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A Game of Financial Musical Chairs

After last week’s depressing blog let’s see if there is any way of coping successfully with things as they are.

We are coming to the end of an experiment which hasn’t worked very well. There is probably no ideal way to run the planet, and the recent experiment is in the process of crashing spectacularly. I dont want to go back further than the second world war, but that was the result of a failed experiment. Mr Hitler thought he knew how things should be run, and he tried to force his ideas on a whole community. As we know, that ended rather badly. We currently have a similar situation in China. That has been working quite well so far but is not looking so good at the moment.

After the war the USA took over control of the planet. The country had a lot going for it. It was wealthy, safe, isolated, and bursting with enthusiasm. In many ways it operated in the same way as the British had operated before them. Britain is the result of multiple invasions, and those of us who belong to that race are a mixed lot. The US also had invasion after invasion, but they were peaceful invasions.

The Brits managed to be successful by building an empire which made them the richest country on the planet. The Americans have done the opposite. They have exported war to thirty or forty countries, and their empire has made those countries poor, and cost the US taxpayers a great deal of money and is now making them poor.

Sterling used to be the world’s reserve currency. The trouble with that is that it cuts both ways. It can be a great benefit, but can also be a big problem, as the USA found to its cost during the sixties when the French started a run on the dollar by insisting they were paid in gold. The Germans followed suit, and things got scary, and in 1971 the dollar was taken off the gold standard to stop the run on the gold reserves.

There is a principle here. Having money tied to gold is all very well so long as no-one wants or needs to exchange that money for the gold backing it. The whole operation can end up like a run on a bank. You soon dont have enough gold to back the rest of the money and the whole edifice falls to the ground.

The reign of fiat currencies since then has been frenetic. Everyone has borrowed and spent so much that the financial situation all around the world is a house of cards. It’s the late sixties all over again. But this time it isn’t just a rush for gold, but it’s a rush for any piece of paper that can be used as currency, only to find that every piece of paper is compromised. Rather too many major banks are over-leveraged up to twenty times. Financially speaking we are living in an age where roughly twenty people have a claim on the same dollar or euro. As I said in an earlier blog, we are living in an age where we are all dancing at the party as the band plays, and we are playing musical chairs. When the band stops playing twenty people will be rushing for one chair. However you care to look at it, that is a nasty prospect. The system is irretrievably broken, to pretend otherwise is absurd.

So what do we do about it?

There needs to be a new system, and that system is in the process of evolving right now. It got its most important push a year or so ago when the USA decided to block Russia from the SWIFT system of international payments. It got another push when British prime minister Johnson weaponised the gold in the vaults of the Bank of England. The speed of the response to those two actions has been phenomenal. The US has pushed Russia into the arms of China, and they will be a formidable force. There are three super powers on the planet, the USA, Russia and China. It is now two against one, with the US marginalised. As of today, the US is no longer the world’s policeman. That role is over, and they have only themselves to blame. They have effectively committed political and military suicide. Fifteen years ago they were offered a pact, which would have changed the political landscape in their favour: a deal with Russia. It was knocked back by the Bush administration.

It gets worse. With the world’s finances in such a mess, and since the whole system is based on fiat money which has no real value in itself, the planet is looking at somewhere in the region of a hundred trillion dollars worth of cross indebtedness. It only requires one major entity to demand real payment for the entire system to implode.

Before that happens a new financial system will hopefully be in place. It is taking shape right now. It started with the BRICS nations getting together to construct a new financial infrastructure based upon commodities. Originally there were six nations in the group. Within a year that has already swollen to twenty, and even more are considering joining. Within another year the dollar will no longer be the world’s reserve currency. It will gradually fade just as sterling did previously.

The consequences of this shift in the way money is viewed will be huge. It will mean that countries with internationally traded resources will be the ones with strong currencies. Put that another way, and we are talking about countries with internationally required resources being the new rich.

There is an interesting difference between the new idea and the old. The idea of having gold backing a currency is all very well, but it does have that snag that I mentioned above. If you are backing a currency with tradable commodities that is no longer a snag because it will be more difficult to run out of renewable resources. That will have other consequences of course, but initially those consequences are unlikely to show up. They will only show up if or when countries start to mortgage their resources, in which case we will all go dancing round the musical chairs again when everything gets over-leveraged.

Luckily for the USA that country is indeed rich in resources, so that country is not about to fade from the scene, but it will no longer be top dog or even primus inter pares.

What this means is that China is not necessarily looking at a wonderful future, as the country, although rich in many commodities, rare earths in particular, is woefully lacking in two basic commodities, clean water and food. For China to do well in the future they need to cut their population by at least two thirds in order to survive.

What this also means is that Europe, once the centre of civilisation, is heading rather rapidly into an international backwater. Europe is heading towards being the new poor. Living in poor countries is no bad thing. I’ve lived in over eighty countries and rather a lot of them were grindingly poor, but that didn’t stop me having a great time. What it does mean is that the source of your income needs to be from a successful country so that you can live in comfort in a poor country.

Let’s have a look at where that might be in the next blog.

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