America Please Don’t Shoot the Budget Messenger….

Many years ago, three other gentlemen and myself met weekly at a modest diner. Our tastes were all similarly modest so we agreed to split the bill three ways. After a few months, a fifth person asked to join our lunch group. He had a much more aggressive appetite. Although he spent about twice that of the rest of us, he felt aggressively entitled to split the bill equally as well.

Without verbalizing their unease, others reacted by slowly increasing their lunch choices to balance their perceived slight. Since my appetite had not changed, the cost of splitting the bill soon stretched beyond my modest budget, and I politely left this burgeoning group. Soon after, a few others understood the budget bulge and the burgeoning bunch’s budget collapsed.

While all Americans are taught a simple understanding of home budgets and how they must balance or bust, somehow over the years, America was inculcated through a cognitive disconnect regarding politics’ Wizard of Oz and his magical black box of budget mayhem. Pull up any American article from a decade ago or even two, and you will see how the messages regarding our economy were the pied piper fluting us down the path to ruin.

In the early eighties, debates centered on retirement accounts and how they were a better solution than planned benefit retirement programs. Our retirement investments shifted into the stock market and were funneled into direct foreign investments. As resulting stock market ratios increased beyond belief, our investment advisors told us of the new market dynamics in which these ratios made sense.

As our manufacturing base left America, free market advocates explained how cheap foreign goods more than made up for lost jobs and how the new American economy would be information and service based. Of course, as our schools continued to drop in international rankings and our students failed to graduate from high school in ever greater percentages, proponents of our learned universities pressed upon us how America was the land of innovation and that no other country could compete with our exceptionalism, even as our grade school teachers explained how every student was exceptional and why competition was therefore inappropriate.

Over the last two decades, as our medical costs began to spike while our mortality and morbidity rates crept lower, we heard correctly but misleadingly that America has some of the world’s finest medical institutions in which the world’s elite come to for leading edge services. All the while, our insurance rates leaped higher at double digit rates, even while denying these leading edge services to the masses, until we spent double per capita of any other industrial country in the world. Yet, our medical costs mirrored our national budget in that hidden pricing passed through insurance without attempting to connect these increases to the consumers understanding of growing insurance rates.

Our military costs accelerated higher over the last decades until our defense budget, including defense budgets items hidden in other departments, now was 200 percent of all other countries’ military budgets combined! Yet, with 300 bases spread throughout our 50 states and with major military manufacturing and research facilities supporting local and state government budgets and creating opportunities for jobs in most, our communities did not connect the business of defense with the massive deficits it caused to America’s budget.

During our awesome run-up of housing and commercial real estate values when traditional rent rates to real estate price models failed to come close to making any economic sense, everyone from agents to mortgage brokers showed us how historical models no longer were relevant because they failed to consider the double digit rise in asset values that would continue ad infinitum.

When inflation seemed too high, we were told why core inflation should not include two of our most basic needs, food and energy. When massive amounts of dollars were flying off our printing presses to cover deficits, we were told why historical money aggregate numbers would no longer be tracked as these exploding values seemed to be discognitive by their very existence. When our trade deficits began to grow, we were told trade deficits were a good thing because they reflected an economy ripe with investment opportunities and flush with consumer confidence.

Our most esteemed and beloved President proposed trickledown economics stating that greater earnings to the rich would be invested in America for net benefit even as record amounts of investments were being transferred to China. Our most learned economists advocated that lower tax rates would bring in higher tax revenues. And when our investment banks got caught with their pants down, our central bank and treasury forcefully told the American public that the only thing that could be done to save America and the world was to print two trillion dollars and give it to the banks so they could pull their pants up.

Now, even as we are told, and with good reason, that our economy, and that of the world as we know it, may melt down if we do not raise the debt ceiling and reduce our deficits, most Americans still do not understand that between our military spending and federal healthcare spending, the two combine to consume every American federal tax dollar collected, and that the rest of our entire federal budget is borrowed. Yet even with such a massive debt and deficit facing us, we have been conditioned to caution any would be town crier against speaking frankly.

Any effort thus far of individual public figures to stand up and tell the American public the truth about the calamity of our historic political failure has been met with the severest of gamesmanship. Our public debate continues to look more like musical chairs. Unfortunately, each truth teller is left standing without a chair to sit in when the current news cycle is up. If only we could pull a Roman Senator from history and place him in the halls of Congress to tell the story of his empire’s ruin, perhaps our leadership would listen. Yet, they say that even if Jesus himself were to appear hovering above the earth in the second coming, most of us would not listen to his message. Instead he might find his musical chair taken away during the second coming’s news cycle.

Kyoto Protocols Would Have Accelerated China’s Plan to Reverse-Exploit EurAmerica

In 1978, the year China emerged onto the world stage with its four modernizations, China, a country with four times the population of the United States, had a paltry gross domestic product of $216 billion, less than eight percent of the United States. China exposed her strategy of four modernizations to the world as if to say,”Please invest in China and we will ensure that our workforce is educated, and that our business infrastructure is stable for your investment.” Yet, this openly expressed strategy, that may have seemed to the rest of the world as a difficult but noble goal for China to achieve, was only the tip of China’s Grand Plan, and only the part she wanted the world to see.

EurAmerica’s history with China was one of gunboat diplomacy, exploitation, and forced trading. When China opened her borders again in 1979, EurAmerica’s merchants were enthusiastic to exploit an opportunity once again. Yet, China had not forgotten EurAmerica’s role in the Opium War, the Sino-Japanese War, and the Boxer Rebellion. China would never open her border again to be exploited. When she finally opened her border in 1979, it was from a position of power, deep strategy, and long lived planning that suggested EurAmerica was finally ripe for reverse exploitation. China’s grand plan was to emerge as the 21st century world power.

What boldness of purpose China must have felt as she aligned her nation’s efforts to that decade’s long task. Looking back today on her impossible achievements, one must give pause to the monumental economic goal she set for herself in 1978, indeed greater than America’s technical goal of landing on the moon early in 1961. Yet, with such a miniscule $216 billion GDP and few material assets how could China possibly build her empire to surpass that of the United States?

Through a hybrid statist-capitalist political structure, China would create a conduit through which American businesses would willingly draw down the wealth of Europe and America and transfer it to China in order to share in the prosperity of that wealth transfer. Through the centralized imposition of forced savings on its people, China would provide low cost labor to sell goods at low enough prices to cause EurAmerica to look the other way as their neighbors’ jobs went to China. Through low interest loans, China would entice EurAmerican politicians to spend beyond their means to temporarily ease the pain of EurAmerica as China’s sucked away their life force. These were the basis of her strategy.

Similarly to how a business cycle contains early adopters and late stage laggards, China planned a capital extraction cycle for EurAmerica, in which China would extract capital in multiple phases, each phase having an optimal extraction strategy. First extraction would be through the early adopter “gold rush” investors rushing into China to stake a claim. China would also plan for early majority, late majority and laggard’s capital extraction.

In 1978, China assessed America’s assets:
• America’s most valuable assets were intellectual capital that resulted from 200 years of publicly funded primary and publicly subsidized secondary education
• America’s physical assets included business assets, commercial, and residential real estate worth $7 trillion in addition to public assets of land, buildings, and infrastructure
• America produced 26% of the world’s GDP at $2.8 trillion and consumed a quarter of the world’s goods
• America’s debt was as low as it had been since WWII as a percentage of GDP and its 110 million workers were capable of doubling their loans to provide China more capital
• America’s Baby boomers were entering a peak spending phase followed by peak saving
• America’s constitutional republic allowed a relative few capitalists to control the direction of her economy

By 1978, multinational corporations had steadily grown in number and size for two decades. China’s success depended on corralling MNCs through direct foreign investment to create massive inflows of capital quickly monetized as hard assets and infrastructure.

China would entice merchants to invest by offering access to the future potential purchasing power of its people. However, given China’s low household incomes, market penetration would be low to start. Therefore, to entice the early adopters, China would create special economic zones that provided the perfect investment opportunity of cheap educated labor, loose regulation, low taxation, strengthened business law, and enhanced infrastructure and transportation, in which businesses could produce goods at very low arbitrage costs to sell back to their home countries for high margins.

With low cost of goods from special economic zones, early adopter businesses were highly profitable and banks poured investment into China as a result. But, China could not complete her Grand Plan to multiply her GDP 50 times by enticing early adopter investors alone. She had to implement a plan timed to extract maximum dollars from EurAmerica at each phase of her exponential growth.

During the next stage, the early majority stage, China manipulated baby boomers’ peak spending phase:
• China’s low prices secured America’s baby boomers as loyal customers
• Prior to America noticing a substantial loss of jobs, China secured free trade agreements, and mined American businesses for their intellectual capital.
• She reinvested profits back into America’s debt to keep America’s interest rates artificially low in order to spur on higher levels of consumer spending and government borrowing.
• China supported lobbying of America’s mass investment vehicles to fund MNCs. 401Ks and IRAs, created in ‘80and ’81, funneled money through the stock market into MNCs for investment into China.

Then, America was drawn into the late majority stage as America’s baby boomers entered their peak saving years. 401Ks and IRAs artificially fed the stock market frenzy. Baby boomers sensed they knew how to invest in a bubble market that kept rising. With access to low interest rate loans kept low by China’s reinvestment, speculators borrowed money to bet on the rising stock market. America ultimately increased its debt to pump up stock values to build more Chinese factories.

Inevitably, the stock market bubble burst, leaving America’s baby boomers with lower retirement savings. The stock market that seemed destined to go up forever finally reversed rapidly decreasing valuations. However, the debt that had funded its escalation remained.

During the late majority phase:
• More businesses began to invest in China just to remain competitive with businesses that had moved offshore earlier.
• Tens of thousands of businesses transferred factories to China to obtain low cost labor
• Millions of Americans lost jobs
• With a generation of education completed, China now was able to take more advanced jobs as well as factory jobs. America’s bastion of protected, more technically competent jobs was not a bastion after all.
• American retail outlets for Chinese goods grew exponentially
• China continued to loan its excess profits back to the American government to keep interest rates low.
After having lived through the weakness of the stock market, real estate appeared to be the baby boomers’ best retirement savings alternative. In the early stages of the Great Ponsi, housing prices went steadily up. With low interest rates, Americans could now borrow on the value of their homes to continue funding China’s growth. China’s final stages of extraction saw the housing bubble increase beyond what had ever been experienced before.

Even though American jobs were increasingly being driven offshore, the frenzy of increased housing prices allowed additional borrowing from Americans, feeding the China gold rush further. This behavior was not unexpected, following a pattern of historical boom-bust cycles and was part of China’s planning. As a result of the stock bubble and the housing bubble, America’s total debt had risen to over $55 trillion. With such exuberance in the housing market, secondary debt markets participated in credit default swaps to the tune of an additional $42 trillion. China now had extracted close to the maximum of America’s value, leaving America with the corresponding debt.

So China extracted maximum value, first in trade secrets and early adoptive money, then by IRAs and 401Ks, then by stock market and home equity loans, then by 2nd mortgages and housing speculation. China monetized the massive cash flows as quickly as possible, building infrastructure and excess manufacturing capacity, while leaving America holding debt in exchange.

Without any other rising asset values to borrow from, America has tapped out its debt. Having maxed its debt, America can only print money to finance its trade deficits. Without further real debt derived money extraction to give China for infrastructure investment and without a real ability to pay for low cost Chinese goods, America is fast losing her worth to China as an infrastructure vehicle. Recognizing that maximized extraction and rapid monetization of America’s wealth is nearing its end, China is now finalizing the implementation of her strategy, that of pulling out of American debt before other countries that maintain reserve currencies create a run on the dollar.

In thirty short years, China was able to accelerate her GDP from $216 billion to $11 trillion. She amassed reserve capital of $3 trillion. She reversed America’s fortunes from the greatest creditor nation to the greatest debtor nation. She gutted America’s factories while creating the world’s largest manufacturing base in her own country. A measure of output that highly correlates to GDP is energy consumption. In June of this year, 2011, China surpassed the United States as the largest consumer of energy on the planet. While the U.S consumes 19 percent of the world’s energy, China consumes 20.3 percent.

In 1992, the world came together to discuss the impact of climate change resulting from energy consumption. The talks resulted in Kyoto protocols being initially adopted in 1997 that attempted to create a framework for reducing greenhouse emissions. The protocols called for 33 industrialized nations to reduce their greenhouse gases to 1990 levels and then to maintain emissions at those levels. Although it called for emerging countries like China to voluntarily lower levels, it did not require them to be mandated.

Of course, all of the countries who had no requirements to reduce their emissions signed the agreement. The United States, under scrutiny from environmentalists and others did not sign. China did sign. This was an additional strategy perhaps not envisioned in 1978 that nonetheless would have assisted in accelerating America’s slide had we signed.

GDP highly correlates to energy usage. In 1990, America’s real GDP was about $8 trillion as compared to $14 trillion in 2011. Kyoto would have caused America to either:
• Invest billions in the attempt to lower our energy usage per dollar of GDP
• Pay billions to other countries to have them produce less so that we could grow our GDP from $8 to $14 trillion
• Or, maintain our GDP at 8 trillion

In the meantime, China’s GDP in 1990 was $1.3 trillion and has since grown to over $10 trillion. China’s energy use has correspondingly grown as well until the point that this month, she overtook America as the greatest polluter. Kyoto was a grand idea that was doomed from the start because of the flaw that allowed the now greatest polluter to play by different rules. It attempted to cap the economic growth of America while allowing other countries to grow unfettered.

China had a Grand Plan that has been executed with the finesse expected of a centrally planned economy. Kyoto added nicely to that plan. America has been thwarted by China’s plan but now has the ability to reverse course. Given China’s size and growth rate, she will pass us soon if she has not already and her stride will be too great for us to catch her. However, by avoiding traps like Kyoto, and understanding that economic gamesmanship can accomplish a much greater destruction of a nation’s wealth than warfare ever could, perhaps America can once again right its course.

America’s Future – Building Block #1: U.S. Debt – Do we increase, decrease or default?

One of a few critical building blocks of American policy that will be required to right our ship of state is stabilization of America’s debt. The seeming annual deadline to vote on raising the debt ceiling is set for August 2nd. While the Republicans have threatened to default unless the ceiling increase has corresponding cuts to the budget, and while the world anticipates corrective action, we may only see hollow political chatter without material cuts because it is not yet America’s season for freefall from treasuries default.

However, it should be the season for reason. Some economists tell us that recent fear of historic deficits comes only from those ignorant of economics. They say we can print money at will without retaliation because of our sovereignty and world reserve currency status, that we owe this debt to ourselves, and that we can inflate the debt away. They surmise that we are nowhere near an insurmountable debt maximum. But how can they be so confident that America’s ballooning debt is not an issue?

Learned pontifications have confounded us through continued clamoring of countering arguments since 1990, when the debt ceiling was raised 33% to 4.1 trillion to contain our previous housing bubble, the savings and loan crisis. We have just exceeded our latest federal debt ceiling of $14.29 trillion dollars. Total American obligations of all public and private debtors are over $55 trillion, and including government’s unfunded liabilities, we owe $168 trillion. Even if we could balance the budget today, each working American is already obligated in some form to pay the world one million dollars. Who is right? How much American debt is too much debt?

In placing their faith in the pseudoscience of modern economics, our scholars fail to mention that the majority of currencies in history no longer exist. Hyperinflations do occur with regularity, 21 countries in the last 25 years. Debt levels do collapse governments, small (Zimbabwe) and large (USSR). Unfortunately, by the time societies recognize they have reached the beginnings of hyper-inflation, their currencies are already on a glide path to extinction. How close are we?

Prior to WWII, America paid down its debt between wars but our perception of debt changed in 1945. Backed by 70% of the world’s gold, the dollar was the world’s hope for rebuilding, and hence became its reserve currency. In 1944, the architects of Bretton Woods envisioned the dollar as the lynchpin to a system in which central banks maintained stable exchange rates to support balanced trade between industrialized countries, with minimal international indebtedness. They did not foresee the corrupting power they entrusted to the United States that would later subjugate the emerging world to a devaluing dollar.

Control of the world’s reserve currency proved too powerful an elixir for America. Perhaps we convinced ourselves that exporting inflation was a fair trade for granting Europe and Japan seed capital, and for our supplying our trading partners with military security. Nonetheless, for the past six decades the U.S. taxed the world $15 trillion through devaluation, and borrowed another $14 trillion, diverting substantial growth capital from emerging countries to fund America’s sustenance.

Without a realistic alternative, the world reluctantly accepted losses of their reserve currencies, but devaluation has not been without cost to America. The collapse of Bretton Woods spurred the growth of a $300 trillion FX market that has quickened the demise of the dollar’s reserve currency role. FX arbitrage and speculative volatility also precipitated the Asian crisis, causing the Asian monetary zone to closely align, lessening a need for dollar reserves. Including Europe’s drive to a common currency and China’s rise, all reduced the dollar’s power and made the possibility of an alternate monetary system possible. And America’s choice to drastically export dollar devaluation to provide investment banks buffer for unwinding of credit default swaps has brought the world to the brink.

While largely diminished, the dollar still yet dominates but for how much longer? After $2.6 billion of quantitatively eased dilution, Bernanke has fatefully claimed an end to QE, but only after President Obama announced a decade long expansion of trillion dollar budget deficits, replacing QE in name only. Is there no limit? If a limit is reached and the world fully rejects the dollar, history has shown that its fall will be too rapid to save. We now have imminent signs of that moment’s approach:

• China rejecting the dollar – For eight years, China purchased 20% of the U.S.’s deficit, buying 50% in 2006. However, for the last year, China has been a net seller of U.S. debt, reducing its total holdings 30%, and dropping its treasuries 97%. China has signaled that its risk of holding U.S. debt is greater than its risk of causing U.S. interest rates to rise, which will limit our investment in China, and will cause us to purchase less Chinese goods. Their risk equation has pivoted.

• Fed’s acquisition of treasuries – In 2011, the Fed has been the chief buyer of U.S. treasuries, purchasing over 70%, as opposed to 10 % during the last decade.

• Private investment shies away from the dollar – Investment firm Pimco, managing the largest bond fund in the world, cut its holdings of US government-related paper from $237 billion to zero for the first time in the history of the firm, stating the U.S’s problem is worse than Greece’s.

• Regionalization of reserve currencies – Asian, European, and Middle Eastern trading blocs all are all moving away from dollar denominated trades. As an example, China’s and India’s central banks agreed to direct currency exchange as of 2011.

• Commodity inflation – While the U.S. government quoted core inflation is up a mere 0.4 percent, Americans have felt the results of a real 12% inflation and much higher commodity inflation.

• Debt rating concerns – As of June, 2011, Moody’s has threatened to reduce the U.S.’s debt rating unless imminent progress is made on reducing America’s deficit

• American public losing faith – Most telling is the behavior of the American people. With 28% of home prices lower than the underlying mortgages, record numbers of Americans have chosen strategic foreclosures. 25% of foreclosures are from those that have chosen to walk away from debt obligations even though they still have the wherewithal to pay them. Feeling betrayed by America’s financial institutions’ “contract” with Americans for stable money, stable employment, and stable pricing, Americans increasingly no longer feel compelled to honor their financial contracts. The underpinnings of the dollar are on shaky grounds.

Our political and financial leadership now have choices to make. The Fed has signaled no more QE and the President has signaled a decade of continued historic deficits, but those announcements are political balloons that have been lofted toward their constituents. What should America’s true strategy be for our mounting debt?

We have but limited choices. 1) Debt can continue to increase at historic rates, perhaps preserving our banking system in its zombie state, but risking the loss of world credit, a spike in interest rates, crowding out of government services, and the march toward hyperinflation. 2) The rate of increasing debt can be reduced by either budget cuts or tax increases, but either measure may precipitate a return to America’s recession, increasing unemployment, decreasing GDP, and without substantially austere measures, continuing down a path toward loss of world reserve currency status. Or 3) America can take drastic measures to eliminate the deficit and to begin reducing the debt, most likely causing a rapid downward spiral of GDP which, similar to Greece’s predicament, will create an imploding cycle of further austerity measures and GDP reduction.

Considering that credit agencies have already fired lowered debt rating shots hair-raisingly close to America’s bow, the first option of continuing down our current path of printing money to fund our federal deficit is daring fate to draw us into the abyss. The world is quickly shutting off America’s Fed spigot of money printing. If we continue printing money, we risk paying higher interest on existing debt, crowding out needed government services and shocking America back into recession. The EU’s prescription for Greece has enlightened us that the third option of severe austerity is a prescription for thrusting America into obscurity with little hope of return. Therefore, we must now immediately embark down the second path of significant but directed deficit reduction. Sound choices of which reductions to make is a topic for a near future building block post and would be an interesting response from readers.

While the middle choice of materially lowering the rate of increase in our debt and over time reaching balance is our hope of recovery, it risks sending America into a double dip recession. If we reduce public spending without subsequently increasing private spending, demand will decrease, most certainly causing a downturn. Increasing taxes, without correspondingly increasing earnings of those paying them, will crowd out private spending, also decreasing demand. To successfully navigate our debt hazards, any decrease in government spending must be accompanied by a similar increase in private spending.

To increase private spending, either consumer demand must be increased with corresponding availability to credit, or private business spending must be increased with a corresponding potential for demand for its goods or services and a corresponding availability of credit. To keep this post to a reasonable limit, these issues are items for a future building block post.

Consumer credit is maxed out. Historic consumer debt combined with loss of housing and stock market equity and lowered prospects for employment have dried up any chances of a consumer led recovery. Loosening of credit without a corresponding increased demand for employees is unwarranted and spurring demand for employees is unfortunately another building block topic.

State and local governments are operating outside of constitutional authority in the red, and foreign governments have reduced credit to the federal government. Therefore, deficit reduction must initially be accompanied by increased domestic business spending if we are to avoid a recession. Increased spending must have the potential for successful creation of new profits. Sources of new spending must come from private providers of debt and capital, bank debt in combination with private business equity. America can no longer allow our banks to set the agenda for the path forward. The current prescription of repairing bank balance sheets while limiting credit is no longer feasible. These issues are also a subject for another building block discussion.

Some in Congress suggest we have a fourth option, that of initially maintaining the deficit by cutting taxes to spur growth while reducing government spending accordingly, eventually growing tax revenue through increased growth of the economy. While the idea has much conceptual merit, its implementation in previous Congresses was spurious. Private capital from lowered taxes was siphoned into overseas investments with little if any net benefit to the domestic economy. Much work from Congress, the courts, our executive branch, including trade negotiators and national strategists, business and labor must be done together as a community if we are to establish the real environment that can actually benefit from reduced taxes. (yet another building block discussion)

Initial prescription: Material reductions in government spending with corresponding highly incentivized, private investment that directs spending to domestic projects and increases domestic employment. Ultimately, in a timeframe considered realistic by world markets, the deficit must be eliminated through combination of reduced spending and increased GDP that strategically grows the domestic economy, creates full employment, and retains innovation. (More meat in future building block discussions)

Will EurAmerica Enter a Cold Financial Winter? (Revised)

When China announced to the world that it would open its doors to foreign investment, multinational corporations from both Europe and America rushed to stake a claim to a unique gold rush opportunity of historic proportions. China offered EurAmerican MNCs that agreed to share trade secrets and intellectual capital, that had capital to expand China’s manufacturing infrastructure, and that could open their own countries to China’s goods, the opportunity to participate in China’s newly opened special economic zones, with the hope of marketing to their 1.3 billion people.

Requiring massive investment to capitalize on the opportunity, MNCs sought the support of international investment banks and lobbied home governments to provide looser, deregulated capital markets as well as to submit to opening home markets to “free trade”. MNCs then began a three decade long extraction of wealth, factories, and jobs from EurAmerica to build China’s manufacturing infrastructure and GDP.

At the beginning of China’s historic rise, American politicians freed capital for China investment by reducing taxes of the investment class of Americans; through a reduction of the top tax income rate from 70% to 50%, through reduction of capital gains tax from 28% to 20 %, and through tripling of estate tax exemptions. As more and more capital was needed, America’s baby boomer retirement investments were developed for ease of use in China. In America, 401Ks, started in 1980, and IRAs, made available to all citizens in 1981, siloed middle class investments into the stock market that directed a majority of retirement funds toward China.

Later in China’s growth cycle, EurAmerican banks devised ways to extract even more capital through debt instruments from their citizens. EurAmerican interest rates were set low, creating the credit to extract maximum capital to fund the growth of China’s manufacturing infrastructure through home equity and business development loans. Yet, to meet China’s capital needs in the exponentially growing latter stages of growth, extreme capital extraction through maximum borrowing of a majority of private citizens and public entities was required.

Investment banks created a method of extracting maximum capital from EurAmericans’ main investments, their homes. To accomplish this, Investment banks restructured the banking industry. They first created methods of incentivizing consumers to take as many and as large of loans as possible through risky, low interest, no income verification loans and other, more predatory loans. They also rid commercial banks of their traditional, credit restricting roles by incentivizing them to make as many loans as possible, with minimal risk because they could simply resell the mortgages to the investment banks for a profit. Finally, they developed complex, (and unfortunately faulty) derivatives to buy mortgages from commercial banks and repackage them for profits.

In the process, a majority of consumers that could afford it were lured through ease of access and Ponzified greed into their debt web. Greed played its part with commercial banks as well, as most became willing accomplices of the role that investment banks created in transforming them into maximum credit authorizing, debt creating factories to feed the raw commodities of capital that China needed for her later growth stages. As beneficiary of EurAmerica’s capital, China became a strategic partner to the process by supporting low EurAmerican inflation and interest rates through:

• Accepting free flow of manufacturing infrastructure into her economic development zones
• Funding infrastructure debt payments through sales of low costs goods back to EurAmerica
• Mitigating international demands to revalue the Yuan higher by maintaining historic trade imbalances with EurAmerica and reinvesting Yuan back into EurAmerica
• Keeping internal inflation low through internally enforced savings of wage controls and removing excess Yuan from circulation through funding trading countries deficits
• Managing external commodity inflation through aggressive development of international Greenfield commodity projects to supplement absorption of long term international commodity contracts and relationships that were left unattended by EurAmerica.
• Reinvesting surplus capital into EurAmerica, keeping world interest rates low to extract last vestiges of EurAmerican capital through historic levels of corporate and private debt

When this historic, debt driven, extraction of two great empires’ wealth reached its zenith, like all financial bubbles finally do, public, private and corporate debt had stretched beyond its ability to pay, exceeding $50 trillion dollars in America alone. The financial herd had stretched so thin that it simply required a few debt ridden gazelle to nervously default to start the whole herd stampeding frenzily toward the bank runs that inevitably follow peak excess. This time in history, it was the unraveling of the predatory American home loans that toppled EurAmerica’s financial house of cards. Nonetheless, if not for this gazelle, another would have jumped to take its place, for no exuberant and irrational credit binge ever stands in the longer term.

When this Rube-Goldberg loan scheme supporting the massive capital transfer from EurAmerica to China finally collapsed, investment banks were pushed to the precipice of default. Acting independently of government mandated goals, central banks, with the Federal Reserve out front, stepped in to protect the banking industry by providing liquidity to those investment banks most at risk. They did so claiming that not providing liquidity would have caused domestic businesses and private citizens to default through massive foreclosures, bankruptcies, layoffs, financial and operational restructuring.

Unlike previous historical investment bubbles, in which many investment banks failed, EurAmerican central banks temporarily saved the vast majority of investment banks through simultaneous, massive expansion of the money supply, staving off a rapid disintegration of public, private and corporate debt, recorded as assets on their balance sheets. Recognizing further monetary support was required, the Federal Reserve attempted to mount another widespread EurAmerican expansion of money supply but Europe, intent on preserving its courtship of unification and now dealing with the crisis of PIIGS deficits, did not concur. Without palatable alternatives, the Fed embarked on a Romanesque fait accompli of reserve currency monetary expansion, attempting to reverse the entire world’s contraction of money supply through what they termed Quantitative Easing.

It appears that temporarily at least the Fed’s Quantitative Easing policy have strengthened EurAmerican banks’ balance sheets, transferring some toxic assets to sovereignties, and have girded them to endure the coming double dip recession. However, it failed to accomplish their stated long term debt stabilizing goals. Unemployment is once again increasing, housing prices have reversed and are falling, and while some European countries have begun to institute austerity programs, America is projecting trillion dollar deficits for the remainder of the decade.

Unfortunately, the Fed does not have the magic bullet to repair the only ways to truly provide long term stabilization of massive EurAmerican debt supporting their balance sheets. To do that, EurAmerica must stabilize the underlying ability and desire of their debt holders to make debt payments. This can only be accomplished by:
• Maintaining and growing EurAmerican economies
• Reducing real EurAmerican unemployment
• Increasing the nominal values of EurAmerican Housing or restructuring housing debt
• Eliminating public deficits
• Reducing non-value generating debt
• Maintaining minimum interest on existing debt while incentivizing its reduction and saving

Without immediate and urgent prescriptive measures to meet the above objectives and to mitigate the impact of EurAmerica’s retreat from previous financial investment and consumption patterns, a cold, worldwide economic winter most likely ensue. American direct foreign investment has already begun its inevitable descent. Europe’s protectionism has kept available resources flowing to China but EU will soon follow with fewer investments in China as well. China will react with less support for EurAmerican deficits, severely restricting EurAmerica’s monetary managment options.

If we do not act soon, our political systems will be forced into severe austerity measures. The world will enter a deep and disruptive recessionary cycle from which countries and entire regions will eventually emerge in an entirely new trading pattern; one that is China centric, developed around its newfound industries that were funded by EurAmerica at the turn of the 21st century. China will emerge first, building on its excess modern manufacturing capacity and hegemonic commodities relationships. When at last EurAmerica exits from the long winter of debt riddled recession, it will follow the path to the Asian economies.

Prescriptions to follow…

QE2 Has Precipitated the End of Post-Bretton Woods Money

The worldwide economy runs on a Post-Bretton Woods concept of money. Central banks create enough new currency out of thin air to provide adequate money velocity. This new money is then inserted into the banking system that then lends it out according to the public’s credit potential to pay it back with interest. The public then multiplies money through purchases of goods and services that create economic output and that redistribute currency back into banks for relending to other members of the public who demonstrate a viable ability to repay.

When an economic shock stalls the money engine, it must be restarted while the economy is on a glide path prior to freefall. When money supply is temporarily pulled from the economy, loan creation that multiplies money is temporarily halted, shrinking the supply of money required to pay back existing loans. When this occurs, although the public still has the skills required to create value to pay back loans, it loses access to money to repay the loans.

If temporary money supply disruption is allowed to fester, enough unpaid debt cycles accumulate to create collapsing credit, toxic debt, shrinking money supply and deteriorating markets. When the economy stalls, one of two government interventions must occur to reverse the trend and right the world’s money growth. Either credit limits must be loosened to allow for borrowing to cover unpaid debt plus future growth, or demand must be increased to create enough credit under existing credit conditions to cover unpaid debt plus future growth. Which process is most viable depends on the extent to which the markets have been allowed to fester.

In the first days of the Great Recession, banks knee jerked in response to collapsing real estate and slammed the credit market shut. Worldwide central banks quickly responded by attempting the first of two interventionist tools. By infusing currency from thin air, they hoped to provide cover for free-falling real estate prices, and to re-establish credit into the market. Had banks re-established loose credit, businesses would have bet on an increasing economy and would have used the new credit to increase production, thereby maintaining employment and multiplying money. However, the toxic asset load from the housing Ponzi was of such historic proportions that central bank loans did not repair bank balance sheets enough to incentivize re-establishment of credit. Without forgiving insolvent bank debts that would have correspondingly collapsed the world’s money supply and depressed world markets, governments indefinitely stalled the traditional banking engine of money growth.

Each month that banks remained functionally insolvent, increased business risk. As money supply collapsed, demand decreased correspondingly decreasing the willingness of businesses to bet on producing supply before demand. When the risk chasm became too great, the economy stalled and then collapsed.

Government Keynesian central planners then attempted a correction through the second of their interventionist tools. However, the stimulus packages they devised to attempt to bridge the demand gap created artificial demand in too concentrated pockets of industry and created too small an artificial demand to restart an economic engine that requires the credit and faith of every able consumer, worker and business in the world pulling on the ropes of credit derived money multiplication.

Both traditional methods of reversing money collapse, central Keynesian planning and central bank capital infusion, proved ineffective. Without effective worldwide government and central banking tools, festering turned parts of the world’s economy gangrene. No single government had the ability to re-start the world’s engine, and no worldwide consensus of political will existed to simultaneously and aggressively create the size of artificial stimulus required.

In desperation, the United States Federal Reserve has embarked on an unrealistic attempt to float the entire world’s money collapse by inflating the world’s Post-Bretton Woods reserve currency through what it coined “Quantitative Easing”. However, any attempt by one country, even the United States, to singlehandedly recover the world’s economy, even with an untried policy as aggressive as quantitative easing, has fluidly dissipated to fill the world’s credit gap without the desired stimulus effect. The temporary momentum created through massive QE creation of dollars out of thin air allowed for a temporary, mild upward glide of the economy, but anticipating the June, 2011 end of QE2, the world adjusted its glide path and its real economy is beginning another freefall.

The Post-Bretton Woods system of worldwide money supply being introduced through fiat currency backed by the simultaneous introduction of credit enhanced value creation has, in effect, been severed. Now that the United States has raced ahead of the world’s traditional money supply, the Fed must either continue down the slippery slope of additional quantitative easing leading ultimately to the collapse of the dollar, or revert to an alternative, non-traditional, never before tried fiscal or monetary tool, to escape from its trap. Any alternative tool will invariably destroy the world’s faith in the dollar as the reserve currency, and will mark the end of the Post-Bretton Woods concept of money.

God Save Us from the Fish Mongers – An Allegory

A small, tropical isle fishing village sits across an inlet from a much larger fishing village to the east. Both villages want for little, spending their days either fishing or taking leisure. The western villagers choose to fish in deep-water, prime fishing grounds where catches are ample and large. They have much leisure, for long ago a western family learned to use the woodlands of their island to produce boats. The eastern villagers, lacking boat building skills, are forced however to cast long hours along their shores for smaller inlet fish. The boat building family enjoys even more leisure than most because their skills provide access to the deep waters so their villagers give them a bit of fish from every catch.

Desiring vessels for their people, eastern village elders approach the boat builders with head gear in hand, explaining that they will provide twice the fish of the western villagers if the boat builders will also supply them with boats. With such an agreeable offer, the boat building family begins to supply boats to the eastern village, and soon eastern villagers can be seen venturing out into the deep for fish.

Flush with fish from the easterners, the boat builders craft an idea. They will trade their excess to westerners in exchange for a return of fish later. To entice their villagers, they will agree to give more fish today than will have to be returned later. Westerners find the offer irresistible because they can enjoy leisure now knowing that some day when they must repay the debt, they will work fewer hours than the hours of leisure they gain today.

Having an abundance of both leisure and fish but now lusting for more, the boat builders unwittingly cast aside their future and that of their island as they craft another idea. They will teach eastern islanders the secrets their forefathers gave them about boat building in exchange for a bit of fish from every catch of the boats the easterners build. Yearning to harvest more of the deep waters, easterners agree to the terms. As the ambitious easterners flood the fishing fields with boats, the western boat building family’s fortunes become titanic.

Mongers now flood the shores with fish from the east, eventually causing a fourth of the western villagers to sit idly by, borrowing from the boat builder’s excesses. Without a need to fish, they slowly lose their knowledge of the seas, and without a need to venture into the deep their boats fall into disrepair. The western village elders, who had survived by taking a bit of fish from every villager as payment for administering the village, now find that with many of their villagers idly living on the fish of the easterners, that they cannot skim enough catch from their villagers to live.

They approach the uberwealthy boat building family for solutions. Lobbying that loans of fish to the idle westerners is good for the westerners because they are receiving more fish today than they will have to repay, the family also quietly agrees to supply ample fish to the elders in exchange for support of continuing eastern trades. Having provided the elders fish that can no longer be obtained from the villagers, the family feels justified in crafting yet another idea. They will give fish to eastern villagers so that they can stop fishing and build even more boats in the east that will return a bit of fish from every catch.

The eastern villagers now control the deep fishing fields and begin to weary of trading fish to the westerners, who must rely on eastern fish, as their boats are no longer sailable. With even more villagers sitting out the long hot days in their huts, western elders grow ever hungrier, so with head gear in hand they travel in weather worn boats to the eastern shore and meet with the eastern village elders by the campfire. Emboldened by their newfound wealth, the eastern elders chide the western elders for their lack of foresight but agree to provide fish in exchange for the promise that the western elders will demand a skim of their villagers’ fish to repay the easterners.

For awhile, this uneasy arrangement continues between the western villagers, their elders, the eastern villagers and the family of boat builders until the eastern village bulges with boats. No longer needing the skills of the boat builders, the eastern village does not desire to give another fish to the westerners but instead demands the western village return the fish they borrowed.

Without the skills or boats to repay their debt, the western villagers look aghast as their elders call them to the camp fire. They no longer can sit by the shore gorging on borrowed fish, nor can they linger leisurely. They must now work long hours catching inlet fish to repay the eastern village. Their previous agreement to pay for earlier leisure with less work hours today was unfortunately sold off by the boat builders. For now, the westerners have no boats to venture into the deep and their labor will be spent casting from the shores. This tranquil village in paradise has unwittingly indentured its future to the easterners.

The family of boat builders, attempting to revive its lost fortunes, now sheepheadishly offers to build boats for the western villagers, but their offer is rebuffed. The easterners are now the preeminent boat builders and one by one, the villagers must meekly travel to the east with head gear in hand, hoping to acquire boats today in exchange for a bit of fish from every catch.

So….Why were the villagers allowed to borrow fish that they could never pay back? Why were the boat builders allowed to give the secrets of the island to the easterners, not only giving away their claims to the island’s boats of survival but the rights to the deep fishing fields that were not theirs to give? Why were elders allowed to borrow from the easterners while so many villagers sat idly? Why did the villagers not see that their elders would yield to the boat builders as a means of their own survival? Why didn’t the western village foresee that letting their skills and boats diminish was unsustainable for their island’s survival? Why didn’t they understand that by borrowing leisure, they would end up fishing for scrub fish along the inlet shore? Why?

In the World’s High Stakes Game of Chicken, Bernanke May Have Just Blinked

In Ben Bernanke’s first ever news conference, he stared down reporters with his boldface rejection of a QE3, but my guess is that in this international game of chicken, Bernanke will soon blink. He disclosed that he will not begin a QE3 after QE2 finishes on June 30, and that the Fed funds target rate may buoy from its near zero rate. His reasons for this decision were that his concerns for inflation have overtaken needs to prime the sluggish economy, and that QE2 has been “effective” and “successful”. With Bernanke’s finger on the button of the world’s economy, has he really forsaken quantitative easing?

Pumping a previously unimaginable $1.5 trillion into the economy certainly had to be “effective” on some level but unfortunately, not on the level that would ease anyone’s mind that America, or the world for that matter, has dodged imminent danger. With all of the stimulus and quantitative easing that encouraged it, the U.S. economy crawled ahead 1.8% in the first quarter of 2011, well below the rate of a normal recovery. Meanwhile, unemployment claims are edging higher as a quarter of the U.S. suffers unemployment or underemployment, and the recent moderate gains in housing prices have peaked and are retreating once again.

The recent rise in commodities signaled the expected results of America’s monetary intervention, inflation. America’s consumer’s goods consumption is import driven and those prices are going up. If Bernanke actually holds true to the promise he gave America prior to testing his monetary theories, and pulls dollars from the economy in response to rising prices, America’s economy will turn down a more diligent path of squeezing out its excesses through a hard double dip recession combined with inflation.

The combination of Japan’s recent tragedy and a continued potential for a downturn in the U.S. may lead to a softening in the growth of worldwide demand, thereby reducing the potential for real demand inflation. However, as the unprecedented flood of dollars multiply in the market, we will see the lagging effect of a continuing drop in dollar purchasing power that will more than offset the soft economy to produce inflation. Commodity prices are the leading indicator of future general inflation as the QEs work their way through the economy.

America will then have stagflation similar to that caused by the currency expansion and oil embargo of the ‘70s. Our import consumer goods prices will accelerate higher, while our domestically captive service prices will drift lower leading to reduced wages and higher unemployment, as commodity inflation saps the energy out of our service driven domestic economy.

Bernanke has the choice of funding a QE3 to pay for rising interest rates that are bound to occur as a result of previous government intervention, or of pulling the plug on this bad monetary experiment and potentially having some frustrated economist coin a phrase with his name in it to mean a “really really bad stagflation”. My guess is that rather than be known for the Bernanke Splits, he will blink and a third, perhaps more moderate, round of QE3 will begin to assist inflation even higher.

That’s my take, what’s yours?

Was America’s Empire but a Shooting Star?

During the early 1900s as America overtook England as the new century hegemonist, Europe was embroiled in colonization efforts to fend off the inevitable transition to America’s rise. Europe’s diminished capacity to deal with domestic consequences of the transition created the impetus for a chaotic shift of world leadership, just as every shift of empires in world history. In this case, it led to a world war.

The war left citizens in Weimar Germany impoverished and subjugated to the rest of Europe, setting the stage for Nazi atrocities. International banking policies including the Fed’s precipitated a great recession from which Japan turned militaristic. The hegemonist of the era, the United States refused to share our contracted oil and other commodities required for Japan’s military success in Manchuria, so Japan drew America into the war ending in the single greatest bombing devastation imposed on a civilization.

The end of WWII marked the end of what was clearly a severely chaotic transition to America’s hegemony. America emerged from WWII the dominant economic leader of the free world. However, just because every empire’s transition in history has been as chaotic as the transition to America’s time, does all of history prove that we will also experience a chaotic transition in the 21st century? Or will America’s fall from power be a unique exception?

We were unique in our treatment of Europe and Japan at the beginning of our reign. Throughout history there have been benevolent kings and despotic ones, and America’s king turned out to be benevolent. With a unique historical sharing of wealth through the Marshall plan, a plan that hastened America’s demise as this century’s hegemon, the United States seeded the economies of Europe and Japan so that all could prosper.

Perhaps it was America’s ecumenical roots that persuaded such global altruism. Perhaps it was our European heritage and our desire that Japan be a strong deterrent to the Soviets, or perhaps it was self interest in gaining market share of war torn countries. No matter the reason, America proved her unique qualities in that era. Could we expect a repeat of this uniquely historical benevolent treatment from China after emerging through a yet unknown chaotic transition?

A factor which may unfortunately lead the world once again through such a transition is the life curve of oil that will be decreasing during the transition period. When America rose to power, Europe and Japan could both share in the benevolence that oil bestowed on all industrialized economies. The life cycle of oil however has now peaked and is in its declining phase.

At the world’s current usage, only one barrel of oil is being found for every barrel consumed. With China’s exponential growth occurring during the quickly receding life of oil, that ratio will quickly worsen to a crisis stage as China’s usage doubles in the next five years. While America flirted with the idea of developing a comprehensive energy policy back when we had time to achieve one, nothing we can do, given our political circumstances, will prepare us for the coming world tsunami of oil demand.

With far reaching international oil and other commodity contracts, China has positioned herself to prosper as she escalates her prosperity into her interior. Unlike the United States and Europe, China has a ready market for her next phase of escalated growth, her own interior. How will EurAmerica react as our civilized defenses of international law act against us as China secures oil that has helped us sustain our current world standings?

The lack of any viable alternatives to wealth creating fuels will likely make for an equally volatile transition this empire turnover. Will the transition lead to the death of our nation? How quickly can we modify our energy footprint while keeping our lifestyle intact? How will our diminishing middle class respond? How aggressively will our military complex react to greatly diminished budgets? How comfortable will the world be in turning over hegemonic control to China?

No matter our comfort level, the law of exponential growth states that China will propel herself rapidly beyond the economies of the United States and Europe in the coming decade and will boost herself into the next higher orbit. The question for our economies is what we will do as her rockets suck up the remaining rocket fuel reserves on earth. Unlike the United States and Europe, China has an economic booster rocket that can be ignited by the mere flip of a switch. All China needs to do to proclaim readymade wealth is to dial in her currency valuation as required. While it may make her exports less competitive, she already has an impatient interior market waiting for her goods.

So now the stage has been set for the transition and we have five years to position ourselves. Five years is but a day for finessed diplomacy. With our level of political discourse, five years is but an hour for national strategic planning. Without time to create such precise tools for our western civilization, how will EurAmerica react? Will we revert to the thuggery of gunship diplomacy for which we are all too well known by the East?

Is America Prepared for Kamikaze Finance?

Brett Arends, in his April 25th Marketwatch article entitled “IMF Bombshell: Age of America Nears End”  reports that the IMF has predicted 2016 as the year when China’s economy overtakes that of the United States.

http://www.marketwatch.com/story/imf-bombshell-age-of-america-about-to-end-2011-04-25

Perhaps the word bombshell is the right allusion.  What comes to mind is America’s shock and disbelief in 1941 that the Japanese could fly formations of attack aircraft for so long under the radar right above sea level to destroy Pearl Harbor.  Just as Americans were unprepared to foresee the stealth attack of Japan even after years of her militaristic advances, Americans have stood helplessly by as the armaments of American financial defense sit helplessly in Congressional harbors of polarized politics.

Two concepts of financial attack seem reasonable afterthoughts.  First is that exponential financial expansion is hidden from radar until the last few years of growth.  American appeasers failed to recognize that as China expanded it’s economy 10 percent per year for 30 years, the law of exponential growth meant China’s economy would grow 800 percent in thirty years, but that the  greatest 400% would occur in the last seven years.  

The second even more ingenious stealth move unforeseen by America but creating an even more shocking surprise attack is that by holding the exchange rate low for so many years, the Chinese were able to fly even lower to the ocean swells and build a purchase power parity empire undetected by conventional financial defenses.

In preparation for this two pronged financial assault,  China has been building the hegemonic relationships that thwarted Japan’s  military attempt to over take the United States just 6 decades ago.   China also was successful in its hegemonic strategy to preemptively gut American factories through the “treasonous”  collaboration of multinational corporations and international banks residing  in financial cells right here in America.  

Our American factories, that were so successful in mounting a war of attrition against the Japanese in WWII, now lay dormant in the rust belt as 24 percent of our capable American workers line the “soup kitchens” of the American social welfare system and charitable organization’s generosity.  This time around, without the physical and financial capabilities to defend ourselves from within, it may be Americans who are forced to display patriotism through financial kamikaze during the end stages of the American empire.

How Could America Have Squandered the Gold of Ancient Egypt and the Incas?

Gold has been the store of human endeavor since ancient times. While each ounce of gold can hold only a finite amount of labor, perhaps 1,000 hours in non-industrialized nations, some of the gold locked in Fort Knox has touched millions of hours of labor from civilizations untold. For gold’s greatest benefit, as with all money, is not its storage of value but its lasting ability to temporarily hold value in the exchange of non-coincidental barters.

For millenniums, money was the interchange commodity for simple trades as between farmers and herders. The farmer gave the herder a coin in winter for meat, and the herder returned the coin at harvest time for a bushel of vegetables. Farmers and herders relied on the value of gold because precious metals took effort to mine and purify, were tested for weight and purity, and could be stamped, coined and carried. With such a universal appeal, precious metals became synonymous with storage of value and dominated the world’s choice for money.

At one point, America held within its coffers 70% of all the gold that has ever been purified from ancient Egypt and the Incas through modern times. But it was our misjudgment as to the true value of gold that robbed our forts of ingots and brought America to the precipice of ruin. As history’s greatest superpower, why did America not learn from ancient empires that tumbled down the path to insignificance, and why did we allow our government to amass more debt than has ever been owed by every other soul that has ever lived?

1964 marked an accelerating turning point in America’s misfortunes. In 1964, President Johnson was elected to enact Great Society reforms just as America was increasing her involvement in Viet Nam. Baby boomers were entering the work force just as multinational corporations were beginning an upsurge of direct foreign investment and the transfer of jobs to overseas markets. America’s use of oil was peaking just as political undercurrents were coalescing around oil as a geopolitical force.

Six simultaneous assaults on the American dollar joined to fuel the American financial malaise; a lack of fiscal adherence to a gold standard, military excursions in support of American interests, funding of the great society, a lack of will to respond to oil cartels, multinational corporate indifference to the plight of the American worker, and a financial industry gone wild.

America did not Steward Its Gold

Even though, for 600 decades of recorded history, gold was the stable base of transactions, the world has temporarily abandoned this gold standard for the last 5 decades. Our abandonment was not because of the world’s enlightenment that gold is an unnecessary physical impediment to the electronic age of finance. It is because, with no viable alternative, the world has clung to the hollowed out American dollar that inflated beyond the discipline of the gold standard.

In the 20th century, industrialized nations twice attempted to redistribute wealth through great wars that left all of Europe bankrupt. Afterward, America held 70 percent of the world’s processed gold, and became through Bretton Woods the gold-backed, paper money guarantor of the free world. During the next 15 years, America squandered her gold to cover currency imbalances, until by 1960 the dollar lost its legitimacy. Interestingly, it took Spain over a hundred years to squander its 20,000 tons of Inca gold.

From 1971 until now, America and the rest of the world have had little choice but to allow our currencies to float, giving up the imperfect discipline imposed by a gold standard. As a result of America’s freewheeling monetary policies, it is now encumbered by a spend drunk Congress and an obliging central bank that have conspired to reduce the value of America’s 1971 fiat dollar to a mere 17 cents today.

Scholars suggest that the reason for the dollar’s fall was the inevitable Triffin dilemma which requires America to carry a current account deficit to provide the world with reserve currency. Yet debt financed trade imbalances are not required to provide reserves. Reserves could just as well have been sold to other countries as given to them through trade shortfalls. No, America’s post war monetary policies quickly gambled away the historical hegemony that was bestowed on us at the end of two world wars.

This five decade hiatus from a gold standard will prove only temporary. Gold’s appeal as the engine of financial growth has not been lost on China. At the end of World War II, U.S. gold reserve was over 18,000 tons but has since reduced to 8,000 tons. China is executing a strategy of purchasing approximately 250 tons per year and, as the world’s largest producer of gold, producing 320 tons per year, and now has surpassed all but the U.S. as the second largest holder of gold with 2,000 tons.

Military Excursions Drained America’s Coffers

Without the ability to borrow vast moneys, earlier civilizations relied on warring, exploration and conquest to quickly expand their stores of gold. This strategy was not without consequences. To fund war, Rome engaged in coin clipping and smelting with lesser metals to reduce size and value of denarius in attempts to pay soldiers with coins of veiled value. After 200 years, the Roman denarius reduced from 100 percent silver to only 5 percent just prior its army leaving Rome unprotected from invasions and fall. Interestingly, it has taken less than 100 years for America’s dollar value to plunge that amount.

As all empires have before, America found that its wars must be financed with inflation. The Fed supported an excessive expansion of the money supply (dollar clipping), creating debt to fund each of America’s wars. The Civil War added 2.8 billion. WWI added another 21 billion. WWII created another $216 billion. The Korean War was financed with taxes. Viet Nam increased the debt $146 billion. Cold war expenditures cost 1.6 trillion. The first Gulf War cost a mere $7 billion. In contrast, Iraq cost $786 billion and Afghanistan cost $397 billion. Not including the 700 foreign soil U.S. military bases that contribute greatly to America’s balance of payments deficit, her major wars added a total of $3.4 trillion dollars of carried debt.

The Great Society Became the Broke Society

President Johnson outlined The Great Society in his State of the Union Speech on January 4, 1965, saying “The great society asks not how much, but how good; not only how to create wealth but how to use it.” Notwithstanding the good that was done by these programs, they drained America’s future potential GDP growth and the money that would fuel her economic engine.

46 years later, Great Society initiatives touched education, health, urban renewal, transportation, arts and culture, Medicare and Medicaid, the Food Stamp program, Project Head Start, The National Endowment for the Arts, The Corporation for Public Broadcasting and federal aid to public education for a total expenditure of $9.5 trillion dollars.

America’s Addiction to Oil Made Us Slaves to the Oil Cartel

Oil enabled powerful nations to create a world order that flowed money from agrarian nations to those that controlled hydrocarbon powered machines. Oil was the catalyst that propelled the 20th century’s world leaders into fortune and thrust the world into war. Oil is a finite fuel, controlled by a few nations that are barely separated geopolitically and have common ancient civilizations and modern goals.

Already struggling from Viet Nam and Great Society debts, America found herself the object of a politically motivated oil embargo in 1973. Fuel prices soared and supplies tightened to cause the 70’s stagflation in America. From then until now, America has not found the political will through fluctuating fuel prices to organize an intervention away from oil dependence.

Since the embargo, America has consumed 250 billion barrels of oil at a total cost of $11 trillion dollars. This debit line in our national budget has only one trade, oil for dollars. Had America given our energy war a smidgeon of the effort of placing a man on the moon, we could have easily reduced energy consumption by 20 percent for the same productive output, transportation, and environmental comfort, and saved 2.2 trillion dollars. Surely, the costs to achieve such a modest conservation would have to be netted from the gross, but those costs could have been internally generated and added to America’s GDP.

America’s Multinational Corporations (MNC) were Indifferent Citizens

While America fought the war on poverty, her political leaders surrendered to the war on American jobs. Certainly, with the relative world peace supported by America’s military, globalization was bound to occur. With the risk of direct foreign investments reduced, the last five decades have unleashed an acceleration of money flow and intellectual capital from America to other countries.

While over 4 trillion dollars have been invested overseas by American uberwealthy, America has also been a receiver of investment, so that the net outflow has only been 0.7 trillion. However, the loss of America’s wealth and jobs has been much greater, contributing to a stagnant workforce where one in four able Americans has been idled. MNC direct foreign investment has indirectly added $4 trillion dollars to America’s debt.

The Fed Financed MNCs and Saved Banks but Failed to Keep America Employed

During most of the 17th century, Europe embroiled itself in wars that killed 30% of its population. Some of the world’s largest banking houses failed as royal debtors defaulted, including England in1672. Finally, in 1694, the king agreed to give the Bank of England authority to print all of England’s bank notes in exchange for bank loans to support his war with France. The newly created Central bank, having transferred its risk of loss to British subjects, profited simply by printing money for the monarchy. However, this excess printing did not stop the emptying of England’s coffers.

After America revolted to escape the monetary control of the Bank of England, Hamilton, the United States’ Secretary of the treasury, proposed a charter to a create a similar central bank for America. Against Thomas Jefferson’s insistence, the First Bank of the United States became the precursor to America’s Federal Reserve. Some say major banks manufactured a bank run in 1907 to destabilize the Treasury and instigate support for the Federal Reserve Act of 1913 establishing the Fed, a quasi-agency, private enterprise with a quasi-public board.

From the establishment of the Fed until today, many have argued that major Fed decisions have enriched banks at the expense of the American People. An example is the erroneous decision the Fed made to keep interest rates high for an extensive period of time as America and the World clearly were entering the Great Depression. Also of heated debate was the decision to bail out the banking industry at the start of the Great Recession.

Nonetheless, Fed decisions combined with lobbied efforts to reduce financial regulations, allowed Wall Street to orchestrate multiple financial bubbles that consecutively destroyed value in American portfolios. It cost taxpayers $88 billion to bail out the S&L crisis. The boiling and bursting of the dot.com bubble evaporated $5 trillion dollars. Notwithstanding that the credit default bubble lost the world $30 trillion in value, it has thus far cost America $51 billion in bank bailouts, $787 billion in stimulus, $1.5 trillion in quantitative easing, $5 trillion in lost property values, and with over 5 million bankruptcies and 5 million foreclosures, ruined trillions of dollars worth of wealth generating credit.

In Conclusion

Adding up the numbers versus our $15 trillion dollar debt, it is amazing that the resiliency of the American economy is thus far holding ground:

10,000 tons of gold: $0.5 trillion
Wars: $3.4 trillion
Great Society: $9.5 trillion
Lack of Energy Policy $2.2 trillion
MNC DFI: $4.0 trillion
Banking Debacles: $12.4 trillion +
Total $32.0 trillion

The idea of currencies unsupported by gold reserves is not in itself troublesome. Whether Crowley shells, tally sticks, or paper money, if the market has trust in its role as a place holder for non-incidental barter, any money will do. However without the external discipline imposed by a gold standard, America must instead substitute gold’s imposition for a President strong enough to stand for American sovereignty, a Fed subjugated to defend a stable currency, a Congress selfless enough to impose its own financial discipline, and a willingness of American businesses to defend American jobs. Otherwise, America’s five decade reign over this short lived worldwide fiat money dollar system will come to an end.