Sooner or later, we all go flat

Nov 13, 2014

New York, New York

Dear Diary,

No action yesterday. The Dow was flat. Gold was flat.

TV screens are flat. Some singers are flat. Cakes come out flat, sometimes. Tires go flat. Prize fighters are laid out flat. Dead men too.

Sooner or later, we all go flat.

One of our favorite columnists, Thomas L. Friedman, wrote a book about it, "The World is Flat."

You can count on Friedman. He's bound to have something to say on almost any subject. He has so many thoughts because they come so cheaply to him. He is not a deep thinker. In fact, he is in over his head in a parking lot puddle. But we have no quarrel with superficial thoughts. They are better, in many ways. Easier to understand and repeat at dinner parties. And much more easily put to service by men of action. That's the real benefit of all superficial thinking; it is the unleaded gas that purposeful jackasses put in their tanks. Forget the nuances. Ignore the paradoxes. Don't over-think it. Give them a simple idea and they can use it to make a grand mess of anything.

Friedman is a world improver. Not, of course, in a way that would actually make things better; if he wanted to do that he could paint his windows, pick up trash on the sidewalk and flirt with the fat meter maid. No, he insists on telling other people what to do. That is, he is not a real doer...he is a real pain in the derriere. He has a plan for every situation, a fix for every problem... And in every case, he claims to be able to look into the future and make it better before it happens.

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Remember our dictum: people who try to force people to abide by their ideas are always the same people whose ideas are moronic. You can quote us on that.

Years after publication, Friedman explained what he had in mind, in his 1993 book:

    When I wrote 'The World Is Flat,' I said the world is flat. Yeah, we're all connected. Facebook didn't exist; Twitter was a sound; the cloud was in the sky; 4G was a parking place; LinkedIn was a prison; applications were what you sent to college; and Skype, for most people, was a typo.
He was right. Globalization, under the umbrella of Pax Americana, was a trend. And he spotted it. And teased it out. And wrote a book about it that was a best seller.

But there was much more to globalization that new technology and American capitalism. Importantly, it was financed by a whole corrupt new money system. In the Bretton Woods 'system', foreign nations linked their currencies to the dollar...and the dollar was linked to gold, at a fixed rate. Over centuries, gold had proven very useful. It may not be perfect money. But it was the best yet discovered. Some cryto currency, such as Bitcoin, may eventually prove more useful...but that is for the future to decide. For us, for now, gold works. Fiat, or paper, money does not. Since the supply of gold is limited, prices tend to remain stable. The supply of credit is also limited, because the currency is limited. When demand for credit increases, the price of it goes up (interest rates)...and the credit-fueled boom comes to an end.

Back in the '60s, Lyndon Johnson pursued an expensive, hopeless war in Vietnam and an ambitious giveaway program at home too. 'Guns and butter,' he wanted it all. And then, as the bills came due the financial whizzes in Washington had a simpleminded idea -- 'rather than pay the piper, in gold, as is customary...and statutory too...let's change the system so we can pay our debts in IOUs...just green pieces of paper that we'll call dollars.'

'Wait a minute,' more thoughtful people objected. 'A fiat money system has never worked. If you could create real money just by printing up pieces of green paper, everyone would do it.'

Determined not to over-think it, the authorities applauded the benefits of this new 'flexible' currency. And in two moves, one in 1968 the other in 1971, the US abandoned gold and took the lid off the money pot. Now, there was almost no limit to how much cash could be created...or how much credit could be boiled up...nor how many bubbles could come rising from the hot, open crock.

Now, people could buy things they couldn't afford and probably didn't need with money they didn't have. Credit cards, lines of credit, mortgages and their derivatives!

Without gold, the feedback looped around in the wrong direction. American consumers bought - on credit - Chinese goods. Dollars went to China. The Chinese government had to print extra yuan to buy up the dollars from private holders. This caused a boom in China, centered on capital investment...which added extra capacity to China's export machine and pinched off more and more of America's industrial output.

Then, what could China do with all these dollars? It had to invest them back into the it bought US debt. Interest rates went down, stimulating more credit-fueled buying.

So, the world was not so much hammered into a grotesque new shape by US monetary policies. The Chinese produced too much. The Americans consumed too much. And all over the world, a huge debt bubble got bigger and bigger - waiting to be flattened.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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