Darryl Robert Schoon
Posted Aug 5, 2010
…what if history is not cyclical and slow-moving but arhythmic, at times almost stationary, but also capable of accelerating suddenly, like a sports car? What
if collapse does not arrive over a number of centuries but comes
suddenly, like a thief in the night… dramas lie ahead
as the nasty fiscal arithmetic of imperial decline drives yet
another great power over the edge of chaos.- Niall Ferguson,
July 28, 2010
The nasty fiscal arithmetic of imperial decline that Harvard professor Niall Ferguson refers to is
America’s unsustainable debt. Growing levels of debt according
to Ferguson are now about to drive the US, like other great powers
before it, over the edge of chaos; an event Ferguson believes
will come sooner rather than later.
…most imperial falls are associated with fiscal crises…empires behave like all complex adaptive
systems. They function in apparent equilibrium for some unknowable
period. And then, quite abruptly, they collapse.
In 2010 the U.S. government is expected to issue almost as much new debt as all other governments, around the world, combined
The resemblance between the above chart and the following is obvious - except, of course, to those in
denial. [see them
side by side here]
The US borrows 45 % of all moneys borrowed by all governments and spends virtually that same percentage
After WWII, both the USSR and the US spent vast amounts of their respective GDPs on military expenditures.
Bankrupted, the USSR collapsed in 1992. Three decades later,
the US now faces the same fate.
America’s pending bankruptcy reflects America’s shift from the world’s creditor to its
largest debtor. Prior to Reagan’s military buildup, the
US did not need to borrow to support the global deployment of
its military; instead, in order to do so the US spent its entire
hoard of gold - 21,775 tons.
The only gold the US now possesses is there because in 1971 the US refused to convert its remaining
gold for dollars as required under Bretton-Woods; and by the
time Reagan was elected, the US could pay for its global military
force only by indebting itself to others
When Reagan took office, total US debt was $980 billion. Today, the budget deficit for this fiscal year
alone is projected to be $1.4 trillion. After the Reagan presidency,
the US accelerated its spending until sovereign default or currency
debasement are its only options.
SOVEREIGN DEBT SOVEREIGN DEFAULT SOVEREIGN DENIAL
The Emperor has no clothes, i.e. the empire has no money
The publication of Rogoff and Reinhart’s seminal work on sovereign debt in 2008 predated the sovereign
debt crisis by two years; and if Rogoff and Reinhart were not
surprised, they would be surprised that it would be industrialized
nations that would find themselves under the scrutiny of global
In 2010, sovereign default concerns unexpectedly shifted from developing nations, i.e. Rogoff and Reinhart’s
sovereign rite of passage, to industrialized nations -
Greece, Spain, Italy, the UK, the US, and Japan etc.
The shift in sovereign debt concerns was accompanied by another extraordinary shift. Between 2000
and 2010, China became America’s creditor as well as its
sweatshop; and China knows that the US owes so much money that
only by borrowing more can it pay what it owes, a condition economist
Hyman Minsky called ponzi-financing, the last stage prior
to debtor default.
In truth, the US is not the default virgin described in Rogoff and Reinhart’s study. The US default
on its gold obligations was perhaps the most important monetary
default in history, plunging the entire world into a regimen
of fiat money against its will
Sovereign default, however, is not the only strategy available to the US regarding its unpayable debt.
The US could alternatively pay down its massive obligations by
debasing its currency, a strategy wherein the US would pay its
creditors with increasingly worthless US dollars - to the US,
a far more convenient solution.
This is why China is worried - and the rest of the world (including Americans) should be worried too.
BORROW BORROW BORROW SPEND SPEND SPEND
No one will be surprised when the US again tries to borrow its way back to economic growth. This has
been the default strategy of the US ever since Ronald Reagan’s
Treasury Secretary, Donald Regan said, “Deficits don’t
matter”, a financial heresy that would eventually undermine
the American economy.
Capitalism is an uneasy balance between credit and debt. However, in the 1980s, far more credit was created
and far more debt resulted. Combined with the removal of gold
as a constraint on monetary growth, it would be only a matter
of time until capitalism’s accrued debt would overwhelm
the capacity of credit to contain and service it. That time has
Bankers have unleashed a beast they cannot contain. The beast is of their own making although they are careful
to deny their patrimony. The bankers’ deflationary black
hole of defaulting debt is now destroying capital faster than
bankers can create it.
This is why Fed Chairman Ben Bernanke is contemplating flooding the US economy with even more printed
dollars, the so-called helicopter drop of money (Milton Friedman’s
term), the proscribed solution of Milton Friedman to the Great
Because Friedman observed that the money supply had contracted during the Great Depression, Friedman erroneously
believed sufficient monetary expansion would prevent another
depression in the future. This is why Bernanke flooded the US
with money and credit in 2009 hoping Friedman was right.
But Friedman was wrong. Bernanke’s palliative was temporary, producing only a short boost instead
of a sustained recovery. Despite trillions of dollars spent and
interest rates lowered to zero, the US money supply is still
contracting - and the US economy is again slowing.
Despite Friedman’s failed theory, Bernanke still believes more injections of credit and debt can
Can you hear the helicopters coming
Sounds of choppers fill the sky
Whirling birds of destruction
This is how currencies die
Printing money is easy
The problem is the debt
Money’s source is credit
You ain’t seen nuthin’ yet
Bernanke’s dream is our nightmare
His solution is our demise
Helicopters filled with money
Dropping from the skies
THE GOLDEN HEDGE AGAINST CHAOS
In The Critical Path (St Martin’s Press 1981) Buckminster Fuller predicted the world’s power
structures would fall, plunging the world into an unprecedented
crisis. Communism collapsed in 1992. Now, capitalism is about
to do the same. Bucky’s predicted crisis comes next.
In The Great Wave (Oxford University Press 1996), Professor David Hackett Fisher observed we
are at the end of a great wave - a phenomena that separates historical
epochs, a phenomena which always end in the complete economic
collapse of the existing order. Great Waves last 80 to 120 years.
The current wave is 114 years old.
At the 2010 Aspen Ideas Festival last month, Harvard Professor Niall Ferguson warned the collapse of the American empire could be imminent.
I think this is a problem that is going to go live really soon,” Ferguson said. “In that sense, I mean within the next two years. Because the whole
thing, fiscally and other ways, is very near the edge of chaos..
When America’s empire does collapse and, like all empires, it will, chaos will reign. Today, the
US is the world’s super power, its dollar is the world’s
reserve currency. The collapse of the US will change all this
This is why the price of gold has quintupled in only ten years. America’s failing grasp on power has
been mirrored by gold’s rise during that same time. In
2000, America’s credit-driven prosperity began to falter
with the collapse of the dot.com bubble. Ten years later, America
has still not recovered. Indeed, as Niall Ferguson predicts,
its demise is imminent.
Since the 1980s, the US has conspired with others to suppress the price of gold as it is an indicator
of the failings of the fiat financial system upon which its power
is based. This is akin to doctors icing the thermometer to convince
others that the patient is not in danger; and while they have
been successful in so doing, the patient is now about to expire.
When the US empire implodes, the global geopolitical matrix will collapse as will much of the world’s
financial underpinnings. It will be a time of chaos; and gold
- history’s hedge against chaos - will again perform its
RESPONSIBILITY AND RENEWAL
In an extraordinary mea culpa published July 31st in the New York Times, President Reagan's
Director of the Office of Management and Budget, David Stockman,
a Republican, blamed his own party for four critical errors that
contributed to America's decline:
The errors are as follows:
The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with
the world. It is.. an outcome that Milton Friedman said could
never happen when, in 1971, he persuaded President Nixon to unleash
on the world paper dollars no longer redeemable in gold or other
fixed monetary reserves. Just let the free market set currency
exchange rates, he said, and trade deficits will self-correct. [But] relieved of the discipline of defending
a fixed value for their currencies, politicians the world over
were free to cheapen their money and disregard their neighbors…
The second unhappy change in the American economy has been the extraordinary growth of our public debt…This debt explosion has resulted not from big spending by the Democrats,
but instead the Republican Party’s embrace, about three
decades ago, of the insidious doctrine that deficits don’t
matter if they result from tax cuts…
The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector…the trillion-dollar conglomerates that inhabit
this new financial world are not free enterprises. They are rather
wards of the state, extracting billions from the economy with
a lot of pointless speculation in stocks, bonds, commodities
and derivatives. They could never have survived, much less thrived,
if their deposits had not been government-guaranteed and if they
hadn’t been able to obtain virtually free money from the
Fed’s discount window to cover their bad bets.
The fourth destructive change has been the hollowing out of the larger American economy…It is not surprising, then, that during the last bubble (from 2002
to 2006) the top 1 percent of Americans - paid mainly from the
Wall Street casino - received two-thirds of the gain in national
income, while the bottom 90 percent - mainly dependent on Main
Street’s shrinking economy - got only 12 percent. This
growing wealth gap is not the market’s fault. It’s
the decaying fruit of bad economic policy. Read
Stockman’s mea culpa is an unexpected admission of political responsibility especially
at a time when Americans are searching for someone to blame.
But there’s no one to blame except America itself. The
Russians aren’t responsible, the Muslims aren’t responsible
and guess what, illegal immigrants aren’t responsible either
- America, and America alone, is responsible for its own demise.
America was born out of the desire for freedom and a better life for all (apologies, however, are due
to the Native Americans and the African slaves who suffered in
the process). But, along the way, America chose to instead pursue
power, not freedom; and, today, the considerable bill for America’s
fatal choice is coming due - and more paper money won’t
God save America from itself.