Photo: flickr / Images_of_Money
Contrary to popular belief, the global economic crisis is not complicated. The problem is simple: there is WAY too much debt in the global economy, and it can’t all be paid – and so it won’t be.The only question is who’s going to pay what to whom. Once that’s settled, we’ll have the foundation in place for the next secular bull market in real estate and equities.
The way a debt crisis is resolved is with a sale of the assets owned by the insolvent entity.
In the case of insolvent governments, this process is already under way. The end result of that is a destruction of greater and greater public resources, and the emergence of more private water, private roads, private communications networks, and so on.
That’s the first component to solving a debt crisis. The other part, especially if the crisis is so big that it’s going to take the whole economy with it, is to socialize the losses. This means currencies used in debtor economies get depreciated.
Over the past decade, we’ve seen this most with the US dollar — a debtor currency, as the US is a debtor nation — has been in a 10 year downtrend. Although, being that all governments and many of their constituents are insolvent, all other nation-state currencies have declined relative to commodities during this time as well. And that’s the real problem: because every government is too indebted, they are all trying to inflate their currencies away. Hence, the “currency wars.”
The way this mess gets solved is with everything eventually rolling up into a larger economy. For instance, solving the problem in Europe means rolling up the individual member country debt into a single Euro bond debt instrument; this process is already under way. In the US, this probably means rolling up all the municipal bond debt into US federal government debt (since Treasuries are still selling like hot cakes). But as the majority of the world is insolvent, this process must keep repeating, until we reach the point where there is no other solution but to create a new currency: a new currency, issued by a new monetary institution – or the IMF or World Bank, which are already well-positioned to assume this responsibility/privilege.
For the average person on Main Street — regardless of what country they’re in – this is going to be a deal that leaves them worse off. Everything will cost more due to debtor currencies being devalued, and
there will be the transformation of formerly public property into profit centres, such as how tolls on roads are increasingly being used.
The alternative, though, is a counter-revolution: a revolution against a debt-induced revolution for a world government. This is a world in which non-state networks – hactivist groups like Anonymous, social
networks like Facebook and Twitter – begin to launch their own economies, complete with their own currencies and a commons that can be utilized by their constituents.
Though this will seem like a long shot to all but the most pious adherents of cyber-utopianism, those versed in US monetary history may find it similar to the conditions that set off the first American revolution, in which the Currency Act of 1764 – issued by King George of England to forbid the American colonies from using their own currencies – led to the impoverishment that served as the catalyst for the actual Revolution starting in 1776, 12 years later.
The Internet and the pace of modern life ensures that it won’t take as long this time around, but it is likely to still be a gradual process – although perhaps one on the brink of accelerating, if the recent acceleration in the price of gold is interpreted as being correlated to the breakdown in our current world order.
Anyway, that’s the story: there’s too much debt, it all needs to be rolled up into a new currency so that the losses can get spread around. This new currency system will come about in a top down fashion – meaning supranational institutions like the IMF and World Bank issue the currency and re-define economic regions and trade agreements, forming what essentially amounts to a world government – until there is a bottom up revolution, powered by virtual currencies issued by non-state networks. Whatever kinds of monetary systems emerge out of this mess, gold will likely play a part in this process.