Friday, April 1, 2011

The Causes of The Mess We’re In

Right now, we’re in that weird in-between time of financial crises: The Global Financial Crisis of 2008 is behind us, while the next global crisis is not here yet—but it’s on its way.

“But I just wanted a pony!”
We can feel how it’s on its way. Most everyone plugged into the macro-economic zeitgeist can tell you that bad juju is most definitely in the post—just that nobody yet knows (or is sure) what shape the next crisis will take.

Lots of people have been pointing to the various signs of the coming crisis: A U.S. Federal government deficit that’s over 12% of GDP, to be repeated in fiscal years 2012, ’13, ’14 and possibly ’15, if not surpassed; abnormal rises in commodity prices; European disintegration; a Federal Reserve that is printing money like there’s no tomorrow; the largest bond fund in the world—PIMCO—exiting Treasuries (that’s like Baskin & Robbins exiting chocolate); a complete inability of the political leadership class to do anything about the fiscal mess of the United States, at the Federal, State and local levels.

But though everybody points to the signs of the coming crisis, no one can yet make out its true shape. I’ve posited that it’ll be hyperinflationary, while other very clever people have claimed it’ll be deflationary.

However, these different interpretations about the coming crisis are interpretations of what’s coming up in the future.

As we sit here waiting for the next Apocalypse, let’s forget about tomorrow and instead consider the past. Let’s ask ourselves the obvious question:

What got us here?

What policies were implemented—decisions made—actions taken—which would set us on such a path to oblivion? Because that is our ultimate destination—oblivion. It’s coming to the American economy—and American society—as surely as if it had been FedExed last night. So if we’re going to hell, might as well figure out how we got there.

Some people claim it was the very invention of the Federal Reserve back in the early XX century that set us on the path to ruin. Others claim it was the Hamiltonian desire for a central bank. If we play the causal game at these focus lengths, then we might as well go back to Adam and Eve—they’re the reason for all our macroeconomic misery!

Patently absurd.

But if we get serious and look at the policies, decisions and actions carried out in our own lifetimes, then I’d have to say that there were two things that set us on the road that we’re on:
• One, the failure of Congress to deliver a balanced budget since 1975, and 
• Two, the subsidy the Federal Reserve gave both the U.S. economy and the Federal government by way of its artificially low interest rates, starting in 1987. 
Starting in 1975, the United States has had an uninterrupted string of yearly deficits—that is, the Federal government has routinely spent more money than it has brought in, barring a few exceptional years in the 1990’s.

Deficit spending satisfied the ideologies of both sides of the economic divide:

For the economic Right, cutting taxes satisfied its notion that more money in the hands of the citizenry and corporations guarantees greater economic growth.

For the economic Left, more government spending every year satisfied its notion that more money spent by the government guarantees greater economic growth.

As per my Democratic Bankruptcy Paradox, starting in 1975, both sides of the political divide in the United States failed to resolve the fiscal incoherence of the United States, except in a couple of exceptional years in the 1990’s.

The economic Right wanted lower taxes. The economic Left wanted more fiscal spending. Rather than thrash out their differences and come to a compromise, they resorted to the national credit card: Since 1975, the political equation insofar as Federal government money is concerned has not been either/or—it’s been both/and.

Both lower taxes and higher Federal government spending—an achievement bought and paid for with fiscal debt. The fiscal incoherence I have posited, and which the American Congress proved in spades.

With each year that the fiscal incoherence was unresolved—that is, with each year that the political factions failed to hammer out their differences and balance the Federal government budget, and instead issued Treasury bonds to cover the difference—the overall debt became greater and greater—

—to the point where we are now: Total fiscal debt that exceeds 100% of GDP. Yearly deficits for the next five years that will exceed 10% of GDP each year.

Now, the Federal government has failed to resolve its fiscal incoherence starting in 1975—but it’s been able to get away with deficit year after deficit year because of the cheap interest rates it has had to pay for its debt.

The low interests the Federal government—and the rest of the U.S. economy—was able to take advantage of? Brought about by the Federal Reserve’s money subsidy.

Yes: The Federal Reserve’s money subsidy—with all the market distortions that a subsidy implies.

The price of a good is the intersection of its supply and its demand—this is Eccy 101. Money is a good like any other—and like any good, it has a price: Its interest rate. Ordinarily, the price of money is fixed by suppliers of credit—that is, banks. They create money via credit—and they sell this money to their customers, the price of this sale being the interest rate that they charge.

However, starting in 1987, the Federal Reserve went beyond its mandate of price stability and full employment (the latter part of which it has never really paid much attention to), and instead went into the business of goosing along the economy.

In other words, it focussed on mindless growth—and focussed specifically on the blunt, club-like metric of GDP growth—and goosed along the economy in order to raise that mindless metric.

It did this by usurping the role of banks, and providing cheap money by way of low interest rates—low interests rates carried out with the explicit aim of gaming the GDP.

The economy slowing down? Cut interest rates. Momentary market panic? Flood the market with liquidity. The economy (as measured strictly by GDP) slowing down again? Cut interest rates some more. GDP booming? Very very very slowly and predictably raise rates—then cut ‘em again the instant the GDP looks like it’s starting to slow down.

This was, in a nushell, what Federal Reserve Chairman Alan Greenspan did, during his tenure at the Eccles Building: Greenspan subsidized money for the sake of gaming a single metric, the GDP.

Everyone knew it, by the way. There was even a name for it: The Greenspan Put.

For such an avowed free-marketeer, Greenspan was quite the Socialist apparatchik: Rather than allow the market to dictate the price of money, he subsidized it like a Socialist Pricing Board. And just like a Soviet apparatchik of old, Greenspan focussed on one number—GDP—irrespective of all the other subtle qualifiers that define a healthy economy.

The fucker was a Soviet goon—his Ayn Rand, “Free-Markets Forever!” bullshit was just for show.

The distortive effects that Greenspan’s money subsidy brought to the US economy are clear to all—serial bubbles: Dot-com, tech, bio-tech, CDO’s, real estate, and now Treasuries—all these serial bubbles were blown by the Fed’s relentless subsidy of the price of money.

Now of course, if you are using the subsidized price of money to goose along an economy, there comes a moment when it doesn’t work anymore. Poor Ben Bernanke, he’s living that unhappy life: His Zero Interest Rate Policy (ZIRP) and Quantitative Easing-1, -lite and -2 are the perverted policies he has had to pursue in order to keep up the Greenspan Put.

All of The Bernank’s recent policies are aimed at shoring up the “growth” that the U.S. economy has experienced over the last 24 years.

But the thing is, that “growth”? It wasn’t real—it was steroid-induced bubble-muscle. It was an illusion.

You don’t agree? You think there has been actual growth over the last 25 years?

By measuring gross GDP adjusted for inflation—“Red Al” Greenspan’s sole metric—the answer is “yes”.

However, if measured by median and average wages, per capita incomes adjusted for purchasing power, or any other such metric that measures the well-being of the average- and the below-average-citizen, the answer is a resounding “no”.

People are less well off. The middle class in the United States has shrunk—drastically. Sure, the average income might be higher—but that’s the distortive effect you get from having tremendous, inorganic wealth disparities, as we have today.

It’s not merely that the disparity between the wealthy and the rest of the population is obscene—the disparity skews the results. Remove the top 15% of the population, and the average income in the United States drops below Slovenia’s—and no, I’m not kidding.

Furthermore—and this is germane insofar as our current situation is concerned—the sort of growth the American economy would have experienced since 1987 without this money subsidy would likely have been very different from the growth we have actually experienced.

The growth we have experienced has been speculative. Why was it speculative? Because cheap (ie. subsidized) money Greenspan made available was set to chasing returns via trading, not production.

Had money been expensive, yields that beat savings would have been harder to come by—and thereby encouraged savings instead of speculation.

Expensive money would have also kept banks from the insane speculation of the real estate markets: On the one hand, expensive money would have kept low-quality buyers from access to credit, and on the other, expensive money would have disuaded banks from expanding their businesses into riskier territories, in order to reap higher returns.

In other words, risk would have been accurately priced.

In other words, there wouldn’t have been a Global Financial Crisis.

Now, obviously, it’s a fool’s game to try to go back over the 24 years since Greenspan took office and try to deduce what would have been the organic price of money without his and Bernanke’s subsidy.

But clearly, had the Greenspan Put never existed, there would likely have been less growth than has been had.

Would there have been less money for venture capital and the financing of new businesses? Yes, no question. Would those new businesses therefore never have existed? Again, yes.

However: How many ridiculous, fairy-tale businesses would have been financed, as happened during the various bubbles of the last 24 years? Very few: Capital would have been much more efficiently allocated, in a world where there was no subsidy on money. It would have been too expensive for the economy to throw away capital on clearly nonsensical businesses.

Would the solid businesses have gotten financing? The ones that actually did something for the economy, like Google, Ebay, and so on? Clearly, it would have been tougher for them, and their growth would have been slower—but just as clearly, they would indeed have gotten financing, because they are obviously good businesses.

Anyway, even if many good businesses would have failed to raise financing in a world of more expensive credit, the good outweighs the bad: There would not have been any serial bubbles—

—and the Federal government would not have had access to cheap financing, which encouraged its back-breaking debt.

Had Greenspan not subsidized money, it would have been far too expensive for the Federal government to continue increasing its yearly deficits, and adding to the national debt. A fiscal day of reckoning would have happened a lot sooner—and therefore would have been a lot less painful. It would have been bad, sure—all days of reckoning are bad. But it wouldn’t have been mind-crunchingly destructive—as we all sense the coming crisis will be.

As it is—as we live in a world where Greenspan and now Bernanke keep money at absurdly, unsustainably low prices—the Federal government was allowed to balloon its fiscal debt to monumental proportions: As I said, over 100% of GDP, with future yearly deficits in the +10% of GDP range as far as the eye can see.

The Fed’s subsidized money postponed the day of reckoning, insofar as the Federal government debt is concerned—but it has made that day of reckoning much worse than it needed to be.

That’s why we’re sitting here, waiting for the next financial Apocalypse, and pondering the causes that led us here.

If you’re interested, you can find my recorded presentation “Hyperinflation In America” here. I discuss in detail what I would do, if and when the dollar crashes. 


  1. Taxes have been somewhere around twenty percent of gdp all along. Spending has exploded from twenty percent of gdp to twenty-seven percent of gdp. Your tax cutting meme is a canard.

    I agree with the rest of your post, though.

  2. "Remove the top 15% of the population, and the average income in the United States drops below Slovenia’s—"

    I want to shout this from the mountaintop.
    Do you have a source?

  3. GL
    Once again I agree with your analysis but implore you to look beyond Greenspan and Bernanke. Who benefits by this continuing policy of low interest rates? Who benefited during the Too Big To Fail bailouts?

    Not only do we need to see which banks benefited (this is largely known - JP Morgan, Goldman Sachs, etc.) but who are the individuals that ultimately own the bonds of these banks that were paid 100 cents on the dollar by the American taxpayor to bail the bondholders out?

    Who now benefits from the impending collapse of the US dollar? Is it not the owners of the Fed, the private banks that took control of the Fed in 1913? Does the Fed not increasingly buy the debt of the US Treasury with Fed Notes created from thin air? If so, Americans should be incensed!

    I think by understanding these questions we can best predict the future. You are just the man to delve into this in my opinion because of your no-bull approach and keen insight. But please don't simplify too much by pointing at Greenspan and Bernanke. They too have masters and they are not the President or the Congress.

    Yours truly,
    A concerned Canadian

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  5. A better "canary in the coal mine" was Nixon's 1971 closure of the gold window and abandonment of the Bretton Woods Agreement. The 1975 failure by Congress to pass a balanced budget is just a logical consequence of the 1971 events.

  6. New episode of FutureBank! Its Ratings Week.

    At FutureBank, we're Banking on the Future!

    Customer 1: There is nothing in my account. I'll work for food.

    Anonymous (the Bankster): There is some coffee in the dispenser over there. And here's a cookie. Go clean ALL of the toilets. The supplies are in that closet. I'll check the toilets when you're done and you can have your cookie.

    Customer 1: OK

    Customer 2: Are you guys still servicing my mortgage or what?

    Anonymous: Yes. sir. Are you here to pay, or WHAT?

    Customer 2: Well, I kinda thought you might honor our long relationship by considering my ba, ba, ba, and you used to have a 8.75 per cent APR rate on home equity loans, but I don't see it advertised here anymore, and ba, ba, ba, my sister said she borrowed some on a co-sign to pay for her surgery, and, ba, ba, ba, well is there ANY way I can get $10,000 to feed my family? I do have a summer home in Idaho as collateral.

    Anonymous: Sir, come back tomorrow with the deed. I'll have $10,000 for you, but I'll be taking care of the summer home from now on.

    Customer 2: OK

    Customer 3: Oh, Sir. The ATM said that something was wrong with my card and I couldn't use the debit feature to pay my cell phone bill and now I can't get home to see my poor, dying daddy.

    Anonymous: Miss, what's your name? I'll check the accounts.

    Customer 3: Brittney, Brittney Bimbo.

    Anonymous: Well, Miss Bimbo, you certainly look like a good credit risk. Let's go back into the vault and check out your box.


    Anonymous; Oh, Brittney, I mean, Miss Bimbo, it was so good to access both of your boxes. You are very tight, with your money, and I mean, I'll check out the problem with your EBT and debit cards and all those silly accounts and you come back here and see me next Tuesday. Here's a Silver Coin. Go see your Daddy and bring him a dinner.

    Customer 3: OK

    Customer 4: I got two gallons non-ethanol regular back around the old drive-thru.

    Anonymous: Put in into the white F-150 and come back with the empty jerry can.


    Anonymous: Here's 50 bucks. Come back with that can full next Tuesday and I'll show you what's in the vault. Natalie, can you get me the phone number for a Miss Brittney Bimbo?

    Customer 1: Well, how do they look? Can I have my cookie?

  7. Hi GL,

    Loved your post. But check your numbers - there was no budget surplus in the 90s, only a PROJECTED surplus. The US has inceased it's debt EVERY year since before Vietnam.

  8. So what changed in the years just before 1975, that caused this plague of deficit spending you speak of to break out?
    Could it have been Nixon taking the country off the gold standard just a few years before in 1971?
    The gold standard has the great advantage of enforced some frugality on a democratic system. Spend too much and tax too little, run up debts or print money to cover the shortfall, and soon people will begin redeeming your currency for the gold and your central bank's vault will empty. France and other nations were doing exactly that in 1971. But instead of demanding frugality from Congress, Nixon just took the world's reserve currency off the gold standard.
    And this set in motion the wave of ever increasing peace-time deficit spending that has brought us to the brink of economic disaster.

    Other nations still have some restraint on their spending without the gold standard. As they must still be able to buy the reserve currency in order to trade with the world for oil, food and other commodities.

    But when a reserve currency goes off the gold standard, there are NO restraints on overspending at all, except for the discipline of politicos to be frugal. A strong deterrent orders of magnitude weaker than the gold standard.

    And since other nations will not wanting their currency to appreciate too much against the world's reserve currency, as this hurts their trade. They can be counted on to debase their own currencies to keep that from happening. And this has the effect of allowing a reserve currency nation to export much of the inflation they have created, to other nations. Making the temptation for a reserve currency country to print too much new money, all but irresistible.

    When they were all boys, your father, your grandfather and your great grandfather could all buy a Hershey bar at the neighborhood store for 5 cents. To gage the impact of the removal of the restrain imposed by the gold standard, just buy a Hershey bar today.

  9. Ummm... i am going to have to disagree with this comment "Starting in 1975, the United States has had an uninterrupted string of yearly deficits—that is, the Federal government has routinely spent more money than it has brought in, barring a few exceptional years in the 1990’s."

    Please take a look at this:
    (it shows the public debt from 1950-1999 and I think we all know it has only been increasing since then but be sure to check out the data for these years as well.)

    And note that the only 2 years since 1950 that we have paid anything on the debt is 1951,1956 and 1957. Which calls into question these "exceptional" years you describe. If they were so exceptional why did no money go toward decreasing the national debt? Where did the surplus go or was it just fancy manipulation of the numbers to make it appear as though we had a surplus. I would go for the later explanation myself.

  10. I don't buy the "but we need the Fed, just with reasonable policies!" argument either. The Fed serves its masters at the expense of the taxpayer and it was just simply planned that way, I strongly believe, in part based on the fact that federal income tax was instituted just months before this beast was given life.

    And who makes up the Fed is of paramount importance. Every stock holder (you have to buy stock in the Fed to become a member) receives a federally mandated 6% (see Section 7 of the Federal Reserve Act) in dividends yearly on the holdings they have with the Fed; our tax dollars are being used to pay this.

    My tax dollars are supposed to fund the government, not provide revenue to the private banks that make up the Fed membership.

    I see no real reason to keep the Fed and a plethora of real reasons to get rid of it.

  11. Excellent, fantastic post. Right on.
    I would disagree on one tiny point,

    "But clearly, had the Greenspan Put never existed, there would likely have been less growth than has been had."

    We would have seen more growth, in my opinion, from more accurate pricing which makes for a more efficient and productive economy. Especially if the coin shaving was also eliminated.

  12. A good article but it seems to ignore the takeover of the government by the military industrial complex and the buying off of our politicians and judges by Big Pharms, Big Agra, Big Banksters and the rest of TBTF.

  13. I had to stop and chuckle at your assertion that Google is a good business in the context of your article. First, Google had no business for the first several years of it's existence. And it would not have existed had there not been speculative investment in Internet companies during that 90's tech bubble you deride. And while eBay is a good business, it's growth relied on all the speculative investment that built out the WWW during the 90's. I think the world you imagine with less speculative investment is drastically more different than you seem to indicate. For example, I imagine you would be mailing this content in a paper newsletter or at best sending emails around to a lot of .edu addresses. The entire Internet and WWW were built from speculative investments. You can't act like Google and eBay would exist without them.

  14. Hi GL, enjoy all of your posts.

    However I do think the creation of the Federal Reserve (along with the other central banks created about the same time around the world)has a lot to do with todays problem of debt.

    Where once we had gold and silver coin, and scrip redeemable for coin, we now have Federal Reserve Notes that are backed by debt. It's debtmoney.

    New money today is borrowed into existance and that only increases indebitedness. Because it's impossible to borrower our way out of debt with more debtmoney we are trapped. I think we can all agree there's a problem but what is the solution?

    We need a new type of money and perhaps a look back at monetary history can provide some clues. United States Notes, regional or local currencies, merchant money, tokens, scrip.

  15. Hi GL,
    Good article.Thank you.
    We all know that it's the feature of fiat money,that allows everything you have described to happen. Either- intentionally or not.
    It does not matter, who the chief of FED is.
    As long as monetary system allows infinite money supply, the
    bubbles, currency debasement, and other bad things will always be with us.
    The FED is a convenient tool for government/politicians.
    Bubbles happened many times in history, before the fiat money era.
    Fiat money make it easier to create them.
    So,my opinion, while we have no limit on money supply and politicians ignoring economic laws, we are bound to live with bubbles.

  16. Gag is correct. The federal debt went up every year of the Clinton administration, including the years that supposedly had a "surplus". For a short while the capital gains taxes on the tech bubble *almost* balanced the budget. But it stayed in deficit.

  17. If you're going to use the word "apocalypse" in your article, then why wouldn't you accept the Adam & Eve hypothesis for macroeconomics? I know, you're just throwing around Christian terminology to give weight to what you say. If it has weight, is it true or not...?

    Ok, get ready, cause I'm going to use the God-word. My world view tells me that there are answers here and God has a plan and that plan is going right according to schedule. The prophets foresaw it, if anyone of you cares to know it, it can be known; it is not patently absurd. What is p.o. is the absurd lengths people go to deny God.

  18. A century ago, Congress and the President granted a small group of bankers the monopoly power to create and distribute, in secret, all the money we all must use. Not being angels, these men and their heirs have since then bought up and corrupted every single institution of any importance in our society.

    Maybe the idea of a central bank wasn't such a good idea after all.

    Mark Voelker

  19. Doug- Remember the dot com graveyard? There were tons of companies that fell with the bust of the internet bubble, Google was not one of them and it wasn't because they were lucky it was because they mattered. Many of the other didn't.

  20. What got us here? We did! Each and every one of us. It's in our nature, human electrons that we are, to follow the path of least resistance and kick the can down the road by living, not off the sweat of our brows (God forbid), but off the brows of the unborn (ie future generations). Yep, everything is cool as long as we can beg, borrow and steal from the future via our ponzi-esque, fractional reserve, fiat crappola monetary monstrosity (or like the Terminator said, "it's in your nature to destroy yourselves"; wise man, that machine). So is it any wonder the Fed is printing like there's no tomorrow? It is, because their isn't.

  21. Ahem ahem (Clears his throat in a pseudo-intellectual manner)...Unlike most of you I was in Mexico when the Peso collapsed...I was there and the panic in people's eyes as they went from being a well off doctor to driving a taxi to make it.

    Americans are screwed...They don't have any skills, work ethic or willingness to sacrifice as a whole.

    There's some very good people but once you get to the under 40 year old crowd it gets bad because they only remember the good times.

    In a way the future struggle will make people healthier, lose weight, get exercise and relearn to be detailed...It's in the struggles that art literature and real music is made.

    No money? No smoking, less drinking, more walking, less junk food, less soda, more friend/family time, more reading etc etc...This problem can be a solution to the American Cancer of Apathy...Once your belly grumbles with hunger you quickly pay attention or starve.

    Best of luck to all in the future struggle to get by.

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  23. One more comment. Have you ever heard the expression that if you owe the bank a thousand, it's your problem, but if you owe them a million, it's their problem? Well, that's where we are today. If we owe the bank (the Fed), a few billions, it's our problem, but if we owe them a few trillions, it's their problem (which may go some way in explaining why rates must be kept artificially low; otherwise, the vampire squid would kill its host, and itself).


  25. "If we owe the bank (the Fed), a few billions, it's our problem, but if we owe them a few trillions, it's their problem (which may go some way in explaining why rates must be kept artificially low; otherwise, the vampire squid would kill its host, and itself)"

    Right on Marcus. My thought is that Americans need to rise up and default only on the money they owe to the Fed while honouring that which they owe to other countries. Simultaneously they need to revoke the Federal Reserve Act and take control of their own destiny.

    Why should they pay interest to private banks (ie the Fed) for creating money that is rightfully Americans to create themselves through a government owned central bank?

    A concerned Canadian

  26. @Dan, are those the lyrics to an unreleased Ministry song?

  27. I completely agree with you...but it isn't going to help us any if we try to wish the past was different. We need to start looking to the future and find a way to get out of this. I know we can do it..I know we can. In the 90's we had the internet computer revolution...we need to get creative and start something like this.

    In my mind..I am thinking that right about now..I am pretty sick of hearing about Libya and oil. Geez..we need to get on with it..OIL is out. It isn't going to last forever and I know that other technology such as hydrogen (h20) fuel can change the world as we know yet.

    The thing is..the patent was bought out by greedy politicians or oil companies and many new inventions are sitting on someone's shelf rotting away while we cry about our problems.

    Seriously, this country is still one of the best around..but yes we are on our way out..if we don't get off our asses and stop complaining about who's fault it is. ITS ALL OF OUR FAULT.

    We are all greedy, spoiled, and have no idea what it is to truly sacrifice. But, maybe that's what it is really going to take to get us to do something about this.

    I know we have technology that can easily replace oil..I know it...and it also can stimulate the economy to start producing goods that don't rely on oil anymore. Its an idea..but one that is highly needed.

    Our biggest problem now is the Middle East..and don't get me going, but right now they know our financial situation and right now they know we are at our most weakest points and right now the muslim brotherhood is starting to wish their 12th Imam to come out of his well and you know what..that means they want to rage war on the USA today. That's what the riots are over there..let's not kid ourself.

    The scary part is war is usually what takes a country down..and we don't need one with the entire Middle East..because I think..that is what can take us down. WE simply can't afford it anymore.

    Right now America is primed for death if a true war to hit us.

    Think about it.

  28. Soviet goon? I couldn’t disagree more. This isn’t negligent homicide on the dollar but pre meditated murder. Greenspan wants a gold standard and the only way to get it back is to destroy the current order; so he did exactly that. Greenspan doesn’t strike me as a fool like Bernanke, Greenspan knew full well what he was doing. Unlike our current idiots he could think a few moves ahead.


  29. we will never have balanced budgets because the us does not control its money supply. the federal reserve bank controls our money and the fed is a PRIVATELY owned bank! who owns it? no one knows, its books have never been made public. the fed injects money into our economy and charges the government interest! thats like getting paid with a credit card or a payday loan; youd never get out of debt!

    both sites have good info. the video was made in the late 90's by Bill Still and the things he says make sense to me. it is long, 3 1/2 hrs but well worth the time. i leave you with comments on banks from famous men in history.

    Napoleon Bonaparte: “When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”

    President Abraham Lincoln: “The money power preys upon the nation in times of peace and conspires against it in times of adversity. It is more despotic than monarchy, more insolent than autocracy, more selfish than bureaucracy.”

    President James A Garfield: “Whoever controls the volume of money in any country is absolute master of all industry and commerce.”

    Senator Barry Goldwater: “Most Americans have no real understanding of the operation of the international money-lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.”

    Henry Ford: “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

    Niccolo Machiavelli: “For the great majority of mankind are satisfied with appearances as though they were realities, and are often more influenced by the things that seem than by those that are.”

  30. I don't know why you use 1975 as the starting point of the big rise in debt. The inflection point was the election of Ronald Reagan and his tax cuts for the rich. When Jimmy Carter left office, the deficit was $70 billion and the national debt was all of $900 billion total. Within a year after Reagan's tax cuts, the deficit exploded to over $200 billion. By the end of Reagan's second term he almost tripled the national debt to almost $2.3 trillion. By contrast, Clinton raised taxes and produced a budget surplus by the end of his second term.

    It's very politically correct to say a pox on both your houses. But an objective look at the numbers say the Republicans have a heck of a lot more red on their hands than the Democrats do.

  31. So, is that if you take off the top 15% of BOTH the US and Slovenia, Slovenia comes out on top? Or is it "The bottom 85% of Americans have less average income than the average Slovenian"?

    Pretty important difference there.

  32. Greenspan and The Bernank? These aren't the droids you're looking for....

    The real culprits? Our Central Bank/Dishonest Money System. The dollar is the world reserve fiat currency, the linchpin of a world debt based money system that drives wealth out of the pockets of those who create wealth thru work and into the pockets of those who have first access to the newly created money.

    The average lifespan of a fiat money system is 40 years. Nixon closed the gold window in 1971. We are right on schedule.

    Bretton Woods 2011 will take place next week. Erudite thinkers will sprinkle attendees with new vocabulary that will pave the way for a one world currency. The conference is sponsored by The Institute for New Economic Thinking, otherwise known as "The Thieves Who Are Working Overtime to Create A New Vocabulary To Fool Everyone Into Continuing To Prop Up The World Fiat Money System That Pushes Wealth Into Their Pockets."

    The Fair Tax and the Balanced Budget Amendment, great-sounding populist solutions to what ails us, are really tools to crank the wealth-sucking machine into overdrive. The Fair Tax will create a tax enforcement mechanism that will make the Soviet KGB look like the Pillow Pets. It will "give" money to every American adult, creating the mechanism to begin to convince everyone that money comes from government. This fallacy is already being taught in university department of economics.

    Current law allows the Treasury Department to bail out any entity it wants under its own authority - Congressional approval is no longer required. This means the Treasury Department can go around putting money on the books of any crony it wants. Presto! Free Money! A balanced budget amendment will suck the money directly from the wallets of the taxpayers - no debt required.

    The dollar is going down. It is just another milestone in the progression of the world fiat money system. Scapegoats are being created among various constituencies who foresee its demise. For the financial world, it is Greenspan and the Bernank. For the Glenn Beck crowd, it is George Soros. The Left believes the tales of Krugman and DeLong, that those responsible for spinning the financial dials can get us out of the ditch. They are part of a large number of Americans who are oblivious to what lies ahead.

    Last week the governor of Utah signed a law creating the first alternative state currency. North Carolina, Virginia, and several other states are in various stages in the process of creating their own alternative currencies.

    Some are storing food. I am storing lots of popcorn. It will be an incredible show.

  33. I'm just an amateur trying to survive this mess... looking for answers. And, was surprised after reading most of your posts to be reminded of a little book I read 40 years ago.
    Gary Allen's book "None Dare Call it Conspiracy".
    Sounds like most of you have read it, and those who haven't -- should.

  34. I think you all are overlooking the core issue for the economy and the reason we are in this mess. You will ridicule it because you know not what you do. But until we eliminate the racial economics that have dominated this continent since 1502, ruse after economic ruse will lead to crisis after crisis. Upholding a status quo that locks one group in and another out of the economy requires manipulation. Once people face this truth we can move toward a real economy. In the meantime, the puppeteers and their strings will have to be busy. Only difference is that both are now visible since dubya pulled the curtains off.

    So today the ruses are playing out in plain sight with the puppeteers as visible as the puppets

  35. How very dare you slag off my good mate Mr Greenspan!

    Only kidding dude, great article. I just made a music video at the London protests and I'd love you guys to have a look and tell us what you think.

  36. What happened immediately before Nixon removed the US from the gold standard?
    Peak US Oil production. The US had to resort to paper fraud, once their, literal, power basis started to decline

  37. More than any other single cause, Richard Nixon's handling of the country is a major turning point toward the dark side. By continuing the fruitless Vietnam War (as Obama is now doing) he bankrupted the country and had to take us off the gold standard (dishonest money). However, realize that every war is financed with dishonest money. If you look back at points of major currency devaluation, it occurs after wars, when the printed money that was used to finance the war comes back into the economy as an inflated money supply.

  38. But an even deeper cause is very simple:

    Very few problems were ever solved in the past 40 years, they simply had money thrown at them to silence the people complaining.

    And right there is the reason rich countries eventually and always decline.

    1. Poor people? Don't solve the problem, just give them money.
    2. Losing war? No problem, just spend more money to buy bigger and better weapons.
    3. Corrupt banking system? No problem, just pay for the damage done and pretend everything is ok.
    etc. etc. etc.

    Now, when the money stops flowing, all the problems that were never really solved come roaring back with a vengeance. Let's see if any American cities are left unburnt when the free money stops flowing.

  39. Boy, I think you nailed it. I don't like horror movies, but I think we're in one.

  40. A couple of folks have posted in the alleged "Clinton Surplus" that George Bush inherited and screwed up.

    The statement that debt increased every year in the 90s is true-just check treasury direct.

    But the problem runs deeper. The market rally in the late 90's came from the Fed printing as a precursor to todays "grand buffet" It actually slowed down the printing just before the 2000 election thus screwing Bush or Gore -whoever had won-with a declining economy.

    The alleged surplus also came about by increasing social security taxes and using the extra cash flow to reduce the deficit rather than funding social security. The $3.5 Trillion the "general fund" borrowed from the Social Security fund in 1995 was a different disgusting issue. There is not lock box or assets other than a IOU from the so called "general fund".

    Our problems include the continuous lying from government officials and kicking the can down the road.

    Few in DC want to or know how to "stop the bleeding" In the states (such as Wisconsin) when someone tries to stop the bleeding we see the result.

    How different is the public pension problems we have than the social security and other entitlement problems we have? They should be handled similarly.

    The banking issues (risks taken with other peoples money) are just another layer of the mess.

    The real problem is we here are just preaching to the choir.

  41. I couldn't agree more with your theory.
    However I see that you are passing by few words like: Jews-Cosa-nostra/ [totally beneficiaries of this gansterism. That majority of American call it "Democracy".

  42. GL

    When you have the time, dig deeper.

    Google the "Illuminati" or "13 families" or "Black Nobility"
    The current world economic situation has been planned for centuries. All the people you mention are just tools.

    The deception is easy to hide, since it has been happening so slowly, although recently I sense the timeline is being advanced more quickly since more people are catching on. The curtain is rising.

    The weakness that has been exploited in the USA is the self centered greed factor. Other countries have other weaknesses that are being exploited.

    The solutions are not easy.

  43. The Mess we are in is an intentionally coordinated mess. If there is enough pain and chaos, the New World Order will be welcomed.

  44. Dear Mr GL,

    I have a question which might be a bit off the point, but I can't think of anyone whose opinion I would value more than yours.

    With the fiscal mess we find ourselves in there is much debate about the cause and also possible remedies. Austerity? Increased taxes? More of the same? (not so much!).

    However I would propose that one of the greatest inequalities in our system is the two parallel systems of taxation: namely that which allows businesses (specifically large corporations) to deduct ALL EXPENSES, and the second which us poor working slobs have to abide by which allows for the deduction of virtually NO EXPENSES.

    For the most part, individuals pay taxes on INCOME and corporations pay taxes on PROFITS.

    Now let's assume that corporations are in fact paying taxes at the corporate tax rate (which we know is rarely the case anyway... see GE!). Because they only pay taxes on profits, their effective tax rate is miniscule compared to that of the general population.

    I realize they incur business expenses, but when you think about it, it's no different from an individual. I can't function as an economic unit in this economy if I don't have home to sleep in at night, or a car to get to work in, or food to give me energy, or even a small vacation once a year to keep me sane!

    Where's the difference?

    Corporations are treated as individuals under the law and get to influence elections just like we do. They enjoy all the benefits of existing in this society, like the security provided bu the armed forces, the infrastructure, the social services provided to their workers, etc, etc. And yet they shoulder a fraction of the burden. And anyone tell me "oh well individuals own the corporations therefore we indirectly get the benefits". That's bullshit - we all know who benefits the most from corporate largesse.

    It seems to me that if we implemented a fair system of taxation we could take care of a whole host of problems right off the bat, starting with lower taxes and increased revenues.

    Ok so we might find corporations fleeing off-shore - let them! Any business they do within our economy (still the largest market in the world) will be subject to taxation no matter how they try and cook the books.

    I realize we (the US) are not alone in having this two faced system of taxation and it would not be without it's issues, but ultimately wouldn't we be better to one way or another have a level playing field for all? Get rid of all the loopholes, subsidies, and overly expensive and vindictive enforcement and just simplify the whole thing. Tax rates would be a fraction of what they are today.

  45. GL, to your two reasons behind this mess, I would add the third:

    * Our collectivist but unproductive fellow co-species managed to capture all positions of power through their superior social networking skills. It then resulted in other kind of people, proactive and with more useful set of skills, such as engineers, scientists, specialists etc being gradually kicked out of all corporate boardrooms and purged out of all political power structures in your country.

    Stan (Heretic)

  46. Here is the missing article link to my previous comment:

  47. What was the saying "the road paved with good intentions" What got us here - we all did. Per Hindu scriptures we are in the Kaliyug- i.e. the era of human evil and shallownes , its supposed to last 432,000 years or so. Per some Christian theology its the endtimes - 4 horsemaen and third temple etc (notice all the worlds armies converging in the Middle East for the final battle). Mayans to predicted end of the world. The amusing thing the only person who seems to be right is Karl Marx, a godless communist.

  48. Hey GL another great post. Yeah we all wanted a pony and look at what we got instead!

    Was your DXY post last week (one week) too early? Looks like it will be dropping in the coming weeks. ECB is talking up a hike in rates? Wow!

    Thanks much

  49. This can be summed up in 2 words: Greed, and Debt

  50. In two words, I say that we got here because of "Greed" and "Pride".

    The pride part comes in because the investment banks really believed that they had eliminated all possibility of loss by creating that little thing called a Credit Default Swap!

  51. This is a financial blog, but I do try to bring God into the picture. Because people need to make a decision about God in their lives-- who he is. Eternity is a long time and everyone will enter into it. God enters reality at decision points in people's lives. He effects the natural world, not just the sphere of religion. This financial mess is our fault, because we make bad decisions and because we inherited it from Adam. Its not Bernanke's fault and its not the banksters. People are all playing a part in history and it will all work out just as the Scriptures predict. By the way, "the world's armies convurging in the Middle East" right now is NOT Armageddon. This is not what is happening at this time, because Antichrist would have to be in power and he is not even on the horizon. We must go through the One World gov't and the 10 kingdom world gov't first. It would have to include all the gentile nations of the world and there would have to have been a peace treaty between Israel and Antichrist that begins the Day of the Lord, for this to be Armageddon.

  52. Great article. I agree with most of what you said. I believe the tipping point was repeal of the Volker Rule by congress at the behest of, who else, the banksters.

  53. This has been goin on ever since Darwin said let the strongest survive however he forgot to tell us what "strongest" actually meant. Those in power simply got the wrong virtues :)

  54. "Remove the top 15% of the population, and the average income in the United States drops below Slovenia’s".

    Is that Slovenia without their top 15%?

  55. the gang, who hadn't understood the crisis was coming, is not able to fix it.


  56. the whole debate is undermined by these comments about The Illuminati, Armageddon, Hindu Scriptures, even Darwin is lazily misquoted. Do any of these things really help your understanding of Economics? I should write eConomiX - it's more fun like tha?

    If there is a conspiracy the picture of the four horses at the top of this blogpost tells you that this is part of it. A conspiracy of ignorance and hype.

    What is this "European Disintegration" you people keep slipping into your Economics Papers? Is it the same one that was going to bring down the Euro currency at every step of its expansion since it was conceived thirty years ago? Don't you get tired of being a hyped up monkey on a rope? Cut down on sugar and caffeine and get a perspective on your life. Yes your governments have sold your jobs abroad, so stop voting for them and stop whining.

  57. A radical writer with ads for e-Trade and the WSJ on the side...I think I smell me a sell out or opportunist!

    Sorry no donation to the tip jar for you.

  58. Wobble is right!
    My first Ah-Hah moment was when I heard that our GDP was based to the tune of 70% on "consumerism".
    The last twenty years of "prosperity" was attributable to the cheap products imported on the backs of cheap foreign labor mitigating the obvious deflation of personal wage gains.
    The U.S. now has the highest Corporate taxes in the world-- taxing the "evil" rich and Corporations excessively NEVER works as they do what all smart people do in such situations-- they LEAVE and take the jobs with them.
    The Government terrorists are seemingly, even here, immune to criticism for passing all the onerous taxes that got us here. As GE has proven quite spectacularly excessive taxing does not necessarily equate to collecting revenues.
    Bring our Corporate rates down and initiate a flat no loophole tax policy. Get rid of Capital gains taxes to encourage savings and ENFORCE a balanced budget amendment.
    At the crux of this reform is TERM LIMITS for our "esteemed" leaders who are raping the Country and it's unborn's futures.

  59. Really it comes down to, for me, evolving from animals that prey on others for meat (theft) to animals that respect bodily property rights of others. The notion of good versus evil is basically knowledge versus ignorance. The smart money endorses property rights because it's a better survival strategy than theft. It's basically an evolutionary struggle between dumb and smart people, or if you like, between old technology--theft--and new technology--property rights.

  60. from hungary...

    I dont mind that the bubbles and crisis would be evadeable. But without subsidized money printing both crises and booms would have smaller amplitude. U.S. and it's investors facing great value meltdowns . But this impending crisis is chance for reorganize the whole country for a more productive and competitive future.

  61. The Republican Party in a distant time used to be known for fiscal responsibility, but since Reagan began promoting anti-tax hysteria they have totally abdicated any shred of responsibility. What pisses me off most is that they never have been pressed to explain just how the nation is better served by paying bills through new debt rather than tazes. The Dems generally have engaged in similar irresponsibility, but at least they would run up the debt for better cause than further lining the pockets of the uber-rich.

  62. Wobble: Hear, hear! Well said.

  63. Anonymous, Editor and K Smith have got it right.

    You GL, on the other hand have only considered the direct causes/influences through actions/lack of actions as a result of the absurdity of the current international monetary system.

    The ROOT causes of the current mess are threefold in my mind.

    ONE : The acceptance of the USD as the world's currency via the Bretton Woods agreement circa 1944. This gave enormous strength to the USA to match its industrial and military strengths.
    Mind you this was also done at a time when every other western nation on the planet was in diabolical trouble economically. So it was almost as if it was planned, to take advantage of the widespread weakness and a desire to have a stable pegged currency.

    TWO : The removal of the USD from the GOLD STANDARD in 1971. This didnt kill the Bretton Woods agreement because the USD was/is so very prevalent in all aspects of commercial and financial relationships and international trade, the USD had to retain its reserve currency status.

    These two historical events combined,gave the USA enormous power unmatched by any other nation. In isolation they (in the case of Bretton Woods) ensured total reliance on the USD with the commensurate permeability of the currency through every financial institition (economy) around the globe. In the case of the removal from the Gold Standard, it virtually freed the Government from protecting its currency and guaranteeing its value (to something that was tangible and valuable). The USD became nothing more than a promise by the Federal Government of the USA. This leads me to the most important point.

    THREE: The priviledge that was bestowed upon the USA and the elevation of the USD to the highest plateau (that of the reserve currency of the world) was abused. Until August 1971, the USA flourished. The flagrant manipulation, distortion, coercion, corruption and constant desire for power ruled by greed prevailed subsequetly. All of which were only permissable because of the "priviledged position".
    Each country, that was a signatory to the Bretton Woods agreement, was to maintain its currency through monetary policy. The very same policy that has undermined the strength that was once prevalent. The ability of the US Government and the Federal Reserve to perform such acts were construed upon them only by virtue of the foundations that were formed in the decades preceeding.

    It is true that easy monetary policy and indifferent legislation/ policy together with the lack of transparency and regulation of Banks and Banking practices gives rise to intended / unintended consequences.
    What to me is all too obvious, is that the current international monetary system is flawed. Until it is changed the world will not prosper. When a system relies initially on predetermined (undervalued) exchange rates, then subsequently manipulated exchange rates at the periphery to create export led growth, we are all unequivocally at the mercy of government malfeasance.

    Empires are created and Empires fall. Study history and determine commonality. Key themes that are evident, can be best described as a gradual disintegration or perhaps a complex transformation. Sound familiar...? Either way the process has already commenced.
    Lack of Balanced budgets and low interest rates are merely side-shows to the main event.
    "The Great Adjustment" is now showing. Sit back and watch it slowly fall apart.

  64. I would just like to give my street view of why this happened, just to keep it simple and put aside complex or economic jargon.
    1) The dotcom bubble was too obvious , I knew it would bust (I was servicing a lot of internet startups) as most new companies had no revenue and just expenses.
    2) 9/11 happened and Bush jr launched 2 wars Afghanistan and Iraq, - both needed boorrowed money to fund. It was obvious it was getting expensive and much longer than Rumsfeld and Cheney expected. That was dent#2.
    3) Then Greenspan gave us great rates so everybody could buy million dollar mansions in California with interest only payments and no down. It was so obviously going to fall apart. I even predicted in 2003 that in 3 to 5 years we were gonna go into a massive depression. I referred a bunch of people for real estate and was amazed on how they got approved. dent# 3 and we were out.
    4) Obama came in and spend again. Cash for clunkers was a classic. Dent#4 and we got change we can believe in.
    5) On no jobs in America, that too is obvious. Americans simply have no clue that China and India not only offer cheaper skilled workers, but better workers than AMericans. Its no longer outsourcing - its just a better workforce (Most born in America university grads get aghast when I say this). Dent#5, no future for Middle Class America- no way out of this foxhole.

    So here we are in 2011 with 20% unemployment and an untrusted government and Wall street. Could you please tell me just how on earth was this not the most predictable outcome?

  65. We are in a mess. I lived in Mexico when the peso fell through the floor in 81. I have gone back and visited since then. The interesting thing is that today the standard of living is higher, although most Mexcians have 1. no savings 2. no investments 3. no debt. When your currency becomes worthless, and inflation is high, the savers are hurt the worst. The regular working slob notices little change in his life. Who still got rich in Mexico while the peso fell and inflation raged? STOCK owners. Telmex, Cemex, have gone up a lot. Most Mexicans cannot buy mutual funds as easily as we can here, so only rich ones have stocks.

  66. In 1975 gold was as high a $180 per ounce and silver was about $4.50 per ounce my Inlaws house was $66K, a gallon of gasoline was $0.57 and minimum wage was $2.10 an hour….fast forward to 2011 gold is $1400 per ounce silver $30, my Inlaws house is worth about $700K, gas is $4 and minimum wage is $7.25.

    If we use the same multiples and forecast the next 35 years gold would end up at around $11,000 per ounce, silver about $200 per ounce, my inlaws home will be worth $7,400,000, gasoline will be about $32 per gallon and minimum wage will be $25 per hour……seem realistic? We will likely have massive inflation due to QE 1,2,3,4,and so forth but I think wages will be forced to escalate much more than in the past to support the prices of future commodities.

    All the fear can subside, did the world end betwen 1975 and 2011?

    The overinflated pensions, insane "We the People" debt will be repaid with a dollar that will be worth a dime in todays terms....fixed income retirees will feel the brunt of this along with the poor. The Government really doesn't care about them, in fact it appears they must loathe them. Sad state of affairs. This also gives you some additional ammo against the destruction of real estate in an inflationary world. Gold and Silver are inflation hedges, but real estate is as well but also gives a return long term.

  67. As always I enjoy your knowledge and the bare bones way you present it, Gonzalo. It would be nice to see people sharing more about preparing for this nasty future, rather than focusing on the past...but I understand how much anger is out there.

    All anyone has to do is look at the way the Fed and its cronies have done and it's not hard to conclude that money really is the root of all evil. Maybe we should start giving people mental health exams before giving them control over billions of lives and finances.

  68. Cleinman,

    Money is just a tool -- neither good nor evil. If I may rephrase in modern English:

    "For the love of money is a root of all sorts of evil" (I Tim 6:10 NIV)

    I fully agree with what you are saying. The Fed and the banksters have brought much evil to this world and its peoples.

  69. I have a solution. It will bring together the executive and both sides of the legislative to work together to balance the budget. It will eliminate the fed's power by appealing to the inate greed and self-preservation so powerful in the politicians...

    Add an ammendment to the constitution which very clearly and specifically states that no member of Congress or the president, past, present or future, shall recieve any payment or compensation including but not limited to salary, health benefits, retirement, travel, etc, nor shall their family members or dependants or any other benefit from their position in any year during which the US budget is not balanced.

    And lets put that in all state constitutions as well...

    And make some rule clarifying that the can cannot be kicked down the road (and if it is the guy cannot expect to get his benefits when he is out of office if there is a problem then)

    Just my two cents, put the problem back where it belongs, on the politicians who spent our money for the foreseeable future to get elected/re-elected today.

  70. "The farker was a Soviet goon-his Ayn Rand, "Free-Markets Forever!" bullshiat was just for show."

    Yes, that's the answer -- surely there's no problem with capitalism or Randroidianism, IT MUST BE THAT ALAN GREENSPAN WAS A SECRET COMMIE!


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