Monday, August 25, 2008

USA: the next Argentina?

Americans fixated on the Democratic Circus this week, and the Republican Circus next month (or whenever it is; I don't care enough to pay attention) are wasting their time on irrelevances. Whatever slogans generate the most tumultuous, calculated applause, whatever promises are made, whatever visions of change are released into the ether, have nothing to do with the country's true crisis. Neither party will touch that one, because to acknowledge it would set off a panic. The party wheelhorses are either ignorant themselves or figure that for the public, ignorance is bliss.

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The most immediate crisis is neither Islam (excuse me, "terrorism") nor the Mexican Invasion. Not to discount the importance of either, but another snake will bite first, and leave us even more anemic and unable to cope with them. It is the likelihood of the imminent breakdown of the dollar-based — that is, the funny money–based — worldwide financial system.

Much of the world, but above all the United States, has for years acted as though credit is money. And the no. 1 credit card provider is the U.S. government, because of its ability to create credit by printing money and convincing everyone that the money is actual wealth, when in reality since 1971 it has been backed by nothing except the word of the U.S. treasury. It is what economists call a fiat currency (from the Latin fiat — "let there be"). That faith-based money then gets passed down the line through the banking system and commerce.

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It worked reasonably well for a long time, because the world did trust the word of the U.S. Treasury. Lately, though, the rubes have been catching on to the con game.

Darryl Schoon writes, at the "alternative economics" site www.financialsense.com:
While bankers do control the issuance of credit, they cannot control themselves. Bankers are the fatal flaw in their deviously opaque system that has substituted credit for money and debt for savings. The bankers have spread their credit-based system across the world by catering to basic human needs and ambition and greed; and while human needs can be satisfied, ambition and greed cannot—and the bankers’ least of all.

I have a bad feeling about what’s about to happen. The Great Depression is the closest that comes to mind. I, like most, was not alive during the 1930s when it happened. Nonetheless, what once was feared in private is now being discussed in public. It’s going to be bad. It’s going to make high school seem like fun.
Predicting Sturm und Drang is of course an easy way to command attention. The Financial Sense web site and others like it specialize in this kind of apocalyptic thinking, and to many it will seem over the top. Maybe they're right. I've been reading money manager Ken Fisher's The Only Three Questions That Count, and have no doubt he would scoff at predictions like Schoon's.

Perhaps the most impressive single thing in Fisher's book is a table in which he lists the shocks and crises the country experienced each year since 1935, while in most years (about 70 percent) the stock market was up, often way up. But while Fisher is a very bright guy, I can't help wondering if his market smarts were acquired when the game had different rules.

Schoon notes:
In 2006, in an article published by the St Louis Federal Reserve Bank, Professor Laurence Kotlikoff stated the US was “technically bankrupt” as there was no way the US could pay the $65.9 trillion it owed.

Evidently, Professor Kotlikoff was conservative in his estimate or we’re going downhill faster than he knew. Just three months ago, on May 28, 2008 Richard W. Fisher, President and CEO of the Dallas Federal Reserve Bank estimated the obligations of the US to be actually $99.2 trillion, 50 % higher than Kotlikoff’s figures.

Schoon, admittedly, goes off into Black Helicopters territory with accusations of connections between the CIA and the banking establishment, plots to keep the poorer countries in debt, etc. Whether he is right, wrong, or somewhere in between on that score (I have no way of knowing), I wish he hadn't gone there in this article, because much of what he writes on our present situation is worth pondering — at least as part of your own due diligence.

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This time default will come to both banker and debtor alike. The bankers’ system itself is now collapsing under the weight of debt that the bankers’ debt-based money has produced.

Banks are finding themselves increasingly bankrupt as are the governments the bankers used to debase the world’s currencies. This time, not only will Argentina possibly suffer another sovereign default, so too will its creditor, the US, as will many of the US banks that issued that debt.

When I started this blog three years ago, I didn't expect to be writing so much about politics, and the idea of blogging about economics never crossed my mind. But I've come to feel that both have become so critical to our future that, my own lack of expertise notwithstanding, to short change them would be a kind of irresponsibility to my readers, including those I've never heard from and don't know from Adam.

Let's hope that it's not going to be as bad as I fear, but I'm far from alone in my concern right now. Plenty of information and ideas are available on the web and elsewhere. Learn what you can. Do what you need to.

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4 comments:

stephenhopewell said...

Rick,

I think of your blog as *primarily* a political blog; amazing that you seem to have started with different intentions. It shows what some of us are being driven to.

I appreciate the commentary on the financial situation. Our nation's financial irresponsibility seems related to the liberal reality-denying, intentions-mean-everything ethos that pervades today.

By the way, the CD and DVD reviews are appreciated too!

Rick Darby said...

Thank you, Stephen. It is very strange. Even 20 years ago you would have had a hard time finding anyone less interested in politics than me. The change of focus has been forced on me by trends that you are well aware of.

I still think of politics as mainly playing defense. Unlike leftist ideologues, I do not believe in top-down, political solutions to fundamental problems. The answers to the deepest problems of life can only be spiritual, and the answers to social problems have to come primarily from individuals in voluntary association with one another.

But we sure have to defend ourselves against authoritarian idealists who see the State as the means of bringing heaven to earth.

st├ęphane said...

There's a big trouble with obligations in all developed countries. In France too, where I live.
A few days ago the President Sarkozy, just explain he will take 1,1 % on "life insurrance" and other "retirement plan", to help poor people.
This is taking economy the people do during all their life, to help poor people, because there's no money ?!
And media explain that just rich people are boring about that !
Quasi nobody explain that "life inssurance" and "retirement plan" is not only for rich people !

I make a funny video about that :

http://www.dailymotion.com/video/x6l4ir_colas-des-bois_fun

st├ęphane said...

And anybody explain that there's a lot poor people in France, because there's no more work...

I write a book, a funny novel, about daily life of out of work french citizens :

http://www.avenirdufutur.fr/?page_id=256