In less than two generations, America has squandered the human sacrifice, blood, sweat and tears of than seventy decades. We have been an independent country for 226 years. From 1783 until 1946 was an unrelenting upward trajectory for the beacon of the free world.
With the end of World War II, America was the last country standing. Germany and Japan were in shambles. Russia had lost millions of citizens, with Stalin about to murder millions more. Great Britain was a shell of its former self. The American Empire had been born. We were the manufacturer to the world. We rebuilt Europe and Japan. Our military was dominant. We made the best automobiles. We built 41,000 miles of national highway over two decades. In 1946, one in three U.S. workers was employed in the manufacturing industry.
Today, less than one in ten workers makes something.
In the years following World War II, the United States ran trade surpluses of 2 percent to 4 percent of GDP. We regularly ran surpluses until the late 1970’s. Since the late 1970’s, the United States has run increasingly large trade deficits, reaching 6 percent of GDP in 2007. For the last three decades, Americans have tried to spend their way to prosperity.
The government politicians and their moneyed backers have sold the idea that Americans could be the thinkers for the world, while other countries could do the menial work of producing stuff. After thirty years we are left with a hollowed out economy of paper pushers. It may be a reach to transition the Wall Street geniuses who created Mortgage Backed Securities, Credit Default Swaps, Credit Default Options–MBSs, CDSs, and CDO’s– into jobs building bridges. In truth, many of America’s manufacturing jobs are gone. Too many of the nation’s workers are left to sweep the streets they used to own.
After three decades of burning our furniture to keep warm, we are left owing the rest of the world $2.7 trillion. Many of these countries don’t like us. Ben Bernanke is actively trying to drive the value of the U.S. dollar down, while decreasing interest rates paid on this government debt. As Ben prints trillions of new dollars, the value of China’s, Japan’s and the oil exporting countries’ holdings goes down. The U.S. will run a $2 trillion deficit in the next year. We need these foreign countries to buy at least $1 trillion of our new debt. We are sure they will do so. Our reasoning is, what else can they do. From a purely financial standpoint, it is insanity for a country to make an investment in an asset paying 2.5 percent interest, when in one day last week the Federal Reserve purposely knocked the value of the dollar down 5 percent in one day, wiping out two years of interest income.
The Chinese are not fools. They can clearly see that the U.S. will try to devalue our way out of our financial mess. They are going to put the $500 billion of USD holdings to work, before it becomes worthless.
Recent examples reported by the Washington Post have been:
• On Feb. 12, China’s state-owned metals giant Chinalco signed a $19.5 billion deal with Australia’s Rio Tinto that will eventually double its stake in the world’s second-largest mining company.
• On Feb. 17 and 18, China National Petroleum signed separate agreements with Russia and Venezuela under which China would provide $25 billion and $4 billion in loans, respectively, in exchange for long-term commitments to supply oil.
• On Feb. 19, the China Development Bank struck a similar deal with Petrobras, the Brazilian oil company, agreeing to a loan of $10 billion in exchange for oil.
• Iran announced that it had signed a $3.2 billion agreement with a Chinese consortium to develop an area beneath the Persian Gulf seabed that is believed to hold about 8 percent of the world’s reserves of natural gas.
The Chinese have a long-term plan to rule the world. They are buying up natural resources throughout the world. The walls are closing in on the U.S. The U.S. solution is to print more dollars, borrow from future generations, and tax their citizens more. Ben Bernanke has rolled the dice, but the fear is in his eyes, not our enemies’. We will shortly realize that our castles were built upon pillars of salt and pillars of sand.
Never in the history of the world has a bubble burst halfway. Every bubble has collapsed to its starting point or below. The pundits on CNBC and on Sunday talk shows continue to predict a stabilization of the housing market. They are wrong. The bubble is still deflating and will not end until home values are back to 2000 levels, if we’re lucky. Examples of bubbles that fully deflated include the tulip bubble of 1637 - 1638, the South Sea bubble of 1719 - 1722, the Nikkei bubble from 1983 until today, and the NASDAQ bubble from 1999 – 2003. The United States has three bubbles that are deflating simultaneously, compliments of the Federal Reserve, George Bush, and Congress. Housing, consumer spending, and U.S. total debt are all at different phases of bubble deflation. No matter what politicians attempt, these bubbles cannot be re-inflated. They will deflate fully.
Tulip mania struck Holland in 1637. The whole nation was consumed by tulip bulbs in the first recorded speculative bubble. Contract prices for tulip bulbs reached astronomical levels and then suddenly collapsed. At the peak of tulip mania in February 1637, tulip contracts sold for more than 10 times the annual income of a skilled craftsman. In a matter of seven months, fortunes were made and lost. The bubble popped completely.
The South Sea Company was the AIG of the 1700’s. It was a British joint stock company, founded in 1711. The company was granted a monopoly to trade as part of a treaty during the War of Spanish Succession. The company assumed the national debt England had incurred during the war. In 1719 the company proposed a scheme by which it would buy more than half the national debt of Britain (£30,981,712), again with new shares, and a promise to the government that the debt would be converted to a lower interest rate, 5 percent until 1727 and 4 percent per year thereafter. The purpose of this conversion was similar to allow a conversion of high-interest but difficult-to-trade debt into low-interest, readily marketable debt and shares of the South Sea Company. These are the games that declining empires play when they have overreached in their empire building. The plan sounds a lot like Tim Geithner’s “Good Bank Bad Bank” scheme. Shuffling debt from one entity to another entity doesn’t get rid of it. It is just a scam paid for by taxpayers.
The price of South Sea Company stock went up from £100 a share to almost £1,000 per share. Its success caused a country-wide investing frenzy by peasants, businessmen and lords. The price reached £1,000 in early August and the level of selling was such that the price started to fall, dropping back to £100 per share before the year was out, triggering bankruptcy among those who had bought on credit. The English Parliament reacted to the crisis exactly the way our current clueless bunch of moron Congressmen are reacting to the AIG debacle. The estates of the directors of the South Sea Company were confiscated and used to relieve the suffering of the victims, and the stock of the South Sea Company was divided between the Bank of England and East India Company. A resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and tipped into the Thames River. I’m sure Barney Frank is preparing a similar resolution regarding AIG executives. No one can calculate the madness of men.
Japan Inc. was going to dominate the world. From 1983 until its peak in 1989, the Nikkei rose from 7,500 to 38,900, a 500 percent increase in seven years. Following World War II Japan implemented tariffs that protected their industries from overseas competition. This resulted in large trade surpluses and an appreciating yen. With artificial protections, Japanese companies made mal-investments. Easy money and false confidence led to a frenzy in the stock market and real estate market. Japanese banks had financed this speculative bubble with high risk loans. The PE ratio of the Nikkei reached 78 in 1989. Twenty years after this peak, the Nikkei hit a low of 7,500 this year, the same level it started at in 1983. This has occurred despite spending billions on make work stimulus programs, reducing interest rates to zero, and artificially reducing the value of the …