Hedging Chaos With Gold

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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.

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 of global military spending. Beginning in 1980,
President Reagan started the US on the road to financial collapse,
borrowing heavily in order to fund the US military buildup, an act
of fiscal irresponsibility that would later prove fatal. In his
two terms, Reagan increased the US national debt by 258%, the cost
of which would be the loss of America’s economic power-base.

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.

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.


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 debt collectors.

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.

the rest of the article

9, 2010

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