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I used to rule the world
Seas would rise when I gave the word
Now in the morning I sleep alone
Sweep the streets I used to own

I used to roll the dice
Feel the fear in my enemy's eyes
Listen as the crowd would sing
"Now the old king is dead! Long live the king!"

One minute I held the key
Next the walls were closed on me
And I discovered that my castles stand
Upon pillars of salt and pillars of sand

--Coldplay – Viva La Vida

America has squandered the human sacrifice, blood, sweat and tears of two generations in less than seventy years. We have been an independent country for 226 years. From 1783 until 1946 was an unrelenting upward trajectory for the beacon of the free world. With the end of World War II, America was the last country standing. Germany and Japan were in shambles. Russia had lost millions of citizens, with Stalin about to murder millions more. Great Britain was a shell of its former self. The American Empire had been born. We were the manufacturer to the world. We rebuilt Europe and Japan. Our military was dominant. We made the best automobiles. We built 41,000 miles of national highway over two decades. In 1946, one in three U.S. workers was employed in the manufacturing industry. Today, less than one in ten workers makes something.

In the years following World War II, the United States ran trade surpluses of 2% to 4% of GDP. We regularly ran surpluses until the late 1970’s. Since the late 1970’s, the United States has run increasingly large trade deficits, reaching 6% of GDP in 2007. For the last three decades, Americans have tried to spend their way to prosperity. The government politicians and their moneyed backers have sold the idea that Americans could be the thinkers for the world, while other countries could do the menial work of producing stuff. After thirty years we are left with a hollowed out economy of paper pushers. It may be a reach to transition the Wall Street geniuses who created MBSs, CDSs, and CDO’s into jobs building bridges. The manufacturing jobs are gone. Our workers are left to sweep the streets they used to own.

After three decades of burning our furniture to keep warm, we are left owing the rest of the world $2.7 trillion. Many of these countries don’t like us. Ben Bernanke is actively trying to drive the value of the U.S. dollar down, while decreasing interest rates paid on this government debt. As Ben prints trillions of new dollars, the value of China’s, Japan’s and the oil exporting countries’ holdings goes down. The U.S. will run a $2 trillion deficit in the next year. We need these foreign countries to buy at least $1 trillion of our new debt. We are sure they will do so. Our reasoning is, what else can they do? From a purely financial standpoint, it is insanity for a country to make an investment in an asset paying 2.5% interest, when in one day last week the Federal Reserve purposely knocked the value of the dollar down 5% in one day, wiping out two years of interest income.


The truth is that foreign countries are not stupid. They are already changing their strategy regarding American debt. The Treasury Department released their monthly analysis of international purchases and sales of U.S. assets for February, last week. Below is directly from that report.

Net foreign purchases of long-term securities were negative $43.0 billion.

  • Net foreign purchases of long-term U.S. securities were negative $18.8 billion. Of this, net purchases by private foreign investors were negative $10.2 billion, and net purchases by foreign official institutions were negative $8.5 billion.

  • U.S. residents purchased a net $24.2 billion of long-term foreign securities.

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $60.9 billion.

The Chinese are not fools. They can clearly see that the U.S. will try to devalue our way out of our financial mess. They are going to put the $500 billion of USD holdings to work, before it becomes worthless. Recent examples reported by the Washington Post have been:

  • On Feb. 12, China's state-owned metals giant Chinalco signed a $19.5 billion deal with Australia's Rio Tinto (RTP) that will eventually double its stake in the world's second-largest mining company.
  • On Feb. 17 and 18, China National Petroleum signed separate agreements with Russia and Venezuela under which China would provide $25 billion and $4 billion in loans, respectively, in exchange for long-term commitments to supply oil.
  • On Feb. 19, the China Development Bank struck a similar deal with Petrobras (PBR), the Brazilian oil company, agreeing to a loan of $10 billion in exchange for oil.
  • Iran announced that it had signed a $3.2 billion agreement with a Chinese consortium to develop an area beneath the Persian Gulf seabed that is believed to hold about 8 percent of the world's reserves of natural gas.

The Chinese have a long-term plan to rule the world. They are buying up natural resources throughout the world. The walls are closing in on the U.S. The U.S. solution is to print more dollars, borrow from future generations, and tax their citizens more. Ben Bernanke has rolled the dice, but the fear is in his eyes, not our enemies’. We will shortly realize that our castles were built upon pillars of salt and pillars of sand.

Bubble, Bubble

Never in the history of the world has a bubble burst halfway. Every bubble has collapsed to its starting point or below. The self serving pundits on CNBC and on Sunday talk shows continue to predict a stabilization of the housing market. They are wrong. The bubble is still deflating and will not end until home values are back to 2000 levels, if we’re lucky. Examples of bubbles that fully deflated include the tulip bubble of 1637 - 1638, the South Sea bubble of 1719 - 1722, the Nikkei bubble from 1983 until today, and the NASDAQ bubble from 1999 – 2003. The United States has three bubbles that are deflating simultaneously, compliments of the Federal Reserve, George Bush, and a criminally incompetent Congress. Housing, consumer spending, and U.S. total debt are all at different phases of bubble deflation. No matter what politicians attempt, these bubbles cannot be re-inflated. They will deflate fully.

It is a characteristic of wisdom not to do desperate things.

--Henry David Thoreau

Tulip mania struck Holland in 1637. The whole nation was consumed by tulip bulbs in the first recorded speculative bubble. Contract prices for tulip bulbs reached astronomical levels and then suddenly collapsed. At the peak of tulip mania in February 1637, tulip contracts sold for more than 10 times the annual income of a skilled craftsman. In a matter of seven months, fortunes were made and lost. The bubble popped completely.


Source: mysmp.com

The South Sea Company was the AIG of the 1700’s. It was a British joint stock company, founded in 1711. The company was granted a monopoly to trade as part of a treaty during the War of Spanish Succession. The company assumed the national debt England had incurred during the war. In 1719 the company proposed a scheme by which it would buy more than half the national debt of Britain (£30,981,712), again with new shares, and a promise to the government that the debt would be converted to a lower interest rate, 5% until 1727 and 4% per year thereafter. The purpose of this conversion was similar to allow a conversion of high-interest but difficult-to-trade debt into low-interest, readily marketable debt and shares of the South Sea Company. These are the games that declining empires play when they have overreached in their empire building. The plan sounds a lot like Timmy Geithner’s Good Bank Bad Bank scheme. Shuffling debt from one entity to another entity doesn’t get rid of it. It is just a scam paid for by taxpayers.

Any fool can make a rule, and any fool will mind it.

--Henry David Thoreau

The price of South Sea Company stock went up from £100 a share to almost £1,000 per share. Its success caused a country-wide investing frenzy by peasants, businessmen and lords. The price reached £1,000 in early August and the level of selling was such that the price started to fall, dropping back to £100 per share before the year was out, triggering bankruptcy among those who had bought on credit. The English Parliament reacted to the crisis exactly the way our current clueless bunch of moron Congressmen are reacting to the AIG debacle. The estates of the directors of the South Sea Company were confiscated and used to relieve the suffering of the victims, and the stock of the South Sea Company was divided between the Bank of England and East India Company. A resolution was proposed in parliament that bankers be tied up in sacks filled with snakes and tipped into the Thames River. I’m sure Barney Frank is preparing a similar resolution regarding AIG executives. No one can calculate the madness of men.

South Sea Bubble Chart

Source: Elliott Wave

Japan Inc. was going to dominate the world. From 1983 until its peak in 1989, the Nikkei rose from 7,500 to 38,900, a 500% increase in seven years. Following World War II, Japan implemented tariffs that protected their industries from overseas competition. This resulted in large trade surpluses and an appreciating yen. With artificial protections, Japanese companies made mal-investments. Easy money and false confidence led to a frenzy in the stock market and real estate market. Japanese banks had financed this speculative bubble with high risk loans. The PE ratio of the Nikkei reached 78 in 1989. Twenty years after this peak, the Nikkei hit a low of 7,500 this year, the same level it started at in 1983. This has occurred despite spending billions on make work stimulus programs, reducing interest rates to zero, and artificially reducing the value of the yen. The ultimate outcome has been a national debt that is 150% of GDP with a rapidly aging population and no way out. See any similarities?


Source: Mike Shedlock

To prove that Japan didn’t have a monopoly on foolishness and speculative frenzy, the U.S. had their bubble in 1999 and 2000. The NASDAQ market rose from 1,000 in 1996 to 5,132 in 2000. The introduction of the internet convinced millions that we had entered a new era. Wall Street did what it does best, and hyped the can’t miss riches to be gained from investing in any company that added a dot.com to their name. When AOL acquired Time Warner (TWX) in January 2000, the top was marked. The over-hyped fear of the Y2K “disaster” that awaited our worldwide computer systems resulted in a surge of computer purchases. Alan Greenspan did what he did best and flooded the system with liquidity. These all combined to produce a blow-off top in March 2000. The PE ratio of the NASDAQ reached 264, as most of the hyped dot.com stocks had no earnings. Nine years later, the NASDAQ stands at 1,457, 72% below its peak at 1998 levels. The bubble burst fully.

NASDAQ Dot.Com Bubble


Source: Wikipedia

Toil & Trouble

I’ve scrutinized the four most well known bubbles in history. They all deflated completely. There are hundreds of other bubble examples throughout history and none of them deflated halfway. This brings us to the housing market today. The following chart from Gary Shilling’s newsletter clearly shows that home prices went into a classic bubble frenzy after Alan Greenspan reduced interest rates to 1% and urged Americans to take out adjustable rate mortgages. Americans believed the hype from the National Association of Realtors and Wall Street shills that home prices would go up forever. You may notice that home prices will need to fall another 21% to reach pre-bubble levels. Jim “I haven’t gotten one right yet” Cramer is calling for a June 2009 bottom in housing. It looks like he won’t break his streak of great predictions. I’m sure Jon Stewart will remind him.

Our houses are such unwieldy property that we are often imprisoned rather than housed by them.

-- Henry David Thoreau

There are 75 million houses in America. Twenty four million don’t have a mortgage. Of those 51 million homeowners with a mortgage, approximately 15 million are underwater. According to Mr. Shilling, with the further decline in prices a given, 25 million homeowners will be underwater to the tune of $1 trillion. Anyone predicting a recovery by the end of 2009 is delusional.


Source: Gary Shilling

Most of the luxuries and many of the so-called comforts of life are not only not indispensable, but positive hindrances to the elevation of mankind.

--Henry David Thoreau

The next bubble just peaked in 2008, so it has a long way to go on the downside. Consumer spending as a percent of GDP peaked at 71% in the 2nd quarter of 2008. Americans allowed their savings rate to drop below 0% and counted on their home appreciation to fund their retirements. They believed the Wall Street hype about 10% long term stock returns. This overconfidence led millions of Americans to borrow and spend at excessive levels. In order to get back to pre-bubble levels of 62% of GDP will take years. With home prices down 25% and retirement funds down 50%, only an insane person would continue to spend at previous levels. Ben Bernanke and the Obama administration are praying that Americans will continue the insanity. They will not. Consumer spending will decline by $1.3 trillion annually for years to come. This bubble will not burst halfway.


Source: Gary Shilling

Most men lead lives of quiet desperation and go to the grave with the song still in them.

-- Henry David Thoreau

The last and most dramatic bubble is total U.S. debt. There is no doubt that it is unsustainable. It currently amounts to 340% of GDP. It would need to go back to 200% of GDP or below to retrace its bubble path. This would require $20 trillion of debt to be paid off or written off. The implications of this are staggering. The Federal Reserve and politicians running the country will fight the deflation of this bubble with all of their might. It won’t work. Bubbles always burst. This bubble bursting will change America forever. The American standard of living will decline significantly. Not many people are prepared for this wrenching future. The mantle of ruling the world will be passed to some other lucky country. The government is trying to keep all three bubbles from popping. Their solutions are dangerous and could result in a collapse of our economic system.

Source: Chris Martenson

If the machine of government is of such a nature that it requires you to be the agent of injustice to another, then, I say, break the law.

--Henry David Thoreau

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Source: When America Ruled the World (Part 1)