Economic
Lessons #1 - How can the US run such a huge debt?
Robert
Denner
Reposted
from CollapseNet
7 June, 2012
This
is such an obvious question. Yet how many people on CNBC or CNBC have
ever answered it for you? You are left to assume that the US is such
an incredibly efficient and hard working nation, that everyone trusts
us to pay that debt off at some point in the future…. Right?
Anyone? Bueller?
(Ferris Beuhler’s Day
Off reference
for our non-US readers).
This
is such an obvious question. Yet how many people on CNBC or CNBC have
ever answered it for you? You are left to assume that the US is such
an incredibly efficient and hard working nation, that everyone trusts
us to pay that debt off at some point in the future…. Right?
Anyone? Bueller? (Ferris
Beuhler’s Day Offreference
for our non-US readers).
It
is a long and boring story of how we became the largest debtor on the
planet. I will do my best to make it understandable and possibly even
exciting. Because understanding this subject is the first step to
your awakening; once you understand, the answer to the question I
posed above, it will forever change how you view the United States
and how we run our foreign affairs.
Remember
that this is a high-level history/economics lesson and should not be
seen as an academic piece. I will have to glaze over some parts of
history and make some imperfect analogies. But in the end, if you
have an inquisitive mind, this article should spark an interest to
dig further and to keep learning.
The
story of the United States as we know her today starts not
surprisingly before the Great Depression. We are taught that the
Great Depression was started on Black Monday October 28, 1929. We are
further taught that the Depression was caused by the irrational
exuberance of the roaring 20’s and the system crashed as everyone
started selling everything at the same time.
This
is true to a point. But it is like saying the plane crashed because
air stopped flowing over the tops of the wings. Well no shit the
plane crashed because there was no airflow. WHY DID THE AIR STOP
FLOWING is the question you really need to know the answer to, and it
is here that we will start our lesson on why the United States can
run such a huge debt.
I
will save the Great Depression and the great deflationary collapse
for another lesson. I will just give you some high level points that
should be understood about the 1920’s and 1930’s. The most
important thing to understand about pre-1920’s world economics is
that Great Britain was the big dog in the world. The British Sterling
Pound was to the world what the US Dollar is presently. Great Britain
held sway over the entire world’s markets, her naval fleet, and was
at the center of a worldwide system that extracted the wealth of the
then third world and brought it back to the home island. However,
there was a problem brewing in Great Britain as the 1920s started.
The UK was overextending themselves at almost every single turn. They
were carrying a huge debt burden that in the past was never a
problem.
In
the past, Great Britain just needed to pull more third world nations
under her “protection” and they could extract more wealth to keep
their debt in check. The game they were playing started to end in the
1920’s as people started to question the British Sterling Pound
system that was at the heart of international commerce during that
time.
Again,
I will skip some very important history here to keep the story
moving. Just understand that it was the collapse of the British
Sterling Pound system, which directly led to the Great Depression and
ultimately World War 2.
By
the1930’s almost all of Europe was caught up in a massive
depression and towards the end of the decade, open war. In the United
States, the 1930’s saw a massive economic depression the likes of
which our country had never seen. Our history lessons state that FDR
saved the country through his miraculous government spending programs
and his non-stop intervention in the US economy. The reality was (as
it is now) that nearly all of the programs initiated in the 1930s
failed miserably. It wasn’t until December 7, 1941 that things
started to turn around for the United States.
I
will come back to this period in time during another lesson, as it is
deserving of probably several articles. I know FDR is seen by many as
a figure beyond reproach. And on some levels he was. I just don’t
want to detract from the lesson here by getting bogged down with
debates regarding FDR, The Depression and World War II.
We
will flash forward towards the end of the War and 1944. It becomes
apparent to the eventual victors of the war (France, US, and England)
that if nothing is done to prevent it; another Depression is going to
take hold as millions of men return home to factories that are no
longer producing tanks and airplanes. The ultimately victorious
allies met in a place called Bretton Woods, New Hampshire, where they
hammered out the framework for an international monetary system to
replace the failed English system.
Since
the United States was the largest economy at this point and had such
a deep and strong economic base, it was decided that the US Dollar
would act as the world’s reserve currency. This is beyond important
to grasp, as it is this crucial fact that underpins our entire
existence to this day.
What
is a Reserve Currency?
To
put this in easier terms to understand, let us use trading cards as
an example. Let’s say we have 10 different people wanting to trade.
You have Pro Bowling Tour trading cards, one of the other guys has
Pro golfer trading cards and another guy has Pro Hockey trading
cards. Now nothing against people who trade these types of cards, but
they are not the most popular trading cards in the world. I ON THE
OTHER HAND HAVE BASEBALL TRADING CARDS! Everyone on the planet
whether they actually like baseball or not, will understand the worth
of valuable baseball cards. So in this world we decide that my
baseball cards will be at the center of our trading system.
Everything
is “denominated”(meaning the price is fixed on this currency) on
BOB’S BASEBALL TRADING CARDS. So if you want to buy gasoline for
your car, your Pro Bowling Tour trading cards are no good. You have
to trade them in for Bob’s trading cards first. With Bob’s cards
in hand, you can then go and buy your gasoline.
The
guy selling the gasoline can then use those cards to buy other
things, as Bob’s baseball cards are very valuable. OR he can just
sit on them and hope they continue to gain in value, which they do
for decades.
So
relating this back to the real world, what does this mean? Well after
1945 and the end of the war, the victors decide to place the US
Dollar as the reserve currency of the world. This means that all
commodities like oil and wheat and gasoline and gold and silver and
all the rest are primarily denominated in US Dollars.
So
if you are a country without oil or gasoline and you are in need of
these things, you must trade. At this point in time, the United
States was by far the largest oil producer on the planet. The US
controlled the international price of oil. Regardless of whether you
bought the oil from the US or the fledgling oil producer in the
Middle East, you purchased that oil with US Dollars. So if you are
French and you are buying oil from Saudi Arabia, the transaction must
be done in US Dollars. This means that you must exchange Francs
(France’s monetary unit before the Euro) for US Dollars.
There
was a lot that went into determining the relative worth of a
countries monetary unit and I won’t bore you with the details
today. Suffice it to say there was a market that determined what the
Franc’s worth was, compared to the US Dollar. So as a French
company in need of oil, you exchanged Francs for USD (US Dollars) and
you purchased your oil from Saudi Arabia. Now Saudi Arabia is sitting
on a bunch of USD’s and they have very small needs as they are a
somewhat simple country. They have two choices. They can spend it on
lavish palaces or building up a military OR they can save it for a
rainy day. Saudi Arabia in those days did both. They bought US
military hardware to protect themselves from their neighbors AND they
sent the USD’s back to the United States and bought US Treasuries.
Either
way, those dollars ended up back in the United States. The first
method helped to prop up arms dealers and manufacturers in the United
States and employed hundreds of thousands of American’s in high
paying military contract jobs. The second method helped the United
States take on an almost permanent debt load. Remember that US
Treasuries are nothing more than US Debt that is sold on the market.
The holders of US Treasuries are promised a modest return on their
money over a period of 1,3,5, 10 or 30 years. The US wracks up 1
billion dollars in debt and it sells treasuries on the market to help
cover that debt. It only has to payout when the Treasury matures.
Saudi Arabia was known to buy long term US Debt in the 30-year range.
This
meant that so long as they had confidence in the US economy, they
would continue to make more money the longer they kept their money in
US Treasuries. And this was the same for anyone else that held US
Dollars. Remember that from 1946 until the late 1960’s, the United
States was far and away the largest exporter of everything from
Automobiles and Televisions, to Grain and Petroleum products.
During
this timeframe, it was a net benefit to hold US Dollars in the form
of Treasuries, because our currency was by far the most stable and
paid the best return. And our needs became insatiable as the Cold War
churned on and on. From the end of World War II, we had the Korean
conflict and the Vietnam War, which were huge deficit creating
events, but we also had innumerable smaller conflicts and covert
operations that cost the US tens of billions of dollars. ALL OF THIS
WAS FUNDED BY THE US DOLLAR RECYCLING SYSTEM.
We
could run huge deficits, because our currency could be created at
will by creating debt in the form of US Treasuries. These treasuries
were usually in demand as US Dollars were stacking up in foreign
banks with nothing else to do with them. If they weren’t buying US
Treasuries, they were buying US military hardware or the growing
number of consumer goods like refrigerators and washing machines. The
entire western banking world (and all its subordinates around the
world) centered on US Debt creation. It is the lubrication that keeps
consumption rolling on and on.
This
system worked wonders throughout the decades of the 1950’s and
1960’s. It wasn’t until the last part of the 60’s and early
70’s that cracks began to appear on the surface of this “wonderful”
system. Much like the English system in the 1920’s, people began to
question the debt load of the United States and the diminishing
prowess of our manufacturing base. It was at this time that the US
also stopped being a net exporter of Oil.
The
combination of these two events (US becoming a CREDITOR nation
importing more than we exported, and the fact that we CONSUMED more
oil than we produced) that led to a near collapse of the Bretton
Woods system in 1971. It was triggered by France, and their
reluctance to buy US Treasuries with their spare US Dollars. Instead,
they demanded the gold equivalent of those US Dollars. This would
have been catastrophic had it been allowed to happen. Because there
was way too many US Dollars out in the system to be all converted to
Gold. And it was feared that if France was allowed to cash out USD’s
for gold, that there would be a rush of other countries doing the
same.
In
reaction to this panic, President Nixon closed the so-called Gold
Window; meaning that the US would no longer convert USD’s for gold
on the international markets. This led to a financial crisis that
many feared would lead the world back to 1929 and the worldwide
depression. The leaders of the financial world met back in Bretton
Woods NH and hammered out another agreement.
It
is this agreement that has led the United States to wrack up an
astounding 16 trillion dollar national debt (nearly 70 trillion if
you count unfunded liabilities, such as Social Security and unfunded
wars). The agreement was called The Bretton Woods Agreements and was
signed on to by nearly all the major (and minor) economic powers of
the world.
It
is a system that no longer relies on Gold as a backing for
international currencies. It is strictly a paper system that pits one
currency against another, based on relative worth as determined by
the open markets.
But
there is something the world forgot. Or more likely, they couldn’t
figure out how to extricate themselves from the hole they found
themselves in. They forgot that the US Dollar still denominated every
single thing of worth on the planet. The biggest of which was (and
still is) OIL. By the 1970’s it was OPEC that was determining oil
prices world wide, and the United States had to come up with a way to
keep these small oil rich countries from sinking the US into another
Great Depression.
The
answer was PETRO DOLLAR RECYCLING. This is a term I am sure you all
have heard but maybe you don’t fully appreciate what it means. If
you are familiar with Mr. Ruppert’s work on narcotics, I am sure
you have heard the term Narco Dollar recycling. It is the same
concept. Starting in the mid to late 1970’s the United States made
hard agreements with Saudi Arabia and in essence agreed that an
attack on the Middle East was the same as an attack on the United
States itself. Known ultimately as the Carter Doctrine (officially
announced in 1980), it was understood that any country that messed
with Saudi Arabia or any of the other large oil producers in the
Gulf, ran the risk of being on the receiving end of the United
States’ military might.
To
this day, it is what keeps the Bretton Woods agreement in affect.
From the 1970’s to this day, our entire existence is shaped by this
agreement. What this meant was from that day forward, DEFICITS IN THE
UNITED STATES DID NOT MATTER.
It
took nearly half a decade for this agreement to cement itself and for
the economies of the world to start to stabilize and in the end it
took the economic genius (insanity) of a group of men that surrounded
a new president in 1981 to fully utilize the power the world had
given the United States. It became known as either “morning in
America” or “voodoo economics”. It was a realization by those
in charge in the United States that they held the reigns of a never
ended money-printing machine that could literally continue forever.
If
you look at every single chart regarding debt and spending in the
United States, you would see a steady and never-ending acceleration
of debt and spending starting in the late 1970’s and continues
right up to the minute I typed this sentence. The world gave the
United States carte blanche to spend at will… WHY? Because there is
no other option.
If
you are Greece and you want to buy oil from Kuwait, you must still do
so in US Dollars. You must exchange euros for US Dollars first, buy
the oil from Kuwait and then Kuwait has pretty much one of two
options on what to do with those dollars. They either buy US Military
hardware, or they buy US Treasuries.
So
the insatiable appetite for oil worldwide only strengthens the United
States with every single transaction. It allows us to spend over ONE
TRILLION DOLLARS more than we take in every single year. The amounts
are absolutely irrelevant though. We could move the bar to TWO
trillion and the system could still keep pumping away.
WHY?
Because at its very heart is military force. It is why we invaded
Iraq after 9/11, it is why we threaten to invade Iran. It is why
Iceland was punished for turning its back on the system several years
ago, and it is why Greece is being forced to eat Austerity instead of
doing what is in its best interest and throw the Euro overboard and
shirk its “responsibility”.
Without
the world accepting US Dollars as an intermediate for payment in the
global economic system, the US and by proxy the entire US connected
world would fall into a complete and devastating global depression
the likes of which have never been seen.
That
is the stakes they are playing against and is why you are here. It is
why you should be religiously working towards local solutions to the
problems that face you and your community. Because just like the
British system in the 1920’s, the US System is going to fail and
when it does it will make the Great Depression look tame. And the
unfortunate end to most global monetary systems is war and famine.
If
you look at history through the lens of economics and monetary
systems, you will see that what we are living through right now has
happened countless times. Just never on the global scale, we are
threatened with now. Almost to a one, there is a war that meets the
end of any global or regional monetary system’s demise.
It
can happen again. Only the stakes are so much higher now than they
were even during World War II. I wish this lesson could end on a
happier note, but reality is reality. Moreover, ignoring history can
be fatal to ones family and friends (and one’s self); best to
understand the stakes and the dangers and move forward with a plan
that can insulate you from the worst of what may be coming our way.
Sorry
for the length of this post and if you made it this far, please drop
me a note below and tell me what you think. This feedback will help
me construct better lessons in the future.
Robert
F Denner
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