Religion is regarded by the common people as true, by the wise as false and by the rulers as useful – Seneca
I’ve been asked several times to give a description of the economic situation in the world today and how the United States ended up where it is. For most people questions abound about the state of the economy; is the United States in relative decline, is the world economy declining, is a financial collapse on the horizon, how did we get where we are, and so on. Right now considerable uncertainty exists about the economy and the anxiety is not without good reason. One of the important advantages of engaging this subject is that it provides an excellent background for understanding General Federalism and global rule of law. So, I’ve decided to try to outline the economic dynamics of the current situation in the context of global rule of law and the implications the economic changes the world is undergoing will have on the prospects for greater global cooperation.
IN order to take on this task with any success I’ll need to take a few steps back and try to explain, first of all, how modern economic systems work, something rarely explained well and a subject clouded with jargon and obfuscation. I’ll start with a brief history of currency and banking.
Modern, capitalist-style banking was invented, or at least became common, in Europe hundreds of years ago when people with capital learned that they could loan money to people and profit by charging interest. They did this by taking a certain amount of a precious commodity, such as gold, from a borrower as a down payment. They would then write notes that acted as a “legally” binding document requiring banks to pay out the amount of the loan on demand. Usually, the bank where the deposit was made would pay out the initial loan amount. This, of course, was a higher value than the deposit and was paid in what is regarded today as “paper currency”. Since the bank printed these monetary “instruments” and since they had numerous such customers, they quickly realized that they could loan far more than they themselves had on deposit at any given time because not all borrowers would suddenly repay their loans in full all at once. In other words, they could maintain a “fractional reserve” of assets that was only a “fraction” of what they had loaned out on paper currency. In those days this reasoning had an air of confidence about it that does not exist today: loans made then were so onerous as to likely indenture the borrower for life and political powers supported the repayment by jailing those who did not repay on the terms agreed. Given the low social status of most borrowers, coming in one day unexpectedly and paying a loan off in full was highly unlikely. Thus, a “run” on the bank was virtually impossible. As conditions improved for the commoner this confidence weakened over time and, eventually, “runs” on banks did in fact occur.
But the term “Ponzi” scheme comes to mind when you consider the fact that merely by virtue of owning capital a person could loan far more money than they themselves possessed in equivalent wealth (or assets). And by charging interest there was no limit to the profits such an enterprise could generate. And it could do so with relatively small amounts of effort and zero productivity on the part of the banker. By zero productivity we mean that the banker provides no productive value to society in this transaction unless this method is the only method possible to allow economic growth through lending. Three or four hundred years ago technological limitations probably made that a true statement. But recently, the need for a “middle-man” of this type simply doesn’t exist at all and bankers are 100% non-productive members of society whose interest income is parasitic. Thus, banking, while beginning in what I suspect was a just and reasonable context of need, has become an antiquated holdover of another time whose very existence today is fundamentally questionable. Some argue that remuneration of any kind without productive input of any kind is essentially theft by skimming off the top with interest payment requirements. The reason for that assertion will become more clear in what follows.
One thing Alexander Hamilton had a keen understanding of was economics and how to make an economy grow in a free market system. He understood what many today don’t: the more banks can lend beyond their own assets the more aggressive and rapid the economy grows. This is because commercial loans to start businesses are then more plentiful and larger, thus allowing entrepreneurs who don’t have the assets to start an expensive business can do so in greater volume and frequency. These companies, in turn, create more jobs and generate more wealth. And here we need to pause to address one of the key misunderstandings that appear in many accounts of banking today. Paper money and wealth are not the same thing and the reader must be careful not to confuse the two. It is easy to do. But keep in mind that wealth is actual, tangible value that can be assessed with a market value. Paper money is used to assign that value and allow the wealth to be traded in an economy. So, paper money is an abstract representation of wealth and wealth is the actual, tangible value that paper money represents.
So, I’d make this recommendation to anyone wanting to follow an economic discussion: always start thinking in terms of tangible wealth, as if no currency existed. So, one starts by thinking only of the “stuff” out there that is valuable and that people want to trade betwixt them. Then, think of currency as the measuring stick of that wealth that follows the wealth wherever it goes, keeping in mind that it is somewhat ephemeral in that how much is assigned to any given “thing” in the market changes over time, is based on subjective assessments people make when trading commodities and can be artificially manipulated by economists, policy-makers, etc. Currency presenting as a first-order approximation forever chases wealth and the reverse is not generally true. Follow the wealth and you will master economics.
We can give two examples that show wealth as, in the one case, a physical thing that has value when and if traded on the market, and in the other case a representation of “congealed” (a Marxist term) human productivity and its value when traded in the market place.
In the first example, if you buy a house for 100,000 USD your wealth has been made tangible in the form of the house itself. This house has a market value when traded which changes over time. At the time you bought it was 100,000 USD. The 100,000 USD is simply the paper representation of that wealth whose sole purpose in existing is to be the vehicle by which you can easily buy or sell that house on the open market. It has no other meaning beyond that. In the second example, if you produce 200 widgets in an hour at the factory where you work, your productivity is the part-wise measure of the market value of 200 widgets being made available for presentation to market at the rate of 200 per hour. The market can and will attach some dollar value to that wealth for facilitating its trade in the market. Once this distinction is clear, economics as a whole becomes much simpler to understand and master. It is not hard to see now why all currency in circulation in, as in our example, the United States, is society’s attempt to reflect the entire, overall wealth of the United States. This is a crucial point. Every dollar in circulation will ideally reflect a market value of one USD in some piece of tangible wealth in existence in the United States at the time that the total amount of currency in circulation is measured. Of course, in reality, it is impossible to get this equivalence perfect, but it is the pursuit of that equality that drives all economic discussion, theory and understanding. If the total currency in circulation, lets call it M1, exceeds the market value of all wealth in the country, then each dollar loses its value in terms of the wealth it represents. Think about this. If you take the total currency in circulation and magically double it, then each dollar now only reflects 50 cents worth of wealth because the wealth did not change. It remained constant in that example. And conversely, if M1 were suddenly cut in half then each dollar would represent 2 dollars of market value in wealth. These two examples are examples of inflation and deflation respectively. So, inflation occurs when society misses the equality by circulating too much paper currency. Deflation occurs when society erroneously circulates too little paper currency.
But, how does one control M1 values at any given time? This is where national banking comes in. Despite the bad reputation that “printing money” has, it is only by printing money that an M1 too small to represent a nation’s total wealth can be equalized by increasing M1 to match the newly measured value of total wealth. Likewise, if M1 is larger than total wealth, then not printing money and removing, say, old currency from circulation, serves to reduce M1 back to equality with total wealth. This is currency chasing wealth. This is what the U.S. Federal Reserve board is supposed to do; try to correctly estimate the correct value for M1 at any given time so that the Fed can either print or withhold printing and collect old currency from circulation. It is the holy grail of fractional banking and is very hard to do. But over the years this has developed into a pretty good science and the Fed has the tools it needs to do this pretty well, all the way down to the tiniest margins of error in inequalities. Where “printing money” gets a bad name, and rightly so, is when governments seek to solve economic downturns or depressions by simply printing money such that M1 greatly exceeds total wealth. As we noted, this causes inflation and reduces the value of everyone’s money in their wallets overnight. And this makes sense; what makes the economy valuable is not the paper money but the wealth it represents. Currency chases wealth.
If wealth doesn’t change, printing money isn’t going to change the fundamental total wealth present. Currency chases wealth, not the reverse.
In a depression the problem is no more complicated than the fact that the number of mouths to feed and clothe is getting greater and greater while total national wealth isn’t keeping up. Of course, in reality it can be much more complex than this. Sometimes the wealth can accrete into the hands of a few, making everyone else poor. But you get the point. There are economic fundamentals that if you are not aware of them you will never be able to follow economics on a national and international scale.
So, in the United States the mechanism for printing money and getting it into circulation is simple. The Fed prints the money and then uses that money to purchase U.S. Bonds from the U.S. government. There is nothing specious about this and money is not “created out of nothing” provided the print increase in M1 actually well approximates an increase in total national wealth. Conspiracies that treat money and wealth as identical make much hay of this fact but it is fallacious and baseless. USG Bonds, by definition, are fractional instruments that, alas, reflect the speculative market value of all wealth in the United States. In other words, bonds, though similar to currency but not a currency, are rather used to reflect the overall wealth of the United States, with the added inclusion of speculative value: Bonds reflect the perception or speculation the investor buying them has regarding the future performance, and subsequently the future wealth, of the United States as a whole, with each bond being a fractional representation of that wealth. That is, at least, the idea. When one buys bonds they are buying an instrument that puts their confidence in the continued wealth of the United States and that this wealth will almost certainly increase over a span of many years. And it always has. The interest return on bonds reflects the minimum growth in overall wealth of the United States that the government believes it will attain by the given maturation time. This is why the vast purchasing of U.S. bonds by the PRC isn’t as simple as it sounds to those who don’t understand how bonds work; yes, the U.S. is effectively “borrowing” money when it sells bonds on the promise of the future economic performance of the U.S. measured in new wealth each of those bonds represents, but the PRC is likewise invested in the future performance of the U.S. economy and to harm that growth is to harm their own investment. The U.S. and the PRC are, in reality, locking horns with each other which itself is problematic, but is a problem of a completely different kind than most Americans seem to think. But back to the Fed. There is just one Federal Reserve Bank tasked with this job (there are 12 of these overall) and it is the one located in New York City. This bank sells the bonds to the Fed, takes the newly printed cash from the fed and deposits it in federal banking accounts all over the country. That money is then withdrawn and spent in the American economy according to the spending provided for the government by Congressional budget. Thus, the newly minted money is now in circulation and M1 has increased.
One of the common abuses of a Federal Reserve System is to also give it the power to loan money to the largest national banks. They will typically charge interest, called the Fed Rate, on those loans, and use that as a way to either encourage or discourage banks to lend, based on to what value they set that interest rate. Now, presumably the money loaned is printed in accordance with M1 assessments but the interest charged, once repaid, is another matter. Who does that money go? The taxpayer? Don’t count on it. It goes to the Fed and they do what they want with it. It creates a wide open hole for corruption. That is why the Fed does not want an open accounting from a third party.
And this is not the whole story. Those banks in which the money is deposited are usually the biggest of all and how they lend money is dictated by the size and frequency of these new currency print runs. And again, when they occur and how big they are depends on the Feds estimates of what M1 needs to be at any given time it decides a change is needed and which will serve to equalize M1 and total U.S. wealth. What has happened over the years, however, is that the Fed has gotten bolder and has subscribed to the theory that Fed intervention can help the economy in certain situations by, say, printing an amount that is just a little high or a little low. It may create a small amount of inflation or deflation, but the advantage is this: The large banks who ultimately end up receiving this new money as a deposit now have a larger overall currency on deposit should the Fed decide to up its print run. That is, their paper assets have increased, sometimes greatly. This means that, if we set a rule that all banks must retain, say, 10% of what they loan out in deposits they still hold, the banks can now loan more money than they could before. This in turn, drives the economy by allowing more commercial loaning. You get the picture. This all sounds great except for one problem. The problems already mentioned about bankers and zero productivity are now aggravated because in addition to that, they are now given fresh cash they didn’t have before and are allowed to profit from the interest it draws in loans to the public without having to increase their own productivity. So, yes, it is a “Ponzi” scheme, but not for the reasons most think. Lets examine now why this antiquated system is unnecessary and why it “bleeds” an economy.
The Fed has indeed set the requirement for deposits at 10% of the total amount a bank can legally loan (in most cases). This was why Hamilton liked the system he envisioned because it means that the economy can move forward much more aggressively if banks can loan out so much more than what wealth they have on hand. And if you think about it, the very nature of a successful business is that it does in fact increase wealth overall. That is precisely how national wealth increases over time. Therefore, it does make sense mathematically because you are betting on the economy by saying that the 90% of assets loaned out will be inevitably repaid by an economy that responds to that investment by creating new wealth; something itself born out of the investment capital (the loan) directly, human ingenuity and productivity. In a free enterprise system when a new business begins all these things are a natural phenomenon that, if all goes well, come together in a new business. This regulatory limitation of 10% is where the term “fractional” banking comes from. It refers to the fact that loans in such an economy are permissible even if a bank has only a “fraction” of the loans it has loaned out on actual deposit. And since the Federal Reserve acts in a reserve capacity with its ability to recover and replenish M1 at will, it is formally known as a “fractional reserve banking system”. If you read up on General Federalism you’ll notice that we’ve devised what we call a “zero-zero” financial system that eliminates the antiquated mechanism mentioned above and, concomitantly, removes the injustices of the system cited. But perhaps more importantly, it is even more aggressive than any fractional reserve system because there is a 0% reserve requirement and interest is charged at 0% percent for all loans. Even the principle need not be repaid. Sound crazy. Not until you fully understand how banking works.
Recall that banks are charging interest and requiring repayment of principle for the purpose, in the end, of making a profit. Obviously, as independent social entities, to not require repayment of the principle would simply be a give-away from their perspective. Once they pay out the loan they do not automatically receive any new wealth in return to cover that principle. Rather, they are left with nothing. So, clearly, they must require principal repayment by currency tendered over a defined time period – and, to ensure profit, interest payments on those loans. But the astute reader will notice something peculiar here. If the Fed is printing money to reflect true overall wealth, and commercial loans are nothing more than a reflection of new wealth, why not bypass the whole mess? Yep, that’s right. This approach wasn’t technologically feasible three hundred years ago but is trivial today. Let me explain. In the current U.S. loaning industry banks protect themselves from default and failure to recover principle and interests by using what is called an actuarial analysis to figure out how much “extra” interest they must charge every borrower to cover losses due to the few borrowers that default. Of course, it is a little more complicated than that in practice, but at bottom, that is all they are doing. In other words, they are managing risk by mathematically estimating losses and covering them with an appropriate increase in the interest they charge to all borrowers. The Science of managing risk has become honed over the last 100 years to the point that loan criterion are eerily reliable. Complex credit scoring algorithms and a host of other tools allow loan officers to get a good numeric, probabilistic knowledge of any given loan proposal. There is nothing radical about how one does this and it is done thousands of times every day in the Unites States.
So, the obvious question that we hope is on the lips of our astute reader is, “why can’t the currency simply be printed directly to the borrower upon approval? Isn’t it the same in all important respects”? The surprising answer is, “yes”, but it is even better than this. The same risk criteria can be applied. A very small “print” and “insurance” fee (inordinately smaller than a principal or interest payment) could be added as the actuarial risk management tool. If the borrower meets the criteria, there is no reason to deny the print request because not only do you know that the print addition to M1 is truly reflected in the new wealth generated, it will likely produce far more than the print at that time can reflect. And the idea that this “won’t work” is just as valid as saying the existing system “won’t work” since they use exactly the same risk management and mathematical procedures. But this observation, seen by many with a deep understanding of economics, isn’t talked about much publicly because banks get very uncomfortable when they hear this. This would put all of them out of business and end an antiquated industry altogether. There is an enormous system of privilege and profit that has a vested interest in keeping the old Ponzi scheme running just as it is. We will provide a solution to this in what follows. In the case of Zero-Zero Banking, the “Fed” in our example doesn’t have to be concerned that the principle, if not repaid, becomes a giveaway because, alas, it is the federal government that is making the loan and it does in fact get the wealth returned since whatever the loan was used for generated new wealth that was added to the wealth of the nation as a whole, not just to one person leaving one bank without its wealth loaned out in principle. Wherever new wealth generation fails the situation is statistically risk identical to loan defaults. The loan “insurance” covers that possibility. In a pure sense, even the insurance is not needed because as it stands now, when borrowers default it takes away from the economy as a whole and drives inflation. In the current system it is simply an acceptable loss pretty much overlooked and ignored. And that brings us to the final point about “Zero-Zero” banking. Insurance, while good for illustration, can simply be replaced by a transferal of that same risk to the monetary outcome of policy decisions regarding currency printing so that printing is adjusted downward to compensate. Today in the United States the same thing is done by adjusting actuarial analysis to compensate for bankruptcy losses; just another kind of default.
Having framed the national economic picture, we now extend this understanding to international finance, where we can finally understand what is going on with the United States and the global economy. In order for nations to behave like buyers and sellers on an open market; that is, buying and selling each other’s products and services en masse, they must create a system for “translating” currencies, since all of them print and use their own sovereign currencies. Recalling that currency chases wealth, what we are describing here is a situation in which wealth is dynamic and is thence traded back and forth between nations based in simple terms on basic supply and demand. The currency is ancillary to this: as a collection of disparate measuring sticks from one jurisdiction to another, currencies constitute metrics that have to “converted” from one to the other in order to trade wealth globally, just like you “convert” from the English system of pounds to the SI, or metric system, of kilograms. Currency is just a metric.
IN order to do this, there must be something akin to an international standard or referent. And this is just a practical requirement: in order to convert currency a to currency b we will need to pass x notes of a to a willing holder in order to retrieve the equivalent amount of y notes in the currency b of that holder. Now, consider what happens when the situation gets more complex and a large number of different currency holders wish to convert their currency for an equivalent amount of currency in the currency b of a given holder. The result of this is that over time the holder of the b currency, that is, the nation that prints and uses b domestically, will end up with a pool of “cash” on hand in numerous different currencies. This pool grows in consequence of this phenomenon and also as a result of the reverse operation: The b holder also participates in this mélange of exchange, exchanging its b currency for the currency of other countries when needed, therefore increasing this “pool” of foreign cash in the b holder’s “cash reserves”. Recalling that currency chases wealth, all this is justified without any actual transfer of wealth between the nations engaged in exchange provided the currency exchanges are equivalent. By being equivalent, the net exchange of wealth between the nations is zero We shall see later that when there is an imbalance in this wealth exchange, and we are speaking of a nation with a particular status to be described, something called the Triffin Dilemma occurs.
But the practical problem this creates is more subtle. Think of yourself as a consumer in this global market, a nation-state buying and selling on this market. Every time you want to buy or sell something from a different country you have to perform this exchange of currency. Now, we are talking about actual transferal of wealth. If you are selling something tangible wealth “moves” (in the simplified case) from your country to the country that is buying your product (your product is exported). In exchange, that receiving country, let’s call it the holder using the b currency, must pay you in your currency, the currency say, a. But the b holder cannot do that without a conversion of currency first, from its currency, b, to your currency, a. Now we have a problem. In order for the b holder to have a sufficient amount of a “cash” reserve in order to pay you for your product, a minimum amount of the b holder’s trade with other nations must make in your currency, the a currency. By “make” I mean to say that there must be a minimum amount of trade with these other countries in which the b holder exports to these other countries and receives payment for the exports in your currency, the a currency. This is the only way the b holder can obtain your currency without upsetting the balance of wealth described above (the imbalance related to the Triffin Dilemma). This creates what is called a dependency: the b holder now has to consider how much (and in what nature of) trade it can engage in with other nations if it wants to have a specific amount of your cash, the a currency, on hand in order to trade with you in the amounts both you and the b holder desire. But this is the simplest case. Now imagine what happens if the b holder has this same problem with dozens of countries with which it trades. Then the problem becomes intractable and there is no way to satisfy all of those dependencies simultaneously.
There is only one way to solve this dilemma. All nations must gravitate toward a smaller number of currencies as the baseline currency with which it will trade. By “baseline” I mean, there has to be a limited number of currencies with which all nations will agree to perform these exchanges in. We can take the simple case and assume that the limited number of currencies is 1. Let’s call that currency the c currency. Revisiting our example, in this model, when you send large amounts of wealth to the b holder the b holder, rather than paying you in your currency, the a currency, pays you in the c currency by performing an exchange (it must have a minimum amount of the c currency in “cash reserve” with which to pay you). Now, when you receive this payment you can also convert it, but in this case you will convert it back to your currency, the a currency. And the transaction “makes”. Of course, we have to keep in mind once again that currency chases wealth and that by “convert” we are talking about nothing more than a mathematical exercise just like converting pounds to kilograms. That’s because the “conversion” simply refers to what currency money is denominated by in the tranche, or the pool of cash, held inside your country and into or out of which you are paying. So, money is not literally converted, its just a reference to what currency pool you are drawing from or paying into. And this is the only way to break this dependency limitation. Now, all nations of the world agree to hold an amount of c currency “cash reserve” in their banks and institutions (and also in privately held funds, to be discussed) which, in each countries individual case, is sufficient to enable the kind of trading described.
Economists in the popular press confuse the public when they refer to this as being just a “market decision” based on which currency the world’s countries believe is the most stable and reliable for such a purpose.
This is true but conceals the deeper point. There is an underlying fundamental that makes the decision to use a common currency of some kind an absolute necessity for international trade to occur, as we’ve just explained. Ideally, this would just be an international currency and all national currencies would not exist in the first place. This is ideal because in that case no conversions and cash reserves are required, greatly simplifying the situation. But that is not the current case.
This is, by itself, a powerful argument for global rule of law because all currencies must have uniform law behind them to support their use and their stability in an economy; a hard lesson the EU is now learning.
They must, in other words, be backed by the full faith and credit of a bona fide, stable, reliable and predictable legal entity. Attempts to create a world currency today are hobbled by this limiting fact.
The EU was created (specifically in terms of the Maasthrict Treaty) without this backing. Now we see the result in the morning news, a la Greece and Italy. This is not an exaggeration but it is the direct cause of these problems. What happens when a currency does not have full legal backing is that the inability to legislate and enact rule of law uniformly across the jurisdiction in which the currency is “internally” used results in disastrous financial policy that leads to massive debts and insolvencies, exactly what is happening in the EU now. That this was done is gross negligence on the part of the founders of this system, who knew or should have known this result would occur. This is elementary economics.
In all fairness, it isn’t just the United States who is benefiting from this Ponzi Scheme, a map of the Current Account balance sheets, courtesy Wikipedia
We are now coming about, full circle, and beginning to understand what is really going on. The current solution to the dilemma presented is not to have a global currency but, rather, to simply adopt one (or a few) nation’s national currency as this “baseline” currency in which all nation’s must convert monies in order to do business. Such a currency is called a reserve currency and a currency of that kind is said to possess reserve currency status. Now, the problem this creates is three-fold:
1.) A country possessing the reserve currency is the one and only country in the world that can print this money; i.e. they are the only ones that control the fiscal policy of this currency.
2.) As the global economy becomes more inter-connected an unsustainable condition occurs which we will describe infra, and it is nasty.
3.) The country possessing this reserve currency has an unfair advantage over other countries in which the issue, more than one of unfairness, is the fact that it creates an artificial economic environment that does not track with reality.
First, I should outline this “nasty” problem referenced in 2. Everyone is talking about this, from the great minds at the Council on Foreign Relations to the factory workers watching their jobs disappear in Detroit Michigan.
We return to our example and recall that we discussed trade between nations in which tangible wealth was being physically transported to and fro across the globe. Academics and those who want to feel important call this wealth “capital” and when they discuss it globally it is referred to as “international capital flows”, the same thing we just called “wealth moving to and fro”.
Previously, and as a refresher, I stated that:
“By being equivalent, the net exchange of wealth between the nations is zero We shall see later that when there is an imbalance in this wealth exchange, and we are speaking of a nation with a particular status to be described, something called the Triffin Dilemma occurs.”
This mathematical relation, that ideally results in a net wealth exchange of zero, is called the current account (not exactly, but close enough). A current account deficit occurs when the amount of wealth coming into a country is greater than the wealth leaving. This results in a greater amount of that country’s currency exiting the country than returning, by virtue of the trade dynamic I described. We will now need to turn our attention to the USG Bonds discussed previously. These Bonds are a type of financial instrument called an “asset”. Assets refer to things such as Bonds which are denominated in a given currency (in the United States Bonds are denominated in the U.S. currency, the USD). The reader may have already noticed the problem. If a country runs a current account deficit indefinitely they will eventually absorb almost all the world’s wealth and flood the world with its currency, an obviously critically fatal situation
caused in large part due to a lack of uniform, global rule of law since no global currency that is stable can be created without it.
And here is why it is critically fatal. The only reason I said a country running a current account deficit indefinitely will absorb “almost” all the world’s wealth is because financial productivity, Karl Marx’s “congealed labor”, still produces wealth outside the country whose currency is holding the reserve currency status. But I’m being generous here: if all the wealth leaves a country the means to labor are ultimately removed. This is fatal. No one can work. No one has a job. No one owns anything. This is clearly unsustainable and is one of the strongest justifications for global rule of law; a necessary tool to back a true, stable and durable international currency.
Now, let us take two steps back. The current situation is that there is an admixture of reserve currencies but only one in any real, de facto sense. The United States dollar is the world’s current reserve currency bearing overall about 2/3 of the total currency used for the purpose of international trade. And here is what is happening to the U.S. economy. And what has happened is sadly predictable. When global trade becomes commonplace and intricately intertwined, something that has only happened in the last 40 years or so, something nasty starts to happen. Going back to our example, if we use a currency, which we called the c currency, and what is referred to as the foreign exchange currency, then each and every nation engaging in international trade must have a “cash” reserve of this c currency on hand at all times. The more international trade occurs, the greater this demand becomes and the larger these reserves have to be. But this is a vicious cycle: since the United States is the only country that can print this c currency, the USD, the United States bears the responsibility of providing this cash outside the United States, in addition to its obligation to maintain M1 within the country. This inexorably leads to a trade deficit because, recalling that currency chases wealth, in order to get this much cash outside the United States in a balanced and legitimate way, wealth from outside the United States must transfer to inside the United States. And because this trade deficit is created, an artificial situation overseas is created in which an excess of USD “cash” floods the markets, creating the inflation we previously discussed because the amount of currency in circulation overseas begins to exceed the overseas wealth it is supposed to represent. But this “overseas version” of inflation manifests in terms of a depressed value for the USD when traded against foreign currencies (since, domestically for any country other than the United States, inflation must present in that countries domestic currency via the reserve currency). It also creates another ancillary but major problem. As this “inflation” increases the ability of the United States to pay back on its bonds, because remember these are speculative instruments based on a belief in the positive future performance of the United States, the United States has to now pay more on the return than before because the USD is worth less overseas. This raises the interest rates for maintaining bonds and exacerbates the U.S. federal budget woes due to our obligation to service the debt, which was created by the selling of these bonds in the first place. The reader may ask, but how is all of this so if the overall global wealth is correctly matched to overall total USD currency, which is indeed the case? The reason why this doesn’t save the day and why Bernanke is clueless is that the trade deficit creates an artificial situation in which wealth that has accumulated in the United States is barred from exiting, barred from re-circulating naturally back to jurisdictions outside the United States, which is what would happen in a purely natural situation. A fundamentally unjust economic situation is occurring and this is why U.S. policy makers do not want to discuss this. This is a violation of the concept we’ve developed under General Federalism called General Equity, and it is by definition unjust. This is grossly unsustainable, on multiple levels. And what is historically unprecedented, since, after all, the British Sterling was once the global reserve currency and none of this occurred, is that the world has never had the intricate and complex high volume of trade that it is experiencing right now, which is what makes the so-called “Triffin Dilemma” so plausible.
And this trade deficit results in a current account deficit, as it is called, because this figure is dominated by the trade deficit. The ultimate end game of this process is what we described; a raping of all global wealth and a flooding of USD into an artificially created gulag of wealth-deprived economic conditions, driving the value of the USD in the dirt. The Ponzi Scheme is one in which all the world’s wealth accretes in the West and the rest of the world is flooded currency and “assets” that will ultimately be worthless. But that’s the whole point, right? I’ll let Bernanke answer that. Of course the PRC is upset about U.S. fiscal policy. The instruments of investment in the future performance of the United States, having been considered a “risk free asset”, would quickly become high risk and a dumping of these assets would occur. This represents the tipping point. This is one of the most unjust circumstances ever created in human history, if it bears full fruition, even exceeding the injustice of the global slave trade we so piously lament today in the United States. We, as Americans, cannot possibly engage in this kind of genocide and walk away with an intact conscience. No, we must have global rule of law. And this fact motivates my zeal for “world government” more than any other single factor.
But let’s take a brief turn back to Zero-Zero Banking and try to navigate a path and method for how this could be realistically achieved. The biggest practical obstacle is the privilege and wealth that the benefactors want to keep. Therefore, as we did with the National Codicil to a Social Contract, we need an interim solution that will solve this problem, allow an international currency to be created with full backing, block and halt this “rape” of global wealth, and do so without jeopardizing the privilege and status quo. I propose the following solution:
A Constitution for a General Federation be advanced in an International Congress between the United States, Mexico, Canada, the European Union, Ukraine, Georgia, Azerbaijan, Turkey, Russia, India, the African Union, the Union of South American Nations (to be codified as quickly as possible), the United Kingdom, Iceland and Jordan be held in which it is proposed that each party submit a National Codicil (and essentially is their existing State constitutions) and that the IMF and World Bank be administered as a financial department of the Public Trust of the Federation thus created. The key supra national powers would be limited to fiscal policy, all else being under the auspices of each National Codicil. A transition period to a common currency would be employed that tracks with the increase in fiscal policy powers ratified initially for incremental effect on a calendar schedule.
The transition to a common currency would follow the program laid out by George Soros for the enhancement of SDRs initially. The initial purpose and force of this Federation would be solely to provide full legal backing for an international currency while all other agendas vis-a-vis Union would be rescinded until this is achieved. A specific, codified program for “relaxing” foreign investments in the USD with commensurate changes in the geographic jurisdictions of ownership of wealth related to trade. Conversion to an economic system of Zero-Zero banking would be a secondary process implemented by grandfathering capitalist asset holders in such a manner that their interests are not disfurnished in their natural lives.
I look forward to any comments or suggestions anyone else can offer on this monumental problem, but I think this is the least intrusive and paradigm altering approach possible.
“De Oppresso Liber” and “Don’t Tread on Me” are American mantras worth repeating with the zeal of Alexander Hamilton at Yorktown, and the potential suffering of billions is worthy of our collective tears and our collective, preventive action.