Breaking the Camel’s Back

Bill Bonner sounds scarily like me:

We are watching the destruction of an empire. All empires must go away sometime. They are natural things. And nature puts a time bomb in everything she creates.

The U.S. empire is doomed. Just like all the others that went before it. It is doomed by nature herself — condemned by the gods to blow up and die.

None of this should be surprising. We’ve seen this movie before. Hundreds of empires have come and gone. We know how this movie ends. More or less.

What we know for sure is that the U.S. is going broke. There is hardly any other plausible outcome. We’ve gone over the numbers so often we don’t need to repeat them.

Yes, it is true that the feds could still save themselves if they had the will. They could cut taxes to a flat 10% and spend only what they raised in tax revenue. That would do the trick from an economic point of view.

But it’s too late for that politically. Empires have lives of their own. They go forward…expanding…spending…stretching…until, boom, they go too far. Empires do not back up. Some merely go bankrupt. Others are defeated in war. All end disastrously.

Only one presidential candidate favors rescuing the nation’s finances and pulling the empire back from disaster. Ron Paul. He is considered such an unelectable kook that the newspapers barely mention him. And the papers are right. He is unelectable. Because he is opposed by the zombies.

Perhaps my last post got a little fatalistic, just as Bonner does here.

Certainly, the last thing I want is for America to fail, for any reason. As I explained, I believe America’s constitution to be perhaps the most liberty-defending in history.

But if imperial overstretch is the general problem,  things could get a lot hairier.

From the New York Times:

Atomic inspectors in Vienna confirmed Monday that Iran has begun enriching uranium at a new plant carved out of a mountain, an act of defiance that comes amid rising tensions between Washington and Tehran over oil revenues and global sanctions.

More than five years ago, the United Nations Security Council began calling on Iran to stop purifying uranium, which can fuel nuclear reactors or atom bombs. Instead, Tehran accelerated its efforts, saying its nuclear program is entirely peaceful in nature.

Can America afford another war?

Yes — say the military-Keynesians. Just what we need — stimulus! That will do wonders for aggregate demand!

But I say no. Rates are artificially low due to quantitative easing, which has constricted the supply of Treasuries, and due to the Fed’s zero-interest rate policy that punishes saving and investment, and encourages leverage and credit creation. Rates could very easily rise for a number of reasons, which would mean the debt would become much more expensive to service. Even arch-Keynesian Paul Krugman foresaw the potential for such a scenario.

More importantly, the last thing America needs is to lose even more productivity, even more resources and even more manpower to another pointless debt-accruing war, particularly one which will drive the Eurasian powers into deeper anti-Americanism.

America needs her money, her people and her resources to develop her domestic economy and create energy independence. To create wealth, to innovate, to compete.

We will see who is right.

13 thoughts on “Breaking the Camel’s Back

  1. As the dollar -and the rest of the fiat currencies- are losing their value due to money printing, we are approaching a point where the world will simply reject them, and the West will not be able to have oil – at least not at “reasonable” prices by today’s standards.

    This is why the USA “must” attack all the oil states who try to break free from the dollar, and start accepting other means of payment – because no mater how much it costs them to go to war, it will cost them a lot more if the world finally gets of the “dollar standard”, and the value of the dollar goes to almost zero.

    The main thing that prevents the oil states from rejecting the dollar right now is their fear of being attacked by the USA – if that fear goes away, then they will be free to choose what currency to accept as means of payment.

    http://whataboutmarx.blogspot.com/2012/01/oil-wars-stakes-are-higher-than-just.html

    • My view is actually that the real money printing started as a stimulatory response to weakened demand, which has actually been caused by the historic rise in oil (and the resultant cost push inflation) in the past decade. In Japan, the QE money was never loaned so there was no great inflation — it just sat as excess reserves. We will see what happens in America. Eurasia is ditching the dollar. We will see how America responds. I’d say attacking Iran is madness, and could be the trigger for a big spike in rates.

  2. “I believe America’s constitution to be perhaps the most liberty-defending in history”

    But it’s just a piece of paper. It’s so easy to write a constitution. Most people are taken aback when I tell them that the America of the founding fathers had half the population of today’s Portugal and in many ways (besides this one) was totally unlike the one we know today.

  3. I am long USA and its Dollar.

    I have been to the USA. Spent 3 months there. Horrible place if you are poor. Awesome place if your rich. Consumer Goods, Restaurants, Security (Right to bear arms) Wonderful landscapes and getaway destinations (Snow, Beach Forrests, Entertainment)

    The USA just has to open its borders to the rich from all over the globe. I have seen how the Australian dollar was supported by a Cash for visas programme (Spend X$ in a Business in Australia and get a Free Visa and Citizenship)

    This will happen. Australia is their test bed. We are a defacto State of the USA.

    Watch this space.

    • True, USA has a lot of potential. Huge landmass, low population density. But then again, this is also the case for Argentina – and has been the case (perhaps even more so, if I may establish a measure of economic potential/square meter). But while at the beginning of the 20th century Argentina rightfully had one of the highest standards of living in the world, now they are a basket case, and the man who helped turn it into this is still regarded as a hero (Peron).

      You should be careful though with your long dollar strategies. At the end of the 2nd World War, USA’s economy was >50% of the world economy but its share of the global economy is shrinking (currently at 18% I think). Ultimately nobody will care that USA has great landscapes. People from all over the world will demand higher standards of living, and the resources will go to the highest bidders.

      Indeed, as James Grant said, USA’s best export currently is the dollar. I was thinking about these bilateral trade agreements Japan-China, Iran-Russia. Russia would take rials for their products, but will they be able to use them to buy back useful things in the future? Currently, there are these huge amounts of dollars floating around that everybody trusts will be universally accepted and will have a relatively stable value on the short term at least. It’s interesting that nobody really cares too much about the supply or lack thereof of the dollar (QE brings higher worldwide inflation, but it’s still considered acceptable). These arguments about supply/demand have been raised against gold as a universal medium of exchange, but it’s pretty obvious that people don’t care so much about these issues. Gold could easily replace the dollar if some (even electronic) form of gold-backed currency will be established (but this presents problems: who will be administering this currency, and why should one trust this entity). Just shipping gold back and forth is also doable, but the liquidity and instruments that are based around the dollar still make it desirable internationally.

      • Buddy: And another thing; some senior Washington official reportedly told Kyle Bass they intend to “kill” the dollar as a means of growing out of the current economic malaise (through increased exports). I would say: let us not stand in their way! :P

      • Had another idea: there’s no need to create an actual gold-backed currency. The only thing required would be for banks to treat gold as a currency. For example, I could go to a bank and deposit 20 ounces of gold. And then have them wired to an international account for example (where they will arrive as gold) – the banks would then have an infrastructure behind them that would make sure the claims on physical gold are correctly accounted for. As per my above idea this would function as a reserve currency just as well as the dollar would. The price per ounce would be much higher, and I surmise (as per my above comments) the price would also be stable. But for this stability to actually arise, this gold “currency” should be freed from all the likely fraudulent instruments like various ETFs that have no true physical backing (by some estimates, there are paper claims on physical gold to the tune of 60:1). I assume however there are a lot of interests that would fight hard to make sure such an idea would never be implemented.

        • PS: I think that what I’m talking about above is roughy the same thing this guy is talking about: http://fofoa.blogspot.com/ (with his freegold concept); I can say that I only superficially read his articles that are very dense (lack of time), but I gather that he’s roughly saying the same things.

  4. The USA is akin to the great athlete. He got drunk, enjoyed his money, now he is broke.

    He needs to have his “Rocky” moment.

    The amount of propaganda that can be mobilised is breathtaking.

    Watch this space!

  5. The dollar is propped up by China as they need to grow their economy by double digits every year to keep the people happy and under control. Therefore, they need our markets. The rest of the world looks at the EU situation and figures the dollar is a safer bet. How will the next large bubble affect this happy state of affairs? Will the U.S. taxpayer be willing to bail out the gamblers again? What level of inflation will be required to make the debt manageable? Then there is always that gotcha unpredicted by the models: News. Events that are unpredictable in any meaningful time-frame. Natural disasters, a civil war in Saudi Arabia, the realization of peak oil. Let’s hope for a revolution in energy technology on the brighter side.

    If we choose to secure our energy supply through force of arms and bribery I believe we invite disaster. Not only more debt, but a society under seige by the Muslim world. The increased attacks by those we attempt to strong arm will only result in increased loss of liberty. I would hope we can find a better way.

  6. Pingback: The Complex Syrian Situation « azizonomics

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