It is the 19th of March 2008 as I begin to write this piece. The last seven days have been some of the most portentous (save that of Easter Week so long ago which we now celebrate), perhaps in the history of the world.
Why would I make such a bold statement? I am mortal as any other human. I can only tell of what I perceive. But before I express my thoughts about what I see as possibilities about “Where from Here” (Verse 36 John 13 (NIV)), I must consider how we’ve come to this point of embarkation.
The modern financial system would not exist today were it not for the preservation of some things from our deep past. The preservation of those things eventually resurfaced after the Crusades brought the West into contact with Islam many centuries ago. Eventually, those things Islam had preserved from our deep past, would, after that exposure, bloom into the Renaissance in Italy.
Here is what Os Guinness, philosopher and religionist, says about that period;
From The Striptease of Humanism
“The Enlightenment has its own unmistakable identity, but at the same time it also has an affinity with the Renaissance. Both directly appealed to classical antiquity, deliberately opposed Christianity and consequently accelerated the forces of modernity. . . . If the legacy of the Renaissance is humanism, then the contribution of the Enlightenment is paganism.
The eighteenth century came in on a wave of irony and satire, exalting the trivial, ridiculing the noble and attacking anything which previous centuries had been taught to believe, revere or love. . . . As this occurred, the break between reason and revelation was finalized, and the battle was joined in terms of reason versus superstition, philosopher versus priest and men of realism versus purveyors of myth. . . . They asserted their right to use reason to question anything.
As time went on the questions became more far-reaching and the criticisms more uncompromising. . . . Little wonder that it could be said that for men like David Hume “religion has lost all specificity and authority. . . .” The eighteenth century went out amid wars of revolution and the nineteenth century was ushered in by the campaigns of Napoleon. . . . Man was not only the measure of the world he knew but the measure of the world of which he dreamed. . . .”
That project of becoming the “measure of the world” involved the attempt to emancipate men from . . . well, everything. But there are some things from which one cannot “free” oneself. There are certain inescapable “forces” to which we are subject, however we might struggle against them. One is the force of gravity; another is the iron laws of finance. Of course finance is about the “magic” of money, the “store of value” of the past production of surplus. And producing a surplus is the attempt to free ourselves from the tyranny of scarcity that has always plagued human kind. In other words, there is (or we think there is) never enough of anything we might think we need or want and money becomes our means to free ourselves from scarcity – or so we think.
The foundation for modern finance–double entry accounting–originated during the Renaissance in Italy. By the time Enlightenment philosophy began to grip the world, the first “Central Banks” had been invented. One still exists, the Bank of England. The others ended in miserable failure.
During the early 18th century, when England and France fought the world’s first world war over possession of North America, France became infatuated with a Scottish banker named John Law who argued that money could create wealth (the production and store of a surplus) instead of money being the measure of such, to wit: the price, the measure of money, at which some scarce good can be obtained.
Simply “printing money” however distorts the price mechanism. It makes some goods appear cheaper than they really are and therefore creates surpluses in some goods that otherwise would not have been produced. At some price though, folks will not buy the excess being produced - and the “bubble” bursts.
When the bubble that was the French economy under John Law (The Federal Reserve Chairman of his day) burst, France became ill prepared for the fight with England over who would become the chief colonizer of the New World. England had long before defeated Spain, the first colonizing rival for North America, and England’s banks had gotten rich off taking over the financing of the trade in tobacco, rum, molasses and the slaves that produced them from Spain and Portugal. And make no mistake, the capital base of the entire modern world rested upon that trade in slaves to produce those commodities. We hear an echo today of that fact when those who wish to buttress their call for “slave reparations” find financing statements in the records of the antecedents of today’s modern bank’s of the financing of that worldwide trade in human flesh.
In a sense, that struggle between England and France over control of North America in the world’s first world war, (the French and Indian War, as we call it), ended badly for both. The winner, England, would ultimately lose North America to its colonial children, and the financial collapse of simply printing money to magically end scarcity would for the French Monarchy not just help it lose North America, but their collective heads as well during the French Revolution.
In the meantime, the effect of the Enlightenment on England through another Scottish philosopher named Adam Smith (author of The Wealth of Nations) was about to re-found the world. Smith set out the first useful exposition of the relationship between money, trade, and production, and in expounding on an idea called free trade, helped create the industrial revolution. That revolution, for the first time in history, actually began to address the scarcity issue in a meaningful way by creating a conceptual base for the idea of free markets, so much so that today the old saw that one should “waste not, want not” has become nearly meaningless to the modern ear. And the first phase of that revolution was about the production of textiles, which eventually made Cotton King in America and made slavery indispensable to the success of the early American Republic.
In those former English colonies that had become the united States of America, that industrial revolution produced a contention between rival sections, the north and the South. That contention, of course, had many facets. One was slavery, which enriched both sections; another was the issue of finance.
New England, whose early chief proponent became Alexander Hamilton simply wanted to reproduce the English Mercantilist system (“managed” rather than “free” trade), based on the Executive Power’s control of a central banking system to dispense favors to the Crown’s friends. Virginians such as Thomas Jefferson were aware of what had happened in France, and they also knew that the Roman Republic and the subsequent Empire had failed in a similar financial debacle through the debasement of its currency (that distortion of money as a measure of value, aka price). Indeed, the modern world would not exist had the western half of that empire not fallen around 500 AD.
It took nearly 500 years thereafter for Europe to dig out of the Dark Ages that financial debacle and fall produced. Those Virginians were determined that the practice of simply printing money “out of thin air”, creating the catalyst for such bubbles, would not plague the American Republic. In this, they were unsuccessful.
The Hamiltonians won at the point of the bayonet, using slavery as a red herring, and in 1863 the National Currency Act was passed and the national banking system we have today was founded. Eventually, after fifty years of subjugating the chief opponent, the South, the Federal Reserve system, would be put into place in 1913.
The Federal Reserve’s (the FED) chief function is to “create money out of thin air” for the benefit of the “Executive’s friends” (aka big business) , which, unless it has official sanction as France gave to John Law, is called counterfeiting and inevitably leads to a debasement of the currency (which produces those distortions which create bubbles – that price at which no one will purchase the resulting surplus). The resulting inevitable “price corrections” are the popping of the bubble – that mal-investment (those “excess surpluses”) that the executive and its friends always produce in a fiat money system.
Simply put, the world is awash in US dollars that the FED has produced. Those excess dollars have produced bubbles that have already popped or soon will. But the dollar itself is a bubble. There are simply too many of them floating around the world without a home at the right price – hence the explosion in the price of gold, oil and commodities valued in dollars.
So where from here? And just where is here? I would encourage you to peruse Finance’s “New Day”, Highest Volatility in 70 Years and Prometheus. Those inevitable price corrections, as I’ve written, create inevitable solvency problems. Today, that is reflected in the ongoing real estate bubble. We currently have double the amount of homes available for purchase than the market will absorb (that central bank-encouraged mal-investment). The problem is that all of the real estate those mortgages financed is now far below the price at which it was financed, and those upside down mortgages have become part of the financing structure of the world’s financial system.
Because our fiat system has “monetized” debt, such a solvency problem becomes acute because no one will trade that upside down debt and liquidity disappears (no one has the cash they need to finance daily activities). This has happened before in1929, an event also fomented by the then newly-created FED, and indeed in the last week the FED has engineered unprecedented actions (and others not seen since the 1930s) to stave off the latest potential debacle created by the system itself.
Will it work? We shall see. But I would encourage you to do the math. The FED’s balance sheet is roughly $900 billion. They have recently “injected” $200 billion into the “system” by trading nearly worthless mortgage securities for US debt securities and have promised more. That amount is roughly the measure of the excess in mortgage valuation that has already been written off by today’s banking system. There is at least (because no one knows the real final number) $400 billion more to be written off. That’s two thirds of the balance sheet of the FED. If those mortgage valuations end up being significantly less, there is only one way to restore the FED’s balance sheet – PRINT MORE MONEY. This will create more of the same problem.
This cycle of leveraging and de-leveraging (boom and bust) has simply returned us to the problems of the ancient pagan order; only now it is magnified by the enormous distortions provided by magic money. This produces excess surpluses of some goods as well as excesses in certain behaviors. The ancient world fought constantly for land because food surpluses were the first and most fundamental scarcity problem. Today, we have seen an enormous increase in wars, and the degree of destruction they can now produce is beyond human reckoning. I would suggest there is a connection between that fact and the higher demand for the raw materials the leveraged machine age requires to continue its operation. War, after all, is a racket.
The war over possession of North America between England and France, financed by their respective inflationary central banks, that produced the industrial revolution also produced the world’s first deflationary (price correcting bust) in the 1820s. That first bust also propelled the French Jacobin revolution onto the rest of the planet through the development of socialism. The socialist ideology reflected the “war” between money interests and the labor it commands created by this system, a warning that South Carolinian John C. Calhoun remarked about in the years shortly after 1820. (Indeed, Karl Marx would turn that tension between capital and labor into a pseudo-scientific explanation of the whole of human history).
Oil, although produced in quantity in the mid 1800s, did not become the life blood of that machine age until coupled with the internal combustion engine at the beginning of the 20th century. That mating helped cause World War I. It did so due to the exponentially rising demand for black gold to run those new engines of economic expansion, and although certainly involving other matters, the war also was about gaining access to the oil fields of the Middle East that Germany’s ally, the Ottoman Empire, then controlled.
Central bankers are not blind to the dynamics of this new order, but they have the proverbial wolf by the ears. Indeed, Dr. Hjalmar Schacht is a perfect example. Schacht was the Nazi regime’s central bank head in the 1930s. His warning to Hitler that the leveraging that created the “miracle” that Hitler seemed to have produced in the war ravaged economy of post WWI Germany and which built his Wehrmacht was about to lead to an inevitable price correction. Hitler’s solution was to invade the Soviet Union to obtain their oil fields.
The resulting WWII of course put the United States at the top of the international heap and its currency became the measure of the cost of obtaining that oil. And now, to prevent our own price corrections, we also have invaded and practiced war in order to avoid the inevitable consequences of the boom and bust cycles produced by our magic money systems.
The amplitude of those booms and busts keeps getting steeper and steeper. The booms are ever more expansive and the busts are potentially ever more catastrophic. In the 1970s, the inflationary consequences almost brought us to disaster by the end of that decade, until Paul (the Vulture) Volcker, then the Federal Reserve chairman, deflated and produced the worst economic downturn since the Great Depression. Then came Alan Greenspan, who re-inflated, thus creating three of the biggest bubbles the world has ever seen (the equities bubble that popped in March of 2000, the real estate bubble that Greenspan’s successor Ben Bernanke popped in 2007, and now the commodities bubble of the last five years, caused by deflating once again).
One day we will run out of margin for error. We may be there now, but eventually we are headed for a collapse of historic proportions – the kind of change that brings down governments and creates Dark Ages. I would encourage everyone to ponder these matters. In preparation, store up some necessities such as food, water, ammo, tools, etc. Things could get truly nasty. If you’d like to ponder just how nasty things might get, think about his. In the investment world there is a mathematical principle called “reversion to the mean.” This fiat “magic” money system is 500 years old. If we retrace half the “advance” it has produced, that ought to put us at about the year 1750. What was the world like then? I would also recommend remembering the Scriptures’ admonition to “Be not Afraid.” We’re going to need all the courage and help we can get.
Basil Childress
Chairman, Kentucky League of the South
Adam Smith, Basil childress, Books, Culture, Current Affairs, Economic Independence, ENglish mercantilism, Fed printing money, FED produced dollars, historic roots of the Fed, JOhn C Calhoun, Karl Marx, Os Guiness, Political Well Being, the National Currency ActIf you enjoyed this post, make sure you subscribe to my RSS feed!
