When United States ruled the world
By James Quinn,
a certified public accountant and a certified cash manager
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I used to rule the world
Seas would rise when I gave the word
Now in the morning I sleep alone
Sweep the streets I used to own
I used to roll the dice
Feel the fear in my enemy's eyes
Listen as the crowd would sing
"Now the old king is dead! Long live the king!"
One minute I held the key
Next the walls were closed on me
And I discovered that my castles stand
Upon pillars of salt and pillars of sand
Coldplay – Viva La Vida
 America
has squandered the human sacrifice, blood, sweat and tears
of two generations in less than seventy years. We have been
an independent country for 226 years. From 1783 until 1946
was an unrelenting upward trajectory for the beacon of the
free world. With the end of World War II, America was the
last country standing. Germany and Japan were in shambles.
Russia had lost millions of citizens, with Stalin about
to murder millions more. Great Britain was a shell of its
former self. The American Empire had been born. We were
the manufacturer to the world. We rebuilt Europe and Japan.
Our military was dominant. We made the best automobiles.
We built 41,000 miles of national highway over two decades.
In 1946, one in three U.S. workers was employed in the manufacturing
industry. Today, less than one in ten workers makes something.
In the years following World War II, the United States
ran trade surpluses of 2% to 4% of GDP. We regularly ran
surpluses until the late 1970’s. Since the late 1970’s,
the United States has run increasingly large trade deficits,
reaching 6% of GDP in 2007. For the last three decades,
Americans have tried to spend their way to prosperity. The
government politicians and their moneyed backers have sold
the idea that Americans could be the thinkers for the world,
while other countries could do the menial work of producing
stuff. After thirty years we are left with a hollowed out
economy of paper pushers. It may be a reach to transition
the Wall Street geniuses who created MBSs, CDSs, and CDO’s
into jobs building bridges. The manufacturing jobs are gone.
Our workers are left to sweep the streets they used to own.
Source: www.globalpolicy.org
After three decades of burning our furniture to keep warm,
we are left owing the rest of the world $2.7 trillion. Many
of these countries don’t like us. Ben Bernanke is actively
trying to drive the value of the U.S. dollar down, while
decreasing interest rates paid on this government debt.
As Ben prints trillions of new dollars, the value of China’s,
Japan’s and the oil exporting countries’ holdings goes down.
The U.S. will run a $2 trillion deficit in the next year.
We need these foreign countries to buy at least $1 trillion
of our new debt. We are sure they will do so. Our reasoning
is, what else can they do. From a purely financial standpoint,
it is insanity for a country to make an investment in an
asset paying 2.5% interest, when in one day last week the
Federal Reserve purposely knocked the value of the dollar
down 5% in one day, wiping out two years of interest income.
The truth is that foreign countries are not stupid. They
are already changing their strategy regarding American debt.
The Treasury Department released their monthly analysis
of international purchases and sales of U.S. assets for
February, last week. Below is directly from that report.
Net foreign purchases of long-term securities were
negative $43.0 billion.
- Net foreign purchases of long-term U.S. securities
were negative $18.8 billion. Of this, net purchases by
private foreign investors were negative $10.2 billion,
and net purchases by foreign official institutions were
negative $8.5 billion.
- U.S. residents purchased a net $24.2 billion
of long-term foreign securities.
Net foreign acquisition of long-term securities,
taking into account adjustments, is estimated to have been
negative $60.9 billion.
The Chinese are not fools. They can clearly see that the
U.S. will try to devalue our way out of our financial mess.
They are going to put the $500 billion of USD holdings to
work, before it becomes worthless. Recent examples reported
by the Washington Post have been:
· On Feb. 12, China's state-owned metals giant Chinalco
signed a $19.5 billion deal with Australia's Rio Tinto that
will eventually double its stake in the world's second-largest
mining company.
· On Feb. 17 and 18, China National Petroleum signed separate
agreements with Russia and Venezuela under which China would
provide $25 billion and $4 billion in loans, respectively,
in exchange for long-term commitments to supply oil.
· On Feb. 19, the China Development Bank struck a similar
deal with Petrobras, the Brazilian oil company, agreeing
to a loan of $10 billion in exchange for oil.
· Iran announced that it had signed a $3.2 billion agreement
with a Chinese consortium to develop an area beneath the
Persian Gulf seabed that is believed to hold about 8 percent
of the world's reserves of natural gas.
The Chinese have a long-term plan to rule the world. They
are buying up natural resources throughout the world. The
walls are closing in on the U.S. The U.S. solution is to
print more dollars, borrow from future generations, and
tax their citizens more. Ben Bernanke has rolled the dice,
but the fear is in his eyes, not our enemies’. We will shortly
realize that our castles were built upon pillars of salt
and pillars of sand.
Bubble, Bubble
Never in the history of the world has a bubble burst halfway.
Every bubble has collapsed to its starting point or below.
The self serving pundits on CNBC and on Sunday talk shows
continue to predict a stabilization of the housing market.
They are wrong. The bubble is still deflating and will not
end until home values are back to 2000 levels, if we’re
lucky. Examples of bubbles that fully deflated include the
tulip bubble of 1637 - 1638, the South Sea bubble of 1719
- 1722, the Nikkei bubble from 1983 until today, and the
NASDAQ bubble from 1999 – 2003. The United States has three
bubbles that are deflating simultaneously, compliments of
the Federal Reserve, George Bush, and a criminally incompetent
Congress. Housing, consumer spending, and U.S. total debt
are all at different phases of bubble deflation. No matter
what politicians attempt, these bubbles cannot be re-inflated.
They will deflate fully.
“It is a characteristic of wisdom not to do
desperate things.”
Henry David Thoreau
Tulip mania struck Holland in 1637. The whole nation was
consumed by tulip bulbs in the first recorded speculative
bubble. Contract prices for tulip bulbs reached astronomical
levels and then suddenly collapsed. At the peak of tulip
mania in February 1637, tulip contracts sold for more than
10 times the annual income of a skilled craftsman. In a
matter of seven months, fortunes were made and lost. The
bubble popped completely.
Source: mysmp.com
The South Sea Company was the AIG of the 1700’s. It was
a British joint stock company, founded in 1711. The company
was granted a monopoly to trade as part of a treaty during
the War of Spanish Succession. The company assumed the national
debt England had incurred during the war. In 1719 the company
proposed a scheme by which it would buy more than half the
national debt of Britain (£30,981,712), again with new shares,
and a promise to the government that the debt would be converted
to a lower interest rate, 5% until 1727 and 4% per year
thereafter. The purpose of this conversion was similar to
allow a conversion of high-interest but difficult-to-trade
debt into low-interest, readily marketable debt and shares
of the South Sea Company. These are the games that declining
empires play when they have overreached in their empire
building. The plan sounds a lot like Timmy Geithner’s
Good Bank Bad Bank scheme. Shuffling debt from
one entity to another entity doesn’t get rid of it. It is
just a scam paid for by taxpayers.
“Any fool can make a rule, and any fool will
mind it.”
Henry David Thoreau
The price of South Sea Company stock went up from £100
a share to almost £1,000 per share. Its success caused a
country-wide investing frenzy by peasants, businessmen and
lords. The price reached £1,000 in early August and the
level of selling was such that the price started to fall,
dropping back to £100 per share before the year was out,
triggering bankruptcy among those who had bought on credit.
The English Parliament reacted to the crisis exactly the
way our current clueless bunch of moron Congressmen are
reacting to the AIG debacle. The estates of the directors
of the South Sea Company were confiscated and used to relieve
the suffering of the victims, and the stock of the South
Sea Company was divided between the Bank of England and
East India Company. A resolution was proposed in parliament
that bankers be tied up in sacks filled with snakes and
tipped into the Thames River. I’m sure Barney Frank is preparing
a similar resolution regarding AIG executives. No one can
calculate the madness of men.
Source: Elliott Wave
Japan Inc. was going to dominate the world. From 1983 until
its peak in 1989, the Nikkei rose from 7,500 to 38,900,
a 500% increase in seven years. Following World War II Japan
implemented tariffs that protected their industries from
overseas competition. This resulted in large trade surpluses
and an appreciating yen. With artificial protections, Japanese
companies made mal-investments. Easy money and false confidence
led to a frenzy in the stock market and real estate market.
Japanese banks had financed this speculative bubble with
high risk loans. The PE ratio of the Nikkei reached 78 in
1989. Twenty years after this peak, the Nikkei hit a low
of 7,500 this year, the same level it started at in 1983.
This has occurred despite spending billions on make work
stimulus programs, reducing interest rates to zero, and
artificially reducing the value of the yen. The ultimate
outcome has been a national debt that is 150% of GDP with
a rapidly ageing population and no way out. See any similarities?
Source: Mike Shedlock
To prove that Japan didn’t have a monopoly on foolishness
and speculative frenzy, the U.S. had their bubble in 1999
and 2000. The NASDAQ market rose from 1,000 in 1996 to 5,132
in 2000. The introduction of the internet convinced millions
that we had entered a new era. Wall Street did what it does
best, and hyped the can’t miss riches to be gained from
investing in any company that added a dot.com to their name.
When AOL acquired Time Warner in January, 2000, the top
was marked. The over-hyped fear of the Y2K “disaster” that
awaited our worldwide computer systems resulted in a surge
of computer purchases. Alan Greenspan did what he did best
and flooded the system with liquidity. These all combined
to produce a blow-off top in March 2000. The PE ratio of
the NASDAQ reached 264, as most of the hyped dot.com stocks
had no earnings. Nine years later, the NASDAQ stands at
1,457, 72% below its peak at 1998 levels. The bubble burst
fully.
NASDAQ Dot.Com Bubble
Source: Wikipedia
Toil & Trouble
I’ve scrutinized the four most well known bubbles in history.
They all deflated completely. There are hundreds of other
bubble examples throughout history and none of them deflated
halfway. This brings us to the housing market today. The
following chart from Gary Shilling’s newsletter clearly
shows that home prices went into a classic bubble frenzy
after Alan Greenspan reduced interest rates to 1% and urged
Americans to take out adjustable rate mortgages. Americans
believed the hype from the National Association of Realtors
and Wall Street shills that home prices would go up forever.
You may notice that home prices will need to fall another
21% to reach pre-bubble levels. Jim “I haven’t gotten one
right yet” Cramer is calling for a June 2009 bottom in housing.
It looks like he won’t break his streak of great predictions.
I’m sure Jon Stewart will remind him.
“Our houses are such unwieldy property that
we are often imprisoned rather than housed by them.”
Henry David Thoreau
There are 75 million houses in America. Twenty four million
don’t have a mortgage. Of those 51 million homeowners with
a mortgage, approximately 15 million are underwater. According
to Mr. Shilling, with the further decline in prices a given,
25 million homeowners will be underwater to the tune of
$1 trillion. Anyone predicting a recovery by the end of
2009 is delusional.
Source: Gary Shilling
“Most of the luxuries and many of the so-called
comforts of life are not only not indispensable, but positive
hindrances to the elevation of mankind.”
Henry David Thoreau
The next bubble just peaked in 2008, so it has a long way
to go on the downside. Consumer spending as a percent of
GDP peaked at 71% in the 2nd quarter of 2008. Americans
allowed their savings rate to drop below 0% and counted
on their home appreciation to fund their retirements. They
believed the Wall Street hype about 10% long term stock
returns. This overconfidence led millions of Americans to
borrow and spend at excessive levels. In order to get back
to pre-bubble levels of 62% of GDP will take years. With
home prices down 25% and retirement funds down 50%, only
an insane person would continue to spend at previous levels.
Ben Bernanke and the Obama administration are praying that
Americans will continue the insanity. They will not. Consumer
spending will decline by $1.3 trillion annually for years
to come. This bubble will not burst halfway.
Source: Gary Shilling
“Most men lead lives of quiet desperation and
go to the grave with the song still in them. “
Henry David Thoreau
The last and most dramatic bubble is total U.S. debt. There
is no doubt that it is unsustainable. It currently amounts
to 340% of GDP. It would need to go back to 200% of GDP
or below to retrace its bubble path. This would require
$20 trillion of debt to be paid off or written off. The
implications of this are staggering. The Federal Reserve
and politicians running the country will fight the deflation
of this bubble with all of their might. It won’t work. Bubbles
always burst. This bubble bursting will change America forever.
The American standard of living will decline significantly.
Not many people are prepared for this wrenching future.
The mantle of ruling the world will be passed to some other
lucky country. The government is trying to keep all three
bubbles from popping. Their solutions are dangerous and
could result in a collapse of our economic system.
Source: Chris Martenson
“If the machine of government is of such a
nature that it requires you to be the agent of injustice
to another, then, I say, break the law.”
Henry David Thoreau
Civil Disobedience
“There's nothing that I detest more than the
stench of lies.”
Colonel Kilgore – Apocalypse Now
The National Debt of the United States from the creation
of the country in 1783 until 1986 was $2 trillion. The National
Debt of the United States has increased by $2 trillion in
the last 18 months from $9 trillion to $11 trillion. It
has increased by $1 trillion in the last six months. The
independent Congressional Budget Office, which has been
overly optimistic over time, projects that the Obama budget
plan will add $9.3 trillion to the National Debt by 2019.
This will drive the National Debt as a percentage of GDP
to levels above the peak years reached during World War
II. The difference is that in 2019 the unfunded liabilities
totaling $56 trillion for Social Security, Medicare, and
Medicaid will sweep over the country like a tsunami. If
our government follows the path it has chosen, our country
will be bankrupted.
Source: 911review.org
Many Americans who have lived by the rules are angry,
frustrated, and appalled at what the government is doing.
They feel helpless to change the course of the country.
The housing, spending, and debt bubbles will burst completely,
no matter what the government does. Following the current
path will lead us into the Japanese model of a 25 year downturn,
if we’re lucky. When I read many of the responses to my
last article about ways to reclaim your life, I was struck
that We The People actually hold all the cards. The government
is at our mercy. Americans can change the course of the
country through passive resistance. American consumer spending
makes up 70% of the U.S. economy. No matter how much liquidity
the Federal Reserve creates out of thin air, we do not have
to spend the money. American citizens pay $1.2 trillion
in Federal Income taxes per year. If they decided not to
pay these taxes, the empire would come to a grinding halt.
American citizens have more control then they know.
I came across an essay by Henry David Thoreau called Civil
Disobedience (Resistance to Civil Government),
published in 1849. It argues that people should not permit
governments to overrule or atrophy their consciences, and
that people have a duty to avoid allowing such acquiescence
to enable the government to make them the agents of injustice.
The definition of civil disobedience is the active refusal
to obey certain laws, demands and commands of a government,
without resorting to physical violence.
“Resistance” also served as part of Thoreau’s metaphor
which compared the government to a machine, and said that
when the machine was working injustice it was the duty of
conscientious citizens to be “a counter friction” – that
is, a resistance – “to stop the machine.”
 Disobedience
is the true foundation of liberty. The obedient must be
slaves.
Henry David Thoreau
Thoreau’s most famous quote from the essay was:
“That government is best which governs least”
Mr. Thoreau was a man of principle. He believed that citizens
should follow their moral conscience above the laws of the
state. He believed that slavery was immoral and that the
invasion of Mexico to acquire land was not right. He refused
to pay his taxes in protest and was jailed for this action.
Thoreau’s argument was as follows:
“How does it become a man to behave
toward this American government today? I answer that he
cannot without disgrace be associated with it. I cannot
for an instant recognize that political organization as
my government which is the slave’s government also.”
Thoreau’s essay was the inspiration for both Mohandas Gandhi’s
Indian independence movement and Martin Luther King’s civil
rights movement. Both men admired him for his bravery and
morality.
“Thoreau was a great writer, philosopher, poet,
and withal a most practical man, that is, he taught nothing
he was not prepared to practice in himself. He was one of
the greatest and most moral men America has produced. He
went to jail for the sake of his principles and suffering
humanity. His essay has, therefore, been sanctified by suffering.
Moreover, it is written for all time. Its incisive logic
is unanswerable.”
Mohandas Gandhi
“I became convinced that noncooperation with
evil is as much a moral obligation as is cooperation with
good. The teachings of Thoreau came alive in our civil rights
movement; indeed, they are more alive than ever before.
Whether expressed in a sit in at lunch counters, a freedom
ride into Mississippi, a peaceful protest in Albany, Georgia,
a bus boycott in Montgomery, Alabama these are outgrowths
of Thoreau’s insistence that evil must be resisted and that
no moral man can patiently adjust to injustice.”
Martin Luther King
Americans have a duty to not sit idly by and enable the
government to be an agent of injustice. The reckless actions
taken by politicians and the Federal Reserve in the last
eighteen months and their inaction regarding our $56 trillion
of unfunded future liabilities are immoral, cowardly, and
evil. David Galland, from Casey Research, reflects my anger
in his recent column:
“But it is our generation that should take
the hit. It is us who should feel the pain of the collapse.
We did it to ourselves by standing idly by while the government
and its many friends in the banking sector got us into this
mess. And don’t forget the orgy of spending and personal
debt that the population engaged in, encouraged every step
of the way by the government’s easy-money policies. This
all happened on our watch, but instead of taking our medicine,
we the people are now encouraging the government in its
many efforts to re-inflate the bubble, fully aware all we
are really doing is trying to shift the mess onto the backs
of our children, and their children, and probably their
children’s children. What a bunch of cowards we are.”
The bailout of corrupt bankers by corrupt politicians
with money printed and borrowed from future generations
is a criminal act and must be overturned by civil disobedience
on the part of Americans with a moral conscience. The government
has stepped over the line and we must act before it is too
late. The brilliant John Hussman describes what Geithner,
Bernanke and Congress have done in the last two weeks:
“Ultimately, funding the bailout of lousy assets
comes at the cost of debasing our currency and selling our
good assets to foreigners. Make no mistake - we are selling
off our future and the future of our children to prevent
the bondholders of U.S. financial corporations from taking
losses. We are using public funds to protect the bondholders
of some of the most mismanaged companies in the history
of capitalism, instead of allowing them to take losses that
should have been their own. All our policy makers have done
to date has been to squander public funds to protect the
full interests of corporate bondholders.”
Americans formed this country by revolution. We are not
a country of laws. We are a country of citizens with consciences.
If government becomes so corrupt and out of control that
they threaten our very existence as a country, they must
be cast aside. Americans have an obligation to do what is
right. Thoreau voiced the right of people with a conscience
160 years ago:
“All men recognize the right of revolution;
that is, the right to refuse allegiance to and to resist
the government, when its tyranny or its inefficiency are
great and unendurable.”
People's first obligation is to do what they believe is
right and not to follow the law dictated by the majority.
When a government is unjust, people should refuse to follow
the law and distance themselves from the government in general.
A person is not obligated to devote his life to eliminating
evils from the world, but he is obligated not to participate
in such evils. If we do not fight the injustice that is
being inflicted on future generations by the actions of
government today we are also guilty. Thoreau argued that
the majority that rules through strength rather than legitimacy
is worthless:
“But a government in which the majority rules
in all cases cannot be based on justice, even as far as
men understand it. Can there not be a government in which
majorities do not virtually decide right and wrong,
but conscience? — in which majorities decide only those
questions to which the rule of expediency is applicable?
Must the citizen ever for a moment, or in the least degree,
resign his conscience to the legislator? Why has every
man a conscience, then? I think that we should be men first,
and subjects afterward. It is not desirable to cultivate
a respect for the law, so much as for the right. The only
obligation which I have a right to assume is to do at
any time what I think right. It is truly enough said that
a corporation has no conscience; but a corporation
of conscientious men is a corporation with a conscience.
Law never made men a whit more just; and, by means of their
respect for it, even the well-disposed are daily made
the agents of injustice.”
Fiscal Sanity Movement
It is now time for all Americans to force fiscal sanity
upon our government through the use of civil disobedience.
Our current fiscal path is unsustainable. The government’s
solutions will extend the pain for decades in the best case
or result in an abrupt collapse in the worst case. If Americans
force a fiscal restructuring upon the world it will be extremely
painful, but would result in a more balanced sustainable
society going forward. In both cases, Americans will need
to accept a reduction in their standard of living. This
is the price that must be paid for thirty years of living
above our means. Some passive resistance ideas regarding
the fiscal sanity movement could be:
- Imagine that Americans refused to spend any money on
discretionary items like electronic gadgets, furniture,
and jewelry. With 70% of GDP dependent on consumer spending,
this would result in the closing of thousands of unnecessary
retail stores. We know that a sustainable level of spending
is 62% of GDP, so let’s get there in two years rather
than dragging it out over a decade.
- Imagine that Americans decided to withdraw every dime
of their money from all the banks that have accepted TARP
funds. There are 8,500 banks in the United States. Seventy
banks have accepted TARP funds. Pull your money out of
these banks and put it in your local banks or credit unions
that didn’t bring down the financial system. This would
ruin the Treasury’s latest $1 trillion scheme of hiding
toxic assets.
- Imagine that Americans stopped using credit cards.
The major purveyors of credit cards, Bank of America,
Citicorp, American Express and Capital One would collapse
under the weight of bad debt. Credit cards are a ponzi
scheme dependent upon new credit issuance. Without charging
21% interest and collecting $25 late fees for being one
day late, their businesses will implode.
- Imagine that every working American walked into work
tomorrow and changed their W-4 to 20 exemptions. This
would immediately remove $1.2 trillion of taxes from the
grasp of politicians in Washington. You could bet that
would get the attention of the political hacks in Washington.
- Imagine that no more young men and women volunteered
for the military or re-enlisted. With an all volunteer
military, the lack of cannon fodder would force a downscaling
of the American military empire. The government doesn’t
have the guts to reinstitute a draft.
- Imagine that Americans refused to buy new cars and
choose to get by with the 240 million existing automobiles
already in use. This would force the necessary bankruptcies
of General Motors and Chrysler.
- Imagine that Americans refused to purchase any more
6,000 square foot McMansions. Maybe families of four could
make do with a 2,000 square foot home. This would force
down prices further and leave people with more discretionary
income to save for their retirement.
- Imagine that no one voted in the next national elections
in 2010. A voter strike would send the ultimate message
to the two corrupt parties. Ron Paul describes why the
two parties are worthless. “Pretending that a true
difference exists between the two major candidates is
a charade of great proportion. Influential forces, the
media, the government, the privileged corporations and
moneyed interests see to it that both party’s candidates
are acceptable, regardless of the outcome, since they
will still be in charge. The two parties and their candidates
have no real disagreements on foreign policy, monetary
policy, privacy issues, or the welfare state. They both
are willing to abuse the Rule of Law and ignore constitutional
restraint on Executive Powers.”
- Imagine a one day national strike coinciding with the
largest March on Washington in the history of the Republic.
This would surely change the dialogue in the country.
The lightweight politicians in Washington DC would cave
immediately.
It is not inconceivable that these civil disobedience
measures would be met with violent countermeasures by those
in power. They will do anything to retain their wealth,
influence and power. Americans with a conscience will be
willing to sacrifice whatever is necessary.
Under a government which imprisons any unjustly,
the true place for a just man is also a prison.
Henry David Thoreau
Published - April 2009
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