The thing that doomed the American empire more than any other was its currency. When the US substituted a fake, paper-only, dollar in 1971, it set in motion a financial doomsday machine.
For a long time, it seemed to Americans and foreigners alike to be a blessing, an “exorbitant privilege”. We didn’t have to make things; we could just print money. Since the dollar was the world’s “reserve currency”, other nations took it willingly and even lent it back to us by buying more of our bonds. But now, the great weakness of paper money is (once again) becoming apparent. Since it can be produced at will, it can also be lent out at will – but in a crunch, it gives way.
When the US switched from asset-backed money (dollars backed by gold) to a credit-backed system (dollars backed by an IOU from the US government) it lost its anchor. Gold is limited – and precious. People are careful with it. And when the wind picks up, it holds fast.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
US banks have some $685billion in unrecognised losses. These reserves were not really a solid asset, but a dubious credit, in which the world’s largest debtor promised to pay its debts with its own fake money. Now, in a pinch, they discover that they aren’t worth what they paid for them. What can banks do? For now, it’s “don’t ask, don’t tell”. They’re hoping the Fed will lower rates this year; then, things will go back to “normal” — the value of their bonds will go back up. In other words, the only way a fake money system can hold together is for the Fed to create more of its fake money, and lend it out at fake rates.
Inflate – and make the next crisis worse.
China's doom loop
That is not just a problem for the US. It’s also a big problem for its fellow delusional, China. Americans thought they could buy things they couldn’t afford, using their new fake money. China thought it could sell products to people by lending them the money to buy them.
Now, the whole fandango has reached a new phase. Chinese factories turned out finished products at low prices; consumer prices, worldwide, fell. This left Chinese exporters with a lot of money – and an almost insatiable optimism. They spent, they borrowed, they invested in more productive capacity, counting on the boom to continue. Economies adjust to whatever conditions they’ve recently experienced. And after 40 years of the fastest expansion ever recorded on planet Earth, many of China’s capital investments now depend on impossibly high rates of growth.
Alas, the boom has come to an end, leaving the Chinese with unsold apartments, silent factories, empty trains – and billions of dollars worth of debt. China’s pool of cheap, abundant labour has been completely drained and wages have soared.
Once the most productive uses of credit are satiated, the new money “flows into unproductive speculation and financial skimming operations”, as analyst Charles Hugh Smith points out. “At that point, all the new money flooding into the system drives inflation.”
And now, China – with billions, perhaps trillions, of dollars worth of “unproductive speculations” – faces a credit meltdown. Its “money” is disappearing along with its customers and its asset prices.
What can it do, but replace the fake money with more fake money – just as the US does? This is probably not the end of China’s drive for full-spectrum dominance of the world economy, but it sure looks like the end of the 1979-2021 boom.
-
How inheritance tax trick is helping families save ‘six-figure sums’Happy to skip a generation to save thousands on inheritance tax? A deed of variation could be the estate planning tool you need.
-
Nationwide: House prices unexpectedly dropped in AugustHouse prices fell by 0.1% in August in a surprise drop, according to Nationwide, as “affordability remains stretched”
-
Are wealthy whisky enthusiasts leaving Britain?Collectables Wealthy whisky enthusiasts are heading to tax-friendly countries such as Dubai, where there is more disposable income to spend on collectable luxuries like rare whisky.
-
'The rise and fall of Kodak is a lesson for the tech giants'Opinion The long decline of Kodak – a once-dominant company – shows why no business is safe from disruption, says Matthew Lynn
-
The financial crisis in UK universities – what can be done?UK universities are running out of cash and have begun to shed staff; bankruptcies look likely. What’s gone wrong, and what should be done about it?
-
8 of the best properties for sale with kitchen gardensThe best properties for sale with kitchen gardens – from a 17th-century timber-framed hall house in Norfolk, to an Arts & Crafts house in West Sussex designed by Charles Voysey with a garden by Gertrude Jekyll
-
'Governments are launching an assault on the independence of central banks'Opinion Say goodbye to the era of central bank orthodoxy and hello to the new era of central bank dependency, says Jeremy McKeown
-
Why investors can no longer trust traditional statistical indicatorsOpinion The statistical indicators and data investors have relied on for decades are no longer fit for purpose. It's time to move on, says Helen Thomas
-
Investors rediscover the virtue of value investing over growthGrowth investing, betting on rapidly expanding companies, has proved successful since 2008. But now the other main investment style seems to be coming back into fashion.
-
8 of the best properties for sale with shooting estatesThe best properties for sale with shooting estates – from an estate in a designated Dark Sky area in Ayrshire, Scotland, to a hunting estate in Tuscany with a wild boar, mouflon, deer and hare shoot
