In the following graph, you can see that the price of goods in the U.S., expressed in constant 2005 dollars, remained about the same for most of the country’s history, in spite of short periods of inflation in connection with wars (the War of Independence and of 1812, the Civil War, and the First and Second World Wars). Then in 1945, and especially since 1971, prices have soared. Inflation is underway.
Given the level of their debt, the situation of the U.S. is quite worrisome, but we must remember that it is still the world’s largest economy and, above all, the greatest military power. The American dollar is still the world’s reserve currency, and the currency in which oil prices are negotiated. Since 1945, the world has gotten so used to the economic dominance of the United States, that its collapse is, for most, simply unimaginable. But the United States is no longer an industrial power. At the beginning of 2011, China replaced it as the biggest manufacturing nation. Between 2000 and 2008, American industries eliminated 25 percent of their jobs. According to some estimates, there are no longer more than eight million industrial jobs in the United States, a country with 300 million people. Manufacturing’s share of the economy has gone from 28 percent in 1953 to 11 percent in 2009. By way of comparison, German industry has always been around 25 percent. By mid-2013, the national debt of the United States stood at some 16 trillion, more or less 100 percent of GDP. According to Congress’s conservative estimate, it will reach 20 trillion by 2015, or 102 percent of GNP. Servicing the interest on this debt costs between 24 percent and 30 percent of total government receipts. But this is an optimistic estimate, since it supposes a growth rate of between 2.6 percent and 4.6 percent per year between 2010 and 2019, which is very high. Congress even foresees a debt of 180 percent of GNP for 2035!
Today, the United States is technically bankrupt. No growth will allow the repayment of what is owed, contrary to what the public is made to believe. The situation is certainly more serious than financial analysts dare say: they function on the assumption that U.S. debt is “as good as gold.” (Until the summer of 2011, U.S. Treasuries were rated AAA, the highest possible score, by Standard & Poor’s.) Is U.S. debt really of better quality than China’s, which possesses a three-trillion-dollar currency reserve and whose government has practically no debt?
Swiss journalist Myret Zaki expounds the thesis of the collapse of the American economic model in her book The End of the Dollar. First of all, she shows that the American figures are a vast deception: GNP is disconnected from reality by methodological changes and constant redefinition, which go almost unnoticed by the general public. Real GNP is far lower than what is published—a thesis maintained as far back as 2002 by French historian Emmanuel Todd in his book After the Empire.
Inflation is greatly underestimated. The American stock market hides inflation in its profits. Productivity gains are real in certain sectors, but so much of the population has been turned into a nation of bartenders, nurses, and federal employees. The unemployment rate is twice the official figures. The Federal Reserve’s balance sheets are faked. According to Shadow Government Statistics (www.ShadowStats.com), the real unemployment rate is not the official figure of 9.8 percent but 22.4 percent for December 2010, and 23 percent in early 2013—quite close to the 25 percent of the Great Depression. Likewise, according to this research site, GDP growth in 2012 wasn’t two percent but negative two percent.
It is also estimated that more than half the products that make up the Consumer Price Index, the typical American “household shopping basket,” are picked so as to underestimate inflation. For example, if the price of steak rises, it is replaced with a less expensive “equivalent” such as hamburger. Inflation is already on the march and accelerating: on average, worldwide basic food prices rose 48 percent between October 2009 and October 2010. Savers and consumers no longer have reliable information concerning their purchasing power, their investments, or their savings, and are on their way to pauperization. This group of fictional indicators is self-sustaining and self-promoting. The process of “creative accounting” that allows the figures to be prettied up makes the Greek and Irish politicians look like amateurs at the game: American statistics have become an exercise in public relations aimed at making the United States look good in international comparisons conducted by the International Monetary Fund, the World Bank, and the Organization for Economic Cooperation and Development. The mechanical retouching of official information given out by economic authorities resembles an exercise in disinformation and marketing.
Finally, one might ask what value an economy has where everything the Americans possess is owned by somebody else. Every dollar is borrowed, everything is mortgaged, there are no more real funds: cars belong to leasing companies, houses to banks; retirement capital and health payments require financing that will diminish because of demography and the economic crisis; the state is taking in less and less revenue and, with the lowering of the AAA rating, the debt will get ever more expensive.
The United States can no longer be the locomotive of global growth and continue to export its inflation to the world, which has already had enough of absorbing the effects of U.S. financial bubbles and toxic debt products. According to Nouriel Roubini, Marc Faber, Max Keiser and other analysts, a dollar crash is in the making. It will be inevitable. The principle global risk at the moment is an American debt crisis. The world’s largest economy is nothing more than a gigantic illusion. What can you say about an economy that borrows 50 trillion dollars, paying four trillion a year interest on it, in order to produce 14 trillion dollars of GNP? If the U.S. were a corporation, it would immediately be liquidated.
It is only a matter of time before we witness the bursting of the giant debt and dollar bubbles. The dollar has already lost 97 percent of its value since 1913, the year the Federal Reserve was created. 17th-century French philosopher (and businessman) Voltaire said that “a paper currency founded only on confidence in the government that created it, always ends by returning to its intrinsic price—zero.” Similarly, Pierre Leconte quipped to me in an interview, “If hyperinflation were a way of creating wealth, Zimbabwe would be a rich country.” In other words, the ultimate fate of the dollar is certain; it is only the timing that is in question. The mountain of dollars printed in these last years by the Federal Reserve is nothing but the biggest speculative bubble in history, and it is going to end in tears. The only remaining question is how much further harm is going to be inflicted upon the world economy.
What is different this time is that the dollar is not just a national currency (like the Weimar Mark that blew up in 1924); the Greenback is the linchpin of the global economy and postwar financial system. This means that the dollar could have much longer staying power than national fiat currencies; it means that it could ostensibly be strengthened by a global panic; but it ultimately means that the consequences of the dollar’s demise will be all the more catastrophic.
In the face of so much risk, who is going to purchase American debt? Japan and China have done so up to now, but each has been replaced as the greatest subscriber to American bonds by the Federal Reserve Bank, which is thus buying back the debt it is itself issuing! The Swiss analyst Marc Faber “guarantees 100 percent that the U.S. is going to experience a hyperinflation like that of Zimbabwe.” Nouriel Roubini concludes that “the American financial system is insolvent.”
This isn’t all. American debt is only the tip of the iceberg. One must add unfunded liabilities for future income programs such as Social Security, Medicare, and pensions for 80 million Baby Boomers. Beginning in 2011, these latter will have to withdraw parts of their retirement funds in order to support their standard of living: this will unleash a long-term stock market sell-off like we have never seen. As far as industry is concerned, even if the value of the dollar falls by 50 percent, America will still not be competitive with China, a country in which the average salary is five to 10 dollars a day (as opposed to 120 dollars a day in the U.S.) It is not surprising that to postpone their inevitable
fall, their only escape route is a headlong rush forward!
There is one other option that should not be discounted—war. However immoral or unstable, war can be a means to overcome the effects of an economic depression. For governments, it’s tempting. There are many advantages to waging war: it mobilizes patriotic sentiment, gets industry rolling, turns unemployed workers into canon fodder, and, if you win, you can seize the resources of the vanquished or impose your domination on them! And there are plenty of enemies to be made. The only problem is that whereas it is known how wars begin, there is no way to predict how they will develop and end. I’ll admit, it’s a simplistic view, but the U.S. ought to have learned its lesson following the Korean and Vietnam Wars, and the disastrous and costly adventures (three trillion dollars at least) of Iraq and Afghanistan. So what to do? Another war against words (“terror,” “drugs” . . . why not “dandruff”?) or against a small-time power (Yemen, Syria, etc.)? A “humanitarian” war, in which the goal is (of course) to bring “democracy” and “human rights” to middle-sized countries (Iran, Venezuela, Syria, North Korea, Burma, Nigeria, etc.), would seem to fit the bill, but it would involve an expensive and dangerous occupation, unless others can be coerced or convinced to do it (as in Libya or Mali). All that remains then is thermonuclear war against Russia or China, which would be much more impressive and could actually provide a long-term solution to the problems of over-population, economic competition, and the exhaustion of resources. Kaboom! In 20 minutes, everything would be solved. Except that here, too, nothing is certain, and the nuclear blowback from the “Commie scum” could make this option unrealistic. I sure hope no one in power today is so insane as to go down the path that was satirized in Stanley Kubrick’s movie Doctor Strangelove!
More realistically (hopefully!), the United States will not go out with a bang, but will instead complete a transition, in less than a century, from a real, sustainable economy to a terminally sick one. America will be mixed—with pockets of astounding wealth, innovation, and productivity and, sadly, great swaths that will resemble the Third World. The series of state bankruptcies like California’s and Illinois’ are harbingers of what’s to come. All these transformations represent a tragic loss of potential. Some day, historians will laugh at the silliness of our contemporaries, who have raised to the status of official truth the fairy tale that infinite growth is possible by printing paper without practicing austerity, as if consuming on credit were the same as producing wealth. “If throwing money out of a helicopter were a viable monetary policy, it would have been discovered a long time ago, and we would all be living in a world of infinite prosperity today,” writes Richard Duncan, financial analyst and author of The Dollar Crisis. The very professional American Armed Forces are not deceived; as Admiral Mike Mullen, Chairman of the Joint Chiefs of Staff, declared recently: “The national debt is the greatest threat to national security.” In the end, it is not the “Clash of Civilizations” that we must fear, but the collapse of the social and political system following the implosion of our financial, economic, and monetary mechanisms.
Have measures been taken? In April, 2011, after long, stormy debates, Congress passed a law to reduce its expenses by $35 billion, including a $1.6-billion reduction in the defense budget. This represents one percent of the 2011 budget, or two weeks of expenses. This is a joke! Between 2008 and 2011, the American government increased spending by 30 percent—and then tries, painfully, to reduce it again by one percent. The process is out of control.
So . . . what? Death to America? Yankee go home? No, because the European countries are also on the edge of the financial abyss. The debt is such that the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) of the Eurozone are going to have to declare bankruptcy sooner or later and return to their old national currencies, which they must then devalue (it is their only hope of reestablishing their competitiveness over the long term). Germany and a few other Northern European states, being better managed and undergoing austerity measures themselves, are not going to ruin themselves to allow others to live eternally beyond their means. All the more so as the European Central Bank has neither the financial capacity nor the will to buy back this bad debt from Southern and Eastern Europe; neither are the larger private banks of the Eurozone, many of them in bad shape themselves. So the euro is also destined to disappear or split up, and we are going to see the economic crisis of the Southern European countries get worse. One should not count on anything but dogmatism from the EU bureaucracy, whose true nature was revealed in 2005 when France and Ireland voted against the European Constitution. The French government ratified it regardless of the people’s vote, and Ireland was asked to vote again with a heavy hint that they’d have to vote again and again until the “right” outcome would be chosen. So much for democracy! The EU then simply imposed the Lisbon Treaty on its member states, which made a former Italian minister exclaim: “Perfect! We don’t even need the people and referenda any more!” Welcome to the E-USSR-K: The European Union of Soviet Socialist Republics and Kingdoms!
The inevitable bursting of the Treasury-bond bubble and European debt are going to have an impact on the most vulnerable investors, like retirees, who traditionally considered treasury bonds the safe investment par excellence. The shock wave will inevitably expand, bringing with it a strong rise in interest rates. These, being added to an already serious economic crisis, will bring about the inability of households to consume or to repay their debts. The only solution the eurocrats will think of will be the consolidation of public finances through heavy taxation on capital, and through bailouts of the largest banks. Finally, private creditors will probably be “invited” to offer extensions and renegotiate lower interest rates, or lose all their investments. In March 2013, the EU and IMF attempted an incredible “hold-up” of Cyprus bank-account holders, trying to, brazenly, take part of the money from savers and businesses to pay part of the country’s debt. Robbery, pure and simple. Though that attempt was botched, due to incompetence, risk of social unrest, and pressure by Russia, it shows the unlimited lack of scruples—and common sense—of the European “leadership.” Of course, such measures will be unpopular, to say the least, and populist or nationalist governments may reject bailouts by unilaterally deciding upon bankruptcy. These risks may lead to unleashing a panic, a bank-run, with people draining ATMs and banging on bank windows to withdraw their savings en masse, thus causing a chain of bank failures. This sort of crisis will be much worse than that of the 1930s. The sums involved are vastly greater, the global economy is much more fragile, and, globally, culture is much less resilient.
The shenanigans in Cyprus—as well as scandals like the collapse of MF Global, in which investors’ funds were confiscated by managers—brings into relief the incompetence, megalomania, and unheard-of greed of those in elite positions in financial institutions. These are the new oligarchs, with power and connections in finance and government; sociopaths like Jon Corzine, Jamie Dimon, and Henry Paulson operate with no consideration for their professional or moral responsibilities to the shareholders and employees who put confidence in them, not to mention the law!
In her book Third World America, Arianna Huffington summarizes contemporary capitalism as follows:
It’s not that capitalism isn’t working. It’s that what we have right now is not capitalism. What we have is corporatism. It’s welfare for the rich. It’s the government picking winners and losers. It’s Wall Street having its taxpayer-funded cake and eating it, too. It’s socialized losses and privatized gains.
President Dwight Eisenhower, as he was leaving office, talked honestly about the danger of a military-industrial complex taking power; but in the end, it was the financial complex that posed the greatest threat. Wars are possible through the Federal Reserve Money Machine, and while the military-industrial lobby conducts its business off shore, Big Finance runs the country.
Politicians of the Left, Right, and Center are unwilling to confront this elite, or perhaps don’t
understand it exists. They get elected by promising miracles and delivering a shabby program of panem et circenses: subsidies, welfare goodies, imbecilic entertainment, and easy credit; none is willing to speak the truth and announce the blood, sweat, and tears that will be necessary to refound our nations on a sound basis once again. And après eux, le déluge . . .
Most fundamentally, our civilization has lost sight of the true nature of wealth—natural resources, which are so often hidden from us by the abstraction we call “money.” Reality will reassert itself in the coming years, as we experience the end of the financial system.
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Kenza is no longer able to make ends meet each month.
She has 500 dollars a month, including government subsidies, for groceries, diapers for the baby, and children’s clothes. Before, she could make it. She is still buying the same products—she’s good at making lists. Sugar has gone up, cooking oil has gone up, bread and flour have actually doubled. She racks her brain to find alternatives. She is obviously not the only one having problems with money, since many of her neighbors are selling furniture in the classified ads. There are some really good deals out there: a nearly new sofa for 100 dollars, a plasma TV-screen for 50 dollars! Other people are selling their jewelry. The price of gold seems to be rising lately.
Kenza’s husband Mikael has two jobs, one during the day and another, undeclared, at night, “to put the merguez [sausage] in the couscous” as they say in the local slang, but he’s afraid the factory may close after the news of the latest layoffs. It seems that the new Chinese owners merely want to copy processes and technology and then shut the money-losing plant. He tries to reassure her by saying that the unions and the government will not allow this to happen. She’s not convinced. . . .
In the evenings, the electricity sometimes goes out. It’s because of privatization. It seems the state is selling everything off: historical buildings, islands, public services, concessions for managing health insurance. Even unemployment insurance (its name has been changed) has been sold to a private group—it appears the group belongs to the President’s brother. Some heads need to roll, as Kenza and Mikael say. The children went to bed early; the television is no longer working. They have nothing to do with themselves but make love.
Survive- The Economic Collapse Page 9
