Spoils of war
"Every public spectacle begins with a lie. Later it develops into mass illusion, self-congratulation, hallucination, farce and, finally, disaster. Until the disaster comes, you never know quite where you are. Because for every imbecility that comes along, there are dozens of hallucinators who are eager to put it over on people and at least half the population is ready to believe it."
Bill Bonner, editor of The Daily Reckoning, March 18, 2005
At its peak, the British Empire was the largest formal empire that the world had ever known. It dominated the oceans of the world and its power and influence stretched all over the globe, shaping it in all manner of ways. While its fortunes ebbed and flowed for some 300 years, its major export continued into the latter half of the 20th century. It consisted of the discharge of human effluent into the North Sea.
It was upon this bountiful supply of organic matter that the shoals of herring fed and this fish became the staple diet of many throughout Europe.
Feeding the market
At its peak, the Empire of the original 13 colonies was the largest corporate military empire that the world had ever known. While its fortunes ebbed and flowed for some 200 years its major export became debt and delusion.
As a developing nation, America borrowed in order to invest, resulting in current account deficits that funded the construction of vast infrastructures and the formation of capital equipment, farms, and factories, all of which fueled American productivity.
Fighting fundamentals
Such investments enabled the production of vast quantities of consumer goods, which America sold back to its creditors, to pay interest and retire principle.
America's creditors got consumer goods and America became the wealthiest industrial nation the world had ever seen, in the process turning its current account deficits into enormous surpluses.
Not that it was without its little booms and busts. To stabilize the situation, congress established a private corporation known as the Federal Reserve in 1913. It was supposed to end periods of inflation and recession. But, as Alan Greenspan stressed in his book entitled Gold and Economic Freedom (1966): "When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage ... The excess credit spilled over into the stock market triggering a fantastic speculative boom and, as a result, the American economy collapsed."
As good as gold
Then, after it rescued the 'civilized world' for the second time, the dollar displaced the British pound in July 1944, and became the key currency in the world, valued at 1/35 of an ounce of gold. All other currencies would derive their value in relation to it. However, should things go wrong, the dollar could be redeemed for gold at the agreed rate by foreign governments and their central banks.
Since America held $26 billion in gold reserves out of an estimated total of $40 billion worldwide the political and economic establishment viewed the Bretton Woods agreement as permanent and impregnable. But they did not take into account the greed of governments and the Fed's expansionary monetary policy.
Cashing in their chips
By the 1960s Western Europe and Japan became annoyed at being forced to pile up dollars that were now increasingly overvalued.
Europe and Japan did have the legal option of redeeming dollars in gold at $35 an ounce and they began to exercise this option. The gold standard check came into use and the US gold stockpile dwindled from over $26 billion to $9 billion.
President Nixon provided a simple solution to this problem. On August 15, 1971, he brought the Bretton Woods system to an end. For the first time in world history all currencies were totally fiat. They were based on promises and faith alone.
End of the golden era
At the time, economists believed the mighty dollar was propping up the price of gold and that the free-market gold price would soon fall below $35 an ounce, even down to the estimated 'industrial' non-monetary gold price of $10 an ounce. Instead, the free price of gold soared from $35 to $195 per ounce by the end of 1974 and a market mania drove it higher until it peaked on January 21, 1980 at $850 per ounce. Since then, gold has never traded below $250 per ounce.
Buoyed by a long period of American economic success and unconstrained by any impartial store of value, the Fed solved each crisis by increasing liquidity, by facilitating credit and by printing dollars. This policy facilitated the equity bubble from 1980 to 2000.
Once that bubble was pricked and the markets started to collapse, along came 9/11 to exacerbate the situation. Then the injection of liquidity was immense and the markets rallied for a time before declining. Between January 2001 and June 2003 the Fed reduced interest rates 13 times to the lowest levels for some 300 years (in real terms) in order to avoid recession and to create the largest asset bubbles in world history encompassing both the equity and property markets and spilling over to other economies.
Fighting for funds
From 1971 onwards America has transformed itself into an asset economy based on credit. Its positive trade balances, essential for the repayment of debt, have become negative. In 2004, its trade deficit amounted to $666.2 billion, the largest negative trade balance in history and 22 percent higher than in 2003.
Since 1990, the US economy has been 'driven' almost entirely by the biggest injection of new debt in history. In 2004, total American debt amounted to over $40.1 trillion, 66 percent of which has been created since 1990. This equates to $136,479 per head of population of the US - per man, woman and child.
In order to repay this debt the US will have to sell most of its assets, although history points to another way this situation can be resolved. When Julius Caesar started his unprovoked war on Gaul in 58 BC he seized enough gold from the countries harboring the terrorists to repay all of Rome's debts. Cycles repeat.
Bill Bonner, editor of The Daily Reckoning, March 18, 2005
At its peak, the British Empire was the largest formal empire that the world had ever known. It dominated the oceans of the world and its power and influence stretched all over the globe, shaping it in all manner of ways. While its fortunes ebbed and flowed for some 300 years, its major export continued into the latter half of the 20th century. It consisted of the discharge of human effluent into the North Sea.
It was upon this bountiful supply of organic matter that the shoals of herring fed and this fish became the staple diet of many throughout Europe.
Feeding the market
At its peak, the Empire of the original 13 colonies was the largest corporate military empire that the world had ever known. While its fortunes ebbed and flowed for some 200 years its major export became debt and delusion.
As a developing nation, America borrowed in order to invest, resulting in current account deficits that funded the construction of vast infrastructures and the formation of capital equipment, farms, and factories, all of which fueled American productivity.
Fighting fundamentals
Such investments enabled the production of vast quantities of consumer goods, which America sold back to its creditors, to pay interest and retire principle.
America's creditors got consumer goods and America became the wealthiest industrial nation the world had ever seen, in the process turning its current account deficits into enormous surpluses.
Not that it was without its little booms and busts. To stabilize the situation, congress established a private corporation known as the Federal Reserve in 1913. It was supposed to end periods of inflation and recession. But, as Alan Greenspan stressed in his book entitled Gold and Economic Freedom (1966): "When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage ... The excess credit spilled over into the stock market triggering a fantastic speculative boom and, as a result, the American economy collapsed."
As good as gold
Then, after it rescued the 'civilized world' for the second time, the dollar displaced the British pound in July 1944, and became the key currency in the world, valued at 1/35 of an ounce of gold. All other currencies would derive their value in relation to it. However, should things go wrong, the dollar could be redeemed for gold at the agreed rate by foreign governments and their central banks.
Since America held $26 billion in gold reserves out of an estimated total of $40 billion worldwide the political and economic establishment viewed the Bretton Woods agreement as permanent and impregnable. But they did not take into account the greed of governments and the Fed's expansionary monetary policy.
Cashing in their chips
By the 1960s Western Europe and Japan became annoyed at being forced to pile up dollars that were now increasingly overvalued.
Europe and Japan did have the legal option of redeeming dollars in gold at $35 an ounce and they began to exercise this option. The gold standard check came into use and the US gold stockpile dwindled from over $26 billion to $9 billion.
President Nixon provided a simple solution to this problem. On August 15, 1971, he brought the Bretton Woods system to an end. For the first time in world history all currencies were totally fiat. They were based on promises and faith alone.
End of the golden era
At the time, economists believed the mighty dollar was propping up the price of gold and that the free-market gold price would soon fall below $35 an ounce, even down to the estimated 'industrial' non-monetary gold price of $10 an ounce. Instead, the free price of gold soared from $35 to $195 per ounce by the end of 1974 and a market mania drove it higher until it peaked on January 21, 1980 at $850 per ounce. Since then, gold has never traded below $250 per ounce.
Buoyed by a long period of American economic success and unconstrained by any impartial store of value, the Fed solved each crisis by increasing liquidity, by facilitating credit and by printing dollars. This policy facilitated the equity bubble from 1980 to 2000.
Once that bubble was pricked and the markets started to collapse, along came 9/11 to exacerbate the situation. Then the injection of liquidity was immense and the markets rallied for a time before declining. Between January 2001 and June 2003 the Fed reduced interest rates 13 times to the lowest levels for some 300 years (in real terms) in order to avoid recession and to create the largest asset bubbles in world history encompassing both the equity and property markets and spilling over to other economies.
Fighting for funds
From 1971 onwards America has transformed itself into an asset economy based on credit. Its positive trade balances, essential for the repayment of debt, have become negative. In 2004, its trade deficit amounted to $666.2 billion, the largest negative trade balance in history and 22 percent higher than in 2003.
Since 1990, the US economy has been 'driven' almost entirely by the biggest injection of new debt in history. In 2004, total American debt amounted to over $40.1 trillion, 66 percent of which has been created since 1990. This equates to $136,479 per head of population of the US - per man, woman and child.
In order to repay this debt the US will have to sell most of its assets, although history points to another way this situation can be resolved. When Julius Caesar started his unprovoked war on Gaul in 58 BC he seized enough gold from the countries harboring the terrorists to repay all of Rome's debts. Cycles repeat.
