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Guest Post: Is It Fixable?
Via Simon Black (from 2011 but perfectly relevant) of Sovereign Man blog,
In the 15th century, the highest standard of living in the world belonged to China. Places like Nanjing had reached the pinnacle of civilization with incredibly modern infrastructure, robust economies, substantial international trade, great healthcare, and a rising middle class.
Across the globe, Europeans were living out short, mud-filled, brutish lives in squalid poverty, dying off by the thousands from the bubonic plague. They were practically Neanderthals compared to the Chinese, and explorers like Marco Polo wrote fanciful tales of wealth and opulence in the east.
If you had told a Chinese merchant at the time that, over the course of the next several hundred years, global primacy would shift to Europe (and a relatively unknown American continent), you would have been laughed at. It was simply unthinkable given how advanced China was over the west.
And yet, it happened. History shows us that the great things about western civilization (Industrial Revolution, technological achievement) and the not-so-great things about western civilization (imperialism, slavery, genocide) caused the tables to turn and primacy to shift from east to west.
Ironically, the tables are turning yet again, and its driven by a number of factors.
At the tail end of World War II, a new global financial system was concocted that was heavily biased to disproportionately benefit the United States. Over the subsequent decades, foreign countries would obligingly mop up US government largess and finance out of control retail consumption.
It got to the point where people felt it was a natural right of Americans to have huge homes, cheap gas, and oodles of junk, as well as a government that could buy anything it wanted without giving a second thought to fiscal discipline. Much of this was made possible at the expense of peasant workers overseas.
For years, they imported US inflation and suffered a tremendous disparity in standard of living, all because of how the global financial system was set up. This system, based on the United States as the center of the economic universe, is now completely fractured, and it’s the biggest game changer in centuries.
Is it possible that such a force can be stopped or reversed? Highly unlikely.
These huge sea changes in the global order happen slowly, like titanic ships changing course in a tight canal. The initial seeds of change were planted decades ago when the US began running consistent budget deficits in the early 1960s, and even before that when the Federal Reserve Act was passed in 1913 (which forever corrupted the nation’s money supply).
The negative momentum has been building for an exceptionally long time. Today’s debt, inflation, and unemployment crises are merely the latest symptoms of a cancer that has been growing for decades.
In total objectivity, the patient is beyond cure at this point… and the math is quite simple.
The US debt situation is already very precarious, and even the government’s own budget shows continued deficits for years and years to come. Undoubtedly, this represents some level of risk for the nation’s creditors, and market participants will require a greater return on investment in order to justify the risk of loaning money to the US government.
Even assuming that all existing debt is rolled into new bonds, higher borrowing costs will absolutely cripple the Treasury. The more money they borrow, the higher their borrowing costs will become; yet, the higher their borrowing costs become, the more money they’ll have to borrow to make interest payments.
Nations typically enter this vicious cycle once they start having to borrow money just to pay interest on what they already owe. The US is already way past this point.
If you study US financial conditions, you’ll see that mandatory entitlement programs like Social Security and Medicare soak up over 75% of all federal tax revenue collected. That’s before paying a penny in interest on the debt. The rest of the budget constitutes several trillion dollars in other expenses like genital-groping TSA agents.
As such, given the current budget just for the sacrosanct areas like defense and senior benefits, tax revenue falls short. America has to borrow to pay its interest expense.
Is it possible for a white knight to come riding in and slash spending by the necessary (and brutal) 50%++ just to break even? Possible, but extremely unlikely without granting him/her dictatorial powers. Getting a majority of 435 members of Congress to sign up for such painful political consequences is dubious at best.
Even still, such cuts would just be enough to break even. In order to actually make progress on paying down the debt, one would have to make even steeper cuts… and that’s just at today’s levels. The debt grows worse by the day, as do useless ‘economic recovery’ spending measures.
As such, borrowing costs are set to rise, causing the budget deficit to spiral out of control towards an eventual default.
Since so much of the global financial system is based on the US treasury market, this will set off a chain reaction of bank defaults and commercial bankruptcies, not to mention trigger a wave of credit default swap and other derivative obligations to the tune of several trillion dollars.
The other (more likely) possibility is that the Federal Reserve will continue to finance the deficit by conjuring additional money supply out of thin air, eventually leading to a loss of confidence in the dollar as a reasonable store of value.
The only reason this hasn’t happened already is because there is no viable alternative yet, however there are clear signs that investors, foreign governments and foreign central banks are scrambling for a solution [especially with the demand for physical gold remaining high].
Barring a benevolent dictator or some kind of miracle, this situation is unstoppable and irreversible until the next cycle of the global pecking order turns the tables once again.
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It is not entirely clear why China reversed course and retreated back behind it´s wall in the 16th century, but China´s change in policy occurred shortly after the worst plague of the late medieval/renaissance period. Infectious disease may well have played a role in the fall of China... just as infectious disease destroyed the native population of the Americas (who lacked antibodies to fight off smallpox, influenza, and other Euro-Asia-African diseases), paving the way for European expansion.
The importance of infectious disease on the course of history cannot be overstated.
You thinking along these lines perhaps??
http://au.ibtimes.com/articles/473089/20130531/middle-east-respiratory-syndrome-novel-coronavirus-world.htm
Its not all about finance, the dollar or Chinese GDP.
Will the center hold? If it does not hold - who will form a new center?
For much of the 20th century the US has been the global center by which every country (even communist countries,) have been guarateed a certain amount of stability and access to oil and commerce. Access on our terms, but never the less still getting access. Countries looked to our financial/capitalist strength, western ueropean traditions, judicial system and military capabilities.
The country has changed much since the days of LBJ. The center has been weakened through undemocratic ideas and spendthrift ways. But who will replace us? I am not talking about trading systems and arguments about best currencies or the billions of Chinese workers/consumers. I am talking about trust and access to a still functioning legal system and guaranteed by the "911 ready call" of the US military and US citizens.
Were the US not in the center, would most trust the Chinese as a replacement? Ask most of Asia, Europe and South America. You might find the answer suprising.
Hmmm. As a world population we've become quite adapt at productiivty. As we drink our Starbucks, we beat our fist on our chest proud of our ability to use technology. The down side is we have eliminated the opportunity for people to make a living AND we have propelled an increased standard of living beyond a normal slope used borrowed money. We refuse tax increases. We refuse the idea of reducing government spending. The jobs that remain go to the lowest cost provider. The greed of shareholders outweighs the moral responsibility of a corporation. Everyone can offer all these solutions but no one wants to sacrifice. So unless we move to a dictatorship the end is on the horizon...we just don't see it yet.
Wrong. The Fed will buy all the paper and the interest rate will be almost zero with the Fed only taking their 6% cut of all interest paid. By this system as the interest rate approaches the limit zero the money supply can be expanded to infinity.
China was more interested in their emperors and communism than in prosperity.
When the Americans started to do more business with China in 1970, these priorities changed.
The USA is a nation built on an ideology (based on a whole lotta experience from European monarchies/dictators), not a nation built around borders, monarchies nor dictatorships.
USA is the only country of its kind in the history of the planet.