Squeeze a human heart, and the slime oozes out.
We weren’t aware that the U.S. Constitution was still in force, but we read that retired General Tommy Franks told Cigar Aficionado magazine that another terrorist attack like Sept. 11th would bring it to an end. We wondered how Americans would bear up under the strain of a financial disaster.
Under pressure, a man reveals the juice — good and bad. A soldier, for example, may tell a reporter he is building a democracy. But threatened by a mob, he reaches for the trigger.
The list of stable paper currencies built by central bankers is as short as the list of stable democracies built by armed invaders. Some basic grease in the human heart seems to work against them. When bankers discover that they can increase the supply of money simply by printing up some worthless paper, they don’t seem able to stop themselves. Soon, there is too much paper and it becomes worthless. And when foreigners invade a country — even foreigners who think they have a better idea how to run the place — the locals seem to resent it. That may not stop us from hoping. But readers might want to check the odds — just in case.
The madness of George II, reigning president of the American government, is that he believes he can do what has never been done. Never mind the grease, says he; with some Ajax and a little scrubbing, the economy and the war effort will sparkle.
Most Americans believe he will succeed. More spending and borrowing will bring a recovery, they think. Somehow, the war in Iraq will work itself out, they pray. Few notice the long odds; fewer still bet against them. What will they do if things go against them? Suppose the dollar falls more and the Chinese stop buying U.S. debt…or actually sell it? What would happen to U.S. spending if interest rates were forced up? How many people would refinance their homes? How many could continue to live in the style to which they’ve become accustomed? How many would lose their homes? How many would lose their jobs — or be humbled into accepting a lower income, and a lower standard of living? How many would blame themselves?
Our worry is not that George II will be proved wrong; we have little doubt that neither of his grand projects will yield a decent return. Instead, we worry what will happen when American hearts are squeezed harder…when the miry clay of disappointment, bankruptcy, depression, inflation, and national humiliation have Americans entrapped, struggling to stand up straight.
“Incompetent central bankers are more lethal even than incompetent generals,” writes our old friend Lord Rees-Mogg in the Times of London this week. “They, too, have their Gallipolis.
“‘We have suffered more from this cause [bad paper money] than from every other cause of calamity,'” Lord Rees-Mogg quotes a dead man, Daniel Webster. “‘It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemy.’
“I have lived through most of the period of the decline of the pound and the disintegration of the sterling area,” his Lordship continues. “It was a long, historic process. Its early stages, which occurred before I was born, have some resemblance to the current state of the dollar. After 1918, Britain was heavily indebted and had lost competitiveness to new economies.
“The U.S. is now heavily indebted, and the debts are growing rapidly. The U.S. in its turn has lost competitive advantage to the countries of East Asia….High savings and competitive exports were the characteristic of the U.S. 100 years ago. Now they are the characteristics of East Asia.”
The U.S. dollar cannot be called stable. A dollar today will buy only about 5% of what it would have bought a century ago. Compared to gold, too, it has lost more than 90% of its value since Franklin Roosevelt devalued it in the ’30s.
‘Steady’ might be a better word to describe it. But even that is not true. The dollar does not drop at a steady rate, but at a jerky one. Like a melting polar ice cap, it tends to lose a little every year…and then, suddenly, a large iceberg falls off. Over the last 20 years or so, a strange weather pattern has persisted over the northern hemisphere. While the dollar has continued to melt away…it has melted at a slower and slower pace. Against gold, it did not melt at all — until recently, it froze even more solidly.
With no telling entrails in front of us, we cannot know what will happen. But we take a guess: a chunk the size of New Jersey is about to fall off.
Your editor had tea with Lord Rees-Mogg on Wednesday. We reminisced about paper currencies. None had ever survived for very long — and even gold-backed currencies tended to give way under the stress of a shooting war. Squeezed for cash, the Continental Congress of the American colonies issued ‘continentals’ — I.O.U.s not backed by gold. They were just promises to pay later, after the war was over. But after the war was over, they became the thing that worthless things were worth more than.
In America’s war against the Southern States, again, the Lincoln administration resorted to paper. It established a central bank — a forerunner to the Federal Reserve system — and issued I.O.U.s….which subsequently lost their value. The Confederate States did likewise. Years after the war, desk drawers in Atlanta were still full of I.O.U.s — completely worthless, of course.
Largely under pressure from Johnson’s War on Poverty and war in Vietnam, the Nixon Administration resorted to I.O.U.s again — paper dollars backed by the world’s biggest debtor. Since 1971, the world has seen nothing else. Central bank coffers are full of them. For every ounce of gold in the world, there are approximately $20,000 worth of dollar-based assets and maybe $10,000 worth of dollar-denominated debts, with the paper-based assets and credits growing many times as fast.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving The Soft Depression of The 21st Century.