Yes...but!

October 27 2008

Home > Columns >Yes...But! Year 8 -51

“Britannia rules the waves”, was the triumphant cry when Queen Victoria governed the largest empire ever. Now this slogan has been reversed: the waves rule not only Great Britain but the entire economic world.

Alan Greenspan, appearing before the US congress last week, used the ‘tsunami’ metaphor – the largest wave possible - to describe our money agony.

Just as each life has certain stages, so too are there definite phases in history, both medium-term cyclical swings as well as very long-lasting structural trends.
Nikolai Kondratieff, about 80 years ago, published a book in which he explained that historically we can expect a depression every 50-60 years. He discovered this by analyzing financial data since 1790.

His theory was confirmed in the 1930’s. We also know that the world came out of this deep slump in 1945, thanks to a world war.

According to the Kondratieff theory, the next depression should have come as early as 1995, and no later than 2005. However, thanks to energetic government intervention, such as in the 1987 stock market plunge, in the 1989 savings-and-loan collapse, the 1997 East Asian financial fall, and the 1998 Long Term Capital Management mismanagement, the cycle was artificially extended, also thanks to a new phenomenon.

Since 2000 we have witnessed the fateful invention of fanciful financial experimentations, creating a wealthy super-class in New York and London, but a poor underclass elsewhere, with factory jobs disappearing from Detroit, Essen, and Oshawa, while expanding them in China, India, and Brazil. Through their magic the money powers thought they could eliminate economic downturns.

We now know better. We no longer can defer a depression. The belated end to the next Kondratieff wave is aggravated by the simultaneous transformation of another wave, a 1000 year cycle. To illustrate this, I’ll have to go back 3000 years.

The 10 centuries before Christ were a period of steady growth, starting with the establishing of King David’s reign, followed by the rise of Greek civilization and the birth of Roman rule.

This period peaked 2,000 years ago, when, providentially, the Pax Romana – an era of universal peace – facilitated the spread of Christianity. The ensuing five centuries saw a slow decline, culminating in the fall of Rome in 476 A.D. In the next 500 years Europe descended into barbarism as commerce and public order collapsed: we now know that period as the Dark Ages.

Around the year 1000 Europe woke up with the ‘rebirth’ – renaissance - of commerce, arts and verbal skills, and something new and vital emerged in the Old continent.

We can now see that, after a upswing of a 1000 years followed by a decline of that same length, another millennium of growth was, again, starting out gradually, then accelerating with the discovery of America in 1492, and reaching a climax in the current Pax Americana, the embodiment of Capitalism.

Capitalism depends on three vital components: skilled people, cheap commodities – especially air, water, soil - and low taxation. These ingredients have now become increasingly unobtainable, so that in the Western world it has become impossible to profitably produce goods and services. So business went to the Far East, where this process is rapidly repeating itself.

The West was basically left with a virtual economy in which person A traded online money with person B. This ‘screen-play’ has caused the collapse of our capitalistic system, now evident in massive government intervention in such industries as banking and insurance.

It’s now left up to fallible politicians to fashion a new world order, which will take years, if not decades, if ever.

Because of America’s immense debt, its dollar will likely be replaced as the world’s currency. Already its economy is caught in a down-ward debtors’ spiral. Its government is on the hook for $10 trillion, plus scores of more trillions in future obligations. Its people owe almost $11 trillion in mortgage debt and a further $2.55 trillion in consumer loans. The IOU’s of Corporate, State and Local governments add up to a further $9 trillion, so that each of the 300 million US citizens is burdened with a $100,000 debt.

Governments have only one answer: print immense sums of extra money, which always leads to lots of inflation. They know very well that this debt will be paid back in inflated dollars. Good for them but bad for us because prices, taxes and interest will increase faster than wages.

Brace yourself. This is no short-term recession. GEAB, the Global Europe Anticipation Bulletin ( 200 Euro for 16 issues ) which in February correctly predicted the September money melt-down now believes that the USA will renege on its debts- go bankrupt in other words - before the summer of 2009. The fall of the mighty dollar can be compared to the fall of Rome, with similar disastrous consequences.

Unless a miracle happens, we have poised to careen into the depth of a long-lasting, deep-diving wave, made worse by Climate Change and Peak Oil. Another Dark Age?