Most of us are bored and confused by economics, finance and monetary systems. But big changes are happening that are worth understanding. To make this website useful, I answer some basic questions and define key terms. Some of the definitions here are very debatable. If/when I get better information I will update my thinking. This section will expand and change as my understanding improves.
What is a Superbubble? • What happens next? • What’s the problem? • Is there a solution? • What is debt, and is it bad? • What happened in 1971? • What is the petrodollar? • What are eurodollars? • What went wrong in 2008? • What is de-dollarization? • Gold. Srsly? • Who is Robert Triffin? • Exorbitant what? • What do central banks do? • Why do they matter?
WHAT IS A SUPERBUBBLE?
The Superbubble is another name for the US dollar-based international currency system. This system relies on ever-increasing amounts of US debt being exported to the rest of the world. Or it collapses. The chart below shows that US debt began increasing exponentially after 1971.
The fragility of the system became obvious in 2008, when slowing debt expansion almost crashed the world economy. A system that crashes without constant growth is not sustainable.
WHAT HAPPENS NEXT?
After more than 70 years of continually stockpiling US Treasuries, central banks recently stopped. Without continued accumulation of US paper the US has to fund its deficits for the first time in decades. And the world currency system no longer functions. The actions of the world’s major central banks suggest that they are preparing to replace US paper with physical gold as the world’s primary reserve asset.
Replacing US paper with gold as the world’s would require further main steps:
Step 1. Devalue the US dollar. History shows that this can be decreed easily and suddenly by US presidents. It happened in 1933/34 and 1971. It cannot happen again, especially as US President Trump told us how he liked to deal with debt in the run-up to his election.
Whether you call it ‘negotiation’ or default, we can be pretty sure US creditors will not be getting their money back (in real terms). Trump’s core team have hinted talked about writing off US debt in more or less subtle ways.
Step 2. Increase the price of a yellow, shiny and useless substance to some very high number.
These steps could occur together, or separately – It could be a long drawn out process or happen overnight. This is a big subject, and many economists would find these claims / expectations fairly insane. The point of this website is to test the truth of these idea. So I will continue to do that.
WHAT’S THE PROBLEM?
Too much debt. More debt that can ever be paid back. The US dollar is the world’s reserve currency. By historical standards this is odd, because a US dollar is itself a form of debt. Dollars can be created in infinite amounts, and exchanged for real stuff. Don’t be surprised if there are too many of them.
IS THERE A SOLUTION?
I see one plausible way to solve the problem: first, a realization that most of the debt cannot and will not be paid back. These realizations usually take the form of financial crises, debt cancellations, and currency devaluations. Second, as the global debt Superbubble deflates, the system will need to be recapitalized with a new monetary anchor. This can be done by raising the price of something yellow and useless to a very high number. The actions of a few important institutions indicate that this is where we are headed.
WHAT IS DEBT?
Debt is credit. Credit is debt. They are two sides of a promise to pay. Unfortunately, promises are much easier to make than they are to keep. This makes debt an unreliable store of value. Debt-based assets lose value if the promise to repay cannot or will not be kept. Systems based such promises are inherently unstable.
This is the problem the world now faces. Since 1971 the global currency system has been based on promises created by the US government and related agencies. These institutions have a track record of not keeping their promises.
The world realized long ago that they would not be getting their money back (in real terms), so have been looking for ways to bring the global currency system back to normal.
IS DEBT BAD?
No. Debt is crucial for an economy to run. Historically, money has mostly been debt (aka credit, aka a promise to pay later). Even simple systems of commerce cannot function without the flexibility credit provides. You buy something on the internet, you receive what you paid for a few days later. That is credit in action. Supply chains cannot work without it. The problems start when there is too much debt.
WHAT HAPPENED IN 1971?
1971 was the final step in a 49-year process which removed gold from the monetary system and replaced it with paper promises (mostly issued in New York and London). Other notable dates in this process are: 1922 (Genoa Conference), 1933/34 (FDR confiscated gold and devalued the dollar), and 1968 (gold-backing of the dollar was officially ended by the US Congress).
In 1971 US President Nixon went on national television to announce sudden changes to the world’s currency system. He canceled international convertibility of US dollars to gold. He also told his audience that the US government would not give European central banks gold owed to them.
Why did Nixon do this? Before August 15th, 1971, the value of the US dollar was linked to gold, and the value of major currencies were linked to the US dollar. Under the Bretton Woods system, nations importing more than they exported could periodically settle the difference with shipments of physical gold. In the years before 1971, the US imported a lot more than it exported, so had to send a lot of gold abroad (mostly to Europe). By the time of Nixon’s announcement, America’s gold reserves were down to 8,133 tonnes (from a high of over 24,000 tonnes).
Removing the US dollar-gold link created a problem for the US. Why would foreigners accumulate dollars if they could not redeem dollars for gold? The solution was the creation of the petrodollar system.
Why does this matter? Previously, the amount of money/credit the US could create was limited by the amount of gold they had. Removing gold from system removed the limits. This allowed the creation of vast amounts of dollar-based debt.
WHAT IS THE PETRODOLLAR?
Paper or digital US dollars can be printed or typed into existence in infinite amounts. However, much of what can be bought with dollars requires finite labor and resources to locate, extract, refine, transport, design, manufacture, assemble, market and deliver. So why do foreigners collectively send real goods to the US in return for IOUs that can be created out of thin air? The answer is the petrodollar system, which creates international demand for the dollar. Foreign nations needing oil – as most do – need US dollars. To get dollars foreigners must export real goods and services to the US. This is called the exorbitant privilege and is how the enormous US twin-deficits are funded. In other words, a large percentage of US government spending on welfare and warfare programs is funded by foreign nations.
WHAT ARE EURODOLLARS?
Eurodollars are another kind of incomprehensible modern money (like financial derivates and bitcoin). Eurodollars are US dollars created by commerical banks outside the US. Being located outside the United States, eurodollars escape US regulation. They can be typed into existence in infinite amounts, and used to purchase real stuff, or to create loans (which have to be paid back with ‘real’ dollars. Very few people fully understand the eurodollar system, and that key to its success. How could any government regulate what no-one understands? Jeffrey Snider’s Eurodollar University provides excellent analysis of the subject.
WHAT WENT WRONG IN 2008?
The 2008 financial crisis was triggered by excessive US debt. To save the system, more debt was created. the U.S. Federal Reserve typed trillions of new dollars into existence. Monetary authorities in other parts of the world created a lot of currency too. The newly typed money was given to major financial institutions – some fraudulent. This bought the system another few years. It also made the Superbubble bigger and more unsustainable.
WHAT IS DE-DOLLARIZATION?
Short description of de-dollarization. Coming soon.
I know. Physical gold is a very unfashionable asset – especially in the English-speaking world. There are places where you cannot give it away. The US and UK have been letting gold flow East for decades. However, as New York and London lose control of the gold market, our ideas of what is cool or uncool are becoming a lot less relevant.
WHO IS ROBERT TRIFFIN, AND WHAT’S HIS DILEMMA?
Short description of Triffin’s Dilemma. Coming soon.
The term ‘exorbitant privilege’ was coined by the French politician Valery Giscard d’Estaing in 1965. It describes the advantages the US gained by issuing the world’s reserve currency. Barry Eichengreen explains:
It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries have to pony up $100 of actual goods in order to obtain one.
In other words: dollars the US can print or type into existence have the same value as dollars foreigners have to work for. That gave the US incredible economic advantages. I describe it in the past tense, because it is coming to an end.
WHAT DO CENTRAL BANKS DO?
It is commonly thought that central banks create most of the money in circulation. This is not true. Nowadays, most of our money is created by commercial banks when they make loans.
Despite that, central banks are still the biggest players in the global currency game. They make the rules. They decide how much money and credit are in the system (the chart above signals failure). Central banks’ most important role is ‘price stability (maintaining the value of their currency). Theoretically, the major central banks are independent: free to maintain price stability in ways they see fit. However, this independence is often a myth. Historically, central banks have had a big problem: government. In Western democracies, politicians have to win elections. Central banks can print and borrow money. Money helps politicians win elections, and stay elected. A lot of politician’s promises can be delivered by spending money. Political interference has been an ongoing cause of currency devaluations, inflations, and hyperinflations through history.
QUESTIONS TO INVESTIGATE LATER
Is the economy about to collapse? • What replaces the dollar as world reserve currency? • Other currencies are also f*cked. Why focus on the dollar? • How is the euro different to the dollar? • Why does the United States borrow a currency it can print? • Why is populism rising everywhere? • What is a reserve currency? • What is a ‘debt-backed’ currency? • What is an ‘oil-backed’ currency? • What are US Treasuries? • What does ‘risk-free’ mean? • How much debt is too much? • What is dedollarization? • Will Bitcoin save us? • Will Modern Monetary Theory save us? • Isn’t gold too old-fashioned and primitive to be part of the modern financial system? • What was the Gold Standard’s fatal flaw? • How could that flaw be fixed? • Is this a conspiracy theory? • If this is true, why isn’t it front page news? • How can you be optimistic in this dire epoch?
Last revised: 2019–03–04.