The Rise And Fall of the WEST

This article is written by Simon Black and I will add to this blog more and more from him as I find them, I believe this is a good departure point and also believe what he says is true. Enjoy!!
Notes from the Field

Date: June 13, 2011
Reporting From: New York City

In the 15th century, the highest standard of living in the world belonged to China. Places like Nanjing had reached the pinnacle of civilization with incredibly modern infrastructure, robust economies, substantial international trade, great healthcare, and a rising middle class.

Across the globe, Europeans were living out short, mud-filled, brutish lives in squalid poverty, dying off by the thousands from the bubonic plague. They were practically Neanderthals compared to the Chinese, and explorers like Marco Polo wrote fanciful tales of wealth and opulence in the east.

If you had told a Chinese merchant at the time that, over the course of the next several hundred years, global primacy would shift to Europe (and a relatively unknown American continent), you would have been laughed at. It was simply unthinkable given how advanced China was over the west.

And yet, it happened. History shows us that the great things about western civilization (Industrial Revolution, technological achievement) and the not-so-great things about western civilization (imperialism, slavery, genocide) caused the tables to turn and primacy to shift from east to west.

Ironically, the tables are turning yet again, and its driven by a number of factors.

At the tail end of World War II, a new global financial system was concocted that was heavily biased to disproportionately benefit the United States. Over the subsequent decades, foreign countries would obligingly mop up US government largess and finance out of control retail consumption.

It got to the point where people felt it was a natural right of Americans to have huge homes, cheap gas, and oodles of junk, as well as a government that could buy anything it wanted without giving a second thought to fiscal discipline. All of this was made possible at the expense of peasant workers overseas.

For years, they imported US inflation and suffered a tremendous disparity in standard of living, all because of how the global financial system was set up. This system, based on the United States as the center of the economic universe, is now completely fractured, and it’s the biggest game changer in centuries.

Is it possible that such a force can be stopped or reversed? Highly unlikely.

These huge sea changes in the global order happen slowly, like titanic ships changing course in a tight canal. The initial seeds of change were planted decades ago when the US began running consistent budget deficits in the early 1960s, and even before that when the Federal Reserve Act was passed in 1913 (which forever corrupted the nation’s money supply).

The negative momentum has been building for an exceptionally long time. Today’s debt, inflation, and unemployment crises are merely the latest symptoms of a cancer that has been growing for decades.

In total objectivity, the patient is beyond cure at this point… and the math is quite simple.

The US debt situation is already very precarious, and even the government’s own budget shows continued deficits for years and years to come. Undoubtedly, this represents some level of risk for the nation’s creditors, and market participants will require a greater return on investment in order to justify the risk of loaning money to the US government.

Even assuming that all existing debt is rolled into new bonds, higher borrowing costs will absolutely cripple the Treasury. The more money they borrow, the higher their borrowing costs will become; yet, the higher their borrowing costs become, the more money they’ll have to borrow to make interest payments.

Nations typically enter this vicious cycle once they start having to borrow money just to pay interest on what they already owe. The US is already way past this point.

If you study US financial conditions, you’ll see that mandatory entitlement programs like Social Security and Medicare soak up over 75% of all federal tax revenue collected. That’s before paying a penny in interest on the debt. The rest of the budget constitutes several trillion dollars in other expenses like genital-groping TSA agents.

As such, given the current budget just for the sacrosanct areas like defense and senior benefits, tax revenue falls over $400 billion short. America has to borrow to pay its interest expense.

Is it possible for a white knight to come riding in and slash spending by the necessary (and brutal) 50%++ just to break even? Possible, but extremely unlikely without granting him/her dictatorial powers. Getting a majority of 435 members of Congress to sign up for such painful political consequences is dubious at best.

Even still, such cuts would just be enough to break even. In order to actually make progress on paying down the debt, one would have to make even steeper cuts… and that’s just at today’s levels. The debt grows worse by the day, as do useless ‘economic recovery’ spending measures.

As such, borrowing costs are set to rise, causing the budget deficit to spiral out of control towards an eventual default.

Since so much of the global financial system is based on the US treasury market, this will set off a chain reaction of bank defaults and commercial bankruptcies, not to mention trigger a wave of credit default swap and other derivative obligations to the tune of several trillion dollars.

The other (more likely) possibility is that the Federal Reserve will continue to finance the deficit by conjuring additional money supply out of thin air, eventually leading to a loss of confidence in the dollar as a reasonable store of value.

The only reason this hasn’t happened already is because there is no viable alternative yet, however there are clear signs that investors and foreign governments are scrambling for a quick solution. Smaller alternatives like the Swiss franc, Singapore dollar, and gold are all at record highs.

Barring a benevolent dictator or some kind of miracle, this situation is unstoppable and irreversible until the next cycle of the global pecking order turns the tables once again.

Tomorrow I’m going to discuss the social implications… but first, I’d like to hear from you about this– do you think the problems in the existing system are fixable without a complete reset in the way the world works?

Notes from the Field

Date: June 14, 2011
Reporting From: New York City

For the last few days, we’ve been having an important discussion about the magnitude of the economic challenges in the west; if you didn’t read yesterday’s letter, I really encourage you to do so before proceeding because it’s important to understand why the west has truly passed the point of no return.

Simply put, the United States and much of Europe are borrowing an extraordinary amount of money now just to pay interest on the money they’ve already borrowed. They cannot even self-fund their mandatory entitlement programs without going into the hole, and their options are limited:

Option 1: Continue borrowing, keep the party going.

As long as the government CAN do this, they WILL do this. Regardless of their intentions, though, more debt only worsens the situation, creating higher borrowing costs in the long run, and even more debt. As this happens, the pool of buyers begins to dry up, especially from overseas.

Option 2: Inflation

The more buyers stop purchasing Treasury securities, the more the Federal Reserve will mop up the excess liquidity. In doing so, the Fed essentially conjures up money and loans it to the government.

No matter what the government monkey statistics say, this is inflationary, plain and simple. The more money they print, the greater the level of inflation in the long-term. Meanwhile, as foreigners simultaneously reduce their US dollar holdings, this inflation will become more acutely felt in the US.

Option 3: Austerity

There’s going to come a time when the US government is forced to face its economic reality and make some incredibly deep cuts that would be felt across society, from Wall Street and the military industrial complex to project housing on the other side of the tracks.

Option 4: Default

Eventually, the debt burden is simply going to be too much, and the most obvious solution will be to default. Politicians will make China out to be the enemy and they will probably invent a war just to have an excuse to default on Chinese owned debt. Americans will wave the flag and celebrate defaulting on their enemies.

Option 5: Economic Cannibalism

In the best traditions of Atlas Shrugged, the government will continue its persecution of the productive class– professionals, investors, entrepreneurs, and skilled workers. Existing taxes will rise, new taxes will be created, trade barriers will be enacted, and a maze of cost prohibitive regulations will be passed.

The first option (keeping the party going) is what has been happening for years. Politicians make small concessions to show they’re “serious” about fiscal discipline, cutting laughably small programs while dumping hundreds of billions of dollars into wars and entitlement programs.

The worse the debt situation becomes, though, the higher the borrowing costs become, and the worse the debt situation becomes. It’s not an enviable position. Existing lenders will continue backing away from the US Treasury market, giving option 1 a half-life measured in months at best.

In the longer term, only options 2-5 remain: inflation, austerity, default, and cannibalism. Each of these remaining options will shake the financial system to its core. More importantly, each of these has the power to create widespread social upheaval.

When inflation eats away at a family’s already meager standard of living, when austerity eliminates the benefits to which recipients have grown accustomed, when default vanquishes a retiree’s savings, when high taxes make workers feel like they’re just government serfs– this is when the real turmoil will begin:

* Rising crime: devoid of a job or means to support their families, people will turn to crime out of desperation

* Class warfare: with dividing lines drawn between have’s vs. have-not’s, it will become unpopular and even dangerous to be successful

* Corruption: low-level public service officials will look to supplement their income through bribery and kickbacks

* Black economy: An underground, cash-only (probably gold or foreign currency) economy will emerge with people getting paid in envelopes

* Censorship: Of course they’ll blame it on national security, but the idea will be to prevent public disparaging of government policy

* War: The government will need another major event to distract people from the real problems

* Protests/Riots: This is when things turn bloody

* Police state conditions: The government will close ranks and send the cops out to show all the little people who’s really in charge

There are a number of other manifestations, and many are already showing signs of emergence. The US and European police states are alive and well. Crime is on the rise.

In Europe, cops are doing battle in the streets with their citizens. Think it can’t happen in the US? Remember tanks in the streets during the LA riots? Remember New Orleans? Remember any number of G8/G20 protests?

Here’s the bottom line: all you have to do is glance at the headlines to see what happens when you strip people of their livelihood, of their benefits, of their ability to put food on the table for their families.

The US has been able to kick the can down the road with the most blunt social implications simply because the country benefits so much from a US-oriented financial system. This is coming to an end very, very quickly.

As a rule of thumb, the greater the economic distortion, the harder the collapse. The US economy has been in a fantasy world for so long, and when its dominant primacy is yanked away, the collapse will be at freefall speed.

Listen… I’m not talking about the end of the world here, I’m talking about difficult times ahead, and the things that go beyond economics. It’s time to face facts and look at how society will change (and has already changed).

Tomorrow, I’d like to write more about what we can do now. Meanwhile, please tell me what you think about this– how do you see society changing from this reset of the financial system

Sovereign Man
Notes from the Field

Date: June 15, 2011
Reporting From: New York City

Over the last days, I’ve endeavored to explain why the economic reversal of fortune in the west is unstoppable… and what the social implications of this decline will be.

Economic decay and social upheaval are inextricably linked. This is not some doom and gloom conjecture, but rather simple historical reality: when you take away people’s livelihoods and their abilities to put food on the table for their families, turmoil reigns.

Consider Argentina during its millennium economic crisis… Zimbabwe during its hyperinflationary period… Japan during its lost 2-decades… Germany in the interwar period… Rome during the reign of Tiberius… Russia after the fall of communism…

There is a common element in each of these examples– even just a few years before the economic turmoil began, nobody would have expected it.

If you had told an Argentine in the mid 1990s that he would be digging for food out of a trash dumpster in a few years, he would have been insulted. If you had told a Japanese businessman in 1984 that he would spend the next decades floundering in stagnation, he would have thought you were crazy.

What would you have said in 1995 if someone told you that government agents would fondle children at airports while stagflation takes over the economy and the government borrows money just to pay interest on the money it has already borrowed?

America’s balance sheet is deteriorating by the hour, and lenders will require a higher return to compensate them for this additional risk. Consequently, government borrowing costs will rise, making the situation even more precarious.

The increased interest expense will cause them to borrow even more money and go deeper into debt until one of two things happens: either the Federal Reserve debases the currency to its intrinsic value, or the US government defaults.

Either case is catastrophic. If the US defaults on its debt, it would set off a chain reaction of derivatives that would bankrupt the entire financial system. If the Fed debases the currency, Americans will be left holding worthless dollars that can’t even be used as toilet paper.

Meanwhile, you can expect the government to declare war on its citizens, raising taxes to feudal serf levels in order to pay for their largess, and imposing police state conditions to keep everyone in check.

So– what is one to do about this? There are a few options.

1) Do nothing. You can always stick your head in the sand and have faith that your ‘leaders’ are going to work out the problems, because, hey, collapse could never happen here… right? This option obviously worked out well for the Argentines, the Japanese, the Germans, the Romans, etc. who thought the same thing.

2) “Stay and fight”. This is a nonsense solution. There is no enemy to fight… these issues were not caused by a single person but by the very institution of government. People who talk about political solutions have no understanding of the problems– try getting 155 people to agree on specifics. Now try 155 million.

3) Have a plan, and take steps to prepare. As its fiscal desperation increases, your government is likely going to shake you down for everything you’re worth.

Here’s the bottom line: if you live, work, invest, bank, own property, structure your business, own gold, hold retirement funds, etc. in the same country of your citizenship, you literally have all of your eggs in one very frail basket.

Moreover, the basic systems that you depend on to support your family are going to come under intense pressure and will be prone to failure. Default and inflation are going to make it very difficult to truck food and fuel across the country to your local grocery store and gas station.

It’s imperative to reduce these system dependencies, as well as diversify your assets and livelihood across different geographies. I call this planting multiple flags, and ultimately, this is what our premium service Sovereign Man: Confidential is all about (the June edition comes out this evening).

It’s also why we held our first (and only) offshore workshop a few months ago in Panama. About 350 attendees joined me along with over 2 dozen of my best contacts– international bankers, immigration experts, asset protection attorneys, incorporation specialists, investment experts, startup business gurus, etc.

Unlike most conferences which leave you with more questions than answers, our workshop strived to provide the means to develop a clear action plan for reducing dependencies, building independent income, and safeguarding your livelihood… plus all the contacts, forms, and information necessary to take immediate action.

We filmed the entire event and put together a comprehensive “stay at home” package. It includes a 200-page workbook and over 21-hours of professional footage on 12 DVDs. We also produced a short trailer to explain more, you can view it here.

Honestly, most people that you and I know are going to go with option 1– they’ll place their faith in politicians and do absolutely nothing for themselves. Lambs to the slaughter.

My guess is that you’re reading this because you sense something very wrong with the world… and you have much more confidence in yourself than some politician. I hope I’m right.


One Response to “The Rise And Fall of the WEST”

  1. Anonymous Says:

    Thought provoking, and redolent of all the misgivings I had as a student about the ‘system’ .
    It’s all too easy to relax and assume that ‘they’ know what they’re doing.
    They do.
    They’re screwing us!

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