economy

 

In Part I of this two-parter a coming currency collapse and accompanying sovereign bankruptcies were discussed. This part discusses why a currency collapse is nearly certain and what options and motivations government has to avoid or facilitate such an event.

Whether the coming collapse is slow and orderly or takes place rapidly and haphazardly is not possible to foresee. As one wag observed, these things happen slowly until they do not. Thus, most people will not realize what is happening until it is too late.

What is clear is that a currency debasement strategy, the subtle and age-old way to default on debt obligations, has been selected by Europe and the US. By paying contracted debt back in nominal currency which has been devalued, the lender is being cheated. The monies purchases less than what was anticipated at the time of the debt contract. In essence, the government cheats all debt and fixed contract holders in an attempt to pretend to “honor” their obligations without outright default.

The description of this process is called inflation, and it can be as devastating as an outright default without the stigma associated with a legal default. In essence, the Federal Reserve has practiced this policy since its inception in 1913. From the time of its formation until today, the dollar has lost 96% of its purchasing power. “Lost” is a euphemistic term to hide the fact that the government has stolen this amount from its citizens, especially lenders and those living on fixed incomes.

There is political motivation to develop a new reserve currency by all countries other than the US. No existing currency other than the dollar can serve this role today. Regional currencies, ala the Euro, are possibilities. So too is a new one-world currency. Statists and one-worlders have pushed for this latter solution long before this crisis.

It is unlikely that a change of this sort can occur quickly because of politics. It is also ironic that such a change would put most of the world on a system akin to the failing Euro. Never mind that the Euro will fail; politicians always believes they are stronger than markets and economics. History always demonstrates the fallacy in such delusional thinking.

One thing is certain: the current situation cannot hold much longer. We are headed for sovereign defaults in numerous countries. The US, even with their dollar hegemony, cannot escape this fate.

It is impossible to reasonably forecast what will happen. Every day brings more pressures that are harder to containvia the old tried and trusted methods of “sweeping the problems under the rug.” The rug is now bulging with all the debris it contains. We edge closer to a worldwide currency collapse. There are no good options, at least from the political perspective. Here are the main options left:

Belt-tightening

Governments could slash spending and social programs to the bone. That is the only real solution to the problem, but it is considered “impractical” or “impossible.” In the case of the U.S., it would mean halving  current government spending, including dramatic changes to social security and medicare. Changes of this magnitude will not happen because no politician has the courage to undertake such actions.

After almost a century of convincing citizens that government is the source of goodness and wealth, it is impossible to reveal the obvious — “we lied; there is no Santa Clause. Blood in the streets would ensue among a populace that is convinced it is entitled to live off others. Any other watered-down solution is nothing more than can-kicking, an attempt to buy time without truly addressing the underlying problems. These politically palatable half efforts might buy some more time but only at the expense of greater future pain. What is the point of buying time if it does not advance a solution?

Benign Neglect

Ignoring the obvious is exactly what caused us to reach such extreme danger. In this scenario the political class continues funding whatever Continue reading »

 

“Talk of a recovery is Orwellian in its deception.” So says Jim Willie in his lengthy piece dealing with the collapse of the US and probably the rest of the civilized world.

Mr. Willie is bold in his predictions/assertions, a style that has characterized his writing. To be sure, he is often early and sometimes exaggerated in his forecasts. Yet he is a man worth listening to because he provides early warning signals generally long before others. For those who believe I am a doomsayer, read Mr. Willie’s latest missive and prepare to consider me an optimist.

How much of this should you believe? That is difficult to say because I am not privy to all the knowledge that Mr. Willie apparently has. Those areas where I have some familiarity, I generally agree with his dire outlook. The road ahead will be unlike anything recent generations have seen. For most, outcomes likely to happen are unimaginable. To shock yourself out of complacency, read Mr. Willie.

It is up to you to decide how much of this is possible and what actions should be taken to protect yourself and family. All of it is possible, although with varying degrees of probability.

 

To think that civilizations always progress is a sign of ignorance, if not stupidity.

Ludwig von Mises emphasized how proper institutions and incentives were necessary for progress. He knew that progress neither constant nor guaranteed. If institutions and incentives are damaged or destroyed, progress will cease and retrogression will set in.

Henry Hazlitt

History is replete with examples of how societies and civilizations revert to less prosperous times and conditons, often accompanied by rebellion and civil unrest. The Roman empire died from within. Oh, they were overrun but only after their empire had exhausted itself and its resources.

Mises used the phrase “time will run back” to describe the process of losing ground or retrogressing. Henry Hazlitt wrote a fictional novel using Mises’ phrase as the title in which changes in institutions, laws, incentives and freedom all combine to impoverish a previously prosperous and civil society.

Victor Davis Hanson details below how this process is already well underway in his home state. It is not limited to California. The same retrogression is underway in Michigan, Illinois and a number of other states. Inner cities in parts of the country have sections that are too dangerous to visit. The retrogression is underway and the regulatory apparatus and insolvency of Washington is destroying incentives. This process will not stop until the craziness that we call government is stopped.

Civilization in Reverse

In Greek mythology, the prophetess Cassandra was doomed both to tell the truth and to be ignored. Our modern version is a bankrupt Greece that we seem to discount.

News accounts abound now of impoverished Athens residents scrounging pharmacies for scarce aspirin — as Greece is squeezed to make interest payments to the supposedly euro-pinching German banks.

Such accounts may be exaggerations, but they should warn us that yearly progress is never assured. Instead, history offers plenty of examples of life becoming far worse than it had been centuries earlier. The biographer Plutarch, writing 500 years after the glories of classical Greece, lamented that in his time weeds grew amid the empty colonnades of the once-impressive Greek city-states. In America, most would prefer to live in the Detroit of 1941 than the Detroit of 2011. The quality of today’s air travel has regressed to the climate of yesterday’s bus service.

In 2000, Greeks apparently assumed that they had struck it rich with their newfound money-laden European Union lenders — even though they certainly had not earned their new riches through increased productivity, the discovery of more natural resources, or greater collective investment and savings.

The brief euro mirage has vanished. Life in Athens is zooming backward to the pre-EU days of the 1970s. Then, most imported goods were too expensive to buy, medical care was often premodern, and the city resembled more a Turkish Istanbul than a European Munich.

The United States should pay heed to the modern Greek Cassandra, since our own rendezvous with reality is rapidly approaching. The costs of servicing a growing national debt of more than $15 trillion are starting to squeeze out other budget expenditures. Americans are no longer affluent enough to borrow hundreds of billions of dollars to import oil, while we snub our noses at vast new oil and gas deposits beneath our own soil and seas.

In my state, Californians for 40 years have hiked taxes; grown their government; vastly expanded entitlements; put farmland, timberland, and oil and gas lands off limits; and opened their borders to millions of illegal aliens. They apparently assumed that they had inherited so much wealth from prior generations and that their state was so naturally rich, that a continually better life was their natural birthright.

It wasn’t. Now, as in Greece, the veneer of civilization is proving pretty thin in California. Hospitals no longer have the money to offer sophisticated long-term medical care to the indigent. Cities no longer have the funds to self-insure themselves from the accustomed barrage of monthly lawsuits. When thieves rip copper wire out of street lights, the streets stay dark. Most state residents would rather go to the dentist these days than queue up and take a number at the Department of Motor Vehicles. Hospital emergency rooms neither have room nor act as if there’s much of an emergency.

Traffic flows no better on most of the state’s freeways than it did 40 years ago — and often much worse, given the crumbling infrastructure and increased traffic. Once-excellent K–12 public schools now score near the bottom in nationwide tests. The California state-university system keeps adding administrators to the point where they have almost matched the number of faculty, though half of the students who enter CSU need remedial reading and math. Despite millions of dollars in tutoring, half the students still don’t graduate. The taxpayer is blamed in constant harangues for not ponying up more money, rather than administrators being faulted for a lack of reform.

In 1960, there were far fewer government officials, far fewer prisons, far fewer laws, and far fewer lawyers — and yet the state was a far safer place than it is a half-century later. Technological progress — whether iPhones or Xboxes — can often accompany moral regress. There are not yet weeds in our cities, but those too may be coming.

The average Californian, like the average Greek, forgot that civilization is fragile. Its continuance requires respect for the law, tough-minded education, collective thrift, private investment, individual self-reliance, and common codes of behavior and civility — and exempts no one from those rules. Such knowledge and patterns of civilized behavior, slowly accrued over centuries, can be lost in a single generation.

A keen visitor to Athens — or Los Angeles — during the last decade not only could have seen that things were not quite right, but also could have concluded that they could not go on as they were. And so they are not.

Washington, please take heed.

— Victor Davis Hanson is a classicist and historian at the Hoover Institution, Stanford University, and the author of the just-released The End of Sparta. You can reach him by e-mailing author@victorhanson.com.

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For anyone interested in learning about Money, Banking and Business Cycles, I highly recommend this book. It is massive and an excellent treatment of the subjects from an Austrian perspective. Furthermore, its price is about 1/3 of what I paid. Outstanding bargain and outstanding presentation.

Money, Bank Credit, and Economic Cycles
Only a few 2nd edition copies remain! Get them while they last!
Jesús Huerta de Soto, professor of economics at the Universidad Rey Juan Carlos, Madrid, has made history with this mammoth and exciting treatise. He integrates sweeping history and rigorous theory to make the good-as-gold case that the institutions of money and banking can be part of the free market — without a central bank, without bailouts, without inflation, without business cycles, and without the economic instability that has characterized the age of government control.

 

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