June 4, 2012

[The following article was written by Stuart Bishop, TDV Thai Correspondent]

Imagine a scenario. One fine morning you turn on the television, and all the channels are preoccupied with an imminent speech from the president of the United States. People are excited, as the supposed biggest pop star in the world walks to the podium to make his speech. Maybe he is finally going to solve the financial crisis. Maybe he is going to follow the sage advice of Paul Krugman and announce another massive increase in spending, and this time it will be enough for these economic green shoots to turn into solid oak trees, built to last for generations.

He finally arrives on the stage, looks calmly at his teleprompter and starts to read out aloud in his own unique style:

'Citizens of America, I address you today to give you an honest appraisal of our financial situation. We are broke. We cannot afford to pay the promises we have made to people. We owe $16 trillion to our creditors, and our government is not in a position to pay this back. We have according to some estimates $75 trillion in unfunded future liabilities.

To this end, I have just finished speaking to the Chinese leadership and explained our problem to them. Unfortunately they have decided not to continue to support our ongoing trade deficit by recycling the excess dollars we print and give to them for physical goods into purchases of US government bonds. All the other creditor nations of the world have informed my team of financial advisors this morning that they intend to do the same. To compound matters, they have decided to stop using dollar currency pegs, which in simple terms means all the inflation we used to be able to export to them via forcing them to absorb and hold printed dollars as reserves is now going to return to us faster via increased prices. If we continue down this path, the trade deficit will widen even further, and we will have to print even more money to purchase fewer physical goods. This increase in the money supply would decimate the savings of many of you that voted for me, the middle class, and only nominally save the asset values of the wealthiest. As a champion of the middle class I cannot allow that to happen.

In practical terms, this means every promise that I made to you in my campaigns cannot be met. Obamacare, forget about it. Social security for retiree's is not going to happen. Expect to work more hours for less pay, if you are lucky enough to even have a job. The savings for social security were spent decades ago. Medicare and Medicaid is also going to be completely abolished. Our military is completely unsustainable. Just the same as all the fancy military equipment we buy and all our bases in countries all over the world. We need to cut this back dramatically. These soldiers will be made unemployed and will have to find work in the private sector. The world will now need to police itself.

Your government, led by me has a spending addiction, and like any other addict needs it's 'fix'. Unfortunately to sustain our government spending 'fix' Federal Reserve President Ben Bernanke would need to continue to print more dollars. He has simply refused, suggesting we check the whole federal government into rehab. I understand and accept his refusal to hyper print the currency and will use an executive order to tell congress not to pass any laws forcing the Federal Reserve into printing more money to pay for our ballooning expenses.

Finally, I would like to say to everyone watching this, change really has come to America'

I hope you could read between the intentional sarcasm there and grasp the bigger point. At some point in the near future, the United States and its government is going to have to voluntarily or be target="_blank">unfunded liabilities estimated by many at $75 trillion and by some at over $110 trillion. It has a spending problem, where roughly

Allow me to add a little historical background to this story. The story of the US dollar being the world reserve currency starts back in 1922, when after an target="_blank">store of value function to the world. In other words, a world forced to save in other peoples exponentially growing debt, hoping the counterparty never defaults. For a decent, if a little US centric overview of the evolution of the monetary system check out target="_blank">exorbitant privilege it has received. Control of the world reserve currency is something they have been given. Anyone that doubts this merely needs to look at who have been the main purchasers of the government debt of the United States. Do you really believe that these countries ever expect to able to use these dollar reserves it holds for anything? If any large holder of US debt were to dump them, it would quickly bring on the end of the world dollar reserve and all the fiscal problems would just happen almost immediately, as the dollar is repudiated all around the world. It is like the world is stuck playing a game of chicken, the cost of not blinking is giving away free stuff to Uncle Sam. Who blinks first?

This set of circumstances has allowed the US to live above its means during much of the last century. The dollar world reserve system affords the US a standard of living it could never maintain were it not for the political and structural support from other nations. Mainly from the European countries from 1980-1999 and China since roughly 2001. This support takes several forms. Primarily the deficit of the US is recycled by other countries back into United States government debt. Furthermore other countries, as they receive these dollars print more local currency to match the dollar holdings. The inflation that would return to the US from running a deficit never actually returns to the US. A pain free deficit so to speak. If only my credit card worked like that (I wish). Imagine this scenario. My name is Uncle Sam. I spend $500 billion in 2011, I don't pay my bill. My credit card company turns to me and says that I have a $500 billion credit limit for the next year. So the next year I spend another $500 billion without consequences. This cycle continues, with the debt increasing exponentially. The only difference between me and Uncle Sam in my scenario, is that Uncle Sam gets to set his own rate of interest. Unsurprisingly, he chooses close to zero to let the party go on a little longer. This is largely responsible for the addiction of the US Government and the US people have to free stuff (paid for by paper dollars) from the rest of the world, as well explained by the target="_blank">foreigners hate them for their freedom! Maybe more like they hate giving you free stuff and working for free.

At the same time global trade requires a currency which can be exchanged quickly to complete digital transactions in. In currency terms a compatible global target="_blank">unit of account. This is a catch 22 for many of the largest exporting countries in the world. Exchange real tangible physical goods and services for paper promises and support the status quo, or end the existing currency arrangement by refusing to honour and support the US dollar as a trading unit and store of value any more.

Changes in economic systems are traumatic periods of time, and the largest surplus countries like Russia, China, Saudi Arabia and some of the Gulf States fear the inevitable upheaval that will accompany any switch from a dollar reserve system to something new. The power to pull the trigger on the dollar is a power that has consequences. This upheaval can equal revolutions and threaten the very existence of these governments, so they have good reason to be concerned. Given the political nature of currency management and that target="_blank">Federal Reserve. Some other surprise countries have been purchasing over the last 12 months, including world economic powerhouses like Luxemburg, Belguim and (two lost decades) Japan. It seems like target="_blank">Helicopter Ben to rev up his chopper and nominally save everything and anything that needs a bail out, and for all this inflation to return to the US via US debt monetisation and

Stuart is a professional internet entrepreneur and an amateur free market thinker.