Get ready, it’s coming
We Live In The World of the Unreal
We live in a world of fake money and fake wealth: wealth created out of a magic trick the US pulled off over four decades ago in plain sight of everyone.
And Americans have still thought of their nation as the most advanced economy on the planet while more and more of the business of making things– things people want and need- left America in favor of the business of making money– the so-called “service economy” or ironically the FIRE industry: Finance Insurance and Real Estate.
It Stated Out Well Enough
Europe and Japan were in ruins after the Second World War as the United States,– untouched by the war– was both the sole producer and sole consumer of goods in the non-communist world.
This posed a number of problems for the United States. Not only did American companies need markets to export to, the American government needed stable partners in the Cold War struggle against the Soviet Union and her allies.
Enter the Marshall Plan.
The United States spent massive amounts of capital to help Western Europe and Japan rebuild after the war. In return the US received military base rights and markets to export to. The dollar was exchangeable for gold so Americans could buy overseas goods and foreigners could redeem their dollars for gold. Remember this.
As the Europeans and Japanese built their industry from the ground up with modern plants and machinery they rapidly became more competitive against American firms leading to trade deficits.
At the same time that American industry was becoming relatively uncompetitive, the US military was spending trillions of dollars maintaining overseas military bases, providing military aid to anti-communists and fighting small-scale wars. The holders of these dollars couldn’t spend them in their home countries and had little reason to buy increasingly uncompetitive American products so they took their dollars to the gold window, asking the American government to live up to its pledge that the dollar was “as good as gold.”
Then The Run On the Dollar Came
The United State didn’t want to raise taxes to fund the Vietnam War and Great Society programs but as long as the US could maintain the dollar’s fixed price to gold the appearance of inflation could be managed, meaning the US could
- continue to run deficits
- have foreigners buy the debt
- and redeem the debt in inflated dollars later
But the world was wise to the game. When push came to shove, President Nixon closed the gold window and let the [tooltip keyword=’dollar’s value be set in relationship to other currencies’ content=’this is called a floating exchange rate’]. Americans would have to buy local currencies like Marks, Pounds and Yen to buy goods from overseas.
“You promised a magic trick!”
so I did.
Here it is:
The US Government went to Saudi Arabia (the world’s largest oil producer) and said “Nice place you have here. It sure would be a shame if something happened to it. You know, Israel’s only two doors down and they’re likely to go off the handle at any minute and wreck the neighborhood.”
“But if you agree to take dollars-and only dollars-for your oil then we’ll guarantee nothing bad happens.”
“That sounds like a shakedown”
DING DING DING
And here’s the magic: EVERYONE NEEDS OIL. So the US prints as many dollars as they want and everyone takes those dollars no matter what because oil is priced in dollars and EVERYONE NEEDS OIL.
You like magic, here’s a trick: create a computer entry in a bank account that’s denominated in dollars. Send those electrons to a bank in another country and buy WHATEVER YOU WANT WITH IT. Magic dollars backed by nothing other than a mafia-like shakedown agreement with a family of corrupt Arabians!
Some good things… get betterer
As we learn in part 2.