Why the US is collapsing

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in one paragraph: This is the leader of the Swedish Pirate Party
explaining how the US went bankrupt in 1971, and has been covering it
up through an accelerating whack-a-mole borrowing frenzy that is
bursting right now. It has been paying rapidly growing VISA bills using
MasterCard and vice versa for 37 years. The creditors are catching up,
and the US is about to go extinct as a superpower. Become irrelevant.
It is not yet on its death bed, it is still walking, breathing and capable of
entertaining a conversation in public. But there are ominous
bloodstains on its hands used to cover the painful coughing.

Last summer, I wrote (in Swedish) about how the US is in grave danger
of becoming the Fourth Reich. I also said that such a state would not
last for more than 15 years, because of a number of factors I would
elaborate on later.

I was right about the sequence of events, but horribly off on the timing.
Where I had expected them to happen gradually in about ten or 15
years, instead they are unfolding before my eyes at an accelerating
pace.

Some people believe that pirate politics is somehow about the right to
obtain music and movies without paying. Some, a bit more initiated,
believe it is for fight for civil liberties. In that, they are correct. But few
understand the scope of this fight. It is not against the music industry.
It is not against entertainment cartels.

I see the pirate fight as being against corrupt governments that

systematically curtail civil liberties as the primary and only defense of
a gigantic and growing financial bubble, built over four decades. A fight
against a small elite that are literally killing people to be able to keep
living in luxury without paying the bills for it. Some bloggers have
called this Fascism 2.0. The entertainment cartels are just a small part
of this bubble, and fascism is used here in its most lexical sense.

fascism n. a merging of the interests of big corporations and

government, adjoined with a systematic curtailment of civil liberties

In order to understand what pirate politics are really about, you need
to understand global economic politics in ways that most people will
never encounter. You need to understand the gold coin of Bretton-
Woods, Toyota's impact on Detroit, the strategic dollar advantage of
the Marshall Plan, why the WTO and UN WIPO are rivals, how and why
the US uses threats of trade sanctions, and how money is created and
ceases to exist on today's financial markets. I will cover the basics in
this blog post.

The most prominent of these bubble-pumping governments is the US.

And their bubble is bursting. The dollar is not just falling in exchange
rate, as in "oh, the curves are on a downslope, interesting, btw I
wonder what's for lunch today". The US dollars are about to become as
irrelevant as the rubles, the deutschmarks, and the sesertii.

For these empires - the Soviet, German and Roman empire - followed
the exact same pattern. And if history is a teacher, future empires will
do so too.

Part I: Background
Some of you may have noticed that the dollar has lost some of its
value against other currencies, the euro in particular. Usually, with a
healthy currency, this would not be a cause for alarm, other that a sign
that the American households might be overborrowing and
overmortgaging, and thus increasing the money supply, causing the
rate to fall due to supply/demand rules.

It is much more serious than that.

Let's go back to 1947. The US did two extremely strategic moves at

that point. One was called The Marshall Plan and looked like charity,
giving money away to all of war-torn Europe, officially to help repel
communism.

Three years prior, it had established the Bretton Woods system, which
put the US Dollar at the center of rebuilding the countries, and
guaranteed an exchange in gold for the US Dollar. Every 35 US Dollars
would be exchangable and refundable with one ounce in gold.

I genuinely believe that these two deals were good for everybody
involved. The ruined Europe got a foundation for rebuilding its nations.

But what the US accomplished was much more important than that: it
succeeded in making its own currency into a world currency. The dollar
became the trade standard.

This status is extremely important. In fact, it carries the entire US

economy and its continuous overspending. Let's stop for a moment to
understand why.

Every nation has a currency reserve today. Savings in a piggy bank, if

you like. This currency reserve was filled with the world's most stable
and standard currency, the dollar.

Let's take that again: every nation has been buying dollars for the past
60 years just to stockpile it, because the US Dollar has been the
standard currency.

And since they are buying the dollar, this means that the US is getting
something else of value in return. In effect, the US has been able to
print money at a rate that outpaces its industrial production, just
because countries have been buying its currency.

At the end of 2007, this stockpile across the world was two and a half
trillion dollars. More specifically, it was 2,445,180 million dollars.

What this means, is that unless the US has an equivalent on two and a
half trillion dollars in cash on hand, which it absolutely doesn't, the US
has consumed goods and services for two and a half trillion dollars that
are not yet paid for. The countries bought dollars in exchange for yen-
or-whatever, the US bought shiny toys for the yen-or-whatever, and
never gave it a second thought.

This is like going on a shopping spree and paying with checks, and
having the luxury of the checks never arriving at the bank to charge
the account.

But the checks for that two and a half trillion dollars haven't vanished.
They are sitting in vaults. And they are starting to trickle in to the
bank. A barely noticeable dripping at first, it is now starting to turn into
a small stream, and once people figure out what is happening, it's
going to be a burst dam torrenting down the valley of global finance.

How much is two and a half trillion dollars? Actually, it isn't a lot of
money in the global economy. It's about $7,500 for every man, woman
and child in the US. It is about four years' worth of American military
spending. It's about one-quarter of the American GDP.

The key here, however, is not how much money it is. It is that there is
no financial coverage for it. Spending $1,000 on a TV set isn't a lot of
money, but it can cause a lot of bad consequences for you and your
standing if you don't happen to have those $1,000, and no more
creditors are willing to lend you a hand.

And the US is running out of new creditors fast.

Part II: The war bankrupted the US

I wrote previously, that under the Bretton-Woods agreement, the dollar
was essentially an IOU. A loan paper, an obligation to the US. Every 35
dollars was good for one ounce of gold, to be paid at any time of the
creditor's choosing. However, the war tore through the American
economy like a plough through a golf course. At the start of the war,
the gold coverage was 55%, which is healthy by modern bank
standards. During just 1970, however, that coverage dwindled from
55% to 22%.

Wait. 1970? Right. I'm not talking about Iraq. I'm talking about
Vietnam.

At this point, economists no longer believed in the US' capacity of

regulating its expenditure and making good on its promises.
International pressure mounted to exchange dollars for the promised
gold, particularly from France, which converted large amounts of its
dollar currency reserves into gold at this time. It was a run on the bank
to withdraw the savings while the bank was still alive.

On August 15, 1971, president Nixon declared bankruptcy. It wasn't

worded like that, of course. But what Nixon did was to state that the US
would no longer honor its creditors and pay gold for the dollar. He
declared the credit documents invalid. This event has been dubbed
The Nixon Shock. In any other milieu, cancelling payments is the same
as declaring bankruptcy. Here, it was "just an executive order", and the
world at large didn't really appreciate its consequences.

One such consequence was that the US was free to print as much
money as anyone was willing to buy, inflating the bubble without any
check, balance, or irritating warning light.

At the end of 1995, the foreign US Dollar stockpile was 610,337 million
dollars. As I wrote earlier, today that number has grown to 2,445,180
million. That's close to two trillion in 13 years. A fourfolding of the debt.
A 300% increase. Who is buying all of these dollars?

Asian countries, it turns out. A small handful of countries have been

derogatorily called ODIC - Organization of Dollar Importing Countries.

The U.S. trade deficit was 763.6 billion dollars in 2006. This means that
the United States bought goods and services for three-quarters of a
trillion more than it was able to sell to other countries. Where did the
US get three-quarters of a trillion dollars to fund this trade deficit in
2006? And an equal amount in 2007? And 2005?

You should start to get the answer by now. It didn't. Part of it came for
printing money for foreign cash reserves, predominantly Asian ones. In
any case, the US spent that money anyway.

To put this in context, in a list of global trade balances for 164

countries, the US is at the bottom of the list. The worst of all measured
countries.

Not only that, but the silver medal goes to a country with a trade
deficit of 125 billion dollars. That means that the US' trade deficit is six
times larger than the second worst! We're not talking about a goal
photo here to determine who's the worst offender, folks, we're talking
about piles of money that are burning so big and fast you can see the
smoke from weather satellites!

The US is running a federal budget deficit as well, with a current official

debt running over nine trillion dollars and increasing fast.

Part III: Compensating by enforcing lopsided trade

terms
Towards the end of the 1970s, economists in the US administration
panicked. The Japanese cars, which flooded the market, struck at the
heart of the American pride.

Foreign cars were better than American cars from proud Detroit. This
just could not happen. Toy-o-ta. Even the name didn't sound very
American. And yet, people in America were rejecting the pinnacle of
American engineering - cars - for a foreign-produced equivalent.

So the administration concluded quite simply that American's

dominance in industrial production was over. Far from throwing in the
towel, another question was asked: "How can the US have a continued
economic dominance in a world where the US does not have an
industrial production of tradeable value?"

The answer came from an unexpected source.

Some time in the early 1980s, the then-CEO of Pfizer, Edmund Pratt,
was frustrated with competition from foreign companies that (quite
legally) copied and improved Pfizer's products. At the point, however,
there was no way to change foreign laws to create a trade environment
where such competition would be outlawed.

To cut a long story short, Pratt ended up on the ACTN - the Advisory
Committee on Trade Negotiations - and recommended a plan to the
Department of Commerce that would guarantee American trade
superiority.

In short, it involved a two-pronged approach. The first part of it was to

enforce trade laws that favored American interests, and then
establishing "free trade" within that framework, set up to favor US
interests. The second part was to threaten trade sanctions against
countries that did not agree to this lopsided "free trade" agreement.

At first this was believed a risky business, since trade sanctions had
never been used as part of a systematic policy before, but only used in
exceptional cases. However, the strategy - focused on intellectual
"property", i.e. mostly-American monopolies - turned out to work
extremely well.

A forum was sought to establish the new American trade terms as a

world standard. Pratt and ACTN went to WIPO, the UN-controlled World
Intellectual Property Organization, to seek their blessing. They were
basically thrown out on their faces, when the UN realized what they
were trying to accomplish.

So hijacking another vessel became necessary. That vessel was the

GATT, General Agreement on Tariffs and Trade.
Using a combination of unilateral threats, bilateral agreements of
"free" lopsided trade, and multilateral agreements once enough
countries had agreed to the terms, an all-encompassing and lopsided
trade agreement was devised. It would prohibit third world countries
from manufacturing medicine to save lives in their own population. It
would make sure that established players, primarily in the US, could
outmaneouver upstarts not by building better products, but through
the legal framework. The companies in the agreement, such as the
record industry, are now lobbying for warrantless searches of people's
mail and homes to find out when their monopolies are infringed.

Using a combination of deceit and tricky negotiations, the agreement

was signed by many enough countries. That agreement is called TRIPs.
The vessel enforcing it is GATT, which was renamed World Trade
Organization, or WTO.

And that is how America came to enforce its monopolies over civil
liberties of the people in the US and elsewhere. The key takeaways
here is that America deliberately skewed international trade through a
combination of threats and coercion, in an attempt to irrelevantize the
fact that American industry didn't produce anything sellable.

With the US now having a record trade deficit, the strategy has
ultimately failed.

(The full background to the TRIPs agreement can be found in the book
Information Feudalism. A very worthwhile, although very heavy, read.)

Part IV: Understanding the monetary system

Most people, I would say it's so "most" it can be approximated to "all",
do not know where money comes from. How does a dollar appear? If
there is $1,000,000,000 in the total economy, who makes the decision
to change that number to $1,000,000,100?

Most people would answer "the government" or "the central bank".

This is wrong.

The correct answer is: you do. When you borrow a hundred dollars,
those hundred dollars appear magically in the economy. They did not
exist before and will not exist after they have been repaid.

The monetary system works like this, somewhat simplified: a bank

must have a certain fraction of its outstanding loans as savings
accounts. If that fraction is 1/9 (a common number), and you deposit
$1,000 in a bank, that bank has the right to lend $9,000 to other
people, at a higher interest.

UPDATE II: the above paragraph has received a lot of comments on

various forums. To clarify: I simplified it a bit to not go into too much
detail. In the full somewhat more complex picture, the $1,000-
becomes-another-$9,000 involves a cascade of deposits in different
banks, multiplying the original limit. The first bank can only lend $900
for the $1,000 of deposit, but those $900 becomes a deposit
somewhere else, generating another $810 in debt and magical new
money, which becomes a deposit in turn, etc, and that's how $1,000 of
deposit generates another $9,000 of magical new shiny money in the
economy. If you're interested, I reiterate - take 45 minutes to watch
the Money As Debt animation.

This is called the Fractional Reserve banking system. It is now doing its
third tour of the United States, introduced by President Wilson in 1913.
Before that, Andrew Jackson killed the second tour in 1836.

Lately, through lobbying and obscurity, the fractional reserve

requirement has all but disappeared. Banks can now practically create
as much money as you want to borrow.

In short, while Andrew Jackson was able to remove the central bank, he
wasn’t able to eliminate unsound fractional reserve banking. When one
such unsound bank in Massachusetts collapsed, it was discovered that
its bank note circulation of $500,000 was backed by exactly $86.48.
Why is this obvious absurdity, and the banks’ protection from criminal
prosecution if they suspended payments, not called into question?

This has a number of interesting consequences. From a monetary

perspective, it means that if the interest rate is 4%, then 4% of all
credit will default, as that money must be used to pay interest on the
remaining money pool. Since every dollar in the system is borrowed,
every dollar is also owed interest on. Every single one. Where would
the money come from to pay that interest? The answer is that it
doesn't. The system is designed so that a certain percentage of people
must go bankrupt.

Europe has had a similar system since the 1600s. If you're interested in
more about this, I would very much recommend the 47-minute movie
Money As Debt.

But the most important aspect is that the money supply is tightly tied
to household borrowing. If people were frugal and economical, and
everybody paid off all their debts, there would not any money left in
the economy! There would be a shortage of money, meaning that
there would not be any money to pay wages, rents, or creating new
businesses.

On the other side, the more people borrow (particularly using house
mortgages), the richer everybody feels because it increases the money
supply, without increasing actual value of goods, commodities and
services.

In 2006, this household debt was $45 trillion, compared to $5 trillion in

1969. The money supply has been expanded ninefold.
This is significant because a collapse of the credit system means a
collapse of the money supply, and therefore create a society where
nobody will have any money.

You can see where I'm going with this with the recent subprime
mortgage market collapse, which is now snowballing.

Oh, and you've heard about the crash of 1929? The crash which
everybody talked about as the worst in history? That crash saw a mere
27% reduction in the money supply. Compare this with the fact that if
the US is forced into going back to a pre-1971, pre-bubble economy,
we'll see an 89% reduction in the money supply.

To be absolutely clear: These numbers mean that in a worst case

scenario, every working citizen in the US is about to receive an 89%
pay cut on average. The best case scenario is hard to predict but I'm
betting my money that the money supply will reduce a good bit more
than the 27% of 1929.

The United States is heading for something that will make 1929 look
like just an ordinarily disturbing day with some red numbers. And its
fall will affect the rest of the Western world, as well.

Part V: The fall of the dollar and of the US

Like I wrote previously, the US' money printing machine is dependent
on the dollar being the world standard currency. It was so by legacy
even after the collapse of Bretton-Woods in 1971. No other economy
was large enough to back another currency. There was no competition
for a world standard.

Until 1999.

Since a few years back, the European Union has a larger economy than
the United States. This is according to three different sources, all
American: CIA, the World Bank, and the International Monetary Fund.

Let's take that again, because it is a shock to many: The European

Union has a larger economy than the United States. A larger economy
with which to back its currency, the euro. Reuters reported this the
other day, but incorrectly attributed it to the decline of the dollar. It has
been true since at least 2005.

When the euro debuted in 1999, it was introduced at just above the US
dollar, but quickly fell to about .89, lower than the dollar. Today, it is
trading at 1.55 dollars per euro. Two euros is more than three dollars.

To put fuel to the fire, the American Federal Reserve is expected to cut
interest rates on the dollar from 2.25% to 1% by mid-2008. In contrast,
the European Central Bank has been holding interest steady at 4%.
What do the central banks' interest rates have to do with this?

When keeping a national reserve, choosing between the dollar and

euro here is like having a choice of two different banks with different
interest rates. Everything else being equal, anybody rational would
choose the euro as savings account, because it gives a better interest
rate. But as I have already said, everything else is not equal. The dollar
is losing value quickly, too.

Many empires have overspent on their military using borrowed money,

and collapsed as a result. This was a major reason for the fall of the
Soviet Union, for instance. It is generally agreed that the
macroeconomically sustainable limit for military spending hovers
around 2% of GDP.

The US is currently spending 5% of its GDP on its military. It tops the

league of military spenders with an expenditure of 625 billion dollars
yearly. (That's before emergency expenditures for the ongoing war.) To
hide the real numbers, only $515B are allocated to the Pentagon
openly. You need to dig deeper to discover that the funds for building
and maintaining the expensive nuclear arsenal lies with the
Department of Energy. The funds for funding and training insurgents
across the world lies with the Secretary of State. And so on.

To put this number in perspective, the world's second largest spender -

China - spends $60 billion. About one-tenth. The total world military
spending is $1.1 trillion. This means the US spends more on its military
than the rest of the world combined.

The same U.S. military is also used to enforce the dollar bubble.

Like I said earlier, the dominance of the US depends on the dollar being
a standard currency. But with Bretton-Woods gone, the dollar's status
as a world standard instead depends on many other things.

One of these things is oil trade.

Oil is currently - mostly - traded in dollars per barrel, which creates a

defacto dollar-based economy. A few years back, one prominent oil
producer switched to trading in euros per barrel.

This threatened the entire stability of the dollar as a world currency,

and by extension, the US' economic bubble. After some chaos and
turmoil involving the bubble-funded US military, that particular country
is now exporting oil by the dollar again, thus once again contributing to
the dollar bubble.

That country was Iraq.

(The interpretation that the US administration invaded to protect its

currency bubble is mine and mine alone. But in this light of things, it
would have made perfect sense to do so. The alternative to spending
trillions on the war would have been risking a collapse of the entire
economy, one that now seems inevitable anyway. When I have
checked this hypothesis with Americans, though, they generally brush
it off, saying that I vastly overestimate the intelligence of the current
president.)

Today, Venezuela is trading in euros per barrel, and Iran has announced
plans to open a euro-based oil bourse in Teheran. (Yes, the same Iran
that the Republican candidate McCain is now singing about bombing.)

In international trade, more and more agreements are being signed in

euros where anything else than dollars would have been unthinkable a
few years back. In New York, tourist shops are now brandishing "we
accept euro" signs - equally unthinkable a few years back. In
Amsterdam, most exchange offices have stopped accepting dollars for
currency altogether. It is falling so fast, they can't resell it for profit any
longer.

In China, exporters are complaining about the cost of currency

insurance on trade deals signed in dollars, and are switching to the
euro. In Germany, Volkswagen is not selling one of its top models to
the US solely due to the falling dollar. In Tchad in Africa, people on the
streets have switched to the euro.

The thing that happens when we reach a critical tipping point - which
may already be here - and currency reserves start switching from the
dollar to the euro en masse, is that the collection agencies of the
world's economy will come for two and a half trillion dollars of US debt,
which is currently held in stasis in currency reserves.

There is nothing that can pay these two and a half trillion dollars of
debt when the repo man comes knocking.

That tipping point will kill the dollar as a currency, sending it

plummeting to levels previously inconceivable. It will kill the dollar as a
world trade standard, the American economy, the American military,
and the United States' status as a superpower. Just like when the
Soviet union collapsed. It is even conceivable that the United States
will fracture as a nation, just like the Soviet Union did.

But unlike the Soviet Union, the American public will be hit hard. In the
Soviet Union, not much changed when the government-owned homes
weren't paid for. They hadn't been before either. Not much changed
when the food supplies were formally not coming, for they had not
come before either. People had learned to live with a malfunctioning
system. In the US, however, a lot of people will lose their homes and
might not be able to get food. This is not a recipe for a happy society.

One prominent US economics professor recommends immediate

investments in precious metals: "gold, silver, and copper-jacketed
lead".

This difference in functionality of society before and after a collapse is

called the collapse gap. And it's much larger in the US than what it was
in the Soviet Union, Germany, or Rome.

Final words
This is what the pirate fight is about, in my eyes. Preventing fascism
from spreading amongst corrupt administrations; defending civilization
against the systematic curtailment of civil liberties in order to maintain
a false image of prosperity and enrichen a self-serving elite. You could
even say "defending democracy". The file sharing debate is but the
symbol, but a very powerful symbol. Like the insignificant Belgian
village of Waterloo, or the small overlooked Pennsylvanian town named
Gettysburg. They, too, were important battlegrounds.

The US is already lost. I can think of no action that would prevent its
downfall. My fight is for Europe, which has copied every US
"intellectual property" policy in what can only be described as cargo
cult economics, and risks a similar fate.

UPDATE I at Mar-22 17:23 CET - added links to Amsterdam story,

Orlov's Collapse Gap, Information Feudalism

UPDATE II at Mar-23 11:30 CET - fixed some typos, added clarification

on federal reserve requirement