The US economy
Our money system is going to collapse and take the economy with it. That is the system. The downturn is past due. We’re heading off the chart of the exponential curve of debt and money creation. Over the ten years from 2006 to 2016, our central Fed expanded its balance sheet by 18 percent on average every year. There’s an end to this road and it’s coming up fast.
Our monetary wizards are out of ammunition to manage the next meltdown. It will be too big. But, they’re inside and either don’t see it coming, or figure they’ll have the power and privilege to come out making a profit – even if the national economy collapses. And, some of them will because they have power and privilege and will look out for themselves.
Did the system pressure us to elect a billionaire president who will give Wall Street and the radical generals a free hand because the system requires freer money creation and more war to keep them in business? With all three branches of government in their power, the GOP has been very busy deregulating the financial industry as much as they can. These changes will further destabilize our economy, ramp up the transfer of wealth to billionaires, and erode the common wealth – amplifying the size of the bust.
After the election financiers were giddy in their expectations of a self- benefitting boom – as evidenced by the skyrocketing shares of the biggest banks. Within one month of the election of billionaire Trump, bank stocks gained 20 percent.286 As finance is deregulated, the value of the stock market reached an unhealthy and giddy size of 26,617 at closing in January 26, 2018. But by Summer 2018, the cracks, mini- gyrations, and initial scattered drops that characterize the closing to a crash had begun.287
On election Trump baldly stated that for his cabinet secretaries: “I want people that made a fortune!” Money-making is his measure. Trump’s first 17 picks for cabinet and cabinet level posts had a combined net worth of more than $9.5 billion – more than a third of American households combined.288 Experience in the cabinet’s portfolio of responsibilities, experience managing staffs in the tens of thousands, experience working with Congress…in other words, competence, was ignored in his cabinet picks. Money-acquisition was all that mattered to be on his team. These people are the top 10 percent of the top 10 percent – the ones with money creation power. There is no evidence that they are worthy of our trust or that they will care for the general welfare and domestic tranquility over their own profit-making. Eighteen months into this administration, it feels like the road to the end has become a fast track.
Global money system
International banking follows the same formula that the global banks model in the US, with slight national differences. The global banks hold reserves, and currently a majority are in US dollars. This is money held in banks around the world to anchor the creation of national and global money. To keep using our money as a cash standard and reserve, the world must believe our economy is strong and our nation well led.
Reserve Currency
Global and national banks are nearly all fractional reserve systems, committed to maintaining some level of reserves or equity, or at least pretending to on their books. Globally, as in the US, the ratio of reserves to total money supplies has been shrinking. In the first half of the 20th century, British Sterling was the most used reserve currency, sharing that status with the US dollar, French franc and the German mark. After WWII, the Bretton Woods agreements made the US dollar the primary world reserve currency with a guarantee from the US government that dollars could be exchanged for gold at $35 per ounce. The other countries signing the agreement, then pegged their currencies to the US dollar within a one percent deviation.
The Bretton Woods agreements also created the International Monetary Fund (IMF) and the World Bank. The IMF was formed to be the central bank to the world’s central banks. It monitors exchange rates. And, like any central bank in a reserve system, it sets targets for interbank lending and has the power to create new money for its members by lending (to its members and to nations with trade deficits).
After the US dollar was decoupled from any commitment to exchange it for gold in 1971, the use of the dollar as global reserves began to decline. It dropped to a low of 46 percent in 1991. By the mid 1990s it was back in the mid-60th percentiles, where it has held.289
The US dollar shares the role of reserve currency. In late 2016, 65 percent of global reserves were in dollars. The remaining reserves are in Euros, British pound sterling, Japanese yen, Swiss francs, Canadian dollars, and since September 2016, the Chinese renminbi. In 2016, total global foreign exchange reserves reported to the IMF were $10.8 trillion, of which US dollars accounted for roughly $5 trillion.290 So, we have a domestic money supply of $14–18 trillion (depending on what you’re counting (Chapter 5.49) and another $5 trillion is abroad serving as reserves. Most of those reserve dollars were created by global bankers.
As China and other countries show increasing economic strength, it is reasonable and prudent to assume that the role of the dollar as a reserve currency will gradually diminish, even in our current system. To make that transition steady and comfortable, we need to maintain the world’s confidence in our leadership and the strength of our common wealth. We are not doing well.
We have elected a president most of us don’t like, whose favorability rating with the rest of the world was in the low teens before the election. In 2016 when the PEW Research Center surveyed global attitudes towards Donald Trump, our newly elected president, more 74 percent of the people in every one of the 15 leading countries had NO confidence in Trump’s ability to do the right thing regarding world affairs. Our allies – the UK, Germany, France, Japan had confidence levels ranging from 6–12%. Poor favorability ratings of our president translate into unfavorable views of the US, which dropped from 64 percent at the end of Obama’s term to 49 percent under Trump.291 And, that was before his inauguration.
In his first two months in office, President Trump insulted the leaders of Great Britain, Australia, Japan, Germany, Mexico, and Iran. He withdrew the US from the Global Climate Accord and the Iran Nuclear Deal. He insulted the continents of Africa and South America. In Summer 2018 he insulted Canada, further rudely insulted all of our NATO allies, called the European Union, America’s foe, Germany a captive to Russia, and lavished praise on the world’s dictators – particularly the Russian leader responsible for a cyber and information attack on our elections, and on the elections and utility grids of other NATO members.292
Then for a little more turmoil, he started a trade war with allies, neighbors and China. He’s planning to run up the deficit further using at least $12 billion to replace the lost sales for farmers.
By the third quarter of 2017 the US Dollar had lost 10 percent of its value against its peers and it’s use as a reserve currency dropped to 63 percent of all reserves.293 Keeping in mind the rate of increase in the supply of dollars, that 2 percent drop is significant.
While Trump supporters have been gleefully thumbing their nose at the rest of the world’s opinion, they have been cutting off their nose to spite their face, as the saying goes. This very low level of confidence is a warning sign of consequences to come. And, they are coming.
Our friendly neighbor Canada is considering using their equivalent of the Magnitsky Act, to sanction our president’s personal businesses and wealth as retaliation in the trade war he started.294 Germany is stepping into our leadership role in NATO.295 China is stepping into the role of world leader, investing $1,663 billion in global infrastructure projects in the decade from 2009 to 2018. These investments will provide them with customers well into the next century.296
The world may decide the US no longer deserves this privileged position of major reserve currency. Remember it’s about confidence in the future. Should the world decide to use more of a different currency, or, as some nations are considering, change their money systems so they no longer need to keep dollars tucked away, they will spend these dollars into circulation. These reserves were $5 trillion (2016) – roughly equivalent to one-third of the reported size of our money supply. If and when the use of this money is dismissed by other nations, it will come back to roost in our own economy. If it happens in a short time, it may cause catastrophic inflation, a monumental crash and depression. If the crash has already happened in the routine cycle of boom to bust, then this US dollar dump will make it devastatingly worse. We need a plan in place to weather this storm. See Chapters 8–10.
The planet
We are quite literally on a path to our destruction. Earth as a living system will continue, but like the dinosaurs, humans may not be part of it. We only have one earth available. Charts of our exploitation of potable water, arable land and depletion of natural resources show the same exponential curve as our money supply. Our world faces an acute and violent meltdown as the wealth transfer machine reaches nearly unfathomable inequality. Oxfam, an international confederation of 18 non-governmental organizations, says the top one percent of the world will own more than that owned by the other 99 percent together by 2020. This is in just two short years! From 2009–2014 the wealth of the wealthiest doubled.297 This is the speed at which wealth is being transferred into the hands of a few extraordinarily rich people. Think of the poverty, desperation and war this will bring!
Already this rising income inequality is increasing strife and violence. When we are frightened and worried about basic survival, it is human nature to lean back to childhood solutions: a strong and powerful Daddy will take care of us; fascist authoritarian rulers and violence make sense to our child mind. The grey drops out of thinking and people want black and white; clear and simple rhetoric that defines who’s at fault and who wins the day. When people are starving or working 60 hours a week and living out of their car, they’re not interested in discussing public issues and long-term incremental change. People are more willing to fall behind a pied piper who promises to make everything great again with his personal strength and “very stable genius.” There is a readying to hunker down in armed bunkers against everyone else. This is how militarists and dictators emerge. This is already happening around the world. It will only get worse. There are signs we are heading toward living in gated communities and ghettos in a police state. We do not have to go there; we can call on our better selves and change the money system.
And now you understand how the money system causes the consumerism, exploitation and the transfer of wealth destroying us.
We have a choice.
The next chapters consider backward steps, bandages, bridges, a simple solution, and a we-can-do-it pep talk.