PART ONE: AMERICAN ASCENDANCY -- The Unique Place of the U.S. in the 19th-20th Centuries (Cont'd)
|
c. Capitalism & the Industrial Revolution – An understanding of the workings of a free-market economy grew out of the demise of feudalism. The foundations of Capitalism had been laid in Western Europe and in our nation since colonial days, and its modern, democratic, free-market structure was classically described by Adam Smith in his 1776 work, The Wealth of Nations. Free-market economics is simply an attempt to describe the reality of economic laws in the natural order of the universe. It was given the pejorative name, ‘Capitalism’, by Karl Marx. Finding its native soil in democracy, the free-market bloomed into the birth and growth of the Industrial Revolution, creating the stage for incredible economic vitality heading into the 19th century. We saw one astounding invention after another; the steam engine, telegraph, telephone, light bulb, combustion engine, automobile, airplane and on and on and on. Each new invention spawned several more and America’s momentum grew exponentially.
|
|
NOTE: ALL PICTURES CAN BE EXPANDED BY LEFT-CLICKING ON THE IMAGE OR TAPPING IN MOBILE |
|
d. The Devastating Effects of War on Europe and Asia -- Most nations that stood as potential competitors of the U.S. had their economies devastated by WW 1 & 2. These European wars provided tragic, but exceptional growth opportunities for the U.S. America emerged as the largest creditor nation in the world after WW1 and as the manufacturing engine of the world following WW2. |
|
e. The U.S. Dollar as the World Reserve Currency -- The decimation of European economies left the U.S. dollar as the logical candidate for World Reserve Currency, replacing the pound Sterling. Though Britain had held world reserve through much of the 19th century, having succeeded the Spanish Dollar of the 18th century, her economy was now severely weakened. The world reserve status of the U.S. dollar was formally established in a conference at Bretton Woods, NH in 1944. Being the reserve currency provides a great advantage, as the nation gets a huge discount on borrowing and gains great influence in world affairs. But this advantage holds a danger as it also enables a nation to spend far beyond its means. The world currency nation also has enhanced influence over the affairs of other nations. As one observer put it: |
|
“The nation with the world currency gets to write checks that no one cashes”. And in an afterthought he added, “ But when you lose world currency status, then those nations bring all of those accumulated checks for you to cash.” (http://dailyreckoning.com/one-dominant-currency) |
f. Technological Development – As the momentum of the industrial age rolled on toward the service and information eras, manufacturing and technological development continued to mushroom, catapulting the U.S. into the world’s powerhouse economy from WW2 through the 1970’s.
|
g. Establishment of the Petrodollar -- In 1973, an agreement with middle eastern oil-producing countries was forged that arranged for oil to be traded in dollars. In exchange, the U.S. promised to provide military defense for these regimes. This arrangement created the ‘Petrodollar’, essentially forcing all nations of the world to purchase oil with U.S. dollars, this maintained a strong demand for the dollar because of the global demand for oil. Nations increasingly needed oil and that meant they had to keep a large supply of U.S. dollars in order to buy it. This, along with being the World Reserve Currency has kept the value of the dollar strong for the last 40 years. |
America still towers over the world in many ways. The U.S. accounts for 40 percent of the total
world’s spending on scientific research and development, employs 70 percent of
the world’s Nobel Prize winners and is home to three-quarters of the world’s
top 40 universities. With a GDP of $15
trillion the U.S. leads China, which holds a distant second at $10 trillion, dropping
from there to Japan with $4 trillion.
With a military budget of nearly $700 billion, America spends 58% of the
total of the top 10 countries, coming
in at six times the amount of the second highest which is China. Clearly, the U.S. is still the world’s lone
superpower. Unfortunately, the U.S. has
used all of this advantage to grow into a place of great disadvantage by
accumulating a staggering debt.
|
THE UNPAYABLE DEBT It is hardly comprehensible that the U.S. was the world’s largest creditor nation as recently as 1981. Today, in the space of only 30 years, the U.S. is now the largest debtor nation and the size of the U.S. debt has passed the point of no return. We are now beyond the ability to repay our national debt, even at the ‘official’ $17 trillion dollar mark. But politicians are not thinking about paying off the debt. They are simply concerned about reaching the point where we cannot pay the interest on the debt, which by definition is the point of default. Even so, this $17 trillion amount still does not include off-budget obligations such as Social Security, Medicare, and other government entitlement programs that are estimated to bring the total debt obligation to between $80 and $100 trillion. These numbers are so astronomical that there is no way mere humans can comprehend them. The following example will help illustrate the enormity of the debt. |
|
ILLUSTRATION: WHAT IS A TRILLION? |
BC /AD
32000 27500 25000 22500 20000 17500 15000 12500 10000 7500 5000 2500 0 2013 (YEARS)
| 1 MILLION seconds (11 ½ days)
|| 1 BILLION seconds (32 years)
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| 1 TRILLION seconds (32,000 yrs)
Keep in mind that as recently as 1987 our debt was in the billions.
Our debt now is 17 times the trillion line.
Of course, the amount of borrowing one can handle is relative to the amount of one’s income. Someone with a million dollars of income per year can expect to borrow and pay back much more than one with a ten thousand dollar income. The generally accepted safe debt level for a country is 60% or less of its Gross Domestic Product (GDP). As of 2011, the U.S. debt had reached 105% of its GDP which is around $15 trillion. There are countries with higher debt-to-GDP ratios, and some argue that the U.S. debt can grow forever with no problem, as long as the world market continues to believe the U.S. can handle it. This is like arguing that someone can continue to move out on a tree branch as long as everyone believes he can keep from breaking it. The mathematical results of exponential growth guarantee that there is a point of failure.
The impact of exponential growth happens slowly at first and then swiftly. If exponentiality is working in the favor of a skillful investor by compounding his interest, then wealth soars. But if it is compounding the interest on borrowed money, then the debt grows ever more rapidly and begins to sky-rocket out of control. We are at the point of extreme acceleration on the parabolic curve of the debt chart. We’ve heard warnings about our debt trend for years. The exponentiality factor is now making our financial crisis move quickly to the point of critical failure.
How has America been led into this entangling web of financial mismanagement? Blinded by assumptions that market forces were now ‘different’, or hoping that new economic theories could solve old economic problems; seduced by the political and economic payoff of easy credit, and overly-confident in her economic and political might, America has let herself be caught in a fatal trap. Each of the following strands has played a part in pulling the U.S. into this debt trap. Our purpose is not to lay political blame, because both major parties have had a significant share in causing the problem. This is about how we as an entire nation have lost touch with economic reality.
How could we have let our financial situation come to this? You’re about to see. We’ll need to step back and take a brief look at how each of these key pieces played a major role in our troubles; 1) The Banking System, 2) Our Spending Patterns, 3) Changing Mindsets 4) Cutting Corners 5) Deferred Trouble 6) The Effect of Globalization.
