December 19th, 2014
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Britain Becomes the First to Choose Deflation

by Rick Ackerman on June 9, 2010 2:36 am GMT · 107 comments

[Over the last three years, the Federal Reserve has conjured up trillions of dollars of funny money in an attempt to breathe some inflation back into the economy. The attempt has clearly failed. Now, it would appear, Britain has become the first country to throw in the towel on fiscal and monetary black magic. In effect, the country has decided to let deflation take its course, allowing the chips to fall where they may. In the essay below, "Cameroni," a frequent contributor to the Rick’s Picks forum, takes a close look at the decision and what it will mean not only for Britain, but the world. He concludes with a list that spells out what to expect, and the kind of pain we will experience as the world’s financial system comes very slowly back into balance in the years ahead. If his predictions are borne out, the standard of living is about to fall sharply for billions of people around the world RA]

David Cameron’s new Government in Britain announced Tuesday that it will introduce austerity measures to begin paying down the estimated one trillion (U.S. value) in debts held by the British Government. Lets let that sink in for a moment, for it is a stunning announcement. Now repeat it:  Britain will introduce austerity measures in order to eliminate the deficit and begin paying down the national debt. And that being said, we have just received the signal to an end to global stimulus measures — one that puts a nail in the coffin of the debate on whether or not Britain would “print” her way out of the debt crisis. That would have virtually guaranteed an eventual hyperinflation that would have spread to all Western nations, destroying the U.S. dollar as the world’s reserve currency in the process and ending several hundred years of Western economic dominance.

Be prepared for bare shelves in deflationary times

This is actually a celebratory moment although it will not feel like it for most. But wait. The U.S. did not say it would pay down its debts. And anyway, everyone knows that debt pile is too large to ever be repaid. They are wrong. And the U.S. does not need to send any particular message at this time anyway. The U.S. has been in a deflationary spiral since 2006, having discovered that nothing, not even oil flooding the Gulf, a nuclear North Korea threatening war, campaigns in Afghanistan and Iraq, nor threats that Israel might one day bomb Iran and shut down the oil pipe, can pump up energy prices enough to drive future inflation or save the economy the old-fashioned way. Not nearly enough to escape the gravity of the housing and asset collapse anyway.

‘Time to Rejoice’

We have run out of the ammo of cynicism and old-style politics. Debts will have to be paid. Creditor arrangements will be made, concessions granted, standards of living will decline and countries will be sent to the table to bargain in a cooperative effort to resolve credit imbalances. There will be horse-trades, payments out of key commodities and access granted where previously it has been denied. There will be recovery eventually and it is a better future than what a hyperinflation would bring us all. And yes, the bills will be settled. Time to rejoice.

To my way of thinking, the U.S. will not, cannot, resort to regular debt monetization, printing press economics or the eventual and guaranteed destruction of their currency, economy and way of life before attempting first to harness what appear to be insurmountable debts and obligations. That is particularly so if European nations and Britain (first among them) begin taking serious steps toward fiscal discipline and enacting measures of restraint. Many will argue against my theory. They will all be wrong.  And so the English have opted to go with the devil they know. They have chosen a path that means their economy will contract, perhaps significantly.  Unemployment will surge as public sector layoffs and the elimination of programs are required to harness the debt bomb are enacted, and all spending is carefully scrutinized, fleshed away, even eliminated.

Minimal Safety Net

Everything could conceivably be on the chopping block short of core government services, social service spending, basic medical services, pensions and the safety net itself. The debt is just so big that nothing less than all the efforts of Government and the cooperation of the majority of the public in accepting restraint will allow it to work. What does it mean in the wider picture when one of the leading members of the G8 has deliberately chosen the path that signals a deflationary trend — possibly even bringing on a global depression as an outcome of that choice?

As I said, the English have chosen the devil they know, and that is economic contraction. The last serious bout they experienced on that front was of course during the 1930s and again following the Second World War, but over the years, Britain has seen many recessions. Some were deep, and folks may recall the Maggie Thatcher days of fiscal restraint, elimination of public programs and a sell-off to the private sector of everything from coal mines to railways and airlines.

Hyperinflation ‘Devil’

The devil the British does not know is hyperinflation — not up-front, ugly and in their faces, anyway, but only anecdotally from the experience of others. No major modern economy in the West has ever hyperinflated. The exception, Germany, did so only under duress brought on by destructive and debilitating reparations following the First World War. Nobody wants a repeat of that. So this is actually a relatively safe move from that standpoint.

Those other nasty outcomes are already too well-known from readings of the history of the Weimar Republic: a complete destruction of the currency there resulted from ill-conceived “fixes” followed by a total failure of the financial, investment, banking and insurance systems. Printing press solutions led to widespread public misery and hunger. Bond and debt defaults were manifest and eventually the worst insult was when the country was saddled by an inability to borrow and rebuild following its confidence crisis. Last came radicalism and political instability as the people demanded solutions to all their problems.

Social Collapse Possible

We know too that hyperinflation can lead to chaos and social disorder. Nor is social collapse out of the question under that scenario — particularly with so many people dependent on our existing system, and as the population ages and becomes more dependent on fewer folks of working age. No Brit wants that either. No Brit Government could survive it. The debt must be paid and the burden of that pain will be shared by all. It is the right decision. But at a high cost.

I think it is worth it. The likes of Russia, India, Brazil and China have been working in concert to develop an alternative world reserve currency, buying up gold in earnest, ostensibly to back their claim with real wealth under IMF auspices and the terms of Special Drawing Rights (SDRs).  Success will give them the kind of collective bargaining power that until now has gone automatically to the U.S. because of the dollar’s status as the world’s reserve currency.

So, will we just sit back, punish our creditors through an inflationary default and thus hand them the power and influence to control a new and developing reserve currency; or will we defend our position, pay off our debts fairly (or by concessions) and retain the rights we hold dear? Let’s first ask ourselves the following question: Why must hyper-inflation be the only alternative to deflation?  Answer:  Because governments all over the globe have already tried stimulating their way out of the recent credit crisis and recession to little avail. They have attempted fruitlessly to generate even mild inflation despite huge stimulus efforts and pointless spending.  All they have to show for it is massive additional debt and an unfolding currency time-bomb.

No Buying Our Way Out

Clearly, we cannot buy our way out our debt burden. It is that simple. It has been tried and it does not work. We cannot dig our way out of a hole either. So instead, consumption, the driver of our Western economies, remains sluggish at best, real estate is badly overpriced almost everywhere, and personal indebtedness is strangling the middle classes as unemployment continues to rise along with the tax burden.  It is an unsustainable exercise that will not end well.  We now know it will not work, cannot work and won’t likely be tried again in any significant way except by insane self-serving governments and those that have just run out of creative solutions. It is time to just pony up and pay the piper. This is simply the better (and only reasonable) solution compared to all the alternatives. But it will mean a long, slow and deliberate winding down until solvency is within reach. It will mean cities, states and counties will go bankrupt and not be rescued.

And it will be painful. Public spending will be cut. Consumption could decline precipitously. Unemployment may skyrocket and bankruptcies will stun readers of daily blogs like this one. It will put the brakes on growth around the world. Oil prices will fall along with the prices of most other commodities. Gold could soar while food costs rise as a relative percentage of daily expenditures. The Dow will crash and there will be ripple effects across the European union – and eventually the globe. Hardest hit will be major exporting nations like China and India who depend on Europe and the Americas for their bread-and-butter income. Aid programs to the Third world will be gutted, and I cannot yet imagine the consequences that will bring to the poorest people on earth.

Announcement ‘No Coincidence’

The significance of the decision announced Tuesday will impact every nation on earth. And this is not happening in a vacuum, nor is the timing of the announcement just weeks prior to the G8 and G20 meetings coincidental. The statements made Tuesday are designed to lead, and they will.  The EU is also attempting to bring spending and fiscal controls to its member states. Greece is only the first to face the specter of a declining standard of living, much higher taxes and interest rates, controls imposed from outside its borders, and seriously reduced government spending. But the idea proposed now by the Cameron government has real traction and will gain momentum. Britain is signing on voluntarily and has done so before, its back is to the wall and no good options other than strategic default. I applaud them.

The idea will spread, but with a twist this time: Instead of protectionist stances between governments, there will be more free-trade arrangements. Access to markets will open, not close. Canada itself is in the process of concluding a major trade agreement with the European Union that would include among other things greater labor mobility and freedom from past employment barriers between the partners. Structural change is in the air too. It will be in the interests of all nations to cooperate and not enter into conflicts or trade wars.

This Is the Big One

Anyone who thinks that the massive debts piled up by governments can be discharged easily while we go through a mild recession is flat-out wrong. This is the big one. Markets may respond positively at first, but then that sinking feeling will bring on some very bearish sentiments. This could well occur over the next few weeks. A major global economic contraction will undoubtedly sap the world’s stock markets as reality begins to set in. This is the expected outcome. It will come as a big surprise, though, to all who were certain that uncontrolled spending, stimulus and debt monetization would be the solution chosen by governments to satisfy the electorate. While spoiled and self absorbed, the electorate is not stupid. They will get on board with a solid plan if it is presented in a way that assures them their core interests are protected and offers hope and a better future.

A major reckoning is now a foregone conclusion. The word “reset” comes to mind — and then a long, slow grind from the depths of debt insanity, followed perhaps by an agonizing return to prosperity and economic health. A decade may well be too optimistic a time frame to bring balance back to the old world and economies of the West. Let’s get used to it. We are all in this one together.

So deflation it is. It will come to Canada eventually, too, so let’s start having a real debate about what that will look like and get familiar with the idea. We have already experienced stark restraint in this country in a program that was masterfully crafted by Jean Chretien and Paul Martin in the 1990’s. Sanity was restored after three hard years of belt tightening.  But this next phase will be a much more bitter pill to swallow. We need to look to our leadership to guide us through the crisis as it unfolds. The inflationist camp can now leave the room because none of us can stand to hear their anguished cries, angry foot-stomping and teary, selfish objections. How pathetic!

What to Expect

Here is a very short list of what can be expected — and trust me, this is a much more palatable list than the ones I have analyzed involving an unthinkable and devastating hyperinflation. So put away the placards and protest signs. We all need to get on board with paying down debt like any responsible citizen debtor would do. We owe big-time, and this is but a taste of how it may cost us:

  • Major employment reductions in the public-service sector
  • Rationing of health care services, fewer nurses, health practitioners and support staff
  • Larger class-size in schools, and large reductions in the number of teachers
  • Reduced public pensions and benefits, including social service payments
  • Interest rates that will gradually rise and eventually settle at around six percent
  • Strikes, labor unrest and supply chain breakdowns
  • Widespread unemployment affecting virtually every sector of the economy. No one will be spared
  • An expansion of public works programs and green initiatives
  • Civil disobedience, arrests, targeting of threatening movements by security agencies and government
  • Increasing taxation, particularly on the wealthy and buoyant businesses
  • Shortages of all kinds and the loss of variety on store shelves
  • An erosion in the standard of living for most, but particularly for those who are in debt
  • Cutbacks in military spending, defense, coastal patrols and overseas engagements
  • Cherished programs that governments usually support will be eliminated
  • Larger police forces, prison expansions and a judiciary that is strained to the breaking point
  • Cities, states and counties will be denied bailouts, forcing them into bankruptcy
  • Services that protect the environment, animal rights and special interests will be reduced
  • Universities will close

The list could stretch on and on, but you get the picture. It will be a very difficult and long-lasting correction that will purge waste and inefficiency from the system. Few will be happy, but the alternative is just too distressing to consider. The only thing that will give you true immunity in the mean time is a fat blanket of cash. Be sure to have some. Be liquid. Pay off debts. Rejoice in your good decisions. And live free.

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{ 4 trackbacks }

Canada Poised For Deflation — Rick's Picks
June 10, 2010 at 5:56 pm
Why Deflation then Hyperinflation Will Occur — Rick's Picks
June 10, 2010 at 6:02 pm
Gold Hardly Jinxed By NY Times Feature — Rick's Picks
June 15, 2010 at 12:03 am
World Will Feel the Drag of Europe's Austerity — Rick's Picks
June 24, 2010 at 4:25 am


Rich June 9, 2010 at 9:02 pm

Bonds climbed from 2.519% to 5.066% yields and retracement to 3.888% so far, the definition of a primary uptrend…

david June 9, 2010 at 9:48 pm

Bank of England projected 2.0 cpi…Note actual English cpi 3.7….What gives.Wait its coming very soon the usa will be importing inflation from China India and Brazil as these healthy producer economies are experiencing inflationary growth.What say you Rick, I say we seeit in 6 to 12 months!Chinese salaries doubling hmmm

larry abrams June 9, 2010 at 9:50 pm


—respectfully, you’re f**king nuts. Some people living today in the US and Western Europe have the experience of a major deflationary cycle behind them: the Great Depression. It was horrible beyond words, and what it led to of course was a mainstream Democrat, FDR, embracing the platform of Socialist Party Candidate, Norman Thomas in an largely successful attempt at saving Capitalism. This time, it won’t be so easy.
— I don’t disagree with you that deflation is either coming—or is already here— and that the Markets are probably gonna crater in the short and mid term. But if the West consciously chooses deflation it will take China and India down with it, both politically and economically. All this, on a planet on which the natural world is dying and increasingly we will be facing a struggle for survival of our own species.
—One embraces this scenario at one’s peril.


I didn’t write that essay, Larry, but it is my policy to publish essays that I do not necessarily agree with. In this instance, I share your doubts that politicians will be able to stay the course, paying off debts the old-fashioned way. In fact, the debts are so large that even if they wanted to pay them off, they/we taxpayers could not not. However, given that borrowers are incapable of growing debt at the moment, deflation will out. All the blather about how Bernanke et al. “won’t let it happen” is just that — blather. It is dumbfounding that some people still believe that the Fed is in control of an imploding debt juggernaut that aggregates into the hundreds of trillion of dollars. RA

cameroni June 11, 2010 at 9:48 pm

This response from me to so many writers should actually be comment number 103 but I am going to slip it in at the top of the comments page for the benefit of those who have not yet read all the remarks to my article. It is kind of like an answer from the future to past objections in that sense….

I cannot begin to express how disheartening it was to read some of the responses on my article. Is this really representative of the feelings Americans have of the future? That it is hopeless, that nothing will work and you really are in a terminal economic spiral from which there is no escape? So many objections…so few alternative ideas put forward. Perhaps it is just group-think. Where a few negative comments can lead to a pack mentality of criticism.

There seems to be no end of people that can quote from the record of spending waste, Government error and mismanagement and then frame their objections in light of one school of thought or another about why this or that idea is a pointless waste of time. What Mises, Keynes or Kondrateif and others said is not law though and it is not the final word. The beauty of economics is that it really is more art than science. That means creative solutions can be applied to it’s problems and the course of history can be changed in the process.

Are you really going to allow historical artifacts, dead people and commentators long past their expiry date to rule your decisions today? Is there really no hope left except to allow some implosion of your economy and way of life to occur without any attempt at all to change the direction and the eventual outcome? I now conclude that fatalism and hopelessness is actually winning the day.

Pointing out all the problems is easy. Armchair critics abound. Solving problems though takes leadership, a will and desire to find answers where it appears none exist. And you do have leadership available in spades. So bring em up and promote them.

Where is the hopefulness, confidence and can-do attitude that I have always known Americans to have? There are millions of brilliant people in your country. Cannot anyone see a way out of this mess? And what is wrong with the idea of negotiating with creditors to relieve the debt burden? I alluded to just such a thing when I said there might be horse-trades, concessions granted and trips to the negotiating table. America does after all provide policing and security services to the globe. So why would Americans pay the full cost of those services out of their own pocket. That might be one of many starting points to creditor negotiations. Stop thinking in terms of dollars and cents and how that growing debt will be impossible to service. The answers are out there.

Remember the old Star Trek, where James T. Kirk and crew aboard the USS Enterprise would hunker down and find a solution to the most improbable and impossible of situations? Remember when we all used to believe that creative problem solving was not only possible, but essential. Even imperative. That we could win despite all odds.

What the hell happened to those days? Bring back the reruns for a refresher!

Every country on the planet has an interest in the success of the United states of America. Everyone. Even our state enemies for crying out loud are dependent. First amongst those countries though is China and Japan who are on the hook for a Trillions in loans. And I do know that is the smallest part of the debt. There are the unfunded liabilities too. But lets not consider those obligations as fixed and non variable future debts and obligations. The actual numbers are not written in stone. The US is deflating and will continue to deflate. Housing prices will continue to fall for some time. Money (M3 estimates only) is in decline. Credit is contracting. It spells deflation with a certainty and therefore some future obligations will actually decline in value and not rise.

There is nothing especially surprising either about the the impacts on a declining economy and in particular those impacts I alluded to in the list I provided. And anyway, much of this is already occurring. Is California not already reducing teaching positions, health care services and other programs while suggesting it may bankrupt? Are there not expansions in policing, prisons and security? I did not incidentally say that food shelves would be bare. I said that variety would disappear. The picture provided did not do justice to the actual comments.

The question that Americans have to ask themselves now though is whether or not they support a bailout of troubled States or not. My point is that all of the issues I alluded to are actually happening right before you eyes despite all the efforts of government to stimulate them away. It is a waste of time to object that I wrote about it when it is manifest anyway.

And who says the retirement age as one example should be 65 or even 70 for that matter before pensions kick in? These numbers are also not carved in stone. The rulebook can and will be be changed to suit the new dynamics of the future in the same way it was originally designed based on assumptions of days long past that may not now be achievable. There are no absolute entitlements out of state coffers for anyone. Look at what happened when the Soviet Union collapsed. Pensions in Russia fell to almost zero. I believe the worst number I actually read was 15 dollars monthly. Think that is impossible in the US? Shake your heads. If solutions cannot be found and change cannot be embraced voluntarily then the system by default imposes it’s own lowest common denominator on the population and that becomes the defacto new reality.

A dose of optimism could go a long way right about now. I do not live in a fantasy world as one commentator suggested. I am actually pragmatic and do believe the problem is soluble. Do you all really need to wait until new forces arise to confront the pressing issues of the day and pushes aside old style politics in order to bring reason and sanity back to your countries finances? There is a Tea party movement now and there will be others that evolve as time goes by. They are angry and this suggests to me that both change and instability are in the air. One way or another change is going to happen. It is my opinion that it is better to work towards solutions while they are still in sight than to just wait until absolute default imposes hard choices in the absence of any good options.

Who in their right mind would prefer unpredictable outcomes over difficult but manageable certainties?

So I am going to get out my cheque book now and send Peter Schiff a few bucks. He at least thinks there is still time to make positive changes and he has a very clear vision of the future and understands the risks and ramifications of not changing the economic course of events as they are unfolding. And he is brilliant. So promote him.

We need a new Captain Kirk

My new motto: Peter Schiff for Star-Fleet command!

goldfish June 9, 2010 at 10:41 pm

*** a sell-off to the private sector of everything from coal mines to railways and airlines.***

I think they will now finish the looting.

Pay back the debt? H*ll no.

mike v June 10, 2010 at 4:58 am

A politician said that they will pay off the debt… that is the basis for this article? The first time a politician does something they say they are going to–please please let me know- sorry don’t buy it- its posturing in the purest sense- and that is all-

F. Beard June 10, 2010 at 6:20 am

Austerity so the government backed counterfeiting cartel can be paid off? The solution is to bailout out the victims, savers and debtors not the villains, the banks!

Here’s how to do it:
1. set reserve requirements to 100%
2. Print a sufficient amount of debt-free legal tender and distribute equally to all adults in the population. This will allow debtors to pay down their mortgages to market price levels and would also compensate savers for years of artificially suppressed interest rates.

Debt forgiveness is Biblical (Deuteronomy 15:1, Leviticus 25). I doubt the ancient Hebrews even had fractional reserve lending so the need is even more urgent today when the banks have been able to create endless money and debt to cheat savers of honest interest rates and drive borrowers into debt slavery.


A fascinating idea, Beard. The sum required to buy homes back up to par is probably calculable. RA

F. Beard June 10, 2010 at 7:39 am

” The sum required to buy homes back up to par is probably calculable.” RA

Well, let’s err on the side of generosity, I suggest. The minimum repayment for theft is double in the Old Testament. Note that the banks would be made whole in nominal terms but would suffer relatively in real terms. The long term solution is to repeal legal tender laws, the capital gains tax, government deposit insurance and allow alternative currencies. Money is a very contentious subject and who knows who understands it best? Let’s have liberty in money creation and acceptance and let the free market decide.

mikeck June 10, 2010 at 1:30 pm

F. Beard Wrote: “Let’s have liberty in money creation and acceptance and let the free market decide.”

I could not agree more and that is why I still use Liberty Dollars when I find someone interested in a value for value exchange.


howg June 10, 2010 at 8:22 am

To Confused:

Hi confused, don’t be confused – you are correct.
It is impossible!
Since I am no expert, I may actually understand some of this…

I believe the creation of more debt is simply to buy time, (or perhaps, to pay off high-interest debt with low-interest debt, which is still only buying time).

The only trick here is to allow the writing down of bad debt over time, rather than all at once, which would be a disaster – big time!

So the answer to your question is that it (inflation of money supply) works to avoid disaster, but not to avoid bankruptcy… eventually.

“Easing” the quantity of debt at the moment is the goal right now, regardless of the machinations used. These machinations are all tricks to hide the truth – a truth which you appear to already understand!

It should also be said that a monetary digit has no idea as to its buying power. In the books, a dollar borrowed is a dollar owed, regardless of how it affects the marketplace, or what purchasing power it has at any given moment

Our system of debt-money requires this be done cyclically, regardless of government spending, (exports notwithstanding – this is why all countries must export to avoid bankruptcy).

It is unavoidable, and pointing to excess government spending as the root problem only serves as a smoke screen for the monetary system we now “enjoy”.

Government spending should more properly be looked at as a microcosm of the economy as a whole.
Pretty much all the money they spend is debt, and all the money we spend is debt too.

And when we reach the magic point in the cycle, too much of it is used to pay interest, and not enough is available to us as “money”. Thus, the implosion begins.

Grade 2 math…

We do not have fiat money, (as the Austrians argue), it is fiat debt.
Don’t be confused… you are one of the few commentators that actually understands the root problem! And it can never be repaid by further borrowing – that is correct as well, for both governments and the general economy.

Screws the banks too, in a way.
They cannot possibly ever be repaid – but not to worry.
They never had that which they lent in the first place!
But when they all go broke at once, it can cause problems…

The selling off of national assets is also one of the ways governments reduce their debt load.
They used to call it carpetbagging, but now it is hailed as a great thing.

Go figure…??

In using Canada as an example of austerity, it should also be noted that this was done only after we stopped creating our own money through the Bank of Canada, (1974). The national debt started to soar thereafter, (much like Al Gore’s infamous hockey stick graph – exponential growth ‘ll do it every time!).

Perhaps someone can answer me this:
If all currencies are relative, and if they are all losing value together, then why should basic commodities like food be inflating as they are ?? To the best of my knowledge, there are no shortages per se, (at least, not here in Thailand)


Gary Paul June 10, 2010 at 2:24 pm

This article is ridiculous. Please post such an article AFTER such austerity measures have actually been applied.

Jason June 10, 2010 at 8:51 pm

Stupid argument! Just stupid. Of course you can buy your way out of debt. The UK has a fiat currency. They can make as many pounds as they need. Inflation? Really? With high unemployment to soak up wage inflation?

Punish our debtors? What a joke. They lend credit at risk. The more they lend, the greater the risk for them, yet they still do it. There is no moral issue at stake here.

Basically the author wants to ensure that banks get theirs and everyone else suffers.

Yep, that’ll fix the problems.

Might I make a suggestion?

How about some more deficit spending to stimulate the economy? Tax breaks for middle and lower class (ain’t gonna happen with all those toffs in charge), jobs programs. Don’t worry about hyperinflation until employment levels improve and then tighten monetary policy.

lowervolts June 11, 2010 at 4:49 am

Anyone who has mortgage debt, business debt, student loan debt or who has bought bonds backed by that debt should find a lawyer who understands why most of that type of debt or investment that was securitized was a fraud against the borrower & the investor.

Many borrowers & investors across the US & the world are now having success in the courts against the Wall Strees banks & insurance companies that committed these frauds.

If you’re a deflationist or a hyperinflation believer it doesn’t matter one bit when these Wall Street derivative-contract frauds hit the courts.

Investigate these issues for yourself & the websites I posted below & pass this info along to your friends, business associates & to other websites.

The sooner you do, the sooner we can bring these out of control Wall Street bankers, Insurance Companies & their government puppets back under the control of us citizens!

Francois June 24, 2010 at 8:57 am

Reading your list of “what we can expect” is the recipe for a violent revolution.

Even assuming it could be avoided, how could an economy and society survive and grow again after this devastation?

Joe Blocks June 24, 2010 at 11:10 pm

Everyone is going to reverse the decline of fiat currencies over the last 50 odd years and become more responsible. Rrright

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