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Modern Economic Logic:
What Goes Down Must Come Up
By David Whitehead
hen it comes to economic downturns, some people believe what goes down must come up again. A scientist applying this logic to physics would say they got it backwards. Any economist with a grasp on reality would have to agree. We can count on gravity to pull things down. But up requires a deliberate effort from somewhere. This is as true with economics as it is with physics. Getting some more up in the economy is what these unprecedented government interventions are all about. The problem is government and financial leaders are upping in a reckless and dangerous manner. The deliberate effort in this case is accomplished by expanding debt disguised as targeted bailouts to stop the economic freefall experts knew was inevitable for a very long time. As it turns out, something incredibly complex is governed by a very simple bottom line: An economic system isn’t sustainable when downward pressures caused by mounting debt grow exponentially in relationship to upward momentum created by genuine economic growth. But central bankers with the complicity of our government would have you believe otherwise. Economic experts call this phenomenon “the business cycle.” This is not a normal process within a sustainable economic system. It’s more like a cycle of seizures in a terminally ill patient. Experts espousing the status quo point to historical data that suggests no matter how bad a short-term economic trend gets, the long-term “cycle” continues to go up. And because we have been through many of these “cycles” over the decades, most people take it as a given that the long-term trend will always be that way. In fact, we have staked our destiny on this misguided notion and are just beginning to pay the price for our ignorance. The myth of the endless business cycle requires some sleight-of-hand deception on the part of financial wizards for the illusion to appear real. And those of us fearful of losing what we have spent decades building are eager to believe these illusions because they make us feel safer. Yet illusions are what they are and reality has no conscience. The dark side of this deception must be confronted at some point.
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And this alludes to what’s different about this economic downturn. There have been several in my lifetime. I’m not old enough to have experienced The Great Depression. But I do remember Carter administration malaise followed by convulsions in the eighties during the Reagan Revolution. Then the early nineties got so bad, many of us would prefer to forget the first five years of that decade. And just when things were looking good again, we were hit by dot com doldrums in 2000 followed by an astoundingly short recession after 9/11. Short only because former Federal Reserve Chairman Alan Greenspan solved it by bottoming out lending rates, thereby creating a magnificent money bubble. Looking back, I can’t help but notice the downturns tended to get worse and the booms that followed were usually more majestic than any before. This was especially so with the stock market, gold and real estate—all known indicators that money bubbles compounded by lopsided international trade were disguising the fact our currency was and continues to get dramatically weaker in real terms. What’s more, during this time central bankers have grown increasingly interventionist in their efforts to control the economy, while Wall Street has become increasingly creative in what it calls an “asset” worth selling to investors around the world. This is largely because no one wants to experience another Great Depression. And no Federal Reserve chairman, treasury secretary or political leader wants to see a large scale economic catastrophe happen on their watch. So as the problems become more insurmountable, the economic policy becomes more radical and increasingly desperate as the situation gets out of control. So now we have a downturn so dangerous, it has forced everyone to focus on the long-term effects of their actions. It has also forced domestic financial experts and political leaders to remove their blinders and learn about the global causes and effects that spurred, and continues to drive, this financial crisis. The end result is people calling themselves “conservative” proposing interventions in the economy as extreme as any Lenin or Trotsky might have proposed. I find that surreal to say the least.
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The Global Chickens are Coming Home to Roost Since the mid-nineties, we have been indoctrinated to believe globalization will improve our lives. Just before the outsourcing revolution started in the early seventies, Alvin Toffler described this phenomenon in his classic futuristic book Future Shock as the transition to “super-industrialized man.” But few at the time questioned how a de-industrialized society could call itself “super-industrialized.” And even fewer questioned how nations could protect their own wealth and avoid the enslavement of debt if they didn’t control their vital domestic resources and produce their own essential goods. This is the conundrum now before us. Toffler’s book was released in 1970, not long before trade deficits were made legal in the United States. Since then, a dollar with no bullion backing whatsoever has been volatile, consumer inflation has been somewhat steady with occasional dramatic spikes, and real estate has soared in comparison to salaries and consumer prices. Foreign investment of various forms has driven the economy, and the ongoing trend has been for public and private sector debt to mount. We are leveraging our position as the world’s reserve currency to keep things going. But that requires global cooperation, which is waning fast. In mid-December 2008, on the heels of the Bank of England lowering its key lending rate to two percent—something it hasn’t done since the institution was established in 1694—the Federal Reserve lowered its own key lending rate to a range of 0.0 to 0.25 percent. Stock markets then dipped on the belief the central bank was running out of tricks to stimulate the economy. The market then rallied as 2008 transitioned into 2009. However, the Dow lost an astounding 34 percent of its value for the year, the third worst decline in its 112-year history and a fraction of a percent worse than 1930! Finally in the second week of January, the Bank of England broke its record again by lowering the rate another half percent to 1.5 percent. Domestic job losses went into freefall in December, with
540,000 people suddenly finding themselves out of work and unemployment spiking to 7.2 percent, the highest in 16 years. In contrast, unemployment was only 4.9 percent a year prior. In 2008 approximately 2.6 million people lost their jobs, the most since 1945. These statistics are mind boggling. Predicting this as recently as a year ago would have been considered reactionary in mainstream circles. That’s why it is a good time to expand your information sources because for years, credible experts have been preaching from the sidelines about these kinds of foreboding events. Perhaps this will be the final bubble of a 40-year debt cycle that will bring this decade’s long cycle of cycles to an end. If there is a “recovery” in 2009 based on these extraordinary bailouts, which as of this writing seem to be having a somewhat positive effect on the stock market, many of us will breathe a sigh of relief. But another false recovery simply puts off the inevitable. And if and when the last possible bubble bursts with devastating effect, then what? W. Orders Up a New Economic Order for the World Outgoing President George W. Bush recently held an economic summit of world financial leaders to begin what will undoubtedly be a long process to replace the Bretton Woods global economic order established at the close of World War II. This is the great financial order best represented by its institutions, including the International Monetary Fund and the World Bank. Its policies rebuilt Europe after the war. The Bretton Woods institutions have been at the forefront of developing the globalized society melting down before us and have been governing international monetary policy for over 60 years. The Bretton Woods agreement was originally based on a U.S. dollar backed by bullion to serve as the world’s reserve currency. But the dollar was taken off the bullion standard in the early seventies, becoming a fiat currency with nothing tangible backing it. Not only did Continued on page 18
The myth of the endless
The Myth of the Endless Business Cycle
business cycle requires some sleight-of-hand deception on the part of financial wizards for the illusion to appear real.
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Continued from page 17 this make it problematic to develop a prosperous domestic economy without incurring destructive loads of debt, it also freed the developing nations to lowball their currency valuations to maximize their export potential. This process is at the root cause of the false economy we have grown to rely on and is key to the illusion of wealth we were collectively conned into believing was real. On the heels of the gold standard’s eulogy, the long process of de-industrializing and manufacturer outsourcing started and then grew steadily over the decades. With domestic industrial output declining at an alarming rate as the world’s nation states were obliged to hold and spend dollars, this highly manipulated economic environment drives the business cycles and instability we have seen over the decades. Although the term “globalization” was coined in the midnineties, the modern version has roots as far back as the 18th Century British East India Company. The British Empire called these organizations government chartered companies. They were more than just private sector businesses. These economic behemoths were literally authorized to govern the lands they cultivated on behalf of The Crown. In fact, Cecil Rhodes used this concept to raise standing armies to subdue southern Africa in the late 19th Century so the West could control the gold and diamond industries. The modern contracting system the Bush administration implemented to rebuild Iraq has sinister similarities to its imperial predecessors. The United States first got into the imperial game about the same time Rhodes was conquering Africa, originally with the United Fruit Company in Latin America. This is the organization that marketed the famous Chiquita Bananas. The United Fruit Company is often referred to as the first global conglomerate and had a reputation for acting as a government unto itself to the point of initiating coups in emerging Latin American nations if it suited its purpose. In fact, this is where the term “Banana Republic” originated. This modern global process actually allows financial powerhouses to collectively act as parallel governments in many situations, and marginalizes the influence of all sovereign nation states in this world. In other words, this is the process that some would argue actually rules our world through raw unadulterated economic power no political leader has the clout to challenge. On a global scale, the nations we once called “third world” leveraged their devalued currencies and cheap labor to develop large scale industries to produce goods for what we still call “developed nations.” All of these nations, including the United States, the United Kingdom, France and Germany, have de-industrialized to some degree. But none have done so to the extent of the United States. And no others could because by not being the issuer of the world’s reserve currency, their money supplies would implode if they tried. In fact, that’s exactly what happened to several Latin American countries during the 1970s when they dove headfirst into radical “free trade” before the rest of the world became addicted to it. Conversely, if the United States could not rely on its status as the world’s reserve currency to keep foreign wealth at our disposal to back the dollar, we could not have dug in this deep in unsustainable debt. It is now crystal clear to say that we should not have—at least if it is our intent to defend our sovereignty as diligently as our national security. At this point, I am not at all certain most of my compatriots give much thought to the issue. Americans were easily aroused to fight global terrorism because 9/11 made it clear to them why it is a threat. But de-industrialization and the possible internationalization of our currency, whether masked by the pegging of the North American currencies to each other or the issuance of an “Amero” style single currency for the continent, doesn’t sink in for most people as a substantial threat to the nation. Let’s face it—Spielberg will never fill theaters making a movie about that. But my question is this: How can a nation state call itself sovereign when it doesn’t control the manufacturing of its essential goods, and at this point some of its essential services, or even its own money supply? The fact is, it can’t. And if sovereignty isn’t important to a nation that calls itself the defender of freedom in the world, I don’t know what is. There are no straightforward answers to the problems I have just laid out. But the global economy will never recover in a sustainable way unless people at all levels of government, industry, finance and most importantly, the media, begin asking the right questions. I hope I have provoked some from you.n David Whitehead is the publisher of Business Insider Magazine. He can be reached at Publisher@BusinessInsider.us
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. . . if the United States could not rely on its status as the world’s reserve currency to keep foreign wealth at our disposal to back the dollar, we could not have dug in this deep in unsustainable debt. It is now crystal clear to say that we should not have—at least if it is our intent to defend our sovereignty as diligently as our national security.
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