The next financial crisis is knocking at the door. Stock and bond markets, currencies, interest rates and hedge positions have resumed their violent churning. Governments have lost control of their currencies which are sloshing around the globe like tsunamis and Greenspan is smilingly running behind the events.
World money supply and credit expansion have skyrocketed. Even in the more conservative G7 countries M3 money supply is increasing at an average of over 10%! Since Clinton's inauguration the currency in circulation in the USA has grown with 80%. Financial discipline has gone out of the window. Money corrupted the politicians and the politicians corrupted money. By flooding the economy with liquidity and cheap credit, tax collection is booming, budget deficits reduced and still enough left for the starving politicians to squander. What a financial paradise!
But just consider for a moment, that the US national debt in 1998 was US$364 billion and was serviced at exceptional low interest rates and think about it that roughly for each full point increase in interest rates the servicing of the national debt will be increased with U$ 60 billion, nearly wiping out the present budget surplus of U$ 70 billion. Greenspan might be more worried about the national debt servicing than about the well being of the economy when contemplating an interest increase! And what would happen if the 2/3rds of the 1998 tax revenues estimated to have been created purely by the financial asset bubble would fall away? No way we are going to see monetary deflation! Economic deflation and the financial bubble deflating, that yes! And might the economic and financial asset deflation decelerate faster, the government's printing presses and hyper-credit creation will keep outrunning them. The governments are only interested in balance sheet paper profits they can tax and don't care if profits are real or not. Human psychology has a lot to do with financial developments and tendencies. We are living in a violent, aggressive, restless and rapidly turning world where there is no time and place for deflation. Economists and analysts are looking too much at numbers and forget to take the vagrancy of human behavior into consideration.
Where are the good times that governments at the very beginning of the 20th century only presented 10% of GNP and not a present average of 45%! And that the financial sector in the same period went from less than 5% of GNP to now over 20% without even considering yet additional increase of its power!
The newly elected social government of Germany has recently added its voice to cheaper money to keep the economy going, to create jobs for their workers and keep their own jobs and party in power. Japan in the last few weeks has poured trillions of yen into the economy, which the economy refuses to absorb! Last week China stated that it will infuse all the needed liquidity to keep the economy growing (to prevent social unrest). Russia has declared its intention to use the printing presses to pay its debts. Everybody is doing it! Everybody is overspending! However, besides being impotent to tell people what money is, the governments are also incapable to tell money where to go.
The USA is having a heyday: their growing money supply is not flowing into the everyday consumer economy but into the financial greed bubble and out of the country into the dollar-eager lap of the world, while the dollar bill for the ever increasing US imports is being withheld from presentation. The US 1998 trade deficit with the rest of the world stands at U$ 198 billion. On top of the commercial debts, over 35% of the US national debt is being held overseas.
Inflation is building up in the gathering financial asset thunderclouds and\ in the menacing frontal systems of foreign held IOUs, which can only hoped for to be paid back in the far future with zilch Mickey Mouse dollars. The government cupboards are full with zillions of national debt skeletons, today standing at officially U$ 5.65 trillion but with Social Security, Medicare and Medicaid included nearer to U$ 10 trillion. The USA national debt is destined to skyrocket the moment interest rates will turn up again.
However, the present financial situation is far removed from the great depression of the thirties. That time the governments had still the discipline to take corrective measures and gold still reigned supreme in the background. Today corruption is ripe, leadership absent and gold and inflation have been declared dead by Kenneth Gooding of the Financial Times.
If we want to find a more appropriate parallel we should better look at the days of the Weimar Republic in the 1920-ties: Germany then was under the unbearable debt burden of war reparation obligations, with no chance to repay, no reserves, its productive capacity in shambles, its politicians quarreling and nobody wanting to invest. Hyper inflation resulted: In 1922 the average price level in Germany increased by 5000%, but taken between January 1922 and November 1923 the increase was several billion times. In my personal collection the highest denomination of that time is a bill of "5,000 million mark" - or in American numbers: 500 billion! When the money supply increased, it brought price increases and consequently the purchasing power of the workers and pensioners was reduced. So to forestall unrest the authorities turned again to the printing presses. Thus a vicious monetary spiral was entered. Not only did the central authority print money but so did each separate state, even municipalities did it. Later old bills were just stamped over with higher denominations as printing new bills became too expensive. Then the monetary system just collapsed and was followed a few years later by the Nazi dictatorship.
But there is a major difference between the old Weimar days and present day: The financial mess we are getting ourselves entangled into will not be a temporary one with all problems solved and forgotten soon. It is all part of the demise of the outdated structure the national power and financial politics of the 19th and 20th centuries. We are entering the 21st century and the birth of the Internet and globalization are heralding a new World Age with capital letters, the Age of an integrated global society, "The Humapan" (free down load from
Near all present day governments have accumulated astronomical debt burdens. Cheaper money means a lesser interest burden and inflation means paying debt off with depreciated money! More money in circulation means an inflated economy and more tax receipts. And what do we think corrupt politicians to stay in power will go for? Apres nous le deluge! Let's rename the United Nations "the United Weimar Republics"!
During their Weimar Republic, the Germans who had bonds lost all. The ones with industrial shares managed to save from thirty to fifty percent of their capital. And people who had gold under the mattress survived best till Hitler ordered its confiscation.
Maybe the people going for Wall Street are not so dumb after all. People going for bonds might become the suckers. And if you are going for gold be sure where you are going to keep it! Probably only a few countries will experience hyper-inflation. Several countries will end up somewhere between inflation and hyper inflation. But only few will escape inflation at all. The USA and the EU (if it survives!) will in all probability close their financial borders and establish strict internal financial controls. We even might come to see a "sperr-dollar" in the USA. Only once all debts will have been inflated away, or will have been forgiven - only then will the world be able to start anew.
But do you think that after a total collapse of trust in all what is paper money and paper credit at the end of the 20th century, that a free Humapan of the 21st century would go again for the same mistakes instead of axing government and banking power, getting rid of all the corrupt derivatives and rococo financial instruments which only serve to the advantage of the ones manipulating them and would a free world not go only for money with intrinsic value, like gold? Only a digitorial Compu-State, when given a chance, might try to force its citizens otherwise.
Lake Chapala, Mexico
March 18, 1999