money, because the US GDP is about a hundred trillion dollars, so the total debt is about a third of America's GDP. And this debt has interest, so this debt is going up about one to two trillion every two to three months. All this is saying, these numbers, all they're telling us is there's absolutely no way that America can pay all this debt.

So the question then is, if you're China and you're Japan, why do you have all this debt, knowing that America can never pay you back, or America will at some point default on this debt? Why does Japan and China and other countries have all this debt, your treasuries, knowing fully that America can never pay back all this debt? Why? So there are many reasons.

The first reason is that in theory Japan and China can always take this debt and buy oil with it. So this is again the petrodollar. Second reason is that even though America's in debt, it's still an empire, it's still the greatest military power in the world, so you feel that the money is safe there. Does that make sense? Because no one can actually challenge America militarily. And the third reason, and this is the most important reason, is there's no place for you to go. You understand? Where else can you put your money? Nowhere. So that's the issue. Because China and Japan can buy oil with it, and because there's really no place for China and Japan to put this money, in theory the system can go on forever. So it's possible that maybe in 10 years' time the debt will be 340 trillion. Who knows? So in theory this could go on forever, because America's an empire.

But then what happened two, three years ago is Russia invaded Ukraine. Russia invaded Ukraine, and why this is important is that this is basically Russia challenging the dominance of the empire.

What Putin is really saying to the United States is, I think your empire is full of lies, your empire is based on nothing, your empire is based on the perception that you are invincible in war. Well, I'm going to invade Ukraine and prove everyone wrong. I'm going to show that you, America, are in fact a paper tiger. And so if Putin succeeds in his war in Ukraine, then the fundamental understanding of how the world works, that America is an empire, that America is invincible, that the US dollar is safe, will radically change. It will be destroyed, it'll be undermined, it'll be subverted. Does that make sense? So that's why America needs to stop Russia in Ukraine. Can it stop Russia in Ukraine? How's the war going for America and Ukraine? Pretty badly. I mean, the war is almost over.

So what America could do, which will solve all these problems, is for America to transition from a financial economy back to a manufacturing economy. If America just does this, America has nothing to worry about. It doesn't have to worry about the debt, it doesn't have to worry about Russia, it doesn't really have to worry about the world, because America is a self-sufficient economy, meaning that it has the resources to sustain itself.

It doesn't really need to trade with the rest of the world. If America can return to being a manufacturing economy, then it would be invincible. Now the question then is, can America reindustrialize? Yes or no? Why not, Jack? Because the politics doesn't allow them to. Exactly. But can you explain? Yeah, that's exactly right, Jack.

So yes, the problem right now is the very structure of American society and politics and the economy. The financial sector has all the power and they don't want to go back to the time when manufacturing had all the power. So that's a first problem. But let's just say for the sake of argument that they agree to this. What's your other problem? If you want to re Okay, all the foreign investment can just go into factories. But there's actually a really big problem with reindustrialization. As Jack says, there will be political resistance to this, but then you have a bigger problem than this, which is, guys, the problem with this economy is it creates a speculative mindset.

Therefore no one wants to work hard, no one wants to go work in factories anymore, do you understand? If you're a young person you would much rather spend your time investing in Bitcoin than working in a factory, do you understand? Because investing in Bitcoin gives you the opportunity to become rich, but if you work in a factory you have to work hard for 40 years just to buy a house. Does that make sense? So you're not going to find people to work these factories. That's a bigger problem. And the third problem of course is just investment. How do you build these factories? You not only have to build these factories, but you also have to build logistics networks to move goods from one place to the next. So in other words, America could reindustrialize, but it's a pain in the ass. You're going to face a lot of political opposition, especially from the financial sector, it's very hard for you to get people to work in factories, and plus where's all this money going to come from? So if you can't beat Russia in Ukraine and if you can't reindustrialize, then what can you do to protect the petrodollar and your financial system?

Well, I have an idea: invade Iran. Invade Iran. Now why would you do that? The answer is that unfortunately, of all the options out there, because America can't just sit back and let its empire collapse, of all the options out there, invading Iran happens to be politically the easiest to do. You can't go fight a war against Russia because Russia has nuclear weapons. You cannot reindustrialize because there'd be too much political opposition towards that, plus it'll take you about 50 years to reindustrialize. But if you invade Iran, well, you accomplish three things. The first thing is you show the world that you're still the top dog, your military is still invincible. So if you're a foreign investor in America and you have a trillion US dollars, you feel safe. You don't think the US dollar will collapse. That's the first thing, to show the world that America is still the world's foremost military power, therefore the US dollar is safe. What is the US dollar based on? Oil, right? Well, if you control oil, then you don't have to worry about people abandoning the US dollar.

Does that make sense? And it happens that the Middle East produces 40% of the world's oil, and Iran is the world's fourth largest oil exporter. But when you take over Iran you also control Iraq as well, you control that entire area. And the third thing about invading Iran is trade. Most of the world's trade has to pass through that area, so invading Iran would allow you to control the world's shipping. So that would be the theory behind invading Iran, but the motivation would be to save the American Empire. Because if Putin wins in Ukraine, then America is going to look weak, it's going to look like a paper tiger. And in this situation, as the empire, today you have a lot of countries in Africa who are rebelling against the Western powers, France basically, and America, because they think that Putin is now in charge. Why did October 7th happen? Why did Hamas attack Israel? I guarantee you that if it were not for the war in Ukraine, Hamas would not have done such a thing. For the longest time, before the war in Ukraine, there was a perception in the world that America was militarily no power no country could ever dare stand up against the United States, and by invading Ukraine Putin has proved everyone wrong, that the United States can be defeated.

So what the United States must do now is prove to the world, nope, we're still militarily the greatest power in the world. Does that make sense? And again, it must do so to protect its financial economy, otherwise there's a very good chance that this financial economy will implode onto itself. If China, Japan, other countries pull out of the US financial sector, if they sell their US treasuries, not only will America face a sovereign debt crisis, but it will lose access to easy money. Easy money, and the problem in America today is that America is an empire addicted to easy money. People are so used to just around and making millions of dollars that they cannot imagine or tolerate a day when they would have to go back to working hard. So it's this addiction to easy money which will drive America to invade Iran. Does that make sense?

Any questions? Okay, so all this money coming to America, how is it managed? This is actually very complicated, because again the financial sector is very large, but if you have US dollars then your options are you can invest in the stock market, you can invest in houses.

The problem today is because there are too many rich people in the world and all this money is going to America, all assets are bubbles now. So the irony of all this is that you feel that your only option is to invest in America, but when you do this you're actually losing value, and that's why the system is not really sustainable. Everyone in America, and that's driving up all these asset prices, but in the long term that will destroy the American economy, and in the long term it'll create all these bubbles that will also destroy individual wealth. Does that make sense? Any more questions?

Okay, so Jack asks a great question, which is, listen, if going to Iran is all about restoring confidence in the United States, well, if America loses the war then that would destroy even more confidence. And so this is the problem of empires. Empires have something called hubris, imperial hubris, which means that they cannot imagine the possibility of losing a war.

So why is that? There are two reasons. The first reason is that an empire, what an empire is, it's a force that imposes reality onto others. An empire makes you see the world the way the empire wants you to see the world. Does that make sense? Which means there's no feedback loop, which means that you cannot actually tell the empire what you think, your voice doesn't matter, which means that it's not possible for an empire to imagine the possibility of it ever collapsing, you understand? If it could, it would never collapse. That's the first problem.

Second problem is, okay, let's do a thought experiment. If you had a choice, would you rather be smart and strategic or stupid and arrogant? If you had a choice in an ideal world, would you rather be smart and strategic or stupid and arrogant? The answer is stupid and arrogant, because it makes you feel good. Stupid people feel good about themselves. Smart people get depressed, they doubt themselves, they question themselves, and that makes you feel bad. Most people in an ideal world would want to feel good about themselves always.

So when you are an empire you want to be stupid and arrogant because it makes you feel good. Does that make sense? But that's why empires collapse, because once they have too much power they become stupid and arrogant and they refuse to consider the possibility that they could be wrong. Does that make sense? Any more questions?

The American Empire has been building for a long time. You can make the argument that the empire really started after World War II, because now America controlled half the world, and then it became dominant after the end of the Cold War when the Soviet Union collapsed. At that time, before the collapse of the Cold War, America had to behave itself, and the reason it had to behave itself was it wasn't afraid of the Soviet Union, it was afraid of communism. That's why from 1950 to 1980 they treated their workers so well, because they were afraid of a worker revolt. The real threat was not the Soviet Union, the real threat was communism as an opposing ideology to capitalism. Unfortunately, today there's no opposing ideology to capitalism, and that's why America can do what it wants.

It does not fear any enemies, it does not fear internal revolt. Does that make sense? All right, I'll see you guys next week.