Tag: Great Depression

When analysing the current macroeconomic environment, there seem to be two camps. One compares the current state of the Euro-Dollar system to the 1970s, the other to the 1940s post-war inflation.

In my not so humble opinion, both are wrong.

While the current situation is historically unique, as I have laid out previously, the only remotely comparable situation in history was the Fall of Rome.

Why?

If you give me a few minutes of your precious time, I will explain to you, why Rome is about to fall, again.

To understand what is currently going on, we need to have a look at which economic and cycles are currently converging.
The first such cycle is the civilizational cycle, which lasts around 1 to 2 millennia and is accompanied by large shifts in how society is structured.

The last such cycle began with the rise of the Greek and Roman empires and ended when Rome fell, so one could say that cycle ran about from 600 BC to 600 CE.
Since this turning point, humanity has been busy recouping the losses in knowledge from Antiquity and in many areas we have now managed to be near the heights of Roman civilization, in others we are already beyond and declining.

While the sociological implications of this cycle are very intriguing, for clarities’ sake, we will focus on the purely economical aspects today.

The great rise of Rome was possible, thanks to a hard currency on a gold and silver bimetallic standard. The most important coin was the Denarius, which was a Silver coin which was the backbone of Roman and international trade, until it began to be debased and was literally copper with silver traces by the end of the third century CE.

Later, the Denarius was accompanied by the smaller Sestertius and the golden Aureus. The Sestertius was launched as a silver coin, but after the Roman Republic had become the Roman Empire, within a few generations of Imperators, it quickly became a brass Fiat coin.

Let us pause history here for a moment and draw some parallels and highlight some differences:
Like in Rome, the Dollar also started as a gold and silver currency and later became devalued.
In Rome, the authoritarian push that allowed for the devaluation was the power grab of Julius Caesar and his successors, who ended democracy. In the US, it was the establishment of the undemocratic FED and thus the slide into oligarchy.
The FED devalued the Dollar, by artificially expanding dollar supply, through fractional reserve banking (with an ever decreasing backing). Up to the point, where countries who had entrusted the US with their gold reserves got nervous and requested their money back. Being unable to actually fulfil the gold promises on the circulating Dollar notes, Nixon had to pull the plug and turn the Dollar into an outright Fiat currency in 1971.

The most significant difference between ancient Rome and the modern Euro-Dollar system, is that the Dollar is a “world reserve currency”. In contrast, the Denarius, Sestertius and Aureus certainly were accepted and held by major traders all around the then known world, international trade was largely done based on the metal content of individual currencies, however. The actual backbone of the financial system were precious metals.
The Dollar, on the other hand, was forced upon the world in 1944 at Bretton-Woods. A condition by the USA, who then held the other Allied Nations in their hands, as only they had the economic and military power to defeat Hitler.

This led to the unique situation that in the 1970s, with the Dollar now a Fiat currency, the IMF launched a crusade against gold, thus leaving us, for the first time in history, with a purely Fiat world.

Back to ancient Rome.

After Rome had slipped into currency debasement, the government played a hypocritical game. While they paid their soldiers and trade partners in Fiat as much as they could, taxes would be collected in gold and silver.

This is again a move that can be seen today, where Russia will accept only a gold pegged Rouble, gold, or Bitcoin as payment for their energy, while trying to keep their citizens from holding either.
The same can be seen in Ukraine, where the government begged international donors to donate to them, gladly taking Bitcoin, but trying to hinder their citizens from rescuing their savings from the war into Bitcoin.

In Rome, the Fiat system, coupled with the bimetallic tax system, eroded the morals, infrastructure, and power of the Roman Empire. Something that could be seen again—in a fast-forward mode—during the Weimar Hyperinflation.
This ultimately lead to Rome being invaded several times and the Empire ultimately breaking into two, where the Western Part completely dissolved, while the Eastern Part lasted for a while longer in the form of the Byzantine Empire.

Why the difference?

The Byzantine emperor Constantine was smart enough to copy the Aureus and launch a gold currency in the form of the Solidus. This made Byzantium one of the most powerful trade hubs until well after the year 1000, when the solidus was again debased.

Can you already see the pattern?

The long civilizational cycles tend to be synchronized with the shorter cycles of empires by the debasement of currency. The main difference between the cycles being that when an empire falls, this is largely contained in the nation and its colonies, while the demise of an era like the Greco-Roman age of philosophy, throws back human culture around the world.

One of these 100+ year cycles is also coming to an end now, due to the US Empire loosing its grip on their debt colonies.

The next smaller cycle converging with the others is the 4-generational cycle, called “Fourth Turning”. Such a cycle is often aligned with a smaller cycle of monetary and currency rise and decline, as laid out by Argentarius.

Finally, a fourth economic cycle is currently coming to an end, namely the boom-and-bust cycle induced by Keynesian economics. These last usually about 7 to 10 years, but after the financial crisis in 2008, the central banks around the globe have warped the economy with quantitative easing.

As real economists have warned the Keynesian clowns for years, QE does not solve any crisis, but rather only delays and multiplies the negative consequences.

Having laid out the parallels and differences, let’s start conjecture time… How will the Fall of Washington likely go?

From my perspective, the demise of the US hegemony is already in full swing. And the attack of Russia on Ukraine, as well as the lockdowns in China, are part of the East stealthily launching economic war (as I laid out → here).

These attacks, combined with the already disrupted global supply chains, are poised to bring about the worst economic disaster in recorded history. I fully expect Western economies to decline at rates comparable to the Great Depression this decade, while at the same time, one national currency after the other will fall and go into hyperinflation.

What makes this process so hard to predict, is that—as I explained above—a world without gold currencies is unprecedented. Normally, the harder currency nations raise severe tariffs against the debasing states, thus draining their adversaries of intellectual property and capital.

Under a Fiat to Fiat system, this is not as straightforward, but it turns out that the biggest loser is the reserve currency nation. Having the reserve currency is called an “exorbitant privilege” because initially the world needs your currency. So for the first years the US was able to export their worthless paper and get back real goods and services.

If you stop there, it really may seem like a great deal. You just have to print, and others will work for your painted paper. This is a common error that even economists as great as Ludwig von Mises have made. (See my article about this → here)
Money tokens or currencies, are never the actual ends desired by market participants, even if the market participants aren’t aware of this. As Argentarius correctly stated, every transaction ultimately gets settled in goods or services.

In Weimar Germany, the nation exported cheap goods, to get enough gold to pay their war debt, which led to other nations exploiting the weak Mark and purchasing German stocks, real estate, etc. at dumping prices.
For the US, it has been China who sent them worthless junk in exchange for worthless Dollars, which the Chinese then sold for Gold, US and EU company shares, as well as real estate.

This process can be expected to pick up speed, as more and more nations dump their Dollar reserves on the market to diversify their holdings, as can be seen in Israel. Secondly, since the US stock and real estate market are already in a Bubble, China and Russia are bound to focus more on doing the same attack on the Euro. This strategy has, of course, been hampered by the Western sanctions on Russia, among other things by the freezing of Russian foreign currency assets.

A move that surprised me and probably also Russia, it being a de facto declaration by the US and several EU countries that both the Euro and Dollar are IOUs that can be voided arbitrarily and instantly.
To this day, I am uncertain whether this move was out of hybris or sheer incompetence. No matter which is the case, in the mid- to long-term, this will likely turn out to be one of the biggest blunders the Euro-Dollar governments could have possibly made.

Russia promptly took advantage of this mistake by simultaneously asking for their energy to be paid in Roubles and coupling the Rouble to gold at a fixed rate.

This essentially puts Germany—which is highly dependent on Russian gas—in the same trap, as the Weimar Republic was in due to the Versailles treaty. The difference being that this time, Germany is coupled to the rest of Europe via the Euro.

Thus, the ECB is in the worst catch any central banker can imagine. On the one hand, Germany is subsidizing Southern Europe and stabilizing the Euro with its strong economy. Something that is only possible due to low interest rates and ECB asset purchases.
On the other hand, the energy price inflation thanks to the gold-pegged Rouble can quickly grind Germany’s economy to a halt. Which needs to be addressed with higher interest rates and a stop to asset purchases.

As we will see later, there is a way out with Bitcoin, but I doubt the EU will take it.

Rather, I expect the ECB to first continue on their suicidal printing spree, well into a German depression and then steer back too hard, crushing the whole EU economy. The end game for the Euro will probably be another 180° swing towards QE and a Euro hyperinflation.

Before the Euro hyperinflates, however, I expect weaker currencies to be crushed in a similar manner. The Turkish Lira is already bordering on hyperinflation, many others will follow. The interesting thing will be to see, if the Bank of Japan manages to hold out longer than the Euro, but I doubt it.

Historically, the only way a nation can get out of hyperinflation is a monetary reform. Such a reform only works lastingly, if it is towards a gold or silver standard.

This time there is a another, even harder currency to turn to—Bitcoin.

While Bitcoin will still be a bit too young to have the same trust as gold, when this global monetary crash plays out (most likely this and next decade), there are many reasons for nations to prefer Bitcoin to gold.

The first is simply that Bitcoin is a better, harder currency. Some may even argue that it is the hardest theoretically possible currency.
The reason most countries will be led by is more of a practical nature. Most nations have gold reserves that are smaller than their share of the global economy. If they switch to a gold standard, they are thus at a serious disadvantage against a China or Russia, who have over proportionally much Gold.

The nation worst of are the United States themselves.

They had to declare gold bankruptcy already in ’71 and since then, the US has dumped so much physical gold onto the market to stabilize the dollar that I fully expect the national and international reserves in Fort Knox and co. to largely exist on paper only.

To make matters worse, Nixon didn’t really end the gold peg, he only “temporarily” paused it. This means, if the Dollar was to return to a gold standard, creditors of the US would likely demand to get the old value. Something that probably all the gold on the planet wouldn’t suffice to do.

The big chance the US (and other gold poor nations) have is to use Bitcoin. At about one Trillion Dollar market cap, BTC is still cheap enough that a government can easily acquire a large stake.

The first big nation to announce that they have a stack of 5+ Mio. Bitcoin and declares it legal tender, will be the dominant economic force of the century, if not the millennium.

If the US does this, before the Dollar hyperinflates against a gold backed Chinese currency, then they can avoid a lot of the pain they otherwise get and simultaneously rid themselves of most of their debt.

They could simply declare that a Dollar is henceforth exchangeable for Bitcoin at one Dollar per Satoshi (or 100,000,000 Dollars per Bitcoin). This would leave creditors with the choice to either accept the Bitcoin valuation and take the hard money, or take the dollar and sell it before it reaches that valuation by sheer self-fulfilling prophecy and US economic power.

The biggest danger for the US is, if China should manage to acquire more Bitcoin than the United States and pegs its currency to it (or maybe a double gold and Bitcoin peg). If this happens, the Dollar will soon enter hyperinflation and the US Empire will be over.

If the latter happens, we can only hope that the consequences are not as devastating as when Rome fell. Unfortunately, I expect that, if China wins, we will enter a very dark age of global surveillance and totalitarianism.

Next time we will take a deeper look, at how the best case for the US might go on a Bitcoin standard. If you don’t want to miss it, please consider subscribing to my Newsletter.