The Debt Mines

Our story so far is this: During the 1980's the dollar became the reserve currency of the world. The Federal Reserve was smart and it was against inflation. Dollars would satisfy anyone, Russia, China, even France.

At the same time US debt, first from the government but then from the private sector, achieved a reputation for perfect security. The US could work this coming and going. We could print dollars and sell them abroad for goods. After that, we could sell IOUs to foreigners for these same dollars which we could then use to buy more goods.

The world got paper and we got stuff.
It was as if we had conquered a continent full of rich gold mines. It was like Spain's discovery of the Americas except that there were no pesky natives to fight.

Any country would think that this would be just perfect. Any country would be wrong as the history of Spain after 1492 and the recent history of the US show.

Once you find the gold mines no one wants to do anything else. In Spain people stopped making things and farming and either went to the Americas or provided services to those who did. Wages and profits in the money industry were so high that other industries were not competitive.

In the US the debt mines grew. The size of the financial sector doubled. Within the financial sector companies turned from staid products like insurance to the sale of thinly disguised securities. Meanwhile industrial companies like GM and GE expanded their financial sections to pick up the profits.

Other industries, manufacturing, newspapers and so on were profitable, sure, but the profits that they offered could not rival the profits to be made by the creation, packaging and sale of debt. The only other industry to rival the debt mines was the industry that was set up to distribute and market the stuff that debt brought in.

The US became a voracious consumer of the world's output. Our leaders and wise men called it the new service economy and pretended that this was just a natural step in economic evolution.

Except that debts have to be paid back or you have to go bankrupt and start working for a living.

Which will greatly inconvenience many in the world, not just us. After all, the profits and assets that the surplus nations thought they were so cleverly accumulating are now about to lose considerable value. At the same time they will lose the export market that they now devoutly hope will pull them out of their slump.

Sorry Folks, time to find a new reserve currency and a fresh set of customers.


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