[Erich Simon has contributed some appropriately grim essays in the past. In the commentary below, he surveys the economic landscape as America’s descent into bankruptcy picks up speed. There will be no escaping the ravages of Depression, he says, even for those who have piled up gold against events that may lie beyond imagining. RA]
Beginning in 1995, the Federal Reserve financed the arrival of financial Star Wars, leveraging fear over the Y2K computer bug. The spending spree that ensued bankrupted the last greatest nation on earth. To fuel it, global currencies were juggled, gold was suppressed (until 2004) and equity markets were pumped with hot air. The euro, a fallback currency, was invented in case of a dollar rout. With debt force-fed into economies of the East and West, the 30-year Treasury Bond was retired in 2001 to circumvent a possible collapse of auction demand.
The job of the Fed is to disburse “wealth”—i.e., scarce national resources denominated in indigenous currency. Currency gives physical form to the work, and resultant savings, to construct a national means of production. The Fed is charged with maintaining the status quo, a quality of life that has in fact been trending downward for both rich and poor since the supposedly mild recession of 1991. Not long thereafter, free markets gave way to manipulated markets, which today are giving way to de facto markets. Wealth was ripped out of the pockets of savers, retirees and everyone else. And then it was spent. Military contractors — along with the trinity of Wall Street Greed, Washington Corruption and Corporate Machiavellianism — were vastly enriched by The Great Campaign to realign global-resource scarcity and human draw.
This time, supposedly, it was going to be different. The rising tide of prosperity would encompass the whole world. In fact, the only thing that was different was the surreal “wealth effect” of inflated paper assets shortly before the world flared into ruin. The dot.com boom and global McMansioning were decidedly inflationary — the smokescreen that allowed the Masters of the Universe to build the banking system’s version of a perpetual motion machine. It was fueled by arcane and incestuous debt operations that enjoyed the endorsement of U.S. Treasury secretaries Robert Rubin and Hank Paulson, among others. The supply of dollars mushroomed out-of-control between 1995 and 2002, but there was a long lag before the bank crash finally arrived in 2008. It lopped about 42% from the value of the U.S. dollar.
Seekers of Handouts
When the smoke cleared in 2008 there was little remaining of the U.S. economy besides seekers of handouts from The Government. The Obama Administration generously obliged, conjuring up $7.5 trillion in digital dollars to bail out all institutional comers except Lehman Brothers. Global production fled to the lowest-wage countries, inducing a Third World manufacturing frenzy and a subsequent collapse in product quality. Equity markets have continued to rise, goosed by negative real interest rates. The global complexion has taken on the pallor of death while clueless economists continue to “kick the can” down the road. The Fed has engineered a beguiling inflation amidst broader and more powerful currents of deflation.
It has also expropriated the wealth of America’s Middle Class for fiscal purposes, driving savers into penury in the process as they cope with inflation at the consumer level while receiving almost no return on their nest eggs. Once savers are tapped out, within 24 months they will have to liquidate. Blood will indeed run in the streets, but not until every last dollar of savings and disposable income have been stripped from private hands. Gold bugs will be similarly gutted, notwithstanding any fleeting blow-off in the price of bullion. Thereafter, risk will be repriced into the markets, the Fed having been forced, finally, to take a hands-off approach.
Before the greenback is ultimately carried off with the trash, it will find temporary value through relative advantage against other currencies and from rising interest rates. Meanwhile, it will serve as sovereign coupon to the military state, translator of our new state of rationing and barter. The dollar even now no longer reflects national endowment of scarce natural resources, collapsing or gone, but rather endowment by decree. When interest rates and remnant social-wealth-(re)distribution converge over the next 24 months, the 99% will be bankrupted. This is the real secular change happening now, a nation verging on the epiphany that there is little left to lose.
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And PS: Thanks again Erich for the article that seems to have heated up Ricks site the past few days. Looking forward to the next.