Surviving Financial Apocalypse Now

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Doug Casey on Surviving Financial Apocalypse Now
"One of the disturbing facts of history is that so many civilizations collapse," warns anthropologist Jared Diamond in Collapse: How Societies Choose to Fail or Succeed. Many "civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."

Now, Harvard's Niall Ferguson, one of the world's leading financial historians, echoes Diamond's warning: "Imperial collapse may come much more suddenly than many historians imagine. A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice." Yes, America is on the edge.

Dismiss his warning at your peril. Everything you learned, everything you believe and everything driving our political leaders is based on a misleading, outdated theory of history. The American Empire is at the edge of a dangerous precipice, at risk of a sudden, rapid collapse.

Ferguson is brilliant, prolific and contrarian. His works include the recent Ascent of Money: A Financial History of the World; The Cash Nexus: Money and Power in the Modern World; Colossus: The Rise and Fall of The American Empire; and The War of the World, a survey of the "savagery of the 20th century" where he highlights a profound "paradox that, though the 20th century was 'so bloody,' it was also 'a time of unparalleled progress.'"

Why? Throughout history imperial leaders inevitably emerge and drive their nations into wars for greater glory and "economic progress," while inevitably leading their nation into collapse. And that happens suddenly and swiftly, within "a decade or two."

You'll find Ferguson's latest work, Collapse and Complexity: Empires on the Edge of Chaos, in Foreign Affairs, the journal of the Council of Foreign Relations, a nonpartisan think tank. His message negates all the happy talk you're hearing in today's news – about economic recovery and new bull markets, about "hope," about a return to "American greatness" – from Washington politicians and Wall Street bankers.

'Collapse of All Empires:' 5 stages repeating through the ages

Ferguson opens with a fascinating metaphor: "There is no better illustration of the life cycle of a great power than 'The Course of Empire,' a series of five paintings by Thomas Cole that hangs in the New York Historical Society. Cole was a founder of the Hudson River School and one of the pioneers of nineteenth-century American landscape painting; in 'The Course of Empire,' he beautifully captured a theory of imperial rise and fall to which most people remain in thrall to this day. Each of the five imagined scenes depicts the mouth of a great river beneath a rocky outcrop."

If you're unable to see them at the historical society, they're all reproduced in Foreign Affairs, underscoring Ferguson's warnings that the "American Empire on the precipice," near collapse.

First. 'The Savage State,' before the Empire rises

"In the first, 'The Savage State,' a lush wilderness is populated by a handful of hunter-gatherers eking out a primitive existence at the break of a stormy dawn." Imagine our history from Columbus' discovery of America in 1492 on through four more centuries as we savagely expanded across the continent.

Second. 'The Arcadian or Pastoral State,' as the American Empire flourishes

"The second picture, 'The Arcadian or Pastoral State,' is of an agrarian idyll: the inhabitants have cleared the trees, planted fields, and built an elegant Greek temple." The temple may seem out of place. However, Cole's paintings were done in 1833–1836, not long after Thomas Jefferson built the University of Virginia using classical Greek and Roman revival architecture.

As Ferguson continues the tour you sense you're actually inside the New York Historical Society, visually reminded of how history's great cycles do indeed repeat over and over. You are also reminded of one of history's great tragic ironies – that all nations fail to learn the lessons of history, that all nations and their leaders fall prey to their own narcissistic hubris and that all eventually collapse from within.

Third. Consummation of the American Empire

"The third and largest of the paintings is 'The Consummation of Empire.' Now, the landscape is covered by a magnificent marble entrepôt, and the contented farmer-philosophers of the previous tableau have been replaced by a throng of opulently clad merchants, proconsuls and citizen-consumers. It is midday in the life cycle."

Read the rest of the article

The Dollar Is Finished

Economic historian Niall Ferguson warns that China's love affair with the dollar is fading faster than anyone realizes.

TechTicker: "The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency
reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.

China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."

Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.

U.S. Empire in Decline; on Collision Course with China

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Aaron Task
The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."

Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain's case back then it was Germany; in America's case today, it's China.

"When China's economy is equal in size to that of the U.S., which could come as early as 2027...it means China becomes not only a major economic competitor - it's that already, it then becomes a diplomatic competitor and a military competitor," the history professor declares.

The most obvious sign of this is China's major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. "There's no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region."

As to analysts like Stratfor's George Friedman, who downplay China's naval ambitions, Ferguson notes British experts - including Winston Churchill - were similarly complacent about Germany at the dawn of the 20th century.

"I'm not predicting World War III but we have to recognize...China is becoming more assertive, a rival not a partner," he says, adding that China's navy doesn't have to be as large as America's to pose a problem. "They don't have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble" for the U.S. Navy.

“Chimerica Headed For Divorce” -- a hard rain is coming

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Never a disappointing read – Russell has never lost site of the big picture despite the rapid short-term gyrations in the market. If you’re not a subscriber of the Dow Theory Newsletters I highly recommend it:

Niall Ferguson, MA, D.Phil., is Laurence A. Tisch Professor of History at Harvard University and William Ziegler Professor of Business Administration at Harvard Business School. He is also a Senior Research Fellow at Jesus College, Oxford University, and a Senior Fellow at the Hoover Institution, Stanford University.

I want to include a few paragraphs from a most important article by the brilliant Niall Ferguson, author of “The Ascent of Money, A Financial History of the world.” Ferguson’s article is about the coming “divorce” between the US and China. I believe the future of the world will revolve around the relationship of US and China. The Ferguson article appeared in Newsweek magazine (Aug. 21) and is entitled, “Chimerica Is Headed For Divorce.”

And I quote –

“Let’s look at the numbers. China’s holding of US Treasuries rose to $801.5 billion in May, an increase of 5% from the $763.5 billion in April. Call it $40 billion a month. And let’s imagine the Chinese do that every month through this fiscal year. That would be a credit line to the US government of $480 billion. Given that the total US deficit is forecast to be about $2 trillion, that means the Chinese may finance less than a quarter of total Federal-government borrowing — whereas a few years ago they were financing virtually the whole deficit.

“The trouble is that the Chinese clearly feel they have enough US government bonds. Their great anxiety is that the Obama administration’s very lax fiscal policy, plus the Federal Reserve’s policy of quantitative easing (in laymen’s terms, printing money) are going to cause one of two things to happen: the price of US bonds could fall and/or the purchasing power of the dollar could fall. Either way, the Chinese lose. Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn’t address the currency risk. In a best-selling book titled Currency Wars, Chinese economist Song Hongbing warned that the US has a bad habit of stiffing its creditors by letting the dollar slide. This, he points out, is what happened to the Japanese in the 1980s. First their currency strengthened against the dollar. Then their economy tanked.

“What is China’s alternative if it seeks a divorce from America? Call it the empire option. Instead of continuing in this unhappy marriage, the Chinese can go it alone, counting on their growing economic might (according to Goldman Sachs, China’s GDP could equal that of the US by 2027) to buy them global power in their own right. In some ways, they’ve already begun doing this. Their naval strategy clearly implies a challenge to US hegemony in the Asia-Pacific region. Their investments in African minerals and infrastructure look distinctly imperial too. And now the official line from Prime Minister Wen Jiaobao is to hasten the implementation of our ‘going out’ strategy and combine the utilization of foreign-exchange reserves with the ‘going out’ of our enterprises. That sounds like a Chinese campaign to buy foreign assets — exchanging dodgy dollars for copper mines.”

Russell Comment — I believe the above is a brilliant look at our international future. No nation (the US) can be both the world’s leader and world’s biggest debtor. In his fight to thwart the bear market, Bernanke is sowing the seeds for the future demise of the United States. The law of unintended consequences is about to become operative.

A huge problem ahead is this — will the dollar decline slowly, as it has been doing, or will the dollar crash, setting off a world crisis?

Prediction – Where ever you are now will be your best situation for years to come. The trick ahead will be to hold on to what you have. I’ve been warning that a “hard rain is a’coming.” So far, we’ve only experienced a drizzle.

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