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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Bill Buckler
June 4, 2010
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The Global Financial Crisis (GFC) provides the best example yet of the destruction that dishonest “money” causes. In the US in particular (still sheltered from the full effects of the GFC by virtue of the Dollar’s status as the “reserve” currency), the example is at its clearest. The evidence for this is that, in sharp contrast with the last big US economic crisis (1971-1982), there has been almost no debate on the only really fundamental issue in question, the NATURE of the money being used.

Thus far in its progress, the GFC can be broken up into three stages. The first stage went from early 2007 until the Lehman bankruptcy in September 2008. Two things stood out during this stage. First, US politicians and central bankers unanimously described what was going on as a “glitch” in the banking system which would have no effect on the “real” economy. Second, and on an international basis, this was the only stage of the GFC - so far - during which there WAS some mainstream debate about money itself. There were many calls for a “new Bretton Woods”, a new currency or currencies to “underpin” the system and even some discussion about bringing Gold back into the system on an official basis.

The second stage came with the US government’s refusal to bail out Lehman and the instant result, an almost instant deep freeze of the global interbank payment system. The “glitch” in the banking system had become a grave threat to the EXISTENCE of the banking system. The government came riding to the rescue with gargantuan dollops of new spending and promises to pay. Right along with this, discussion about the nature of money was snuffed out. It has not, with very few exceptions, been seen since.

The third stage of the GFC, and the one we are in now, is the “sovereign debt crisis”. Just as the two first stages exactly matched the first two stages of credit deflation which The Privateer analysed nearly two years ago, so this stage perfectly mirrors the third stage, the point where governments “go broke”. It had to come at some point. It did come at the end of 2009 when the US-based ratings agencies started to downgrade the peripheral European nations. The fact that Europe was picked out was no accident. The Euro was the number one challenger to the US Dollar’s unique position as the world’s reserve currency. Not any more, not according to mainstream political and economic analysis anyway.

What has been seen as the sovereign debt crisis which has evolved in Europe this year is an almost carbon copy of what was seen in the lead up to and the aftermath of the Lehman bailout in late 2008. The difference is that the European “powers that be” were far more reluctant to bite the bailout bullet than were their counterparts in the White House, the Treasury and the Fed in September/October 2008. The Europeans took more than five months to finally cave in and announce that they were going to drown the situation in newly created paper. In the US, the deed was done over a weekend.

The problem presented to the EU today by their more “profligate” members is very similar to the problem which Washington DC has faced with their bankrupt states ever since California started to pay their public servants with “IOUs” a couple of years ago. In fact, a recent survey ranked all “nations” as to the likelihood of them defaulting on their debts in the future. California (the state) came tenth, one position behind Greece which came ninth. The point which is still being ignored is that nations have been “reneging on their debt” regularly for decades. Argentina came first on the list simply because it is the nation which actually did it most recently. They officially defaulted on $US 100 Billion of “sovereign debt” in 2002. Argentina’s present debt is about $US 150 Billion, more than it was in 2002. They have been propped up in part by Hugo Chavez, the President of Venezuela, who has been buying Argentine bonds with oil revenues - and demanding a very high interest rate in return.

But whether you are talking about Argentina, Greece, California, Japan, the UK, the US or any other nation, the same factor predominates. There is not a particle of a chance that ANY of them will ever pay their debts off in full and in money which retains the purchasing power it had when the debt was created in the first place. Deflation is anathema to governments and central banks everywhere because it increases the cost of servicing their debt. Inflation is the universal panacea because it allows old debt to be serviced and rolled over with depreciated money, the inflation being the cause of the depreciation.

The problem that governments face today is that they cannot depreciate their money fast enough to keep their debt loads “affordable” without running an ever increasing risk of wiping it out as a viable media of exchange. Their choices are quickly narrowing down to only two. Either start cutting spending drastically in REAL terms or face the collapse of the “legal tender” which is the source of their power.

There is a third choice - habitually resorted to by governments at the end of their financial tether - war.

Whose “Austerity” Really Matters?:

In the context in which the word is being used today, “austerity” refers to governments cutting back on their programs and their spending. There is no demand as yet that governments actually balance their budgets. Even in Europe, the 3 percent of “GDP” beyond which deficits are not supposed to rise has been breached by every government and obliterated by most of them. The problem for the vast majority of governments today is that they have what are called “structural” deficits. These are deficits which are said to be independent of the economic “cycle”. It is the part of the deficit which is said to remain – no matter how fast the “economy” grows - and can only be addressed by direct government action. The major components of these structural deficits are pensions and health care, the pillars of the welfare state.

The amount of real wealth (and the effort and time expended by those who created it) that has been swallowed by the welfare state is literally incalculable. All of it has been taken by force by governments and spent as “general revenues”. It is gone as surely as the meal you ate last week or the car you took to the wreckers twenty years ago. All that remains are the liabilities. These liabilities are tangible in the form of the unfunded promises governments have made to “take care” of its citizens. They are intangible in the form of the attitude of dependence they have bred in most of these same citizens. In THIS context, a government is “austere” to the extent that its citizens are NOT dependent on it. Austerity does not merely mean a reduction in government spending, it means a reduction in the power of government.

This is the BIG problem. It is all embracing. It reaches from the aged pensioner cashing a government check to eke out another week or month of existence to a $US multi TRILLION “sovereign wealth” or hedge fund fleeing into the “safety” of (ever more selective) government debt paper. If the problem was merely the size of the government bureaucracy, it would be difficult but manageable. For less than what has already been spent and promised to “fight” the GFC, every bureaucrat involved in the working of the welfare state could have been retired at a very comfortable income for the rest of his or her life. This would be a government “investment” in the true sense of the word, as long as the “departments” once staffed by the bureaucrats were abolished and the buildings placed on the market for some useful purpose.

The “structure” (there’s that word again) of modern governments is all pervasive because it is all
powerful. The fact is that government produces nothing, it merely extracts wealth from those who produce it and redirects that wealth into areas where those who produce it would not place it if given a choice in the matter. If this were not the case, government redistribution would be superfluous.

As things are, the only things left standing to stave off a descent into economic and political chaos are government “guarantees”. Comfort, or at least a chance to survive in old age, is “guaranteed” by government. Medical care from the flu shot to the life saving operation is “guaranteed” by government. The chance to walk into a restaurant without being stigmatised because of one’s skin pigment is “guaranteed” by government. The ability of banks to return what has been entrusted to them (up to a certain level) on demand is “guaranteed” by government. The chance to reshuffle the deckchairs on the Titanic, which is what “democracy” amounts to today, is “guaranteed” by (most) governments. Everything is “guaranteed” by government - except the right to stand on one’s own two feet.

The fact that the only certainties in life are death, taxes and monetary debasement is guaranteed as long as government is handing out all the other “guarantees”. This has always been the case. As Hans Sennholz put it in his excellent short book - Money and Freedom: “The history of Western society is a long register of the struggle between the individual longing to be free and the political lord insisting on sovereignty and order. Where people seek liberty, self-determination and self-government, they seek to regain their freedom of money or, at least, to force government to be honest in monetary matters.”

This is profoundly true. It also represents the ONLY true cure for the financial implosion that the world is watching with increasing unease. Sadly, the fact that people have done these things in the past is no “guarantee” that they will do them in the future. The future is uncertain. There are no “guarantees”.



Ó 2009 – The Privateer

(reproduced with permission)


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