My unpublished (100,000 word) book “The Financial Jigsaw”, is being serialised here weekly in 100 Issues by Peter J Underwood, author
Quote of the Week: “Do you not know, my son, with what little understanding the world is ruled?” – Pope Julius III
This week we continue speculation about the US dollar and SDR and consider the possible effects on the US economy and therefore the global systems generally. The next crisis is not far off and this article explains what is happening now:
“Overall, you will be able to get a sense of the real bottom that underlies the events now showing up around us. That bottom will be found when the Fed’s last efforts are exhausted. You will be able to see, as the Fed takes action, that its efforts look increasingly exhausted. It will become evident that the Fed is constantly behind the curve and desperate, pushing up the bottom again and again but never launching a true, new, brave and bold, shining economy … until our financial system has to be replaced.”
http://thegreatrecession.info/blog/great-recession-2-0-is-here/
Here is the link to last week: Issue 71
Now that Brexit will not be coming to a final conclusion yet, I will continue to provide weekly updates as events progress:
Brexit Update – 4th October 2019
The Brexit deadline remains 31st October 2019 and stays in place unless Boris can get Parliament to agree a new exit plan. Everything continues in flux at present and we can only sit patiently and await the outcome as events progress. The Tory party conference was held this week so our lives are filled with much more hot air than usual. And the outcome has been Boris’s launch of his ‘new deal’ which is unlikely to succeed according to the latest estimates.
Here’s a good article which explains clearly what is going on with Brexit and why the EU is so keen to have UK remain, as desired by the unelected ruling elite:
Details of Parliament’s deliberations when sitting can be found here:
CHAPTER 13
The New Emergent Economy
“Winning is a habit. Watch your thoughts, they become your beliefs. Watch your beliefs, they become your words. Watch your words, they become your actions. Watch your actions, they become your habits. Watch your habits, they become your character.” – Vince Lombardi
“Everything is determined, the beginning as well as the end, by forces over which we have no control. It is determined for the insect as well as the star. Human beings, vegetables, or cosmic dust, we all dance to a mysterious tune, intoned in the distance by an invisible piper.” – Albert Einstein
“The Chinese use two brush strokes to write the word ‘crisis.’ One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger — but recognize the opportunity.” ― John F. Kennedy
The impact of the SDR on deflation/inflation and the new emergent economy
Japan is a good example of how deflation works through an economy in practice. There are multiple sources of deflation operating in Japan.
A recent NHK TV program reported that some young people in Japan are trickling back to rural villages and renting large traditional farm houses and the adjoining land for less than $200/month, a fraction of what they were paying for cramped studios in big cities.
This is an example of deflation in action: people abandon costly housing, transportation, etc. and adopt lifestyles that generate far less income and far lower expenses; both are deflationary.
Given the structural rise of part-time employment, an aging populace and the deflationary impacts of technology and globalization, no wonder Japan is experiencing stable or falling prices because technology is relentlessly deflationary.
When consumers spent small fortunes buying stereo equipment and music storage, cameras, film, photo printing machines, game consoles, equipment, small-screen TVs and renting telephones now a smart phone combines all these functions into one device.
Globalisation and commoditisation are also deflationary. Global wage arbitrage and automation lowers production costs, and the commoditisation of labour and inputs (capital and materials) push prices lower. Declining energy costs are also deflationary because the cost of energy affects the pricing of almost every good and service.
We can now see why money created out of thin air (QE) need not be as inflationary as would have been expected. If economic activity declines by $1 trillion due to lower incomes and consumption creating $1 trillion out of thin air and injecting it into the economy as monetary and fiscal stimulus is more or less simply replacing the $1 trillion of the effects of deflation in prices.
The Bank of Japan has tripled its asset purchases with monetary stimulus and supporting the stock and bond markets but with little apparent effect on conventional measures of inflation.
As the New Economy emerges over time we expect that people will return to their rural roots and create localised economies distinct from the previous centralised economies which we experience today.
Mutual organisations will arise based on towns and supportive environments where local skills will be at a premium and the main needs of the people will be limited to the daily grind of providing for potable water, food, light, heating and shelter.
People already skilled in these activities will be in demand and exchange can take place easily based on local currencies and barter just as we have experienced in past centuries.
The demise of the American economy and its fall from global superpower status
The reader will no doubt question the thesis projected in these Chapters because the American economy is apparently not only stable at present but commands 25% of global GDP.
How could such a stalwart of economic prowess face a crisis which is likely to engender its downfall? History is full of failed dominant superpowers, from the Roman Empire to the Ottoman Empire and the British Empire of which many no longer exist. Their declines were almost invariably due to excessive government spending, unsustainable debt loads, military overreach, and a society that abandoned its core values which made it wealthy and powerful in the first place.
Every successive superpower believes that they will never suffer a fate similar to those past yet every time they are misled into believing that this time is different and America is no exception.
Former US Treasury Secretary, Larry Summers, summed it up when he quipped, “How long can the world’s biggest borrower remain the world’s biggest power.” In 2017 we witness the US government likely to shut down over the coming debt crisis and gross government incompetence in administering their budgets and mismanaging the economy ably supported by the Federal Reserve.
The US national debt is growing faster than the economy as witnessed by the falling GDP reports in the last Chapter. If interest rates continue to raise this trend will accelerate; it is basic mathematics. The end result will be a gradual decline in the standard of living of the general populace finally entering a nadir likely to be equivalent to living conditions last seen 100 years ago.
According to Ludwig von Mises: “Out of the collapse of the boom there is only one way back to a state of affairs in which progressive accumulation of capital safeguards a steady improvement of material well-being: new saving must accumulate the capital goods needed for a harmonious equipment of all branches of production with the capital required. One must provide the capital goods lacking in those branches which were unduly neglected in the boom. Wage rates must drop; people must restrict their consumption temporarily until the capital wasted by malinvestment is restored. Those who dislike these hardships of the readjustment period must abstain in time from credit expansion.”
As von Mises projects, credit and debt as we have been accustomed to use in extreme quantities in the last 70 years will not be available to us in the New Economy. The ideals of prudence and thriftiness in our personal financial affairs will become the norm; it will take a bit of getting used to because we have all been educated in exactly the opposite memes: to be prolific and spend-thrifts casting aside the future for short-term gains today.
We will need to re-educate ourselves in short order if we are to survive within an almost ‘alien’ environment. One of the key resources which we will require is that of oil and gas because resorting to our earlier reliance on coal and wood would not even fuel such a Spartan New Economy of the future. Before we discuss energy in general it is worth considering how credit is essential for the maintenance of production which we looked at in Chapter 3 about credit and debt.
To be continued next Saturday
