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DOWNTIME Part 13 – The Passing of Nations

On January 30th, Germany’s news publication Spiegel reported, “The bailout packages aimed at shoring up financial markets in Europe are getting increasingly expensive. A creeping depreciation of currency is inevitable and state bankruptcies can no longer be ruled out.” Chancellor Angela Merkel stated, “There is a rumor going around that nations cannot go bankrupt. This rumor is not true.”

Can Nations Go Bust?

Nations go bankrupt when they can no longer service the interest payments on their debt, and the United States is passing perilously close to that possibility. Right now the U.S. debt looks like Dumbo the elephant swallowed a hydrogen tank that’s about to explode inside of him. Abnormally low interest on U.S. bonds is the anti-gas pill that has made it possible to swallow ballooning deficits. The government is inhaling banks that put the meaning in the word “bankruptcy” as if there is no end to the stretch of the government gullet, but there is.

Is it inconceivable that nations like the U.S. could go belly up? Less than a year ago, it was inconceivable to most of the world that Wall Street’s oldest and most respected financial institutions could all go bust. Yet, a year later, their parts are strewn all over the landscape. Since the hydrogen tank blew up inside of Humpty Dumpty, who was sitting on Wall Street, all the king’s men haven’t been able to put Humpty together again. Dumbo may fair no better if he keeps taking on gas. A year ago it was inconceivable that the U.S. would start nationalizing its banks. A year later, it is almost inconceivable if it does not; and, so, a Republican president declared that he had to give up his free market principles. Another inconceivable. The inconceivable is now happening every month.

In less than half a year, the total value of all companies worldwide has dropped by one third. In the U.S. that sifts out as plummeting corporate tax revenue, and lost jobs mean plummeting personal income tax revenue, all while the U.S. government has taken on $10 trillion dollars in bailout liabilities with still no evidence of a bottom being near. (That’s enough to send a check of about $1,500 to every man, woman and child alive on the planet.) Moreover, no one in government seems to know exactly where the money has gone. If all the king’s men couldn’t fix Humpty when Wall Street fell, who’s going to fix the gas-inflated elephant?

What Happens When a Nation Goes Bankrupt?

Government workers go unpaid. Government programs get slashed or simply fail to deliver anything. Government becomes economically powerless and perhaps has to resort to military force to retain control … so long as it can keep paying its military. Because the government cannot finance its debt, it prints money that is not even offset by I.O.U.’s. The U.S. started doing that earlier this year. World history tells us that nations that rapidly expand their currency supply find their currency becomes valueless. Deflation in the value of money equals inflation in the price of goods. That threat is currently being called “stagflation” because the government loses its ability to maneuver and do anything about the economy. The elephant becomes so inflated, his feet don’t touch the ground.

Inflation from growth in the United State’s ballooning money supply isn’t happening right now because the banks are, as you’ve heard, hoarding it all. In other words, none of that new money has, yet, entered circulation. Therefore, it cannot cause inflation… yet. When the credit ice dam breaks and the money starts to flow, however, is when Dumbo’s gas tank explodes into hyper-inflation. Unfortunately, the more the banks hoard the money, the more of it the government creates out of hot air to pump into the system — only pumping up the pressure for future inflation when the hoarding finally does give way. The king’s men think it is safe to keep pumping their gas-money into Dumbo because the elephant is not showing any signs of inflation. What the gurus of government gas have neglected to realize is that all their pumping hoses go directly into that gas tank inside the elephant. The elephant looks fine, inflation-wise, until the tank explodes.

When governments at the top of the world go bankrupt, their movement is something like plate tectonics on the earth’s crust. The Soviet Union collapsed and was subsumed by the small satellite nations that rose up around it. The collapse of Germany into hyperinflation brought Hitler into power and made the whole earth quake with geographic changes. In short, as economies collapse, revolution rises … and so do the efforts to put revolutions down. Nations rise against nations, as Germany did against the world. The map shows upheaval everywhere when catastrophic forces of that size collide.

Spiegel reported on February 9th that tempers around the world are getting shorter, that the French organized general strikes and sang their favorite revolution songs in the streets of Paris, that Russia was sending troops into the streets, and that Beijing was sitting on what could become a rural revolution. So far, these are just burps, but the pressure keeps building

How Much Gas Can an Elephant Eat?

If you really want to get pumped up, forget Al Gore’s fascinating CO2 chart, and look at the Fed’s money supply chart. The amount of money pumped into the economy by the Fed in the past year has skyrocketed far beyond anything seen in U.S. history. If the U.S. tried to offset that by selling treasury bonds right now, it would have to pay astronomical interest to create that much demand for its bonds. Because it can no longer borrow as much money as it needs, it’s creating money by simply decreeing that it exists.

This is a hydrogen time bomb in that we have inflationary pressures building that are not releasing because all the new money is bottled up in bank tanks; i.e., locked in funds that are not even included in the government’s money count. Since there is no inflation, the government continues to pressurizing the money supply in order to try to break through the ice in the credit system. Since the ice is not just easing out of the way, it could be catastrophic when it finally does break loose.

Look at Zimbabwe, for example, where they have mastered this funny money game. In Zimbabwe a trillion notes now buys you a bottle of water… but only if you can find someone who has a bottle of water. The U.S. has long told other nations they need to bite the bullet and not print their way out of financial disaster, but it turns out we have no taste for bullets when it is our turn to bite.

The Bite is On

As more and more governments around the world increase their deficit spending to bail out their banking systems, the supply of bonds mushrooms. That will inevitably mean those governments have to offer much more interest on those bonds. So long as U.S. bonds look more secure than those of other countries, it will continue to be able to finance its debt at low interest; but, if it begins to lose its credit rating, the elephant is in huge trouble.

The likelihood of world investors, especially sovereign wealth funds, moving away from treasury bonds increases daily. China has been talking for some time about pulling away from U.S. treasury bonds. Now, with a lot less American trade, it has far less American money to store; so, it has far less incentive to buy U.S. treasury bonds. With 70,000 factories closed in the last year, how long will China be able to buy anyone’s bonds when it has no money to invest?

If these two problems (the need to pay high interest to roll over U.S. debt and bottled-up inflationary pressures) give way at the same time, it’s going to be the perfect fart. I think the only thing keeping China from pulling out of U.S. bonds at the moment is fear that the U.S. will pass such gas, which is sure to blow everyone around us away as much as it does us. There won’t be anyone wanting to be in the room with that elephant. But you can’t eat gas-based money forever. Sooner or later, you’ve gotta blow.

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