Historian Will Durant observed that great civilizations are not conquered from without until they are destroyed from within. Rome and Greece declined in military strength due to population decline because of abortions, infanticide and wars. Rome and Greece prospered under the hard money policies of Caesar and Alexander the Great. Currency debasement eventually led to the fall of Rome and Greece. Hyperinflation, price controls, and high taxes under Diocletian (284-305) resulted in the break up of the Roman Empire, and created the feudal system of the Dark Ages.
Prior to the Federal Reserve, during the Gilded Age in the US, from 1860-1890, inflation was zero, GDP grew at 4%, and the fertility rate was 5.6 children per woman. In the last 10 years, according to Shadowstats.com, inflation in the U.S. has averaged approximately 5%, GDP is minus 2%, and the fertility rate among women has dropped to approximately 2.1 children per woman. A decline in population occurs in any civilization which has a fertility rate below 2.3.
Research by economists Carmen Reinhart and Kenneth Rogoff show that high levels of debt and deficit spending eventually lead to inflation. When US debt levels met or exceeded 90% of GDP, inflation rose to around 6% versus the .5 to 2.5% range when the ration was below 90%.
History shows inflation can occur suddenly and grow rapidly. Most developed countries use inflation to debase large amounts of debt. In 1971 President Nixon closed the gold window, and the US no longer redeems dollars with gold. Total public and private credit in the US surpassed $1 trillion for the first time in 1964. Over the following 43 years, it increased to $50 trillion in 2007. That explosion of credit changed the world, because most central banks use dollars as part of their banking reserves. Total global debt reached $223 trillion or 313 percent of world gross domestic product in 2012.
The Bretton Woods system of fixed currency exchange collapsed in 1971 when Nixon closed the gold window. Leo Melamed, a small-time egg trader on Chicago Mercantile Exchange developed financial futures contracts in currencies and credit default guarantees. These derivatives contracts now trade world wide with a notational or face value of over $1.2 quadrillion dollars. A quadrillion is 1,000 times a trillion.
The notational value of the derivatives market is 20 times the size of the world economy. The annual gross domestic product of the world is approximately $55 trillion. According to Zerohedge, the 4 largest US banks hold $217 trillion in net derivatives. Net derivatives is the cash exposure of long position less off-setting positions. However, net exposure can change quickly if markets turn or off-setting counterparties fail. Goldman Sachs and JP Morgan Chase have insured deposits and obtain almost half of their earnings trading in derivatives. A total of approximately $9.5 trillion in banking deposits is insured by the FDIC.
FDIC currently has a net worth of approximately $20 billion, and the ability to borrow $500 billion from the Treasury, which is currently is running a $680 billion deficit. The Treasury is back-stopped by the Fed. The Federal Reserve has capital of approximately $50 billion, less accumulated losses in the market value of $4 billion Treasury bonds, and toxic non-performing mortgaged back securities.
The US has a total debt to GDP ratio of 250%. Economist Richard Duncan believes the US can devalue the dollar and expand its debt to 500% of GDP, similar to Abenomics in Japan, named after Prime Minister Shinzo Abe. Once the US reaches a total debt of 500% of GDP, many experts believe it will approach the Keynsian end point, and be forced to default on its debt.
The money supply the Fed controls by printing, called the monetary base, is only a small part of the total money supply. Approximately 20 percent is created by the Fed, but approximately 80% is created by the banking system. As Yellen replaces Bernanke as Chairman of the Federal Reserve, the Fed will need to increase the velocity of money if they want banks to lend and reach their growth targets.
It is assumed the Fed, under Janet Yellen, will continue with Bernanke’s playbook of zero interest rates and quantitative easing, to convince the public to borrow money and make investments. The Bernanke-Krugman-
Quantitative easing has increased the cost of exporting by developing countries and has decreased the competitive price of US exports. QE has caused inflation in emerging market countries such as South Korea, Brazil, China and Thailand, which peg their currencies to the dollar. China has accumulated over $2 trillion in Treasury bonds and now has few good options. If it maintains it currency peg, the Fed will keep printing and inflation in China will get out of control. If China revalues their currency it will put a lid on inflation, but its cost structure will go up when measured in other currencies. This has forced China to diversify out of the dollar into other currencies, and into commodities such as gold and oil. It appears the Fed will continue to print money until it can’t. Once again history will show fiat money printing is not a sustainable path to prosperity. If the US loses it reserve currency status, inflation and interest costs will spike, and spending on consumption and military will no longer be financeable with excessive debt.
“…If you diligently obey the voice of the Lord your God…The Lord will command blessing on you in your storehouses and in all to which you set your hand…” Deuteronomy 28:1 & 8
“..If you do not obey the voice of the Lord your God…the Lord will strike you with the sword, scorching and mildew…” Deuteronomy 28:15 & 22
For more information on currency wars and the clash of worldviews see:
Dr. Stephen Johnston
Dr. Stephen Johnston