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Davos Debt & Denial

In an age of illusion, the guise of truth is often heresy

...........Going off the gold standard and giving up fixed exchange rates constituted a momentous step in the history of international economics.Yergin and Stanislaw were right. It was to be a momentous—and ultimately fatal step—for as a result of the US default on its international gold obligations, all currencies in the world instantly became fiat.The security that gold and silver afforded the use of paper money would be no more—and when a con game is being run, nothing, absolutely nothing is more important than confidence.The last and most critical piece in the banker’s carefully constructed charade was eliminated by the US when it overspent it entire gold reserves leaving the international monetary system bereft of any intrinsic value. Only monetary momentum and residual confidence has allowed paper-based capitalist economies to function since the last vestige of gold was removed in 1971.Now, the postponed but inevitable destructive consequences of 1971 are about to make the demolition of the World Trade Center Twin Towers and Building 7 look like a spring day in Paris. A collapse of world economies caused by the default on trillions of dollars of paper debts and obligations has never before happened. Soon, it will.The consequences will be as devastating as they will be widespread as personal savings will be wiped out. Personal savings entrusted to banks have been invested in the same paper IOUs, sic bonds, owned by pension funds, investment funds, and insurance companies all over the world.Savers forced by the constant depreciation of paper money have given their savings to banks, pension funds, insurance companies and investment funds in the hopes of salvaging the value of those savings. But those hopes will prove to be false as the escalating financial collapse reveals such investments, e.g. corporate, government and consumer IOUs, to be increasingly worthless.Governments that allowed this crisis to occur will then be forced to indemnify such losses in order to maintain civil and social order. But, when done, the indemnification of trillions of dollars of lost savings will cause what remains of the international monetary system to collapse. Paper “money” is but a paper tiger and when exposed to the twin disasters of economic deflation and central bank hyperinflation, fiat “money” will ultimately revert to its intrinsic value—zero.

PANDORA’S BOX AND THE RISE AND FALL OF DAVOS

Economies built on credit and debt are by nature unstable. Caught between cycles of expansion and contraction, they are also vulnerable to the vagaries of man and the dictates of nature, i.e. war, famine, greed, drought, etc.When the backing of gold was finally removed from paper money, it was the final straw that was to bring down the bankers’ house of cards. But before the house of cards collapsed, capitalism was to erupt in one last display of shameless glory.The 25 years between 1982 and 2007 was the longest expansion in capitalism’s history. It was, however, to be its last; for the expansion was built on misallocated and historically excessive amounts of credit—and Davos occupied center stage in the display of this excessive “achievement”.It is natural that at the end of the banker’s system, bankers would have garnered the largest share of the spoils and so it was, at least for a short while. The greatest spectacle of Davos was in 2007, the momentary triumph of bankers standing atop the world of global commerce whose profits and productivity they had increasingly purloined as their own.The triumph of the bankers, however, was to be as short as it was spectacular. The era of billion dollar bonuses paid to bankers was to occur at the apogee of their triumph, a triumph that was to be as short as it was lucrative, for soon after, both banks and the capital markets would collapse............

.............WHEN SYSTEMS FAIL

Unstable systems can function for years without serious problems. But over time, unstable systems will always break down. We are witness to such a systemic failure today. Global credit markets are slowing and contracting. The capitalist system responsible for economic expansion and wealth is in disarray.Debt, in capitalist systems, is a wondrous device. That is, until it can’t be paid back. Under capitalism, credit fuels expansion but it does so at a cost. As capitalism expands, credit becomes debt and the greater the expansion, the greater the debt.

EXPANSION BEGETS DEMISE

Capitalism’s fatal flaw is apparent only in its later stages. As capitalism matures, its inherent systemic instability manifests. The very expansion of capitalism sets in motion its demise. The Achilles heel of capitalism is its perpetual need to expand.Only perpetual capital expansion can create sufficient capital flows to service and retire previously created debts, the amounts of which are always increasing because of the accruing compound interest being charged. While any slowdown is cause for worry, a contraction bodes far worse.FEAR IN

DAVOSWHAT A DIFFERENCE A YEAR MAKES

One year ago, the mood at Davos was one of quiet, almost smug, confidence. The on-going economic expansion appeared to be endless, the profits of investment bankers skimmed off the top of productive enterprise was greater than ever. Private equity, the investment banker’s equivalent of flipping real estate, was the hottest game in town.It is no longer. Today in Davos, the scent of Armani is now mixed with the acrid smell of anxiety produced by falling markets and uncertain futures. Concern has replaced confidence. The major phernome in Davos today is fear.Davos will not be the same next year. If you’re planning on going, be sure to take some air freshener.That was then. Now, the major phernome in Davos is panic. Wall Street institutions such as Bear Stearns and Lehman Bros. have vanished into thin air (appropriately Davos is the highest city in Europe) and the financial sector, formerly the king of predators, is struggling to survive. Air freshener will be no more effective at Davos than central bank credit will be successful at reversing now deflating economies............

.........The roots of modern economics are intertwined with institutional deceit on a massive scale because the material rewards are so great. Therefore, the attempt to ascertain the truth about money is not an easy task; and it is not made easier by those who benefit by its deceit.This is why the discussion of ideas antithetical to those in positions of power are now found only at the edges of society. Writers and readers alike must search for truth in books not easily found, such as Buckminster Fuller’s Grunch of Giants (out of print, still available at www.bfi.org, Peter Warburton’s Debt & Delusion—Central Bank Follies That Threaten Economic Disaster (reissued and currently available in a deluxe edition from WorldMetaView Press) and Bernard Lietaer’s The Future of Money (published in 1999 by Random House and never made available in the US, currently out of print).Those in power maintain their power because those without power do not understand the power dynamics operant in the world in which they live. Thus, the economic control over the many for the benefit of the few has continued irrespective of the form the economy takes.We are at the end of an extraordinary epoch, the end of the age of credit. In 1981, Bucky Fuller predicted the collapse of the present power structures in tandem with an unprecedented crisis that would transform humanity.That time, the collapse of the world power structures, has now arrived............