Saturday, November 3, 2012

Government spending, fiat currency and systemic collapse

Writing from Mexico, analyst Hugo Salinas Price has published two articles that I think express very well the political and economic reality that's looming over us like a tsunami.

In the first, 'The house has burned down', he analyzes Europe's current dilemma and points out that it applies equally to many other countries, including the USA.  Here's an excerpt.

In 1999 the Euro was installed as the single currency for a central group of European nations. The interest rates of the various nations were to be set by “diktat” of the European Central Bank. No nation was to be allowed to have a Fiscal Deficit of more that 3% of GNP.

Thus was set up the orgy of government and private sector borrowing and spending on the part of the hot-blooded nations of Europe, that is to say those that form the “Club Med” of Europe: Greece, Italy, Spain, Portugal, with the participation of Ireland and even France. Never were seen nor dreamt of in dreams such low interest rates and such easy credit in those nations.

The spending was gigantic. Never was Europe so happy. The governments showered benefits upon the governed. Life was pleasant, free of worries. The good life was assured: modern housing, autos (his and hers), free education for the kids, medical and hospital insurance, generous pensions for early retirement, a monthly check in case of unemployment; in Italy, three months’ vacations. The standard of living in Europe was the wonder of the world.

What nobody saw, was that the Europeans were burning their financial house down while they went on vacations, munched their tasty “hors d’oeuvre” and washed them down with delicious wine ... Europe burnt down its house when its governments and private sectors took cheap credits in gigantic quantities and spent the funds on current expenditures to please the people with benefits and services, on maintaining a bloated bureaucracy in comfort, and on unprofitable investment projects.

. . .

It’s not only the European house that has burnt down. Right here in our own back yard, the US house is on fire and burning brightly; the Americans who live in the US house have still not quite caught on; the people in MSM are doing their best to keep expectations up. But sooner or later the fact will be self-evident. Watch for teepees being set up.

There's more at the link.

In the second article, 'Reflections on the effects of War as compared to the effects of Fiat Money', he claims that fiat currency has been as devastating as armed conflict to the world's economies.

Cheap goods from the under-developed countries began to flood the economies of the developed countries, with insufficient compensating purchases of goods on the part of the under-developed countries. Industries began to move out of the developed countries and into the under-developed countries which enjoyed burgeoning export sales.

De-industrialization of the West set in under globalization, which was constantly extolled as the new, modern and progressive structure of the world’s economy. Old industrial buildings were transformed into structures harboring cafés, restaurants and art shops.

The de-industrialization was masked with credit expansion facilitating consumption, not production, which was un-economic under the globalization scheme. Stagnant or falling wage earnings were supplemented with easy credit for the masses.

This all happened because the money the world has been using since 1971 is fiat money, not real money. But still, at this date, you hear very few voices recognizing this fundamental fact.

Modern war means destruction and death for masses of people. When WW II was over, the destruction began to heal. The cities were rebuilt, the survivors went back to what they had been doing when the war broke out: they returned to earning their livings with work, doing what they knew how to do. Normality returned, generally speaking.

But consider the effect of fiat money on the whole world.

The whole productive structure of the world has been overthrown. The factories that have vanished in the developed nations cannot be rebuilt. Globalization makes them un-economic.

The apparent prosperity of the developed nations of the world today has been sustained by credit expansion, not by savings. The West has been living like an heir to a great fortune, wasting away its inheritance. It is now bankrupt. The continuance of a whole way of life is now in danger of collapse, because it is becoming impossible to expand credit any further.

Again, more at the link.

One must acknowledge that Mr. Price is writing for a Web site whose very name, the Spanish word 'plata', means 'silver' in English.  It's clearly in his own commercial interests to promote the importance of precious metals as an investment counterweight to the perceived 'evils' of fiat currency.  However, even making allowance for that 'professional bias', I can't find much with which to disagree in his analysis, even though it may be a bit 'over the top' in places.  I think he's got the fundamentals right.

What say you, readers?



Rev. Paul said...

Sounds about right to me, too.

tweell said...

'Give me control of a nation's money and I care not who makes the laws.' - Mayer Amschel Rothschild

Anonymous said...

"The factories that have vanished in the developed nations cannot be rebuilt. Globalization makes them un-economic."

I'm not getting that bit. Asia does not have what my econ teachers would call a "trade advantage" (like the advantage you get with geographically centered resources like, mined metals) in manufacturing. Factories moved there because they'd work for nothing. That's already changing. So, why can't manufacturing happen in North America? -BoydK