Haunted Forest of Bretton Woods

What if we never were the economic power we thought we were?  What if the dollar really held up on its own?  What if the three largest economic powers of the past 60 years all suffered from failing one of wisdom's oldest admonitions recorded as the words of the Patriarch Moses.

"… And it will be, when the Lord, your God, brings you to the land He swore to your fathers, to Abraham, to Isaac, and to Jacob, to give you, great and good cities that you did not build, and houses full of all good things that you did not fill, and hewn cisterns that you did not hew, vineyards and olive trees that you did not plant, and you will eat and be satisfied.  Beware, lest you forget the Lord, Who brought you out of the land of Egypt, out of the house of bondage."  

Devarim 6:10-12.  The Fifth Book of the Torah (Deuteronomy for Gentiles).

In July 1944, it was not certain that the Allies were going to win the Second World War.  The winds were blowing in their favor to be sure.  The Allies were regaining territory on the west with France and on the east in Russia.  One month earlier, the success of D-Day had buoyed confidence that the German juggernaut was vulnerable and that the Allied powers may indeed prevail.  The U.S. economy, barely functional save the frenetic ultra-nationalist industrial orgy supporting the war machine with a dollar untested since the Great Depression, had no evidentiary power save the aspiration wafting on the breezes of imagined victory.  U.S. Secretary of State Cordell Hull pleaded with is colleagues for free trade as a remedy for a world at war.  Thinly veiled post-colonial score settling placed the U.S. dollar above the British pound in large part due to the linking of the British Parliament accession to Bretton Woods one year after its negotiation as a condition of $4.4 billion in much needed reconstruction aid.  A similar inducement forced the Franc to bow to the Dollar in exchange for a Dollar denominated billion dollar loan for French reconstruction. 

A cunning convergence of levers conspired to create the illusion of U.S. dollar hegemony.  The International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, later the World Bank) were carefully constructed to reinforce what, at the time was merely an illusion.  The great concession - linking the U.S. dollar to a gold rate of $35/oz - was half the commodity illusion; the other being the growing global demand for oil conveniently financed with dollars.  But, to reclaim the prophetic warning referenced above, we must consider the Marshall Plan and the U.S. occupation and MacArthur administration of Japan.  The fiat currency - in the form of the U.S. dollar - was instrumental in rebuilding Europe and Japan and building infrastructure (and dollar trade dependency) for the manufacturing base of the subsequent economic booms in both regions.  By August 15, 1971, President Nixon realized that the illusion could be maintained no longer.  Slamming the gold window closed and, with Executive Order 11615, instituting a last gasp effort to preserve the Adam Smith inspired economic employment doctrine, Nixon sealed a fate that would have come fully due in the early fall of 2001 had it not been for a certain distraction.

Without the world's credit tolerance - a much ignored though vital policy that Nixon crafted to allow expansion of foreign ownership of our dollar-denominated debt -  we would have lost our Bretton bet long ago.  With Treasury Secretary Geithner's recent announcement that we are once again at a debt ceiling - one side or the other of $16.394 trillion - we continue to bet that the foreign 'others' and our pensions will keep us going.  But what we seem to overlook is the $1.26 trillion in debt that we have to repay this year!  That's in addition to the new debt we have to raise. 

Now, I'm warning you, I'm about to introduce a concept that you may think is entirely unrelated; but please indulge me. 

In 1993, Richard M. Auty introduced the term "resource curse" to describe the phenomenon in which countries rich in natural resources were typically locked in grinding poverty.  He and hundreds of economists and social scientists have pretended to be puzzled over this phenomenon in faux sincerity.  But this "curse" is an illusion derived from disingenuous monetary myopia.  While Bretton Woods broke the literal colonial trade controls of Britain, and to a lesser degree France, by imposing the U.S. dollar reserve and trade dominance, it merely traded a sovereign colonial force for a monetary one.  To participate in the global economy, a single currency hegemony insures that local collateral (in the form of extractable resources) will be denominated in a debt-based currency (the dollar).  The country capable of selling resources, unable to develop them with direct investment in local denomination is pressured to debt-finance its minority equity participation in its OWN resource development thereby forcing two monetary inefficiencies from which escape (sans corruption and despotism for the few in power) is impossible.  The natural resource, which in the ground could serve as the basis for sovereign wealth, becomes the alienated collateral for international financiers who, with no thought for development, extract rents in excess of the resource commodity sales yield insuring instability and ultimate unrest.  By removing domestic enterprise and commodity optionality through compulsory dependence on a debt-denominated currency financial utility, the country is incapable of sustainable development. 

Which leads me to a couple of conclusions.  By betting the U.S.'s future not on our productivity, industry, or innovation but rather on our money, we removed our own optionality to recover from our present fiscal maelstrom.  Money, in and of itself, is not productive and has no natural yield.  It is optionality constrained.  If its flow is directed towards assets with future productivity, it can serve an important purpose.  However, if money is its own productive cycle in the form of capricious usury, it is unsustainable.  Our perpetual debt growth cycle - fueled in the U.S. and Europe by our complete unwillingness to evidence economic will to: a) live within our productive means; and, b) reduce our Federal employment and procurement market dominance; insures our dollar's ultimate demise. By financing our trade empire with a dollar backed by debt rather than by resource or productivity-linked value creation, we've cut off our own economic and wealth-creating future options.  Ignoring productivity and assets, we've implored the world to continue the illusion for its own sake.  But we've failed to recognize that our dollar was never entirely what the world wanted.  We used our power to create the mandate making it what everybody needed.  When that illusion breaks, well… let's go back and look at the Children of Israel and see how they faired in the "promised land."

Recitation of a lie, no matter how loud and often, does not make it true.  But for the Commonwealth (Anglo-Iranian Oil Company later to become BP which globalized oil production ahead of the Rockefeller's Standard Oil; Anglo-American, De Beers, Rio Tinto; etc.) the U.S. and Europe would have been incapable of enacting Bretton Woods because it was through dollar debt denominated commodity pricing and industrial production - not acclaim and desire of the nations - that the dollar had its ride.  While the World Bank's International Finance Corporation perfected the natural resource piracy still alive and well in Papua New Guinea, the Pacific Forum Secretariat nations, Southeast Asia,  South America and Africa, it did little to improve upon the debt slavery extractive industry model that was quite well entrenched by the Commonwealth and other colonial powers before the Second World War.  

So where am I going?  Very simply put: the U.S. and Europe are currently trying to fix a central bank-enabled problem hoping that, in so doing, they'll reassert their will on the world.  They're hopeful that today's pensioners-in-waiting (a polite way to say modern labor) have total financial and historical illiteracy and, as a result, continue to buy growing debt.  But that's where InvertedAlchemy seeks to be a bit of a spoiler.  The clarion call that emanates once a week from Charlottesville, Virginia (home of the fiscal incompetent but globalist Thomas Jefferson) explicitly reminds you that productivity-linked economic models are, and will be, the ONLY way for We The People to actually build sustainable systems.  If we allow indebtedness to stand as a surrogate for our unwillingness to be productive, we all lose.

Allow me to leave you with the most compelling statement made in this year's volume on June 10, 2012. 

wealth = utility x retained optionality^∞

where ∞ = ∫ of all users across all value dimensions

When one considers this formula, one can readily see that the greatest wealth is experienced when the maximum benefit can be derived (in number of participants) from the least phase and state alteration (for more on this, take a look at my previous postings on Phase and State Coherence).  And the more value (in terms of integral accounting) dimensions can be simultaneously appreciated by the more participants, the greater the momentary and residual wealth.  So use 2013 to align your assets with wealth of the form that lasts!  Happy New Year!