The death of the dollar

I [Koos Jansen] had the privilege to meet with Jim Rickards, while he was in The Netherlands for one day, to do an interview about his new book The Death of Money. Accompanied by friend (and author of the book The Big Reset) Willem Middelkoop we met at the hotel were Jim was staying and for one and a half hours we fired questions at him. Below you can read the highlights of the conversation:

 

March 12, 2014

Koos Jansen: Do you think there will be a collapse in the worldwide monetary system, including chaos, social unrest and bank failures because all policy makers will do too little too late?

Jim Rickards: My new book, The Death of Money, is about the demise of the dollar. A world wide monetary collapse and the collapse of the dollar are the same thing. The dollar is the keystone of the system today, if the world loses confidence in the dollar the whole system collapses. Could there be disruptions, social unrest and other problems before the monetary system collapses? I think we’re seeing them already, in the Ukraine, in the Crimea and the Chinese navy sending vessels to these islands they are in disputes with near Japan. US monetary policy was also a contributing factor to protests in the Arab Spring’s early stages. We’re seeing signs happening already and that will continue.

I do expect that policy makers will continue to pursue the wrong policies, they won’t make the structural adjustments that are needed; unemployment remains high, growth remains weak and deflation continues to have us in its grip. These are all things that will lead to social instability, income and wealth inequality and we could see a lot of stresses before the collapse of the monetary system.

Central banks and governments have made it clear that the big banks can’t fail. That’s what they stated, all these too big to fail banks will not be allowed to fail. Now what are the consequences once they’ve said that? It invites reckless, parasitic and exploitative behaviour on behalf of the bankers. This allows them to grow too large which destabilizes the system. I don’t think we’ll see big bank failures along the way, but big banks will fail as part of the collapse. It’s the policy of too big to fail that leads to the dysfunction of the system that will lead to the collapse.

Jim-R-interview

Koos Jansen: Will the coming collapse of the monetary system be more severe than any prior one?

Jim Rickards: The point I’m making in the book is that the international monetary system has collapsed three times in the last one hundred year. In 1914, 1939 and 1971. So it does happen, it’s not that unusual. When it happens is not the end of the world. What it means is that the major trading powers, the financial powers, come together and reset the system. There is actually a name for this, it’s “the rules of the game”. That’s not a phrase I made up, it goes back one hundred years. So the major powers will rewrite the rules of the game, but here’s the problem. The last crisis we had the Fed reliquify the world. There were tens of trillions of dollars in swap lines with the ECB, they guaranteed all the bank deposits in the US and they guaranteed all the money market funds in the US. It did prevent things from getting worse, but the problem is the Fed raised their own balance from $800 billion to $4 trillion after the liquidity crisis. We had a liquidity crisis in late 2008, but we haven’t had one in the last five years. So now what happens if we have a liquidity crisis tomorrow? They’ve got no more dry powder; they can’t go to $12 trillion.

The next crisis will be bigger than the last one, and it will be bigger than the Fed because they already trashed their own balance sheet. Then the only balance sheet left is the IMF’s.

Koos Jansen: How will the power be distributed in Asia after the monetary reset?

Jim Rickards: It will be based on gold.

Willem Middelkoop: I know wealthy Americans taking measures like getting a second passport and moving their money offshore. Do you see this happening in your surroundings?

Jim Rickards: Yes, I see it all the time. There are billionaires who build vaults in their own houses because they don’t trust Brinks.

Willem Middelkoop: What does that tell you?

Jim Rickards: It tells me that they see what I see, in some ways, but not willing to talk about it. They’re ready for the collapse but want to milk the system in the meantime.

 

_____________________

For Rickards’ CV see here. The whole interview can be read here.

Currency crash course, 4

“As I have said many times before, the economic crisis of 2008 was only a speed bump on the way to the main event. I believe that before the end of this decade there will be an economic crisis so historic that it will eclipse the crash of 29 and the subsequent great depression. I also believe it is both unavoidable and inevitable, because it is merely the free market releasing the stored up energy from decades of economic manipulation. Yes… bad things are going to happen, but it could be the best thing that ever happened to you.”

—Mike Maloney

Note: Economics is not my forte and therefore I cannot discuss the complex issues of these new series with skeptical commenters. I would recommend those who completely reject what Maloney says to go to his own site, subscribe if necessary (it’s free), and discuss it there.

Our crystal ball

Further to my previous post.

As der Schwerter has just translated to German an article by Edward S. May (“Baron Bodissey”) that explains beautifully why it is almost certain that economic Armageddon is around the corner.

Below “Chump Change,” the complete 2009 article by May that originally appeared at Gates of Vienna. Presently the situation in the US is far more compromised thanks to the ongoing (suicidal) efforts of chairman Ben Bernanke:




When I was seven years old I took up coin collecting as a hobby. Back in those days there were still a lot of interesting coins in circulation: the buffalo nickel, the Mercury dime, the Liberty Walking half dollar, and—if you were patient and went through enough rolls of coins—the occasional Indian head penny or “V” nickel.

The most exciting coin of all, however, was the silver dollar. The 1921 “Peace” dollar would do, but the Morgan dollar was preferable—it had a serious-looking 19th century design, and was the very same dollar that filled those heavy payroll bags heisted by stagecoach robbers in Westerns. It was a nice hefty piece of real American history, and it could fill the palm of a small boy’s hand.

Up until my tenth birthday my allowance was fifty cents a week, which I received in the form of a biweekly dollar bill. During my silver dollar craze I would take that bill down to the bank and ask for a silver dollar in exchange for it. The tellers all knew me, and would oblige me by picking through their selection of silver dollars until they found a date I didn’t have.

I was able to indulge myself in this manner because most of the dollar bills in circulation back then were still silver certificates.

The bank had no choice: under its charter, it was required by law to “pay the bearer on demand” a dollar in official United States silver coinage for every silver certificate presented to it.

No one has the same option today. Today all the paper money in circulation consists of Federal Reserve notes, which are not redeemable for anything in particular. You can go to the bank and exchange your dollar bill for four quarters, but those are no longer the shiny silver discs that rang so delightfully on the marble counter at the teller’s window. Nowadays the dimes, quarters, and half dollars are all “Johnson slugs”, the ugly nickel-copper sandwiches that were introduced in 1964 when silver coinage was abolished and the silver certificates were withdrawn from circulation. 1968 was the last year in which the law required that any paper dollar be redeemable in silver.

The abolition of silver coinage was the culmination of an extended process that took most of a century to complete: the disconnection of American paper currency from any fixed standard of value as represented by precious metals.

By the time the Johnson slugs appeared, the abolition of the silver coinage was an absolute necessity. The price of silver had been allowed to float, and because of inflation the silver in a dollar coin was worth more than $1.25. Entrepreneurs could make a tidy profit buying up silver dollars in bulk, melting them down, and selling them as bullion to silver traders. The old coins had to go, which meant that the silver certificates had to go, too.

From then on the federal government was not required to give you anything for your dollar bill. If you had one, you could go out and buy something that other people were willing to give you in exchange for your piece of paper. But the Treasury was obliged to provide nothing of value in return for that piece of paper except the “full faith and credit of the United States government”, which was worth a lot more in 1964 than it is today.

In the 19th century, the United States adhered first to a “bi-metallic” standard—both silver and gold coinage—and then the gold standard. Under the pressure of the Great Depression, FDR initiated a gradual slide away from gold and into a silver standard for the paper currency, although the Treasury and the Federal Reserve adhered to the gold standard until 1971.

Since then the official currency of the United States has been anchored by nothing more than global confidence in the soundness of the dollar. As long as everybody believed in the same fantasy, then the system could operate. The dollars were printed, credit was extended, the financial markets functioned, and business enterprises were profitable. People went to work and got paid and bought stuff.

They also borrowed money and took out mortgages, which brings us to the mess we’re in today.

Today’s system of commercial and consumer credit is made possible by the practice of fractional reserve banking. Until the late 18th or early 19th century, banks did not lend out their cash reserves of depositors’ money. The advent of fractional reserve banking made it legal for a bank to lend out a portion of its deposits, and required it to keep only a fraction of those deposits—in modern times, typically 20%—as an actual cash reserve.

This means that when Joe Consumer deposits $1000 into his bank account, the bank can lend up to $800 of it and keep $200 of the deposit as a fractional reserve, maintaining the loan on its books as an asset. At this point the initial $1000 in cash has morphed into $1800 in cash assets and credit—in effect, $800 worth of money has been created.

When the borrower deposits the $800 into another bank, that bank in turn can loan out $640. And so the process continues, forming a geometric progression of assets which cannot exceed $5000 (500% of the original deposit), $4000 of that in loans listed as assets on the books of the respective banks.

This practice seems bizarre and imprudent at first glance, but it was absolutely essential during the expansion of our industrial economies. Industrialization created wealth where none existed before, but without a way to extend the money supply to match the added wealth, the capitalization of industry would have lagged, and growth would have been much slower. Fractional reserve lending allowed credit to be extended to industrial entrepreneurs, and as long as loans were made prudently and repaid on time, and banks retained their depositors’ confidence, the system functioned well.

Maintaining a gold or silver standard imposed a natural limit on the inflation of the money supply via fractional reserve banking. As long as banks met their capitalization requirements and observed the rules for fractional reserves, the money supply could never expand past the implied mathematical limit.

During times of economic contraction the system sometimes foundered. Then there would be a run on the banks, and some banks would fail. Although the system always righted itself eventually, businesses were ruined and individuals impoverished in the process, so that the political pressure for a system of government controls was irresistible.

Right: At a distance looks like the White House but it is the “Fed” headquarters (Eccles Building)

Thus was the Federal Reserve born in 1913. The Fed is a consortium of private banks linked closely to the government, and functions more or less as a central bank would in many countries. Its job is to control the money supply by setting interest rates for government lending. By stabilizing swings in the money supply, the Fed’s mission is to prevent bank runs. It’s not always successful: witness the recent run on Washington Mutual and its subsequent collapse—the largest bank failure in history.

The current gargantuan federal government, so far beyond the size and scope of what the Founding Fathers originally envisaged, owes its origins to the Civil War and Abraham Lincoln. Using military means, Lincoln demonstrated that the government in Washington was the absolute master of the several States.

But the bloated bureaucracy didn’t really take off until Woodrow Wilson invoked his presidential authority during World War I to create federal powers and functions which had never existed before, and which just happened to fit into his Progressive framework.

Not all of these powers were scrapped after 1918, and Franklin Delano Roosevelt took everything a step further when he created the New Deal to fight the Great Depression—once again, an excuse for massive Progressive intervention—and then World War II.

By 1945 the federal government was simply “too big to fail”, and all the layers of emergency powers that had accreted over the previous thirty years became permanent bureaucratic institutions. Once initiated, a new federal program was virtually never abandoned. No cabinet office has ever been abolished—new ones can be created, but they cannot be destroyed; they may only persist and grow.

Decade after decade the government has continued to expand, adding agency upon agency and bureau upon bureau. It has sprawled out across the District of Columbia into satellite fiefdoms in Maryland and Northern Virginia and created nests of regional offices across the rest of the nation. Whenever a congressman or senator perceives an important “constituent need”, a new federal function is created and funded, and becomes a permanent fixture in the Washington ecosystem.

Needless to say, all of this is very expensive. For the first thirty years or so of the federal explosion, increased taxes were sufficient to fund the pet projects and Progressive fantasies of the federal mandarins. But then the post-war boom leveled off, even as the Great Society was mandating a thicker layer of lard on top of the government pudding.

Increased taxation was not good enough. Unfortunately for the feds, raising taxes much further had become politically impossible, yet the internal logic of government expansion required that more money be found.

That’s where the Johnson slugs came in.

The uncoupling of the money supply from any reserve of precious metals did not automatically doom the country to inflation, indebtedness, profligacy, and ruin.

If the individual functionaries within the system did their jobs properly—if they acted with probity, prudence, fiduciary integrity, honesty, and in the interests of the people they purportedly served—the fractional reserve system could have continued indefinitely.

But there are too many perverse incentives built into a banking system that is not pegged to any external reserve of actual tangible value. By adding new rules, augmenting existing procedures, and tinkering with the arcana of accounting terminology, new wealth could be created where it didn’t exist before. The Treasury could keep issuing bonds, and as long as the price of milk and shoes didn’t rise too much, why then, everything must be fine, mustn’t it?

But it wasn’t fine. Decade after decade of deficit financing created the infamous national debt, which kept growing and growing. But, once again, as long as productivity increased and the economy kept on expanding, inflation could be kept at bay. The national debt, huge as it was, might theoretically be paid off—someday.

Unfortunately, during the last two decades or so, productivity hasn’t really been as high as it seemed. Our national wealth is now denominated at least partially in assets that are over-valued, with real estate as a notable example. Those California house prices—a million dollars for a tiny bungalow on a postage-stamp lot—might have looked good on the asset side of a balance sheet, but they weren’t real money.

That value was conjured out of thin air by cynical or short-sighted people who gamed the system to their own advantage—quite legally, in most cases. But the wealth thus generated was illusory, and could disappear as easily it was created—which it is even now in the process of doing.

The final stroke which broke the banking system—and caused it to collapse years or decades earlier than it would have otherwise—was meddling by the federal government for political reasons.

Meddling was irresistible. And, without a gold standard to enforce fiscal restraint, it was inevitable. Money could always be created out of nothing, so the federal government created it and ordered its agencies to force the private sector to do certain things with it, things that might otherwise be considered foolish or imprudent.

In the case of the subprime mortgage fiasco—the most visible and notorious example—the federal government created government-protected lending institutions and through them forced banks to loan money to homebuyers who would not otherwise have qualified for the loans, and who could not reasonably be expected to pay them back.

Beginning in the 1970s, and continuing until the whole house of cards collapsed last year, the government used Fannie Mae and Freddie Mac—two quasi-government lending institutions which were not bound by normal market constraints—to pump untold billions of dollars into the housing market. Mortgages were issued to people who were poor, or had vaginas, or spoke English badly, or had sufficient melanin in their skin—because they deserved them. Never mind whether they could afford them: it was unfair for them not to own houses, and so the mortgages were issued, backed by the full faith and credit of the United States government.

The rules kept being eased, the system got more corrupt, more and more money flowed through more and more hands, creating an ever-increasing supply of perverse incentives for bureaucrats and businesses to lie, to manipulate the rules, and to line their own pockets.

In the process the demand for real estate increased, driving the price of housing far beyond what it would otherwise be, thus creating the real estate “boom”—which was actually a bubble, and which has now officially popped.

During this period baroque new rules emerged to facilitate the issuing of additional debt. Exotic new financial derivatives were designed. Accounting rules for valuing assets were loosened. Bond-rating agencies were corrupted by their dependence on the institutions whose debt they rated. The securitization of debt removed the traded derivatives ever farther from anything of tangible value. Debt instruments were used as collateral on new debt, which was in turn used as collateral on yet more debt, until the money supply became so attenuated and rarefied that it had almost no connection with anything real. The entire elaborate financial structure of the country’s banking system was spun out of the purest speculative gossamer.

And at every level of the process somebody took a cut, so everyone worked very hard to increase the size of the pie.

In order to issue all those worthless mortgages, the ultimate guarantor—Uncle Sam—had to create the money by borrowing it himself. T-bills were issued, and buyers snapped them up.

Many of the customers for US Treasury paper were foreign governments, especially in Asia. The Chinese accumulated a large surplus of dollars, and recycled them by buying up more dollar-denominated debt. As long as China kept producing cheap products and exporting them to us, the process could continue. Our manufacturing capacity was diminished, and our money flowed out of the country to buy Chinese goods. But they kept loaning it back to us so that we could continue to fund the federal behemoth and its profligate habits.

The entire system depends on confidence in the dollar—as long as foreign countries continue to believe that real value lies behind the dollar, and that the American economy is strong enough to withstand this level of debt, they will continue to loan money to us, and pump liquidity into the system.

But confidence in the dollar won’t last. It can’t, because all those dollars in circulation, held in reserves in central banks all over the world, are not backed up by enough collateral. The last estimate I read—which was over a month ago, and real estate prices have presumably dropped even further since then—placed the number of dollars in circulation and held in reserves all over the world as thirteen times the amount of tangible assets in the U.S. financial institutions that back them up. That is, if all the holders of dollars across the globe decided to exchange them at the same time, the currency would have to be inflated at least 1,300% to redeem them.

With the addition of the recent stimulus package, American debt now exceeds the entire collective wealth of every man, woman, and child in the United States.

And this debt is almost entirely collateralized by confidence in the dollar. There’s nothing else backing up our currency.

The national debt is even more alarming if our unfunded liabilities are taken into consideration. One of the ways that successive presidential administrations kept deficits to a theoretically manageable level was by putting the Social Security Trust Fund “off-budget”—i.e., outside of its fiscal calculations. The “Trust Fund”, of course, is a joke—there’s nothing in it but IOUs. The FICA money that is withheld from your paycheck and contributed by your employer disappears instantly into the insatiable maw of federal spending, leaving only a promise that your retirement fund will be available for you when you are ready to collect it. Your future Social Security, like all things federal, depends solely on the “full faith and credit of the United States Government”, a commodity whose value is dropping precipitously.

One recent estimate puts the unfunded liability of Social Security and Medicare—the money which the system will be statutorily required to provide for today’s citizens at some point in the future—at more than $100 trillion. And that’s just for the two biggest federal entitlements—add to them federal pensions, veterans’ benefits, and state, local, and private pensions, and the amount of unfunded liability is unimaginably huge.

All those hundreds of trillions of dollars are mandated by law and must someday be paid out. Yet the money is not there now—where will it come from?

And “someday” is drawing rapidly closer. Much of the unfunded liability will begin to come into play in the next few years as my generation, the Boomers, begins to retire and claim all its benefits. That’s why political leaders of both parties are so keen to get Pedro and Ahmed into the country—they’re looking for somebody, anybody, who will go to work and pay the FICA and income tax necessary to support the Beautiful People as they shuffle off into assisted living.

But it’s not going to work. Even if all the immigrants were skilled and ready to work, even if mass immigration were not doomed to destroy the culture and civil society that holds this entire Potemkin village together, even if the multicultural dream could be fully realized—even if everything else were ideal, the system would not be able to handle the load. The conclusion is inescapable: the persistence of our current political arrangements is fiscally and actuarially impossible.

This is the broad context in which the current financial crisis has emerged.

The system is going to fail. Failure is unavoidable. The big questions are:

1. How soon will it fail?

2. What form will that failure take?

3. How much civil unrest, violence, deprivation, and destruction will accompany the changeover to whatever new system emerges?

The broad outlines of what is to come are already visible. The banking systems of the West are heading for insolvency, and no amount of bailout money is going to save all the major banks. Bailing them out will only serve to delay the catastrophe and make it worse when it finally arrives. Real value to match the newly-created bailout money does not exist, and at some point the market will mark everything down to its true worth, destroying roughly 90% of the system’s wealth in the process.

One of the first symptoms of the collapse will be a run on the dollar. When confidence finally erodes past a certain point, speculators will start to unload their dollars en masse, and the U.S. government will have to choose between inflating the currency or defaulting on its obligations.

The United States is at the epicenter of the banking crisis, but the European currencies are feeling the pinch first. With the Austrian banks facing the default of Eastern European debt, the euro may be in trouble, and sterling is also widely rumored to be near collapse. The dollar is maintaining its value relative to these currencies (and the yen), but all of them are in the same boat. It won’t be long before investors start unloading their reserves of currency and taking refuge in gold, silver, platinum, and other non-perishable commodities whose value is expected to outlast whatever unpleasantness lies ahead.

After that the major Western nations will experience an unprecedented fiscal and monetary crisis. Mass insolvency, bank failure, an inability to meet entitlement payments, and the suspension of normal commercial activity will be the result.

The modern global economy depends on mass consumption by the wealthy Western democracies of goods produced by the Third World and purchased by savings borrowed from the Third World. This part of the system is already in retreat—consumption in the West has dropped dramatically, Chinese exports have collapsed, and the Chinese are signaling their unwillingness to loan us more money unless we can guarantee that we won’t inflate our currency to pay off our debts. What sane person would believe such a guarantee, even if the Treasury were so foolish as to offer it? The inflation is coming, and the current system will grind to a halt.

We are, in a word, screwed.

All of this will not just happen. None of the unfortunate consequences will occur in a vacuum, and there will be reactions and counter-reactions on the part of governments and the public, which will make the system chaotic and unpredictable.

Governments will continue to intervene to “fix” the market, and by doing so will generally make the problems worse. Riots, civil wars, insurrection, and revolution will be likely if the maintenance dose of government cash is withdrawn from recipients in the major welfare states. Many other negative consequences are probable, but no one knows when, where, and how much.

Even the wisest and most skilled political leadership would find it difficult to intervene in a way that would mitigate the worst effects. At some point the market will have to realistically revalue the system’s assets, and the results will be painful. The consequences can only be postponed, and thus made more severe; they cannot be avoided.

Unfortunately, wise and skilled political leadership is in short supply all across the West. Our social democracies—with their welfare systems and ideologically uniform media—do not reward risk-takers and visionaries. Cynical time-servers, technocrats, obedient functionaries, and corrupt fixers tend to rise to the top. This is the cohort who will be leading the charge with broom-handle and dustbin lid during the coming debacle.

So far Congress and the Obama administration seem determined to do the worst possible things, economically speaking. Pumping more debt into the system, bailing out inefficient and unprofitable private companies, increasing pork-barrel spending and patronage, nationalizing financial institutions, rewarding corrupt and incompetent administrators, raising taxes, increasing regulation… How much more perverse can they get?

Giving bankruptcy judges the right to “adjust” interest rates on individual mortgages will serve only to distort the credit markets further and make the crash much worse when it finally arrives. Appropriating vast quantities of public funds to force a restructuring of private mortgages is senseless when the market value of the mortgaged real estate is half the face value of those loans, and dropping fast.

Barack Obama has assumed the role of King Canute in the current farce, sitting on the foreshore with his hand raised, ordering the tide to stop. A pathetic and futile gesture, but one that he and all the other leaders must inevitably make. They have no other solutions.

“Tide, I command thee: turn back!”

There are a few possible positive aspects of the current mess. As the crisis matures, supra-national institutions will fail and become irrelevant before nation-states do. Individual nations will reclaim their authority and sovereignty in an attempt to take care of their own.

Here in the United States, in the face of new unfunded mandates, trillions of dollars of federal largesse with strings attached, and volumes of new federal regulations, the several States have suddenly recalled the Tenth Amendment and are invoking their own sovereignty. This is all to the good, because for the last sixty years or so the federal government has extended its effective reach by dangling money before the states and making them dance for it. As the money disappears, the dance will come to an end. Without a bottomless cash drawer, the federal government is a pathetic weakling, and most power will eventually devolve to the states.

Another possible spinoff of the coming financial collapse is that the problem of Islam will solve itself. One of the consequences of the depression is that the demand for oil has dropped dramatically, and the price will be low for years. Not only will the sheikhs lose much of their income, but many of them are heavily leveraged and live on the margin, with their assets tied up in the Western financial markets. Like everyone else, they will see most of their wealth disappear.

And, unlike many other countries, the oil-dependent states of the Middle East have nothing else to fall back on. When the oil money disappears, that’s it. The entire population—millions of people on the Arabian peninsula and in Iran—subsists on state oil revenues, directly or indirectly.

The effects of this are already becoming evident. Hundreds of thousands of guest-workers in Saudi Arabia and the emirates are being sent home to Malaysia, Indonesia, Nepal, Bangladesh, and the Philippines. These latter countries will thus experience the unfortunate secondary effects of the collapse of oil prices. Given that most of the rest of their economy depends on the manufacture of cheap consumer goods for the West, they will be in serious trouble.

If this process is severe and goes on long enough, rioting, civil insurrection, and revolution may well give way to epidemics and actual mass starvation all across the long crescent of Islam’s bloody borders, from Marrakech to Mindanao.

All of the above is pure speculation.

I’m a rank amateur when it comes to economics and finance. Over the past three months I have read and digested a huge volume of information in an attempt to understand the catastrophe that is unfolding in slow motion around us.

I don’t know if my prognostications are correct. Unfortunately, no one else can predict what’s going to happen, either. The current situation is unprecedented. It is inherently unstable, chaotic, and unpredictable. Don’t believe anyone who says he knows what will happen next year. No one does.

Preliminary indications are that the global economy has actually been a planet-wide Ponzi scheme since at least the beginning of the Industrial Revolution. Like any other Ponzi scheme, it depended on a constant infusion of new suckers. As long as the world’s population was expanding, and the efficiency of industrial production was increasing, the fiscal bubble could continue to inflate.

But the dream is over, and the bill is coming due. The bubble has popped. The scheme is collapsing. The entire finance system will soon become like 1997 Albania writ large.

When the fever has run its course, a new system will emerge. Eventually the market will reassert itself, and production and consumption will resume.

But how much trouble and sorrow lies ahead of us is hard to predict.

Given that the economy of the United States will take the biggest hit—and has the farthest to fall—the era of American hegemony will almost certainly come to an end within the next decade. On balance this will be a salutary thing for the rest of the world. Europe will learn to deal with Russia and Iran on its own. Third World dictatorships will have to extort protection money from a different client. The Japanese will rapidly discover the value of missile defense and a strong military. All the fires that have been prevented or contained by American military power will rage unchecked until their human fuel is fully consumed.

And America will persist in some form, perhaps in several pieces, or as a loose confederation that will warm the heart of Jefferson Davis’ ghost.

Or perhaps we will continue as a single nation, much poorer and unable to project power abroad, but ruled by a despotic central government wielding a citizens’ army of multicultural block wardens to keep the citizenry in line—a continent-wide Cuba from sea to shining sea.

Or perhaps some other currently unimaginable form of government and civil society will emerge.

The only thing that’s certain is that the system cannot continue for much longer in its present form. The laws of economics—which are nothing more than a mathematical model describing what must happen—tell us that a collapse of some sort is unavoidable.

You will know changes soon.

Why not look through the crystal ball?

Our only strategy appears to be waiting for ZOG to blow itself up based on the inherent unworkability of its founding nostrums.

—Alex Linder

Very few nationalists are taking seriously Austrian economics: that the US will be facing a depression soon—in case that Romney is elected and decides to prick the government bubble—, or even a complete currency crash in case that Obama gets reelected and his Ben Shalom Bernanke allows the bubble continue to expand until it pops by itself.

While I am no promoter of a capitalism that ignores racial interests, I see Austrian economics as a reliable predictor of what’s going to happen during the next administration: either way, Americans will face economic meltdown. The subject is of such paramount importance that I find it bothersome to find the promotion of third-way economics, such as Social Credit, at several Robert Stark radio shows and essays at Counter-Currents, which recently hosted a Stark interview of Anthony Migchels (for an exchange of Austrians with Migchels see here).

Bothersome I said: because nationalists are flatly ignoring the Austrians’ main message, that Keynesian economics is (good news for us!) driving the US economy straight toward the cliff.

Why are they ignoring the most momentum issue of our times?

Most nationalists are just reactionaries. It can be no coincidence that, unlike these reactionaries that like to discuss Social Credit in ivory towers, revolutionaries like Michael O’Meara do mention the literature of collapse. O’Meara for one believes that only a catastrophic collapse of imperial America holds out a possibility that a racially-conscious vanguard of white Americans reclaim their territory.

I don’t see Austrian economics as a way to promote libertarianism (“sound money for brown people”) because, by definition, there will be no browns in the White Republic. I see it as a very hilarious way to expose the Keynesianism that is fulfilling the deconstruction of imperial America for white nationalists to takeover. Austrian economics is a reliable crystal ball to see the future. Even if nationalists fail to take full advantage of it, we all must welcome the big window of opportunity that is about to be opened—exactly what happened in Weimar Germany.

Most Americans will have trouble feeding themselves

The below essay, “US, SU: Same Scenario?” is the thirteenth essay of Michael O’Meara’s book Toward the White Republic, available from Counter-Currents Publishing here.





Book review
of Dmitry Orlov’s

Reinventing Collapse: The Soviet Example and American Prospects (Gabriola Island, Canada: New Society Publishers, 2008)


Despairing of my people’s passivity, I have often thought the collapse of the United States might be the one thing to turn them against the system that seeks their destruction.

This “catastrophist” perspective is, admittedly, a strategy of desperation. For collapse (what Joseph Tainter calls a “recurrent feature of human societies”) may delegitimize the existing system and make whites more receptive to their racial/national interests, but, in a worst case scenario, it could pose problems even more threatening than those of the last 60 years.

The literature of collapse is consequently of the utmost relevance, especially now that the “American Century” seems to be nearing its inglorious end.

Of the numerous works on fallen civilizations, perhaps the most pertinent are, for obvious reasons, those related to the Soviet collapse of 1991. Hence the propitiousness of Orlov’s recently published work.

A computer engineer by training, Orlov and his Russian Jewish family emigrated to the US in the 1970s. He has since maintained ties with the land of his birth, having returned during those periods leading up to, traversing, and following the Soviet collapse. Writing from a radical ecological perspective critical of industrial civilization (which he implicitly—Hebraically?—associates with white civilization), Orlov suggests what collapse entailed in the SU and why the US is no less a candidate.

His book, though, is no work of scholarship.

“I am not,” he writes, “an expert or a scholar or an activist. I am more of an eyewitness. I watched the Soviet Union collapse and this has given me the necessary insight to describe what the American collapse will look like” (p. vii).

He accordingly spends little time sketching the big picture—the structural forces driving the collapse—and, instead, concentrates on its “micro-scale” processes and experiences. This makes his book a “personal” work, without claim to scientific authority, but nevertheless one that is very readable and informed by the all-important “human” dimension of collapse.

Despite their different methods and styles, Orlov sees the two 20th-century superpowers as “antipodes” of the same techno-economic civilization committed to social management, economic growth, material accumulation, world domination, and the realization of the Enlightenment vision of a totally rationalized world.

As such, Orlov argues that the US and the SU both sought a better life through science, approaching every human problem in terms of a technical fix. They both were militaristic, imperialistic powers who, through direct or proxy wars, made a mess of the international arena and, though Orlov doesn’t mention it, introduced reforms in the Third World that has caused it to grow out of control; they both devoted endless fanfare to celebrating their democratic, egalitarian institutions, however fraudulent; both assaulted popular beliefs and values in the name of a higher rationality, discouraged traditional social relationships, created meaningless, uncreative forms of work, exalted materialist values over others, repressed dissent, recruited corrupt, venal elites—and, most seriously, cared little or nothing about the white, or European, race, though Orlov doesn’t actually think this. It might be added, and this too isn’t in Orlov, that the US and the SU both were social experiments that favored Jews, making them, and their values, dominant.

The list of similarities goes on. But the basic point—that the US and the SU were techno-economic civilizations devoted to roughly analogous worldviews at odds with nature and the nature of ourselves—seems rather indisputable. As such, one civilizational model collapsed, and the other, for roughly similar reasons, now faces the prospect of a similar collapse.

Orlov gives no credence to the Reaganesque bombast that the United States defeated the Soviet Union in the Cold War. He argues that its collapse had little to do with ideology and even less with American influence. Instead, he attributes it to the SU’s “chronic underperforming economy, coupled with record levels of military expenditure, trade deficit and foreign debt” (p. 8). These economic problems made it increasingly difficult for “average Russians” to get by.

When Soviet reformers under Mikhail Gorbachev at last attempted to fix the centrally-planned stagnation, they couldn’t. This failure, combined with military humiliation in Afghanistan and the nuclear disaster at Chernobyl, so discredited the Soviet state that it imploded.

Given that Orlov’s book appeared before the US financial meltdown of September 2008, it looks mainly at those structural weaknesses in the US economy that most resemble those of the former SU—rather than at that institutionalized system of fraud responsible for pulling off one of the great historical swindles.

Stressing the inherent flaws in the US economy and noting that it has taken a couple of decades for the US to catch up to the SU, he suggests that the US may soon face a similar fate.

Like many ecologists, he rejects the facile conviction that modern society is exempt from the rise-and-fall cycles characteristic of pre-industrial societies or that present rates of economic and population growth can continue indefinitely.

The United States, he sees, is especially vulnerable to collapse, due to the petroleum basis of its economy. He points out that the US, with its “energy-intensive model of empire,” is more dependent on cheap oil than any other industrial economy, that its crude oil production “peaked” in 1970, and that three-quarters of its energy is now imported.

Any rise in oil prices will consequently be paid for in declining economic growth and higher food prices (agriculture being petroleum-intensive). Once the era of cheap energy comes to an end (sometime supposedly past its peak), world economies will be forced to undergo changes as significant as those that accompanied the onset of industrialization. This will lead to further decline and ultimately to collapse—which Orlov, citing the archdruid John Michael Greer, defines as that condition whereby “production fails to meet maintenance requirements for existing capital” (p. 2). That is, when the declining economic system starts “consuming” its infrastructure (cannibalizing itself, in effect) to compensate for declining incomes, it will simply hasten the inevitability of its demise.

But however central, energy is only one of the problems that Orlov, peak-oilist that he is, considers.

Because the US has outsourced most of its manufacture overseas, no longer produces the high technology on which it depends, and relies on imports for most of its basic needs, it has incurred an enormous trade imbalance, sustained by massive borrowing in foreign money markets. (For different reasons the SU acquired massive trade imbalances and debt in the 1980s.)

The problems created by America’s increased energy costs and the financialization of its economy have been compounded by a runaway military budget, a debt pyramid that grows at an exponential rate, and the decline of its overseas empire and “tribute economy.” Combined with imperial disasters in Iraq and Afghanistan, a growing international reputation for incompetence and corruption, violent changes in weather patterns (which produce killer hurricanes, like Katrina, having a system-disrupting potential), and the impending breakdown of neglected infrastructure (bridges, levees, poisoned water tables, etc.), these factors suggest that the US might eventually follow the SU into the dustbin of history.

The federal government and “the self-enriching political elites” that feed off it have, moreover, a vested interest in “perpetual growth” and imperial overreach, which means they can’t be expected to do anything constructive to stave off the impending collapse. As the economy begins to decline, tax revenues too will decline and public debt grow.

The only solution the elites have come up with to address the state’s impending fiscal crisis, thus far, is to crank up the printing presses and introduce more worthless paper into the market.

Orlov’s explanation of the Soviet failure and his prediction of an impending American collapse, given the impressionistic nature of his work, should, of course, be taken as merely suggestive, though economic contraction, declining energy availability, and increased political turmoil already loom on the horizon.

His work, moreover, is short on the specifics of collapse, he neglects any consideration of collapse as a “political process,” and he ignores important questions as to how and in what manner collapse occurred (in the SU) and will occur (in the US). It’s also not evident if an American economic collapse will mirror the suddenness of the Soviet collapse (which was historically unprecedented) or if, like more traditional cases, it will be stretched out over decades.

Qualitatively more persuasive, though, is Orlov’s claim that the Soviet Union was better situated than the United States to endure and recover from a political-economic breakdown.

In his view, Americans see their “spendthrift debtor nation” as a “land of free ice cream and perpetual sunshine” (p. 16). Never having experienced invasion, world war, famine, or bloody dictatorship, it’s hard for them to imagine a future unlike their past. More than Russians, Americans have been severed from their past and redesigned as gratification-oriented consumers whose defining character is materialist rather than ethnic, historical, or cultural. They also lack the psychology of resilience “bred” into the long-suffering Russians. Finally, they are more ideologically deluded by the system’s pretenses, just as they are more integrated into its increasingly dysfunctional institutions.

Born of a less happy, but more bona fide nation, Soviet Russians put greater emphasis on individual achievement and recognition than on economic success. Money and materialist designations didn’t play quite the same role in their lives as they do in the US, for their primary needs—work, housing, basic services—were essentially provided by their collectivized economy and the lifestyle consumption native to the American economy wasn’t an option. When the political system stopped functioning and the formal economy suffered its knockout blow, there simply wasn’t the moral and social devastation that is likely to affect Americans.

The SU was also favored in terms of food and shelter. Most Soviet housing was owned by the state. Though “drab and soulless,” it was well-built, insulated, and designed to last. Almost all housing was surrounded by public lands on which people kept kitchen gardens. Prior to the collapse, nearly 90 percent of the country’s domestic food supply came from these kitchen gardens and other individual plots, for Communism had turned Russian agriculture, once Europe’s breadbasket, into a basket case.

The Soviet regime also had a phobia of food riots and virtually every city stored large grain surpluses for emergencies. This made the Soviet-style food system almost immune to breakdown. After the collapse, most people were thus able to keep a roof over their heads and to provide themselves with food. All Soviet utilities, such as heat, running water, electricity, and garbage removal, were also public and could be counted on even after the dissolution of the central state. Above all, Russian housing was overwhelmingly urban, situated near the country’s extensive public transportation network, which continued to operate.

This will not be the case in the US, whether it undergoes a sudden Soviet-style collapse or if it should, as is more likely, experience a extended period of decline.

Most Americans, who don’t own their homes, will in either case face foreclosure, eviction, and homelessness.

They will also have trouble feeding themselves, once the shelves of their suburban supermarkets, stocked by just-in-time deliveries, are emptied.

Because the entire country is built around the auto—housing, shopping, work are virtually inaccessible without it—when the economy bottoms out and energy costs become prohibitive, this car dependency will prove catastrophic. Even in the oil-rich Soviet Union, there were gasoline shortages and severe rationing.

Without significant domestic supplies of gas and without spare parts for their foreign-built autos, suburban Americans will find themselves stranded.

Orlov suspects there will be a mass exodus from distant suburbs, as people are forced to relocate to centers whose supply and distribution networks remain operative. If this should occur, the world will shrink to areas that can be covered on foot or bike, long distance and global trade will be drastically curtailed, and the key principles of globalization will become totally untenable. More generally, “the world” will become “the local” and self-sufficiency the supreme virtue.

Consumerism will then become a thing of the past. Though the Soviet economy was notorious in its neglect of consumer goods, it nevertheless made things, with some conspicuous exceptions, to last. American goods, by contrast, are produced with artificially short replacement cycles and often in plastic, which means that once the container ships stop arriving at US ports many of the consumer items that have become essential will disappear, not to be replaced.

The greater prosperity and materialism of American life also means that things most of the world considers luxuries—cars, central heating, refrigeration, flush toilets, cell phones, packaged and processed foods, washing machines and kitchen appliances—have become necessities; their disappearance will be felt more intensely than in the Soviet system of socialized poverty.

An American collapse (or decline) is likely, then, to entail shortages of food, fuel, and countless consumer items, combined with outages of electricity, gas, and water; breakdowns in transportation systems and other infrastructure, including public health; widespread shutdowns and mass layoffs; all accompanied by confusion, despair, and perhaps violence.

Society as a whole will then be forced back to a less complex mode of operation; centralized forms of control will wane; things will suddenly become “smaller, simpler, less stratified, and less socially differentiated”; regions and communities will assume a greater centrality of tasks. Whether there will ensue a Hobbesian “war of all against all” is anyone’s guess.

As the old economy begins disintegrating, old forms of capital (cash, stocks, bonds) will progressively lose their value. Trucking and airplane fleets deprived of fuel will end up as scrap. Scientific and industrial equipment may be exported as forms of exchange, along with antiques, jewelry, and art objects. Numerous jobs—cable installers, lawyers, sales representatives, plastic surgeons, store clerks, stockbrokers—will become superfluous.

Given both the social and economic dislocation this will set off, law enforcement will probably be overwhelmed, replaced in part by private security and neighborhood defense units. Many laws will be ignored. Established authorities, no longer able to ensure the security of its citizens, will almost certainly cease commanding respect and new power structures may arise. Organized criminals, gangs, former cops, and military contractors will find new employment or self-employment. (This will be a good time to be in a Private Military Company.)

As the established market breaks down, an informal economy will likely replace it—an economy that largely revolves around the liquidation and recycling of the old economy and is based on “direct access to needed resources or the threat of force, rather than on actual ownership or legal authority” (p. 61).

As in Russia, we’ll probably see old people in open air flea markets selling off their treasured possessions, middle-class people rummaging through trash, the few remaining stores under heavy security.

All this will happen to a people not only psychologically unprepared for social upheaval, but ill-suited to the harsh realities it’ll bring. Americans, in fact, have lived so long with a radical disconnect between their “culturally acceptable beliefs” and their personal experiences that they are already afflicted with various mental diseases, evident in the tens of millions of anti-depressant and mood-altering drugs they daily consume. Collapse will send a great many of them over the edge—into new fantasized stages of denial or, perhaps, into a millennial “end times” revival.

The good news is that whites will also become increasingly unsupportive of a regime that no longer delivers the goods. Indeed, because the legitimacy of America’s managerial/ therapeutic regime is so closely linked to economic well-being, the latter’s breakdown will likely also either bring down the state or “hollow” it out. But whatever happens, the fall of the American system, based on a highly controlled system of “communications” and programmed consumption (i.e., on packaged goods and packaged lives), is going to lead not to the rapture, but to a very rude awakening.

This is worrisome to the degree that the most vulnerable to collapse, besides the “couch potatoes” spawned by our “prosthetic society,” are whites. For they are the most integrated into the existing system, they are the most deluded by the ideology of the American Dream (which holds that if you work hard and play by the rules, you will succeed), they are the most shorn of their former identities, culture, and communities (which assume a primary importance in times of crisis), and they lack any consciousness of being a people, based on a specific stock with a specific culture, and thus lack any consciousness of why they should act cohesively as a people.

However, once whites cease being sheltered in the bubbles of their cars or in their cubicle jobs, they will have no choice but to deal face-to-face with blacks, Mexicans, turbaned Sikhs, and the other exotic fauna that now cover their land. At this point, they may discover that a nation is not a “racial ragbag,” but a community based on a “consciousness of kind”—i.e., on a consciousness of being related in blood and spirit, of belonging to a people with a shared ancestry and a common culture.

The ensuing anarchy might similarly provoke conflict along ethnoracial lines, exacerbated by high gun ownership on both sides, that could conceivably lead to violent clashes and perhaps forms of ethnic cleansing.

Such conflict will have a far greater role to play here than it did in ethnically homogenous Russia, where communal relations remained civil, if not amicable (except in respect to Jews and other non-Russian minorities).

If American whites should remain unconscious of who they are as a people, they will almost certainly become victimized by the higher cohesion and consciousness of non-whites, whose ethnic identity, family ties, and cultural motivations are both more primitive and more powerful than theirs. The big question, then, is whether whites will passively succumb to black and brown predators, like sheep before the slaughter, or if, in an awakening, they’ll join with other whites to fight back. (I’m betting it won’t take long before they realize that it’s a matter of “us or them.”)

Relatedly, successful, middle-aged white men will be especially prone to nervous breakdown and depression—as the career, savings, and property they spent a lifetime pursuing suddenly go down the drain. Suicide, emotional paralysis, drink, and drugs will strike them at higher rates than other sectors of the population. Their fragility will be further compounded by the fact that their work experiences leave them totally unqualified for employment in a collapsed economy. Concentrated more in business, management, communications, law, sales, and information processing, they will find that non-white immigrants with practical skills as carpenters, mechanics, and general laborers are better situated to take advantage of the remaining job opportunities.

At the same time, as single households and nuclear families prove to be unviable, whites will find that extended families and friends are their most valuable assets.

The Russian family wasn’t much healthier than the American family, but economic conditions and housing shortages before the collapse helped keep marriages together, with three generations often sharing the same dwelling. And like most people worldwide, Russians also tended to live in the same locale all their lives. As a result, they had extended family ties and knew the people among whom they lived, both of which enhanced their survivability.

American whites lack these extended networks, and this is going to affect their adaptability in a broken world. To survive, they will have to rediscover the meaning of community and revive those organizations and activities that were once a mainstay of American civil society. In making the transition to a Third World lifestyle, whites then will either have to rediscover their own traditions or else revert to the sort of practices common to non-whites.

It took Russia only a decade to recover from its collapse and regain pre-collapse economic levels. This relatively speedy recovery was due to the individual Russian’s ability to adapt to crisis conditions and to the country’s vast oil reserves, which enabled their economy to bounce back relatively quickly, once world gas prices revived.

The US is not so well-situated. It will take longer to recover from whatever collapse brings, and it’s likely there will be no “recovery” from the decline of its techno-economic civilization (given the inevitable rise of energy costs and the unfeasibility of a globalized economy based on cheap energy). There’s also no single figure in the US governing elite capable of emulating the nationalist-minded Vladimir Putin, who prevented the oligarchs from turning post-collapse Russia into a colony of the world’s financial system.

But all’s not doom and gloom in this scenario. The crash, if and when it comes, will help whites shed their liberal illusions, perhaps lead them to discover what is most important in life, and, in the best of all possible worlds, prompt them to reestablish the racial-nationalist ties that once made them a great, enterprising people.

Of course, it would have been better if they hadn’t screwed around for 60 years, leaving it until the very last possible moment to recoup the Aryan qualities that will enable them to overcome the coming dark age, but better at 11:59 p.m. than never at all.

In this pre-collapse interlude, before the fall, nothing can be done to halt the inevitable or mitigate the immitigable. We are facing, in America’s world decline, not a solvable problem, but an unavoidable predicament that promises to rip apart the illusions that have animated American life for at least the last two generations—especially the illusion that unlimited growth and limitless consumption are possible in a world of finite resources.

We have, moreover, absolutely no control over what is about to happen: All our efforts would be like “wiggling our toes at a tsunami.” The only certainty now is that the process of decline has begun.

Worse, there are no oppositional parties, political formations, or extraparliamentary forces representing white interests to lead them, once the smoke clears. The impending crisis—this make or break time—comes thus at a relatively inopportune moment.

However, as individuals and, more importantly, as European Americans concerned with their people’s fate, they still have time—a civilization rarely collapses all at once, as Orlov and survivalists fantasize, but rather gradually, often over the stretch of decades—to turn inward to prepare themselves mentally for the looming economic breakdown and, as they do, to start turning outward to develop those “resilient communities” of friends, family, and fellow tribesmen, who, when the moment strikes, might not only help them survive—but perhaps also prompt them to start thinking about what should succeed the failed United States.

Ron Paul’s House speech

The February 15, 2006 speech from Ron Paul (R) before the US House of Representatives gives insight into how the dollar evolved to become the world’s fiat currency. Since five years later the situation is far worse, considering the recent stock exchange news Ron Paul’s speech is worth re-listening (here, here and here). Once the dollar crashes the Wilsonian World Order will very probably fall apart. The US won’t be anymore the unchallenged superpower or world police.

The bad news: China will be number one, an extremely shocking and humiliating discontinuity for the white psyche that has never been experience by Western civilization, not even by the Romans after the fall of the Roman Empire.

The good news: Since the US is the most serious enemy of the white race (see e.g., one of O’Meara’s articles here), after the dollar crashes the US troops will have to leave Germany, and a major overhaul of our values and myths of World War II will be in order.

But I am getting ahead of the story… For the moment let’s just pay attention to the text of Ron Paul’s speech:

 


 
 
The End of Dollar Hegemony

A hundred years ago it was called “dollar diplomacy.” After World War II, and especially after the fall of the Soviet Union in 1989, that policy evolved into “dollar hegemony.” But after all these many years of great success, our dollar dominance is coming to an end.

It has been said, rightly, that he who holds the gold makes the rules. In earlier times it was readily accepted that fair and honest trade required an exchange for something of real value.

First it was simply barter of goods. Then it was discovered that gold held a universal attraction, and was a convenient substitute for more cumbersome barter transactions. Not only did gold facilitate exchange of goods and services, it served as a store of value for those who wanted to save for a rainy day.

Though money developed naturally in the marketplace, as governments grew in power they assumed monopoly control over money. Sometimes governments succeeded in guaranteeing the quality and purity of gold, but in time governments learned to outspend their revenues. New or higher taxes always incurred the disapproval of the people, so it wasn’t long before Kings and Caesars learned how to inflate their currencies by reducing the amount of gold in each coin—always hoping their subjects wouldn’t discover the fraud. But the people always did, and they strenuously objected.

This helped pressure leaders to seek more gold by conquering other nations. The people became accustomed to living beyond their means, and enjoyed the circuses and bread. Financing extravagances by conquering foreign lands seemed a logical alternative to working harder and producing more. Besides, conquering nations not only brought home gold, they brought home slaves as well. Taxing the people in conquered territories also provided an incentive to build empires. This system of government worked well for a while, but the moral decline of the people led to an unwillingness to produce for themselves. There was a limit to the number of countries that could be sacked for their wealth, and this always brought empires to an end. When gold no longer could be obtained, their military might crumbled. In those days those who held the gold truly wrote the rules and lived well.

That general rule has held fast throughout the ages. When gold was used, and the rules protected honest commerce, productive nations thrived. Whenever wealthy nations—those with powerful armies and gold—strived only for empire and easy fortunes to support welfare at home, those nations failed.

Today the principles are the same, but the process is quite different. Gold no longer is the currency of the realm; paper is. The truth now is: “He who prints the money makes the rules”—at least for the time being. Although gold is not used, the goals are the same: compel foreign countries to produce and subsidize the country with military superiority and control over the monetary printing presses.

Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people—just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.

When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules—rules no longer written by those who ran the now defunct printing press.

“Dollar Diplomacy,” a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and [Teddy] Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of “Dollar Diplomacy.” The significance of Roosevelt’s change was that our intervention now could be justified by the mere “appearance” that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government “obligation” to protect our commercial interests from Europeans.

This new policy came on the heels of the “gunboat” diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the “dollar diplomacy” of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar “diplomacy” became dollar “hegemony” in the second half of the 20th century.

This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.

Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress—while benefiting the special interests that influence government.

Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.

The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question—until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.

It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it—not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.

Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”

Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.

Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money—i.e. the dollar system—to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.

In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.

Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.

Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.

Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to—all to solve the problems artificially created by deeply flawed monetary and economic systems.

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars—due to their depreciation—will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble—generated by easy money—has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein—though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony—it’s dominance as the world reserve currency—is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources—we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.

Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.

Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system—like Iraq, Iran and Venezuela—become targets of our plans for regime change.

Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.

But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.

It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism. The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran. But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.

Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.

And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.

Published in: on August 20, 2011 at 11:30 am  Comments (5)  
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