Saturday, November 04, 2006

Sound Money and the Empire

I’ve been doing a lot of reading lately. The books that I’m currently digesting have, ironically, been centered on the economics of money and monetary systems. I hope to write more lengthy review of some of these, which include Murray Rothbard’s What Has Government Done to Our Money, and The Case for A 100% Gold Dollar, and Andrew White’s Fiat Money Inflation In France. Each of these books lay out the foundations for a monetary system based on a sound medium of exchange, namely gold, and illustrate by historical example the detrimental and deleterious effects of “fiat” currency – the very monetary system we are now blessed with.

Well, wouldn’t you know it… just this past week, Ann Berg wrote a short article on further expounding upon how our government policies – namely our warmongering and imperial pursuits – are following the historical pattern, and will surely lead to the demise of the dollar, and all of its stagnating effects on American prosperity.

Although rarely remarked upon, the number of monetary systems the world has seen in the past one hundred years has totaled no less than five – the gold standard, dirty floats, pound sterling, Bretton Woods, and floating or sometimes pegged (1) fiat currencies. Every one of these systems (except the last) collapsed because of war and war debt. The main argument for the continued reign of the dollar, despite the prolonged, costly invasion and occupation of two countries, is the strength of the U.S. economy. But logic and history suggest otherwise: dollar hegemony prevails because the dollar-centric fiat monetary system and the rapid rise of third world economies have insulated America from debt burdens.

After World War II, as the holder of 80 percent of the world's monetary gold, the U.S. crafted a quasi-gold standard by linking the dollar to gold at $35 an ounce. It pegged all other currencies to the dollar, making them indirectly convertible to gold. This Bretton Woods system solved the pesky problem of bank runs that had created a wave of global bank failures between 1931 and 1933 (starting in Austria) by making gold strictly a balance-of-payments mechanism. (Roosevelt outlawed gold coin ownership with the threat of imprisonment in 1933.) Although the initial problem of the dollar-centric system was a dollar shortage, the Marshall Plan spurred the
dollarization of Europe and Japan. The rapid economic revitalization of these regions fueled exports, resulting in their accumulation of dollar reserves.

When Britain, France, and Israel invaded Egypt, Britain was already in decline. Two wars had decimated its balance sheets, forcing it to cede its colonial possessions. Its costly embrace of wage supports, entitlements, and nationalization policies ruined its manufacturing and coal mining industries. The pound, fixed in 1924 to gold and the dollar at $4.82, declined in value to $2.80 by 1955. A month after the Suez debacle, the pound fell to $2.30. When Britain slapped currency controls on
third-country financing, it put the last nail in the coffin for its currency; a rising wave of dollars in European banks gave birth to the eurodollar market. That market, deemed a flash in the pan by some, allowed dollar deposits to be loaned domestically and internationally without burdensome regulation. Today, it reigns as the largest credit market the world has ever known.

Of course… the current dominance of the dollar is not something that is automatically going to last until kingdom come….

How the dollar got so big is no mystery. Once freed from the discipline of backing dollars with gold in 1971, the money supply increased thirteen-fold – an event forewarned by economists. One reason why this inflation doesn't show up in the Federal Reserve's numbers is that the U.S. exports much of its inflation. (China holds probably $600 billion in dollar reserves.) Without the rest of the world's absorption of dollars, which recirculate via cheap goods and low interest rates, the U.S. would have seen runaway inflation. Also the Federal Reserve – the supposed inflation watchdog – ignores a host of data signaling price appreciation. Spending more for food and energy? Too volatile to consider. Did your real estate tax just double? Doesn't count. Your new car more expensive than the last one? It's really cheaper due to the extra pleasure it affords. In other words, the Fed disregards about 40 percent of what the normal person spends money on.

The Fed also turns a blind eye to asset inflation. Ownership is good, even if increased valuations in stocks, bonds, and real estate are merely the result of the pumped-up supply of greenbacks. How does the Fed create extra money? In a magical act called "deficit-backed financing," (
4) it buys Treasury notes from banks or other institutions and simply makes an offsetting credit to them out of thin air. (5) Thus, an anointed committee, creating money and poring over spending data gleaned from consumers' diaries, has replaced gold's automaticity with a sugar-coated economy that keeps the consumer spending and foreigners financing both public and private debt. The dollar, as much as any politician, lobbyist, or mercantilist, is the silent accomplice to the unaffordable pursuits of conquest.

However, the dollar's fault lines are showing.

The booming housing market that supported $600 billion in extra spending last year is coming to an abrupt end. Soft landing? Never have home buyers been more leveraged, procuring homes just by paying interest on the debt. Recently, California foreclosures were reported up by
from last year.

New jobs are increasingly coming from nontransferable service sectors at the low end of the pay scale. Cosmeticians, hairstylists, and nurses are the new American economy.

Pension liabilities and uncompetitive labor inputs are forcing companies to "buy out" their workers. Like the agricultural programs that paid farmers to set aside land, which resulted in the rapid export of U.S. soybean and wheat acreage to South America, Eastern Europe, and Asia, these programs accelerate America's decline as a productive economy.

Educational standards are rapidly sliding downhill. Some estimate that one-third of all high school students
won't graduate this year.

Asia is quickly increasing its consumption, meaning fewer dollars can be recycled into Treasury debt. This will cause interest rates and import prices to rise.

Finally, the whole structure of capital is changing. Corporations have record profits, but are keeping the money close to the vest, often buying back their own shares. As real investment opportunities are declining, the banking and financial houses have spawned a quadrillion-dollar industry around derivatives trading, enticing investors to hop onboard the commodity boom. However, as any trader knows, derivatives trading is a zero-sum game, and unlike capital formation, it produces nothing (other than profits and losses). Therefore, money flows are becoming increasingly cannibalistic.

Anytime some war pig wants to start elaborating how the war on terror is what America needs to survive, ask them what the historical record is for empires that seek to rule the world. Ask them when has Imperialism ever done anything but ruin a nation, destroy its culture, and set back human progress? My sense is, as someone once remarked about Rudyard Kipling, they don’t love America because we’re American, they love America because we are strong. But our faux “strength” is bound to fail sooner or later, and by continuing the fool’s errand of Empire, we are assured to become a destitute, impoverished footnote in the annals of human history.


Anonymous Anonymous said...

Draft Lou Dobbs 2008 Website

5:09 PM  
Anonymous Anonymous said...

Additionally, we may want to ask the war pigs about the role of the fraudulent United States central bank in the demise of our monetary system as well as why we were taken off the silver standard that our Constitution established for us.

2:45 PM  

Post a Comment

Links to this post:

Create a Link

<< Home