The End Game

"The current financial storm represents the death throes of the old Global economic order, and perhaps the birth pains of a new one …. Our long ride on the global gravy train is finally coming to an end, and once it does, nothing will be the same. The sooner we come to grips with this the better."

Peter Schiff, CEO, Euro Pacific Capital Inc.

Deflation or Inflation

There is not much in the textbooks to guide the world in its present, and worsening, economic mess. We are living within a global system that is no longer working, and are unable either to see a solution or go back to a simpler structure that worked adequately. One looks back with nostalgia to the century before the first world war when there was a genuine globalisation, enabled in large measure by the military and economic power of the British empire, which kept global order – no piracy then! – and when gold and silver functioned effectively as a global currency. Now the American empire is causing global disruption through its armed might and the dollar, decoupled from gold, is destabilizing the world’s currency markets as it is printed in huge amounts. Were the US dollar just a national currency, this would have already resulted in severe inflation, but the fact that it is a global reserve currency, and has been the medium of exchange across the world for sixty years, has spread the stresses throughout the global monetary system.

The dollar should have collapsed, but there are good reasons why the central banks of other countries are trying to prevent it, since that would mean the loss of much of their national reserves, which are held in dollars. To protect their own economies they are inflating in parallel. A glance at the world tables for money creation shows that virtually every country in the world is increasing its money supply at an exceptional rate.

There is strong reason to believe that this is the result of a coordinated policy by foreign governments to protect their economies by giving depreciating krone, Euros, rupees, etc. in exchange for depreciating dollars. That way, they hope they will not be cheated.

One of the paradoxes of global economics is that a devalued currency has the enormous advantage of increasing exports and making imports more expensive, thus building up the nation’s wealth, while pressuring it to be self-sufficient. These two factors, but particularly the latter, weaken both the concept and reality of a global economy. This race to the bottom in export competitiveness puts downward pressure on national wealth, and is assisted by competitive devaluations. Together they provide a solid reason for questioning the efficiency of the current economic paradigm.

As we enter into 2016, two economic forces are at work globally. Contraction of global trade is creating a deflationary force, while at the same time the explosive expansion of credit is creating an excess of money, which sooner or later must result in price inflation.

Economically, then, the world is entering into an economic phase where either deflation or inflation will dominate, and there is considerable debate and disagreement among economists as to which it will be. The third and most likely option is stag-flation - i.e., mass unemployment along with inflation. A concerted attempt to stimulate growth by bringing down interest rates will exacerbate the problem of an excess of money in the system. The key factor in this picture is largely hidden, that the excess money is a debt that will have to be paid in the future. The American, European and British governments are providing enormous funds to stimulate their economies, but if the money does not create growth to match, it will simply send up prices. The experience of Japan in “throwing money at the problem” over the past twenty years is clear evidence that putting extra money into an economy does not necessarily stimulate growth. It can be what Keynes called “pushing on string.” The experience of Germany in the 1920’s suggests that printing more money than the economy can put to work productively results ultimately in the destruction of the currency.

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Hyperinflation: A Lesson from History

Of the many historical examples of hyperinflation, Weimar Germany is without doubt the best known, though by no means the only one. (Click here for other recent instances) It offers an instructive example of what will happen when America is forced to choose it as the least impossible way out of its current economic trap. After the first world war, the reparations imposed on Germany by the Treaty of Versailles, brought about a situation where normal economic life became impossible. Almost all German industrial effort was going to pay the reparations, and there was no disposable income for the citizen nor surplus for the government. Inevitably there was great poverty, unemployment and growing social unrest, which became steadily worse. To add to the burden, the German government had borrowed heavily to pay for the war, and repayment constituted another kind of reparation.

Inflation had risen from the start of the war (when the Reichsbank had suspended redeemability of its notes in gold) but started to accelerate in 1918 until the tipping point was reached in July 1922, and within little more than a year it took about 200 billion marks to buy a loaf of bread which five years previously had cost one mark. The wholesale price index, based on 1 for 1914, was

14
100
2,800
in 1921,
in 1922,
in January 1923,

and a lunatic 726,000,000,000 in November 1923.

By then two thousand printing presses were working round the clock to provide bank notes. This would not happen today, since most money is, of course, a computer generated entry and does not catch attention so dramatically. 

The effects on the German economy were diverse, but in general there was a rush into commodities, with businessmen often abandoning their profession to speculate in food, clothing, furniture, coal and other commodities - anything solid. On the rare occasions when there were goods in the shops, people would snap up a dozen suits or twenty pairs of shoes, to use later in barter. In parallel the tax system broke down, as individuals became aware that delaying payment for a month could halve their tax bill. At the end, only 1% of government revenues came from tax, and 99% from printing new money. Farmers refused to take food to market, as they knew they would receive twice as much for it a week later, food riots broke out, and gangs of starving workers roamed the countryside to dig up growing vegetables. The rich fared relatively worse, insofar as their savings and monetary investments became worthless and they were reduced to selling of their most saleable possessions – literally “the family silver” – at any price they could get in order to buy the necessities of life. Those living only on a pension were made destitute in a matter of months. While everyone had been anxious when inflation was increasing, few could have imagined the speed with which hyperinflation struck once the critical threshold had been crossed. In the words of Professor Kessler of Harvard University, who experienced it first hand in his youth:

It was horrible, horrible. Like lightning it struck. No one was prepared. You cannot imagine the rapidity with which the whole thing happened. The shelves in the grocery store were empty. You could buy nothing with your paper money.

Hyperinflation is far more than just an economic phenomenon, and the two most profound social effects of this nightmarish development were less obvious and are still barely appreciated. Firstly, the evaporation of everyone’s savings effectively destroyed the middle class, and while “middle class” is not a term of strict definition, it is a fact that a functioning democracy requires a broad band of responsible, educated and reasonably affluent citizens – Communism’s hated bourgeoisie. Secondly, when a democratically elected government shows itself powerless to prevent the economic ravages just outlined, people turn to “strong leaders” who promise to do this, and dictatorship becomes the new political order. There is no question that the emergence of Adolf Hitler and Nazism, and all that followed from it, can be traced directly to the hyperinflation in Germany. Economics, politics and war are joined at the hip.

As a small but important footnote, after the Bolsheviks took power in Russia, they printed huge amounts of a new currency, which soon became almost worthless. However, they had never bothered to stop the old Czarist rouble from continuing to circulate as legal tender, and its value appreciated steadily, even though it was supposed to be only a relic from the past. The reason for this is central to the whole monetary question, and it is simply that the supply of Czarist roubles was fixed, no one could print any more. In the end a monetary system of any kind can only continue to function when the money supply is either stable or increasing only in line with productivity. A global economy is ultimately impossible without a global currency that has stable backing, something that cannot be fiddled with by any banking system seeking more profit or politicians seeking to bribe voters with their own money.

Hyperinflation in Germany ended much more suddenly than it began, literally overnight. The old mark was by then so depreciated that it had more value as fuel for heating than as money, and there are archive photos showing people stuffing bundles of them into stoves. The end to this Monty Python situation came when the Reichsbank instituted in late 1923 a temporary new currency, the Rentenmark, literally a “secured mark”, backed (in theory) by land, which was exchangeable with the now useless currency at the rate of a trillion to one. A few months later, in 1924, the Rentenmark was retired against the Reichsmark which was partially backed by gold. After World War II, the Deutschmark, backed partly by gold and partly by US dollars (which were then backed by gold), was introduced. In a few years this became the strongest currency in the world, as West Germany’s productivity steadily expanded. In 1998 it was, of course, replaced by the Euro, the backing of which is extremely vague, and ironically includes dollar reserves, but is ultimately a matter of taxability. The experience of hyperinflation was burned into the German psyche, and even today the German central bank struggles with its European colleagues to exercise the discipline that is needed to stop the Euro inflating. But it does not have the political authority to insist on this, and if history is any guide, it will eventually lose the struggle. The power to print money at will is a drug which no politician has ever been able to resist.

 

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The Bankrupting of America

“Military Keynesianism” is a term coined by the political writer Chalmers Johnson to highlight a development in American economic policy whose long-term significance is rarely appreciated. He defines it as “the determination to maintain a permanent war economy and to treat military output as an ordinary economic product, even though it makes no contribution to either production or consumption.” Keynes, of course, argued that a national government should take the country into debt in times of recession in order to sustain demand and keep the wheels of industry turning. Justified implicitly by Keynesian theory of deficit financing, the US government has systematically increased the national debt for some forty years by spending on so-called “defence” projects. There is no clear point where this policy decision was made, but President Eisenhower warned against it in his farewell address in 1961:

The conjunction of an immense military establishment and a large arms industry is new in the American experience ... We must guard against the acquisition of unwarranted power by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

Wiser political counsel has rarely been given, nor so totally ignored. The disastrous consequences of ignoring it, both for America and the global economic order, are now plainly visible to anyone who cares to look. In Chalmers Johnson’s words:

It is virtually impossible to overstate the profligacy of what our government spends on the military. The Department of Defense’s planned expenditures are larger than all other nation’s’ military budgets combined.

The economic consequence of this is the slow bankrupting of America and the breakdown of a global economic system based on the American dollar. In conjunction with the subprime mortgage collapse and the global casino of the derivatives market, America’s “profligate” creation of national debt is forcing a new economic paradigm to birth, as the old one disintegrates like a train wreck in slow motion.

How long it will take to reshape the global economic map, or what its ultimate shape may be, we do not know, but there is no return now to either classical or Keynesian economics. Nor can America regain its political and financial hegemony which until recently seemed beyond challenge and which gave the semblance of a global economic unity. We do not know what will replace the American empire, any more than we knew a century ago what would replace the once unchallengeable power of the British empire. What we do know, by simply looking at the numbers, is that America’s national debt is now so great that it cannot even be serviced, let alone repaid, whatever economic discipline or energy may be brought to bear. That fact will soon enter public consciousness and affect political decisions of every kind, even though the average person may be completely unaware of it at the present time. 

Military Keynesianism has its seeds in the “Cold War,” which made an arms race with Soviet Russia inevitable, for it was in reality a struggle for global dominance between two emerging empires as well as two political ideologies. When the Soviet empire collapsed in 1990, one would have expected that the American military establishment would have been run down, if only for economic reasons, and indeed during the Carter administration this was already taking place, but, as will be explained on the page The New World Order, there were those on the fringe of government who had other plans. The neoconservatives - working under the banner of PNAC – The Project for a New American Century – were prepared to throw all the economic resources of the country into a gamble that American could establish permanent dominance, economic and political, of the whole world. It was an ambition worthy of Rothschild himself, driven not by gaining control of monetary gold but the black gold of oil.

Tracking down the actions and the influence of the PNAC leads into areas where fact  mingles with probability, and the compass bearing that must continually be consulted is the need for America to secure its oil supplies, which in turn entails military dominance across the world, but especially in the Middle East.  This has led to an alliance of interest between the US and Israel, which calls for particular scrutiny, as it has the widest implications for world peace and international justice. The box below attempts to make the point briefly that Israel has been a necessary partner in securing America’s oil supplies. The simple fact is that America and Israel have a unique relationship in which each now considers that it depends on the other for survival.

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The Israeli Connection and Beyond

A significant part of the American military budget has been incurred through supporting Israel, for two reasons, of which one is very obvious. The precise amount of financial support cannot be calculated, but it is reasonable to assume that most of the large and sophisticated weaponry that Israel possesses has been paid for by the American taxpayer. Since so much of America’s oil imports came from Middle Eastern countries with hostile regimes, especially Iran and Iraq, to have the Israeli armed forces effectively policing this region and keeping the oil supply secure was the main plank in American foreign policy.

Over the past half century the relationship between America and Israel has become increasingly symbiotic, that is to say, it has gone beyond mutual assistance to a situation in which neither of the partners could exist without the other. In fact, there has been criticism voiced in and out of Congress that the Bush administration is following an Israeli agenda to the detriment of America’s interests and that it is now the subordinate partner, in what has become a “tyranny of dependence.” The political and economic leverage which Israel is able to exert is greatly increased when one considers that several key electoral areas in the US Congress rely heavily on the Jewish vote, of which New York City is the most obvious. These matters are, understandably, sensitive and criticism is often countered with the charge that it is no more than anti-semitism masquerading as genuine politics. The factual basis can be found in the 2007 book of the Harvard professors, John Mearsheimer and Stephen Walt, The Israel Lobby and US Foreign Policy, a New York Times best seller, which raised a storm of controversy still ongoing.

This is dangerous territory for an economist to enter, but there is no doubt that The Project for a New American Century followed from a similar Israeli document, Clean Break: A New Strategy for Securing the Realm on which three members of the PNAC – David Perle, Douglas Feith and Stephen Wurmser - had worked in cooperation with the Israeli government of Benjamin Netanyahu. (As diaspora Jews, the three had Israeli citizenship as well as American, a fact of significance, since any conflict of national interests would force a choice of primary loyalty.) Clean Break set out the arguments for adopting a geopolitical strategy “based on an entirely new intellectual foundation, one that restores initiative and provides the nation with the room to engage every possible energy on rebuilding Zionism.”  (Quoted from The Guardian 9/3/2002). The strategy hinged on “repudiation of the ‘Land for Peace’,” principle, which was the basis of the Oslo Peace Accord.  

Reading the two documents (PNAC and RAD) together, it is hardly possible to avoid the conclusion that they are two parts of a single geopolitical agenda with enormous economic consequences. Control of the Middle East and its oil is the first and most obvious goal, but the thrust of both parts is global dominance through control of central Asia. It is in essence a revival of what Rudyard Kipling called “the Great Game,” a theory later promoted by Sir Halford MacKinder that whoever controlled this area controlled the world. It was hardly plausible even when the British navy ruled the seas, but in an era of nuclear weaponry is a Dr Strangelove fantasy, resurrected with the discovery of oil in the Caspian basin and the need to control the pipelines planned to go through Afghanistan and Syria.

A less visible, but perhaps more important, connection between US economic policy and Israeli interests may lie in the fact that several of the key figures in PNAC, were students of the political philosopher Leo Strauss at Chicago University, and were greatly influenced by him. The so-called “Strauss doctrine” without doubt played a part in setting the ruthless tone of the PNAC and the subsequent militarization of the US budget, when Strauss’s disciples came to power in the Bush administration. The most notable of these is probably Paul Wolfowitz, who was appointed by George Bush as Deputy Secretary of Defense and later President of the World Bank. These appointments can hardly have been coincidence. Strauss was Jewish, and a refugee from Nazism, an experience which, paradoxically, made him an almost obsessive opponent of liberal democracy. It was his contention that the hyperinflation in Weimar Germany, which a weak democratic government allowed to happen, was responsible for the social breakdown that brought Hitler to power and resulted ultimately in the Holocaust. Such a logical chain is traced by many historians, but the implementation of “strong government”, as argued passionately by Strauss, tends in practice to go to the other extreme in substituting totalitarianism for democracy. Once an electorate has come to accept permanent war as a norm, individual rights become increasingly restricted, and it is considered unpatriotic to object when even the constitution is violated. Few voices have been raised against the Homeland Security Act and the Patriot Act, which override basic rights such as habeas corpus and freedom of speech. When economic power depends on military power, democracy is the loser.

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The End of Empire

It is the greatest of ironies that the consequence of piling up national debt to buy military supremacy is that America is now moving towards a situation of global economic impotence and impending poverty. The national debt has increased by leaps and bounds to a level at which current expenditure can only be maintained by generating more debt and monetizing it. The overarching question is how long the rest of the world will continue or can continue to accept this state of affairs.

American industrial power is still strong, but has declined dramatically in the past half century, as it has expanded in China and the Far East, and the American economy is now heavily dependent on service industries and home-building, which is now in a slump. In 1965 manufacturing made up more than half of the American economy, but less than ten per cent in 2015, and real earnings went down in this period. That the nation’s social and individual impoverishment has not yet been widely seen is because the accumulating national debt has been pushed forward into an indeterminate future, to be paid by the next generations of taxpayers.

A second kind of bankruptcy has been created by economic militarism. Expenditures on weaponry and maintaining US forces in well over a hundred countries across the globe represents public money that cannot be spent on maintaining, let alone on improving, society. The physical infrastructure of roads, railways, sewerage, water and oil refinery facilities have been neglected, some­times to a dangerous state. The failure of a single electricity generator in August 2003, for instance, disabled so much of the grid that forty million homes in north eastern America and Canada were left without power for a day.

A third effect of economic militarism is  a kind of social bankruptcy building up through neglect. To quote Johnson again:

We are failing to invest in our social infrastructure  …. Our public education system has deteriorated alarmingly. We have failed to provide health care to all our citizens and neglected our responsibilities as the world’s number one polluter.

This has all created a moral as well as economic bankruptcy, for the shifting of the tax burden into the future is a great injustice.  In a letter to James Madison in 1789 George Washington stated this principle in the strongest terms:

No generation has a right to contract debts greater than can be paid off during the course of its own existence.

The cost of continuous warfare on a global scale has become too great to sustain. It must all shrink eventually, and the kind of economics that America must then adopt is difficult to imagine. Inflating the currency may keep the present system running for a few more years but collapse of the currency will bring military spending to an end, at least on anything like the present scale. What nation will then take over America’s crown and assume its economic hegemony? This is food for thought. Russia and China are waiting in the wings.

A century ago the British admiral “Jackie” Fisher famously said, “Five keys lock up the World – Singapore, the Cape, Alexandria, Gibraltar and Dover.” At that time the Royal Navy held all five keys, and was able to maintain a global empire – and to a large degree global peace. Today an ominously similar pattern of control is developing but with Russia holding the keys to global oil transmission. It needs little hindsight or wisdom to see that the American grand strategy has not only bankrupted the nation, but has delivered it into the hands of its enemies. A resurgent Russia has built a potential empire on its own oil and natural gas resources, and is now ready to use its power. Global currency turmoil has weakened the Russian position, but that is likely only to postpone its agenda of reasserting its power through control of energy.

The historian Anthony Beavor invented the term “national autism” to describe the lack of normal awareness that empires seem to develop, and we are now approaching a situation in which this ignorant tribalism threatens the world with the most devastating consequences. Admiral Fisher’s locks have been replaced by chokepoints in oil and gas pipelines which are largely controlled by Russia. Europe is now dependent for energy largely on the pipelines that bring in Russian gas under the Baltic and through Ukraine, and by judiciously turning off the supply briefly in the depth of winter, Russia has sent a signal to the West of the political pressure it could exert by turning it off for a longer period.

The American response to a growing awareness of these critically changed circumstances has been to issue a silent threat to Russia in the form of missile installations in Poland and other countries, encircling Russia from the West and South. The world has never been in greater danger of global nuclear war, for we have two continent-sized nations each feeling threatened by the other. With two empires each having a different kind of noose around the other’s neck, the threat of war must become greater as the world’s oil supplies diminish.

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Deflation or Inflation | Hyperinflation: A Lesson from History | The Bankrupting of America | The Israeli Connection and Beyond | The End of Empire

 

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