by Bill Sardi
Recently by Bill Sardi: Should You Save Your Money or Hide It Under The Mattress?
Senator Tom Coburn creates a chilling "end of the world as we know it" scenario in his recent book The Debt Bomb (Thomas Nelson 2012, 349 pages, indexed). The CIA should take note. Maybe it already has.
I'll synopsize Senator Coburn's fictional crisis that begins on August 4, 2014 in Tokyo where a large mutual fund is holding a meeting there along with dozens of private funds and representatives from foreign governments. The mutual fund is a large buyer of U.S. Treasury Bills that fund U.S. debt spending.
The Japanese mutual fund, frustrated that the U.S. has failed to cut spending, fears the Federal Reserve will print more money to inflate itself out of repaying its debts in full to holders of its IOUs (U.S. T-bills). The head of the Japanese mutual fund openly espouses a sell-off of U.S Treasury Bills "before the Americans have a chance to devalue their currency any further."
Recognizing some of the smartest investors in America had also declined to buy U.S. Treasury bills, the Japanese mutual fund officially votes to sell off its T-bills, which makes the newswires that morning in Asia.
The initial response is calm. But then another large fund in Asia also sells its holding in U.S. T-bills and by that afternoon Singapore releases its holdings as well. By then the European markets open and every major private firm is in a frenzy to unload their T-bills. Japan itself, the second largest holder of U.S debt, unloads its T-bills while China elects to wait it out.
In the dark of night, U.S. officials are awakened to a financial crash of unprecedented proportion. The newly elected Republican President, awakened at his vacation home, emphatically responds: "there will be no bailouts on my watch."
Americans arise to a day more memorable than the JFK assassination or the 911 terrorist attacks – everything they own has now lost a third of its value compared to other currencies.
At a White House press conference the President says the fundamentals of the U.S. economy remain strong and everything will be all right. Then the Wall Street markets open and the Dow loses 10 percent of its value in minutes, so trading is halted for an hour. When trading resumes the Dow falls another 20 percent, prompting Americans to head for ATM machines. Bank websites begin to crash, and an orderly coast-to-coast bank run is in progress.
A week into the crisis the dollar loses 50% of its value and oil rises from $80 to $240 a barrel.
With rumors of mass layoffs, anguished American workers take to the streets and reach for matches. Whole city blocks are now going up in flames from city to city. The National Guard is called into action to restore order.
The immediate problem that confronts government is that tax receipts to the Treasury plummet and with a government already operating on borrowed money, largely from Japan and China, there aren't sufficient reserves to issue Social Security pension checks, make Medicare payments and pay for all the other federal entitlements.
The international community offers loans but only under the condition that reforms be immediately put into place. The great and mighty United States of America is now taking orders from overseas to put reforms into practice it had resisted for many years. The U.S. becomes Greece II. Retirement age will immediately begin at age 72. Social Security taxes will double.
The American economy drags along for three more years, with unemployment hitting a high of 24%.
Two years later the People's Republic of China, staging a naval exercise in the Taiwan Strait, suddenly heads directly for Taiwan. The U.S. threatens military action but the Chinese respond they will dump our T-bills if we interfere.
The great false god of government has failed. The other false god of paper money has also failed. The long-held notion that Americans' manifest destiny is to be the most abundant nation in the world is dashed.
When fiction becomes reality
Don't think the CIA hasn't read Dr. Tom Coburn's book. The above is a fictional scenario. But Senator Tom Coburn says: "the end can come quickly," even for great nations he says.
Senator Tom Coburn's scenario reveals how the most advanced country in the world can be brought to its knees by debt. Senator Coburn quotes Admiral Mike Mullen who says: "Our national debt is our biggest national security threat."
This is why America hears reports of body bags being purchased by the Department of Homeland Security. Why spying drones now fill air space above America. Why FEMA internment camps are being prepared. American anticipates insurrection when its populace discovers it is insolvent.
America's Trump Cards
Few Americans realize the many trump cards America holds against competing economies of the world. America holds the most powerful military, the world's largest economy, the world's reserve currency and the largest consumer market in the world, by far. But these competitive advantages lose their power when a nation is in un-repayable debt.
There are many examples of how the U.S. uses these trump cards. For instance, when the EURO was first created as the currency of a united Europe, the Japanese Diet (legislature) began toying with the idea of buying EUROS instead of dollars. The Japanese wanted to see how America would respond to this idea.
America might respond to this by placing a limit on imports of Japanese-made goods, such as cars and cameras, or invoke import duties in response to a turn from the dollar to the EURO. But it chose a different way to demonstrate its displeasure over the idea of Japan buying EUROS over dollars.
The very next week North Korea fired a missile over Japan, into the sea. That was America's way of saying "go ahead, see who defends you." The Japanese never bought any EUROS.
As the U.S. approaches an official default in paying back $1 trillion to Japan, or the more covert way of printing money to inflate away its debt, this would surely trigger many suicides among Japanese women who manage family finances and whose banked money has been used to buy U.S. T-bills. Fortunately, the weakening of the EURO has reduced the threat of Japan opting out of dollars.
In another example of U.S. might, a few years back the U.S. was attempting to persuade a South American nation to sign an agreement. That nation shipped a boatload of grapes to a U.S. port, which was suddenly quarantined by U.S. customs officials because of reported E. coli contamination. Unless that nation complied with the wishes of the U.S., those grapes were going to rot in port. If nations want access to the giant U.S. consumer economy, they had better play by our rules.
But with rising personal incomes, China, Brazil and India are due to develop consumer economies that could rival that of the U.S., and the U.S. could no longer throw its weight around. This seems inevitable.
During the Clinton Presidency, the U.S. shipped nuclear missiles to China. Right-wing critics declared these missiles were aimed at U.S. targets. President Clinton had supplied China these missiles to balance power. Russia and India, which flank China geographically, had nuclear weapons, China did not.
But imagine if China actually did launch these missiles at U.S. targets on its West Coast, such as Seattle, San Francisco and Los Angeles. The U.S. wouldn't necessarily have to retaliate militarily. All the U.S. would have to do is cease to ship food to China and millions of Chinese would starve to death. The U.S. is the breadbasket of the world and can produce food even cheaper than countries like China, which have lower labor costs. Food can be used strategically.
Recently Secretary of State Hilary Clinton almost laughably threatened China unless the value of the Chinese currency, the yuan, was allowed to float higher. This would make U.S. goods relatively cheaper on the world market.
The substance of the threat by Secretary Clinton involved movement of U.S. submarines closer to China's coast. What silliness. Again, all the U.S. need do is slow shipment of food to China. But with the U.S. being such a debtor nation, the U.S. can't play this card and risk having its exports tumble and its balance of trade look more miserable than it already is. Debtor nations lose power.
According to the CIA Factbook, the world supply of money (M1 = currency + demand deposits) grew from $24.07 to $26.34 trillion from 2010 to 2011 while world population grew by 80 million (+$325,000 per newborn), so it is obvious the world is attempting to meet its financial obligations by printing money rather than creating value, with resultant inflation of 4.9% worldwide (the rate at which the value of saved or loaned money erodes annually). Unless the interest on banked money exceeds the rate of inflation (which occurs in only 11 of 31 major countries surveyed), over time the purchasing power of savings erodes. Wealth accumulation will never occur.
All of the nations of the world generate $78.95 trillion in Gross Domestic Product (2011) and have an aggregate budget deficit of -4.1% of GDP or about $3 trillion.
With China headed to a $123 trillion economy by 2050 (3 times greater than the U.S) as some predict, there will certainly be a change in the world balance of power.
New financial instruments
If any single thing brings down the world economies it would be a financial instrument called a derivative.
Derivatives are where parties share their risk (place a bet) on future assets, such as when a wheat farmer sells a contract to a miller for cash that specifies an amount of wheat he will deliver in the future to the miller. Both parties reduce risk but if the wheat never materializes due to crop failure, the entire contract can be wiped out.
The total value of these shared-risk derivatives in the world exceeds total global gross domestic product by a factor of 10. In 2010 these derivative contracts totaled $1.2 quadrillion, 20 times the size of the world economy at that time.
Via these derivatives, the whole world economy has become a casino where bets (derivative contracts) are made on events in the future. Derivatives were illegal in the United States between 1936 and 1983.
Webster Tarpley describes derivatives as black holes of financial engineering that can easily consume all the physical wealth and all the money in the world. Derivatives thrust the world into a surreal scenario where fictional capital is created outside of the realm of real production. Mr. Tarpley is calling on a worldwide freeze of these derivatives to rescue the world economies from impending collapse.
Credit default swaps
If derivative contracts are ice cream, then credit default swaps are the cherries on top. Credit default swaps, a financial agreement in existence since the 1990s, where the seller will compensate the buyer in the event of a loan default or other credit event. This type of insurance plan, if you want to call it that, serves to drag the whole financial world into its unregulated morass. Credit default swaps outstanding were estimated at $62.2 trillion just prior to the 2008 financial meltdown and fell to about $26.2 trillion by mid-2010 and are about $25.2 trillion today (2012).
It's easy to forget that bankers have only one thing to sell – debt. When they oversell it, the world pays a price – this time, the most terrible price – the collapse of all wealth. Then only bankers will accumulate great wealth, which is the present situation.
When nations are lured into un-repayable debt into order to deliver on political promises, which then results in onerous taxes on the wealthy, which in turn robs the economy of needed capital for growth, debtor nations face more than stagflation, they face a regressive standard of living. Forget more costly advances like nanotechnology in medicine, like driverless cars for more safe and reliable transportation, and clean energy via solar generation, consumers won't be able to afford them. Bicycles, home-grown food, and some yet to-be-invented economical form of home power generation appears to be part of a more realistic future.
Debtor nations lose power
The following quotations from Thomas Jefferson are sobering:
“It is incumbent on every generation to pay its own debts as it goes. A principle which if acted on would save one-half the wars of the world.” ~ Letter to Antoine Louis Claude Destutt de Tracy, 1820.
“I, however, place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt." ~ Letter to William Plumer, 1816
As far back as the Bible, sages warned of the pitfalls of becoming a debtor nation:
“When the LORD your God has blessed you, as he promised you, you will lend to many nations, but you will not borrow…” (Deuteronomy 15:6)
The foreigners who reside among you will rise above you higher and higher, but you will sink lower and lower. They will lend to you, but you will not lend to them. They will be the head, but you will be the tail. (Deuteronomy 28: 43-44)
As the Biblical prophets have said: “Poverty and disgrace are for those who ignore instruction.” (Proverbs 13:18; Isaiah 48:18)