Hard times upcoming

From Brussels Journal:

As the Second World War was coming to an end, and plans were being laid for the post-war financial system, the old memory of fixed exchange rates persisted (although this was only a consequence of the gold standard, not its principal virtue). However, at Bretton Woods in 1944, the same mistake was made as at Geneva, only this time the United States dollar alone achieved supremacy as a currency with a “reserve” status. When its own link to gold was cut in 1971 – Richard Nixon needed to print dollars to fund the war in Vietnam – the world currency system was set adrift on the system we now live with, one in which currencies fluctuate in value against each other all the time.

What we now remember as the “oil crisis” of 1973 was, in fact, little more than a rational response by oil producing nations to the de facto devaluation of the dollar. Oil rose in price because it was denominated in a debased currency. The oil producers said they would price oil against gold instead – i.e. against real, as opposed to paper, money. This never happened, in fact, and black gold continues to be priced in dollars. But this is one of the main reasons why the United States continues to enjoy the “deficit without tears”, i.e. a seemingly limitless trade deficit, paid for by flooding the world with dollars which other countries use either in their central bank reserves or to buy oil.

In the last twenty years or so, this policy has been applied with a vengeance. The United States Federal Reserve, a private organisation with the privilege of printing dollars but owned by private banks, has flooded the American (and world) financial system with cheap credit. This has been the principal cause of the tremendous rise in the price (inflation) of stocks and shares. Other commodities which have risen greatly in price include property and, of course, oil. The financial system as a whole may be helped by this rise in credit, because the banks make money on it by lending the money on at a higher rate, but the economy and society as a whole suffer.

[. . .]

To put it in a nutshell, a system of paper currency, easy credit and high taxes destroys the natural order of society. It breaks the social contract and pays for the present at the expense of the future. The financial system, however, prospers. Banks make money because the cheaper credit is, the more money they can lend. In their search for ever greater income, banks have flooded the Western economy with credit. The current “sub-prime” mortgage crisis in the US and Britain is only the tip of the iceberg. It is now very easy to take out vast loans for property in both countries, many multiples of one’s annual salary, on the basis of no proof whatsoever: I, for instance, have a loan which is many times my own annual income and I obtained it without having any regular salary and without providing any proof of my financial position whatever. It was all done by word. My wife, meanwhile, was recently offered a credit card by our local department store, which duly arrived in the post, giving us £6,000 in instant credit even though she has no income whatever, and even though a card was issued in my name without me even having set foot in the shop.

Sooner or later the chickens will come home to roost and the longer we hold back the crisis the worse it will be when it finally arrives. In ancient times a nation or empire that wished to produce more currency than it had the gold or silver to mint would add lesser metals to produce an alloy which would appear to be pure gold or silver but would contain anywhere from a little to a lot less precious metal.

Now it is simply necessary to turn on the printing press. Sooner or later the house of cards has to collapse.