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…what
if history is not cyclical and slow-moving but arhythmic, at times almost
stationary, but also capable of accelerating suddenly, like a sports car?
What if collapse does not arrive over a number of centuries but comes
suddenly, like a thief in the night… dramas lie ahead as the nasty
fiscal arithmetic of imperial decline drives yet another great power over the
edge of chaos.
Niall Ferguson, July 28, 2010
The
nasty fiscal arithmetic of imperial decline that Harvard professor Niall
Ferguson refers to is America’s unsustainable debt. Growing levels of
debt according to Ferguson are now about to drive the US, like other great powers
before it, over the edge of chaos; an event Ferguson believes will
come sooner rather than later.
…most
imperial falls are associated with fiscal crises…empires behave like
all complex adaptive systems. They function in apparent equilibrium for some
unknowable period. And then, quite abruptly, they collapse.
In
2010 the U.S. government is expected to issue almost as much new debt as all
other governments, around the world, combined
The
resemblance between the above chart and the following is
obvious—except, of course, to those in denial.
The
US borrows 45 % of all moneys borrowed by all governments and spends
virtually that same percentage of global military spending. Beginning in
1980, President Reagan started the US on the road to financial collapse,
borrowing heavily in order to fund the US military buildup, an act of fiscal
irresponsibility that would later prove fatal. In his two terms, Reagan
increased the US national debt by 258 %, the cost of which would be the loss
of America’s economic power-base.
After
WWII, both the USSR and the US spent vast amounts of their respective GDPs on
military expenditures. Bankrupted, the USSR collapsed in 1992. Three decades
later, the US now faces the same fate.
America’s
pending bankruptcy reflects America’s shift from the world’s
creditor to its largest debtor. Prior to Reagan’s military buildup, the
US did not need to borrow to support the global deployment of its military;
instead, in order to do so the US spent its entire hoard of gold—21,775
tons.
The
only gold the US now possesses is there because in 1971 the US refused to
convert its remaining gold for dollars as required under Bretton-Woods; and
by the time Reagan was elected, the US could pay for its global military
force only by indebting itself to others
When
Reagan took office, total US debt was $980 billion. Today, the budget deficit
for this fiscal year alone is projected to be $1.4 trillion. After the Reagan
presidency, the US accelerated its spending until sovereign default or
currency debasement are its only options.
SOVEREIGN
DEBT SOVEREIGN DEFAULT SOVEREIGN DENIAL
The Emperor has no clothes, i.e. the empire has no money
The
publication of Rogoff and Reinhart’s seminal work on sovereign debt in
2008 predated the sovereign debt crisis by two years; and if Rogoff and
Reinhart were not surprised, they would be surprised that it would be
industrialized nations that would find themselves under the scrutiny of
global debt collectors.
In
2010, sovereign default concerns unexpectedly shifted from developing
nations, i.e. Rogoff and Reinhart’s sovereign rite of passage,
to industrialized nations—Greece, Spain, Italy, the UK, the US, and
Japan etc.
The
shift in sovereign debt concerns was accompanied by another extraordinary
shift. Between 2000 and 2010, China became America’s creditor as well
as its sweatshop; and China knows that the US owes so much money that only by
borrowing more can it pay what it owes, a condition economist Hyman Minsky
called ponzi-financing, the last stage prior to debtor default.
In
truth, the US is not the default virgin described in Rogoff and
Reinhart’s study. The US default on its gold obligations was perhaps
the most important monetary default in history, plunging the entire world
into a regimen of fiat money against its will
Sovereign
default, however, is not the only strategy available to the US regarding its
unpayable debt. The US could alternatively pay down its massive obligations
by debasing its currency, a strategy wherein the US would pay its creditors
with increasingly worthless US dollars—to the US, a far more convenient
solution.
This
is why China is worried—and the rest of the world (including Americans)
should be worried too.
BORROW
BORROW BORROW SPEND SPEND SPEND
No
one will be surprised when the US again tries to borrow its way back to
economic growth. This has been the default strategy of the US ever since
Ronald Reagan’s Treasury Secretary, Donald Regan said, “Deficits
don’t matter”, a financial heresy that would eventually undermine
the American economy.
Capitalism
is an uneasy balance between credit and debt. However, in the 1980s, far more
credit was created and far more debt resulted. Combined with the removal of
gold as a constraint on monetary growth, it would be only a matter of time
until capitalism’s accrued debt would overwhelm the capacity of credit
to contain and service it. That time has now arrived.
Bankers
have unleashed a beast they cannot contain. The beast is of their own making
although they are careful to deny their patrimony. The bankers’
deflationary black hole of defaulting debt is now destroying capital faster
than bankers can create it.
This
is why Fed Chairman Ben Bernanke is contemplating flooding the US economy
with even more printed dollars, the so-called helicopter drop of money
(Milton Friedman’s term), the proscribed solution of Milton Friedman to
the Great Depression.
Because
Friedman observed that the money supply had contracted during the Great
Depression, Friedman erroneously believed sufficient monetary expansion would
prevent another depression in the future. This is why Bernanke flooded the US
with money and credit in 2009 hoping Friedman was right.
But
Friedman was wrong. Bernanke’s palliative was temporary, producing only
a short boost instead of a sustained recovery. Despite trillions of dollars
spent and interest rates lowered to zero, the US money supply is still
contracting—and the US economy is again slowing.
http://sirchartsalot.com/article.php?id=139
Despite
Friedman’s failed theory, Bernanke still believes more injections of
credit and debt can do what previous injections didn’t. This is akin to
an alcoholic believing more alcohol will dispel the hangover that previous
drinks did not. Friedman and Bernanke’s helicopters are coming. Get
ready.
Can
you hear the helicopters coming
Sounds of choppers fill the sky
Whirling birds of destruction
This is how currencies die
Printing
money is easy
The problem is the debt
Money’s source is credit
You ain’t seen nuthin’ yet
Bernanke’s
dream is our nightmare
His solution is our demise
Helicopters filled with money
Dropping from the skies
THE GOLDEN HEDGE AGAINST
CHAOS
In The
Critical Path (St Martin’s Press 1981) Buckminster Fuller predicted
the world’s power structures would fall, plunging the world into an
unprecedented crisis. Communism collapsed in 1992. Now, capitalism is about
to do the same. Bucky’s predicted crisis comes next.
In The
Great Wave (Oxford University Press 1996), Professor David Hackett
Fisher observed we are at the end of a great wave—a phenomena that
separates historical epochs, a phenomena which always end in the complete
economic collapse of the existing order. Great Waves last 80 to120 years. The
current wave is 114 years old.
At
the 2010 Aspen Ideas Festival last month, Harvard Professor Niall Ferguson
warned the collapse of the American empire could be imminent.
I think this is a problem that is going to go live really soon,”
Ferguson said. “In
that sense, I mean within the next two years. Because the whole thing,
fiscally and
other ways, is very near the edge of chaos..
When
America’s empire does collapse and, like all empires, it will, chaos
will reign. Today, the US is the world’s super power, its dollar is the
world’s reserve currency. The collapse of the US will change all this
and more.
This
is why the price of gold has quintupled in only ten years. America’s
failing grasp on power has been mirrored by gold’s rise during that
same time. In 2000, America’s credit-driven prosperity began to falter
with the collapse of the dot.com bubble. Ten years later, America has still
not recovered. Indeed, as Niall Ferguson predicts, its demise is imminent.
Since
the 1980s, the US has conspired with others to suppress the price of gold as
it is an indicator of the failings of the fiat financial system upon which
its power is based. This is akin to doctors icing the thermometer to convince
others that the patient is not in danger; and while they have been successful
in so doing, the patient is now about to expire.
When
the US empire implodes, the global geopolitical matrix will collapse as will
much of the world’s financial underpinnings. It will be a time of
chaos; and gold—history’s hedge against chaos—will again
perform its time-honored role.
RESPONSIBILITY
AND RENEWAL
In an
extraordinary mea culpa published July 31st in the New York Times,
President Reagan’s Director of the Office of Management and Budget,
David Stockman, a Republican, blamed his own party for four critical errors
that contributed to America’s decline:
The
errors are as follows:
The
first of these started when the Nixon administration defaulted on American
obligations under the 1944 Bretton Woods agreement to balance our accounts
with the world. It is.. an outcome that Milton Friedman said could never
happen when, in 1971, he persuaded President Nixon to unleash on the world
paper dollars no longer redeemable in gold or other fixed monetary reserves.
Just let the free market set currency exchange rates, he said, and trade
deficits will self-correct. [But] relieved of the
discipline of defending a fixed value for their currencies, politicians the
world over were free to cheapen their money and disregard their neighbors…
The
second unhappy change in the American economy has been the extraordinary
growth of our public debt…This debt explosion has resulted not from big
spending by the Democrats, but instead the Republican Party’s embrace,
about three decades ago, of the insidious doctrine that deficits don’t
matter if they result from tax cuts…
The
third ominous change in the American economy has been the vast, unproductive
expansion of our financial sector…the trillion-dollar conglomerates
that inhabit this new financial world are not free enterprises. They are
rather wards of the state, extracting billions from the economy with a lot of
pointless speculation in stocks, bonds, commodities and derivatives. They
could never have survived, much less thrived, if their deposits had not been
government-guaranteed and if they hadn’t been able to obtain virtually
free money from the Fed’s discount window to cover their bad bets.
The
fourth destructive change has been the hollowing out of the larger American
economy…It is not surprising, then, that during the last bubble (from
2002 to 2006) the top 1 percent of Americans — paid mainly from the
Wall Street casino — received two-thirds of the gain in national
income, while the bottom 90 percent — mainly dependent on Main Street’s
shrinking economy — got only 12 percent. This growing wealth gap is not
the market’s fault. It’s the decaying fruit of bad economic
policy.
Stockman’s
mea culpa is an unexpected admission of political responsibility
especially at a time when Americans are searching for someone to blame. But
there’s no one to blame except America itself. The Russians
aren’t responsible, the Muslims aren’t responsible and guess
what, illegal immigrants aren’t responsible either—America, and
America alone, is responsible for its own demise.
America
was born out of the desire for freedom and a better life for all (apologies,
however, are due to the Native Americans and the African slaves who suffered
in the process). But, along the way, America chose to instead pursue power,
not freedom; and, today, the considerable bill for America’s fatal
choice is coming due—and more paper money won’t pay it.
God
save America from itself.
Buy
gold, buy silver, have faith.
Darryl Robert
Schoon
www.survivethecrisis.com
www.drschoon.com
Check his Blog
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