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The Coming Great Default

Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies

March 4

22:05
2018

London , United Kingdom of Great Britain & Northern Ireland - 4 Mar 2018 - Ghassan Matar

If the saying is true that, “The greatness of a depression is commensurate to the government’s efforts to prevent it,” we can assuredly say that we are in the greatest downturn ever to threaten the prosperity of Western civilization. This is no over-statement, the fact that the United States Treasury and the Federal Reserve Bank alone have committed $18 trillion to bailouts and “stimulus” packages speak volumes.

To put this “injection of liquidity” into perspective, we can say that the United States government has spent more money propping up the financial system since August of 2008, as it spent, with inflation adjusted dollars, on all the wars in its history put together.

Ideas have consequences, but not in a social vacuum. There are no social vacuums. Ideas that are held by a minority of fringe academics or polemicists sometimes become the foundations of victorious social movements after existing social institutions are undermined by a social crisis.

There seems to be an inherent optimism in the thinking of most members of the human race. It is the source of men's sacrifice in the present for the sake of the future. We think the future is going to get better, and therefore it is worth sacrificing present consumption for the sake of future consumption.

The free market was such an idea. Adam Smith was the major promoter. His disciples extended his vision of the wealth of nations. The timing was perfect: 1776. That was about the time that the Industrial Revolution began its transformation of the West and then the world.

Beginning around 1800, and limited to the Eastern shore of the United States and the British Isles, compound economic growth began. By 1820, the economic transformation was leaving irrefutable historical evidence of this transformation. By 1850, the world was very different. A series of inventions transformed modern agriculture, modern transportation, and communications. This was visible to everybody by 1851.

We are now over two centuries into this process. It is almost impossible for us to think of a society made up of human beings who are systematically pessimistic about the future.

There has been only one period in which economic growth has stagnated for more than a decade since 1800. That was the Great Depression, which was followed by World War II. Output of almost all goods and services declined in the 30's, and then the war destroyed much of the output of the first half of the 40's. Both sides were committed to the destruction of any economic growth on the other side. With the exception of the United States, all nations that were involved in the conflict suffered direct economic contraction.

The Great Depression was the great stumbling block for optimism. It undermined faith in Western political liberty and Western economic liberty. The Fascists and the National Socialists took advantage of this. The Fabian socialist movement took advantage of this in Great Britain. The New Deal took advantage of this in the United States. Lenin (Ulyanov) had already taken advantage of this from 1917 to 1924, and Stalin (Djugishvili) was taking advantage of it.

This period also gave birth to the era of a muscle-flexing America which periodically engaged in senseless wars whenever it got bored or needed some far-flung location to try out its new weapons systems.

Very soon after, the Western economic system had become dependent on a toxic combination of uncontrollable spending and U.S. military adventurism that began to reshape the world in America’s image, without regard to historical and cultural realities. Rather than criticize this adventurism, the entirety of the Western economies began to fall in line; ignoring the dangers such a system posed to our freedoms and our prosperity. This is despite Madison’s warning about the dangers of a standing army or Eisenhower’s warning about the dangers of a union between the defense contractors and the armed forces.

In time of actual war, great discretionary powers are constantly given to the Executive Magistrate. Constant apprehension of War, has the same tendency to render the head too large for the body. A standing military force, with an overgrown Executive will not long be safe companions to liberty. The means of defence against foreign danger, have been always the instruments of tyranny at home. Among the Romans it was a standing maxim to excite a war, whenever a revolt was apprehended. Throughout all Europe, the armies kept up under the pretext of defending, have enslaved the people.

Of all the enemies to public liberty war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few. In war, too, the discretionary power of the Executive is extended; its influence in dealing out offices, honors, and emoluments is multiplied: and all the means of seducing the minds, are added to those of subduing the force, of the people. The same malignant aspect in republicanism may be traced in the inequality of fortunes, and the opportunities of fraud, growing out of a state of war, and in the degeneracy of manners and of morals, engendered by both. No nation could preserve its freedom in the midst of continual warfare. - James Madison

However, the American public, preoccupied by the war and blinded by the bright sun of full employment and high wages, failed to notice this. Affluent Americans, on the other hand, were keenly aware of the wonderful way in which the war generated money for themselves and for their corporations.

Incidentally, it was also from the rich businesspeople, bankers, insurers and other big investors that Washington borrowed the money needed to finance the war; corporate America thus also profited from the war by pocketing the lion’s share of the interests generated by the purchase of the famous war bonds.

In theory, at least, the rich and powerful of America are the great champions of so-called free enterprise, and they oppose any form of state intervention in the economy. During the war, however, they never raised any objections to the way in which the American state managed and financed the economy, because without this large-scale dirigist violation of the rules of free enterprise, their collective wealth could never have proliferated as it did during those years.

In other words, while the profits generated by the War were privatized to the advantage of an extremely wealthy elite, its costs were ruthlessly socialized to the great detriment of all other Americans. During the Cold War for example, the American economy degenerated into a gigantic swindle (which persists to this day), into a perverse redistribution of the nation’s wealth to the advantage of the rich and to the disadvantage not only of the poor and of the working class but also of the middle class, whose members tend to subscribe to the myth that the American capitalist system serves their interests.

Indeed, while the wealthy and powerful of America accumulated ever-greater riches, the prosperity achieved by many other Americans during the Second World War was gradually eroded, and the general standard of living declined slowly but steadily.

The America of wealth and privilege became hooked on war, without regular and ever-stronger doses of war it could no longer function properly, that is, yield the desired profits. Right now, this addiction is facing major withdrawal symptoms as the U.S. is no longer able to afford war nor can muster enough manpower to fight any type of protracted wars.

9/11 provided the United States with carte blanche to wage war wherever and against whomever it chose, it did not matter all that much who happens to be fingered as enemy du jour. This period of folly saw the total destruction of several nations, the killing of millions of civilians and has taken the entire world to the brink of an even greater recession. More importantly, it has led to the destruction of the Dollar or more specifically the Petro-Dollar system that underpinned America’s militarism. It did this by scaring away the Russian Federation and China whom have already set in motion the de-dollarization process that makes possible these endless wars.

In effect, China, Russia and the rest of the world are no longer willing to finance America’s wars; which they did through the recycling of dollars enabled by the purchase of treasuries and more specifically they are no longer willing to finance their military encirclement.

Even a clueless president Trump was able to correctly describe the pathetic decision to launch an illegal war for no apparent reason than a low IQ and an overabundance of male testosterone. Unfortunately, he too just hammered the final nail in the coffin of the Dollar instigating a trade war which will finish off what Bush started.

"Here we are, like the dummies of the world, because we had bad politicians running our country for a long time," said president Trump. He further called the 2003 invasion of the Muslim country the “worst decision ever made” by Washington.

Trade wars are 'Goood and easy to win'  - Donald Trump

The fallout is not limited to China or Russia; in fact, China’s diplomatic reach is also having an impact on other nations whom have either dropped the dollar altogether or have begun to accept the Yuan for the proceeds of oil and mineral sales.

If you throw in the countries that the United States has waged war on as well as those it is sanctioning, then it is abundantly clear that the demand for dollars is falling at an unprecedented pace. The problem staring the United States in the face is far more profound that simply economics.

The history of the U.S. dollar was always closely linked to U.S. involvement in a series of wars. The Bretton Woods Accord and the resulting world reserve currency status of the U.S. dollar were both byproducts of World War II (1939-1945). The Korean War (1950-1953) was followed six years later by the Vietnam War (1959-1975) which led to the end of the Bretton Woods system. Unfettered by the constraint of gold backing after 1971, the U.S. dollar became a weapon in the Cold War (1945–1991) between the U.S. and the former Union of Soviet Socialist Republics (U.S.S.R.).

Each war corresponded with an increase in the U.S. money supply. The Iraq war, for example, is estimated to have cost at least $4 trillion. However, in 2005, the majority of the world’s central banks had enough and began dumping dollars. The result was all too clear in 2007.  

The loss of value in the U.S. dollar caused by excessive expansion of the money supply, together with rising demand for raw materials from emerging economies, has led to permanently higher global commodity prices. Higher crude oil prices, in particular, have put pressure on the U.S. economy, which is putatively in a gradual recovery from the recession that began in 2007. At the same time, international trade has begun to move away from the U.S. dollar, threatening its world reserve currency status. Given the history of the U.S. dollar, it seems likely that an eventual end of the U.S. dollar’s reign as the world reserve currency will also be marked by war.

U.S. politicians are clamoring for war with Iran, the third largest oil exporter in the world. Iran refuses to sell its oil for U.S. dollars. If Iranian oil were traded in U.S. dollars, it would moderate the U.S. dollar price of crude oil and ease pressure on the U.S. economy, as well as extend the world reserve currency status of the U.S. dollar and give the U.S. economic leverage over consumers of Iranian oil, which include China and India. The U.S. news media is preparing the American public for a war with Iran with reports about the dangers of Iran becoming a nuclear power. They have also been reporting that Iran might carry out nuclear strikes on U.S. soil using intercontinental ballistic missiles (ICBMs), although Iran possesses neither nuclear warheads nor ICBMs. However not even a large scale war can save the U.S. dollar; we are way past that stage.

So how did we get here. The approaching end of World War II led to the creation of the Bretton Woods system in July 1944. The U.S. dollar, which was convertible into gold, became the dominant mechanism for international trade settlement. The price of gold was set to the pre-war price of $35 per troy ounce, which was deflationary at the time. There was nothing in the Bretton Woods Accord, however, that prevented the U.S. from issuing more currency than was backed by gold other than the threat of a run on U.S. gold reserves.

The Bretton Woods system worked as intended for roughly 17 years. The London gold market, which had been closed during World War II, reopened in 1954. By 1961, upward pressure on the price of gold prompted the establishment of the London Gold Pool by the U.S. Federal Reserve and major European central banks (including the central banks of the United Kingdom, Belgium, France, Italy, the Netherlands, Switzerland and West Germany).

The London Gold Pool defended the $35 per troy ounce price through interventions in the London gold market, but upward pressure on the price of gold grew. In July of 1962, Americans were forbidden by then president Kennedy to own gold abroad by Executive Order 11037. In a 1965 press conference, then president of France, Charles de Gaulle publicly denounced the U.S. for abusing the world reserve currency status of the U.S. dollar. The London Gold Pool collapsed in March of 1968 after France withdrew from the group setting off a surge in gold demand that caused the London gold market to shut down for a two-week period.

By 1971, substantially due to the cost of the Vietnam War, the U.S. had leveraged its gold reserves to the breaking point. The expansion of the money supply caused the American Consumer Price Index (CPI) to increase by more than 6% in 1970 and it remained above 4% in 1971.

When U.S. President Nixon “closed the gold window” in August 1971 and instituted price controls, the United States in effect defaulted on its obligations ending the Bretton Woods system and resulting in an ad hoc floating exchange system or a technical default by the United States.

From their peak during World War II to 1971, U.S. gold holdings fell from approximately 20,205 tons to approximately 8,134 tons (currently 4,852 m/t). In February 1973, the U.S. devalued the dollar and raised the official dollar price of gold to $42.22 per troy ounce. By June of the same year, the market price in London had skyrocketed to more than $120 per ounce.

Against a backdrop of runaway U.S. dollar inflation, Arab members of the Organization of the Petroleum Exporting Countries (OPEC), along with Egypt, Syria and Tunisia proclaimed an oil embargo in October of 1974. Officially, U.S. support of Israel in the Yom Kippur War was the reason for the embargo, but it was also a challenge to the un-backed U.S. dollar’s position as the world reserve currency, i.e., as an exclusive medium for crude oil sales; in effect, the Arab’s did not want to be paid in worthless dollars.

After the end of the Yom Kippur War in 1974, OPEC members, including Iran before the Iranian Revolution in 1979, acquiesced and began to accumulate hundreds of billions of devalued U.S. dollars due to current account surpluses linked to rising oil prices. Arab “petrodollars” were recycled into US Treasuries, invested in financial markets around the world and loaned to commercial banks.

This new mechanism also brought about an aggressive Washington, who would now use these and other recycled Petro-dollars to expand its military posture to prop-up the very same worthless dollar, a stupid vicious cycle which set in motion decades of instability in the South America, East Asia and lately the Middle East which has culminated in senseless destruction.

By 1979, oil prices had roughly quadrupled and the price of gold was increasing rapidly. Then Federal Reserve Chairman, Paul Volcker raised the Federal Reserve’s funds rate to an average of 11.2% in 1979. Nonetheless, in 1980 CPI inflation soared to 13.5% and the stagnant U.S. economy also slipped into recession. The price of gold hit $850 per troy ounce.

In a desperate bid to save the U.S. dollar, Volcker increased the funds rate to an unprecedented 20% in mid 1981, pushing the prime interest rate to a usurious 21.5% by the middle of 1982. Finally, Volcker’s radical intervention slowed the rate of CPI inflation and restored confidence in the U.S. dollar. It also brought the price of crude oil down and smashed the prices of gold and silver, but this was not done with sound economic policies, rather, it was done with financial engineering, also known as financial innovations. To put it in milder terms, the United States heralded in the era of ‘Junk Economics’, market manipulations and economic hitmen.

The innovations in U.S. monetary policy developed principally by Summers and Greenspan helped to make it possible for the United States to up the ante in the Cold War, which ended with the collapse of the U.S.S.R. in 1991. Setting aside all other issues, the U.S.S.R. had arguably been spent into oblivion by the U.S. The fall of the U.S.S.R. seemed to guarantee the hegemony of the U.S. dollar for decades to come.

During the 1990s, Greenspan, together with Larry Summers, who was Deputy Secretary of the U.S. Treasury under Robert Ruben at the time, championed financial deregulation. Confident in their ideas, the so-called “committee to save the world” prevented regulation of over the counter (OTC) derivatives and succeeded in effectively repealing the Banking Act of 1933 (the Glass–Steagall Act).

The honeymoon period lasted just a decade. The unregulated financial industry got too greedy and complacent, and by 2007, the world’s entire economy which was now based on these propped up and worthless dollars collapsed. The Loss of value in the U.S. dollar, caused by radically inflationary monetary policies, set off a global currency war in 2009 and pushed global commodity prices higher than they would otherwise have been.

Higher crude oil prices, despite lower demand, slowed economic recovery. At the same time, high debt levels, bank bailouts, soaring government budget deficits and falling tax revenues produced a sovereign debt crisis in Europe. Although the focus of the sovereign debt crisis was focused on Europe, the eye-watering deficit (over $1 trillion per annum), skyrocketing debt ($21 trillion) and unfunded Social Security and Medicare liabilities of the U.S. federal government, estimated to be more than $63 trillion, foreshadowed a looming crisis in America.

Although the U.S. has yet to experience a sovereign debt crisis, it is not due to its strength, but rather a result of a manipulated demand for the U.S. dollar and for U.S. federal government debt.

However, the U.S. dollar is in the latter stages of its demise as the world reserve currency. Global trade is fragmenting into increasingly autonomous trading blocs defined by currencies and trade relations, such as the BRIC nations (Brazil, Russia, India and China), together with South Africa.

In March of 2012, the U.S. unilaterally removed Iran from the (SWIFT) system, effectively cutting it off from world commerce. However, wielding the U.S. dollar’s world reserve currency status as a blunt instrument was counterproductive and accelerated the loss of faith in the U.S. dollar, leaving the U.S. with only the military option.

Having taken a decision to act unilaterally against Iran, the U.S. has set in motion the extreme measures it will take if the world reserve currency status of the U.S. dollar begins to break down.

A successful invasion of Iran would eliminate the largest non-U.S. dollar oil exporter, delaying the breakdown of the U.S. dollar’s status as the world reserve currency. It would also hand the U.S. major control of crude oil supplies to China and India and give the U.S. additional leverage to support the U.S. dollar and U.S. debt, as well as a means of influencing the policies and economic growth of the two largest nations

China however, is fully aware of the intentions of the United States vis-à-vis Iran. The imminent introduction of crude oil trading in Gold-backed Yuan (scheduled to begin in late march 2018) is a very bold move intended to avert such a situation.

Countries worldwide are tired of funding the America’s “military adventurism by being a party to the ‘Empire of Debt,’ as it’s known around the world – the US dollar,” and therefore, will likely join the de-dollarization movement.

It is important to understand that the basis of the US empire is not land-based, nor based on material goods; it is about rent-seeking. It’s based on landing dollars, getting out income and when countries can’t pay they dismantle the assets and take them over. We saw it in Latin America, South America, this is how America built its empire.

What's changed is the technology of military strategy. In the 30s, when a country was a military power, it sent in the Marines, the gunboats, and soldiers. America on the other-hand is musclebound, which is why Mao called it a paper tiger. There's only one kind of war that an American democracy can afford and that is atomic war. A democracy can't afford fighting with real bullets.

For example, in Vietnam, every soldier used one ton of copper per year. There's not enough copper today to produce the bullets. You don't have a draft anymore and you don't have a population that's willing to go to war. So, the American war in the Middle East was basically an air war. You can bomb people, but you can't occupy them, you can't fight them, you can't do what was realized in the 19th and 20th century, you can't have an army that actually fights. It's an eating army or a bribing army or a military-industrial complex without the ability to fight a war.

If it weren't for the military deficit, America would have had to finance its own domestic budget deficit. It's been foreigners that are financing the budget deficit. Now that foreigners are essentially saying, we don't want any more dollars, we're not going to fund your deficit, all of a sudden, they think: who's going to fund the deficit if not foreign central banks? The answer is: American labor, the American middle class and working families are going to fund it, not the bankers nor the affluent.

The modern fascist economy that dominates the West, meaning an economy sustained by central bank counterfeiting and central government fiscal deficits, was born during the Great Depression but was conceived much earlier. It took the Great Depression to provide what we can legitimately call labor pains. Most people today cannot conceive of a world without government intervention, central banking, government guarantees of all kind, and so forth. The Federal Register turns out approximately 80,000 pages of fine print regulations every year. This regulatory order is cumulative. Most of these regulations stay on the books. They are not repealed by the bureaucrats; they are amplified by new rules.

Institution by institution, crisis by crisis, fascist economics increased its support among academics, and amongst the masses. Social Security and Medicare are the most visible manifestations of these policies.

Keynesian economics is however incoherent. The defenders of Keynesian economics, when standing in front of a crowd to explain the system, proclaim its goals and describe its interventions, but they cannot explain how these interventions have in fact created wealth. This is why The General Theory is invoked but never assigned.

The great advantage Keynesians have is that people find it difficult to believe in the theory first proclaimed in the 18th century, namely, that social evolution, including economic progress, is based on individual decision-making within a free market setting. The idea that coherence grows out of individual decisions, and that there is no central organizing entity, is difficult for people to comprehend. Adam Smith correctly named this system of unplanned providence: the invisible hand.

So, in the back of most people's minds in 1929 was faith in some kind of god. As long as the money kept flowing, and economy kept growing, people believed that the boom would last forever. This was basic to their optimism. They weren't sure exactly why the boom was taking place, but they figured that it was forever. They wanted to believe that good times would last. But good times did not last.

Conclusion

New ideas alone do not change the minds of most people. This includes intellectuals. There is usually a crisis that serves as a catalyst for changing the minds of millions of people. Ideas that had been floating around in the world of intellectuals then get applied by a new generation of intellectuals, and simultaneously they are also applied by politicians. This is what creates revolutions.

It is the job of those intellectuals who favor a new outlook to work on the details of this outlook until such time as a revolutionary figure gains political support, and some new apologist for the revolutionary worldview comes to the forefront and begins to gain disciples. The power of ideas alone does not produce revolutions. There has to be a social setting to allow the catalyst of revolutionary ideas to produce a social and political transformation.

This is why the Great Default of all of the Western welfare states will lead to a world-wide revolution and will create tremendous opportunities for new ideas to come to the forefront. It is going to undermine and ultimately destroy the Keynesian worldview.

Of course it will not be pretty. All money is created from debt and all debt is guaranteed by the U.S. Dollar which itself is debt; the entire system is bankrupt and we will all soon realize that our pensions, 401k, cash holdings and monetary instruments will revert to their intrinsic value, which is zero. No one will escape the wealth destruction we are about to witness, not even the affluent who encouraged the destruction in the first place.

We await only the catalyst of the Great Default to produce conditions necessary for the transformation of new ideas into effective political programs, especially at the local level. Decentralization is the wave of the future. Real free trade and the World Wide Web will supply the benefits of internationalism that globalism has suffocated. The global bureaucrats will fade to the dustbin of history.

When the Keynesian medicine cabinet is visibly bare, people will want explanations of why it is bare and why the economy is sick. People will look for fall guys, and the United States will stand out like a sore thumb. At some point, the U.S. debt will not find a market, not even the current fake market where central banks scoop up each other’s debt. The great default will then take place. At that point, Congress's IOU's will become IOU Nothings.

However, no matter how bad it gets, we should recall proverb 24:17 of the Bible.

For a righteous man falls seven times, and rises again, But the wicked stumble in time of calamity. Do not rejoice when your enemy falls, And do not let your heart be glad when he stumbles;

Of course America is not our enemy, it is the enemy of itself and no one should rejoice at the suffering that the American people will endure as they come to terms with the end of the financial hegemony they have enjoyed for 70 years. It will not only be them that suffer.

The Great Default is coming. Count on it. When the dollar collapses and America enters a deflationary spiral, the word “depression” will seem a bit too optimistic.