“One of the disturbing facts of history is that so many civilizations collapse,” warns anthropologist Jared Diamond in Collapse: How Societies Choose to Fail or Succeed. Many “civilizations share a sharp curve of decline. Indeed, a society’s demise may begin only a decade or two after it reaches its peak population, wealth and power.”

Now, Harvard’s Niall Ferguson, one of the world’s leading financial historians, echoes Diamond’s warning: “Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.” Yes, America is on the edge. Dismiss his warning at your peril. Everything you learned, believe, everything driving our political leaders is based on a misleading, outdated theory of history. The “American Empire” is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse.

Ferguson is brilliant, prolific, contrarian. His works include the recent Ascent of Money: A Financial History of the World; The Cash Nexus: Money and Power in the Modern World; Colossus: The Rise and Fall of The American Empire; and The War of the World, a survey of the “savagery of the 20th century” where he highlights a profound “paradox that, though the 20th century was ‘so bloody,’ it was also ‘a time of unparalleled progress’.” Why? Throughout history imperial leaders inevitably emerge and drive their nations into wars for greater glory and “economic progress,” while inevitably leading their nation into collapse. And that happens sudden and swift, within “a decade or two.”

You’ll find Ferguson’s latest work, “Collapse and Complexity: Empires on the Edge of Chaos,” in Foreign Affairs, the journal of the Council of Foreign Relations, a nonpartisan think-tank. His message negates all the happy talk you’re hearing in today’s news about economic recovery and new bull markets, about “hope,” about a return to “American Greatness,” from Washington politicians and Wall Street bankers.

“Collapse of All Empires:” 5 stages repeating through the ages … and in 2010

Ferguson opens with a fascinating metaphor: “There is no better illustration of the life cycle of a great power than The Course of Empire, a series of five paintings by Thomas Cole that hang in the New York Historical Society. Cole was a founder of the Hudson River School and one of the pioneers of nineteenth-century American landscape painting; in The Course of Empire, he beautifully captured a theory of imperial rise and fall to which most people remain in thrall to this day. Each of the five imagined scenes depicts the mouth of a great river beneath a rocky outcrop,” If you’re unable to see them at the Historical Society, they’re all reproduced in Foreign Affairs, underscoring Ferguson’s warnings that the “American Empire on the precipice,” near collapse.

First. The Savage State, before the Empire rises
“In the first, The Savage State, a lush wilderness is populated by a handful of hunter-gatherers eking out a primitive existence at the break of a stormy dawn.” Imagine our history from Columbus’ discovery of America in 1492 on through four more centuries as we savagely expanded across the continent. (More)

The Buttonwood Agreement was signed in 1792 near Wall Street, creating what is now the New York Stock Exchange. For two centuries after that, the industry lived with a “rational man” theory. Recent research by behavioral economists and neuroscientists proves conclusively that investors are actually quite “irrational and woefully uninformed, especially when they’re betting against Wall Street. Wall Street’s theory of the “rational investor” was actually pure propaganda, purposely intended to mislead investors. Today, the new theory of the “irrational investor” has set the “law of unintended consequences” into motion—instead of helping Main Street investors get a grip on their irrational behavior, it has opened new opportunities for Wall Street to exploit and turn the research, tools and technology of behavioral finance against investors, putting Main Street investors at an even bigger disadvantage than they were before, because Wall Street’s arsenal is growing stronger, while Main Street is last in denial.

The English playwright Harold Pinter, well-known for his long mysterious “pregnant pauses,” won the Nobel Prize in Literature a few years ago. A rarity, only the third playwright in a century. Equally rare, a few years earlier Princeton psychologist Daniel Kahneman won the Nobel Prize in economics. What do the two have in common? (More)

Jason Zweig is one of America’s top financial journalists. He may be “the best” when the subject demands a psychological slant. He proved it several years ago. I couldn’t resist reviewing one of his books. Here’s my opening lines: 

Are you an “intelligent investor?” Maybe not. “Would you willingly allow a certifiable lunatic to come by at least five times a week to tell you that you should feel exactly the way he feels? Would you ever agree to be euphoric just because he is, or miserable just because he thinks you should be?” “Of course not,” says Jason Zweig in his commentaries to the updated version of Benjamin Graham’s The Intelligent Investor. “But when it comes to their financial lives, millions of people let the stock market tell them how to feel and what to do, despite the obvious fact that, from time to time it can get nuttier than a fruitcake.”

Today we’re not much different, arguably we’re worse off psychologically. We sure aren’t “intelligent investors.” We’re still letting that “certifiable lunatic,” as Graham affectionately called the stock market, run our lives, even though he’s “nuttier that a fruitcake!” How else can we explain the fact that Wall Street lost over 20% of our money the past decade and still expect to gain 20% in 2010. We should be worried that Wall Street will lose even more of our hard-earned money the next decade, as I wrote recently on MarketWatch: “8 Reasons Wall Street loses another 20% in this decade: Warning, you can’t get back to even, cannot win Wall Street’s ‘loser’s game’.” Here’s Zweig’s latest on the same point in his Wall Street Journal column, The Intelligent Investor, titled, “Why Many Investors Keep Fooling Themselves.” (More)