“What do you mean?”, queries Joe.
“You recall how you said that the U.S. economy was fundamentally the strongest in the world? Well that’s not quite true. Sometime ago, U.S. growth began to falter, and the Authorities opted for a debt-driven, consumer-led economy. Money was printed (as credit), and – normally – a lot of new money or debt in circulation, would have created inflation (such as we had during the Reagan Administration).
“How we managed this difficulty (apart from regularly re-jigging the price index), was by the so-called ‘China Trade’. China was then in the midst of its Industrial Revolution: they sent cheap products to Walmart. They effectively subsidised the middle classes, by giving U.S. a standard of living – access to cheap consumer-goods – which otherwise, we could not have afforded. And better still, they recirculated the monetary proceeds back to Wall Street, through buying U.S. Treasury bonds.
“The point here, was that in so doing (buying our debt), the Chinese allowed U.S. to shrink our created, new-money ‘footprint’, by exporting U.S. dollar debt out of harm’s way – to Emerging Markets. We have lent out $13 trillion in this way, thus repressing the domestic money footprint.
“These little ‘tricks’ were necessary to avoid inflation. But the inflation threat was mitigated also, in another way. All this new money was used to ‘financialise’ and leverage ‘everything’, from healthcare to education. They blew ‘bubbles’.
“This gave U.S. a simulacrum of ‘growth’ – but money-printing did not make the dollars available to you, I’m afraid, Joe. They got stuck in the financial system and were hoarded. You may have noticed that times were getting less rosy. But that was also a result of the U.S. business model, which has always prioritised capital formation and allowed labour costs to take the strain, or be eased-down by off-shoring labour costs to overseas.
“Ah, but what of the ‘hidden war’ that you spoke about. How does that fit in?”, asks Joe.
“You recall what I said earlier about Britain fearing that it could not stay at the pinnacle of international power forever? And seeing Germany somehow coming together, and building-out towards the East, in order in order to rival Britain? Well, China some years ago, stopped re-circulating the proceeds from the China Trade back to Wall Street, and instead started building-out towards Central Asia. It began spending the proceeds of the ‘China Trade’ building the Belt and Road, instead. As Germany had threatened to rival Britain, China was on a path to rival America.
“This posed a problem for the U.S.: firstly, how now to finance that China Trade; and secondly – not least – how to let the middle classes’ down gently, from the loss of their ‘China Trade’ ‘subsidy’, and avoid a ‘revolt’ inside the U.S. The blowing of the housing ‘bubble’ was intended – at least partly – as the offset.
“Equally problematic for U.S. was that the Chinese-Russian Eurasian project, was intended to channel trade – in a hugely important sphere, including energy and raw materials – not via our channel – the dollar – but rather, away from it. The dollar has been ‘squeezed’ by the de-dollarisation crowd since at least 2007.
“Hence all the ‘tricks’ in the toolbox that I outlined earlier. But it got worse: We have tried to keep all the oil sales in the world going through the dollar (sanctioning non-compliant producers, creating instability of supply etc.), but scattergun of sanctions just brought everybody into our jurisdiction, and made their financial systems subject to arbitrary U.S. Treasury threat. The world doesn’t want to do that anymore. The revolt grew.
“This, in essence, was the ‘hidden war’. And it was not going so well: The U.S. Treasury – simply – was running out of further bubbles to blow. Finally, it had resorted to blowing the ‘everything bubble’ to maintain the appearance of a strong economy; but as this structure became ever bigger, more leveraged, more complex and thus opaque – so it became less stable. The Coronavirus ‘pin’ popped the bubble – forcing Washington to deploy unlimited money-printing, and to bailout simply, ‘everything’ (which is the inevitable ‘logical’ response to an ‘everything bubble’, I would imagine)”, said the Alchemist.
“Then, what happens now” blurts out Joe, alarmed: “Will it end in war, like in the 19th Century?”
“Possibly, but probably, not”, responds the Alchemist calmly. “China is too powerful, but its economy inevitably will have been weakened too. More likely, America will continue the struggle against China (and Russia) through proxies, such as in Venezuela, or in the Middle East. (Iran though is a special case, on account of Israel).”
“At the end of WW1, European economies had been partly shut down by the war – and there were huge dollar debts owing to the U.S. Today, western economies are in partial lockdown due to Covid-19. And national debts today are similarly, more or less, at levels associated with (real) wartimes. And there is the $13 trillion – owed by emerging markets, and for which repayment in full, now must be viewed as problematic.
“After WWI, there was no debt forgiveness (no debt jubilee), just a pass-the-parcel practiced by the European states, as they tried to off-load their debts onto others. To find an exit, some hoped that austerity could fix the problem. But others did resort to ‘helicopter money’ (much as the U.S. is so doing, in its response to the Covid-19 lockdown). The gold-backed German Reichsmark became the unbacked Papermark. Initially, the Reich financed its war outlays, in large part, through issuing debt. But From May 1923, the quantity of Papermark started spinning out of control. Wholesale prices skyrocketed. By 1918, you could have bought 500 billion eggs for the same money you would have to spend, five years later, for just one egg. The Papermark was scrap value.
“With the collapse of the currency, unemployment was on the rise. Hyperinflation had impoverished the great majority of the German population, especially the middle class. People suffered from food shortages and cold. And political extremism was on the rise. This is a real risk, since all the earlier Treasury gigs to suppress inflation are no longer available.
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