The Greater Great Depression: How Mounting Deficits and Currency Devaluations Will Cause the Breaking of the

World by Paul Yew, edited by Eric Chung Introduction In the day of final judgment men's hoarded wealth will be worthless to them. They have nothing they can call their own. Christs Object Lessons, page 372 I am not an economist. Nor am I a historian. But there are headlines being made in the world today that make me wish I was an economic historian. Im not talking about tsunamis or earthquakes, about the war in Iraq or the war in Afghanistan. Im talking about currency wars being waged between nations; the winding labyrinth of interconnectivity between these nations on the world stage that seems to be on the brink of collapse; about increasing global trade imbalances that cause ever bigger crises; about the bubble and bust cycles of the new global economy. It is dizzying navigating the jungles of global finance today. Just as no one in the 1920s foresaw the crash of 1929 that ushered in the now justly called Great Depression, few saw the Great Recession of 2008 and even fewer see what I call the Greater Great Depression that is to come. The purpose of this series is to shed some light on current events from an economic standpoint and how it relates to Bible prophecy. After all, we are living in the end times. We will start with a brief discussion on the Great Depression and WWII, since countries today pursued macroeconomic policies because they had the example of the Great Depression as a case study of what not to do. Next, we will examine what exactly happened in 2008, the US governments solution to a near global meltdown, and why it was no solution at all. You will learn that the crisis that was averted in 2008 was not solved, only postponed. Had the crisis not been averted, you will see that the collapsing banking system would have been far worse than the 1930s financial collapse and that would have been the start of what some Christians call the end time events. In fact, it would have been an event never seen before in the history of the world. Most of us have no idea about how close we were to utter chaos in 2008. In this case, ignorance is NOT bliss. This will be followed by what is currently happening in the global economy and its parallels to the 1930s, the dangers of stagflation, and the social and economic unrest that accompanies it. And finally, we will attempt to tie it all together in the light of the Spirit of Prophecy.
-Paul Yew was a former equities trader on Wall Street during 9/11. He now works as a Dentist in Dallas, Texas and only privately invests. -Eric Chung was a former Managing Director at Bear Stearns, former Senior Executive at Oppenheimer, DLJ, Merrill Lynch and is currently a fund manager and trader on Wall Street

Part 1- Lessons from the Great Depression Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. John Maynard Keynes, The Economic Consequences Of The Peace. I allude to the Great Depression because it was the seminal economic event of the 20th century. No country escaped its clutches; for more than ten years the malaise that it brought in its wake hung over the world, poisoning every aspect of social and material life and crippling the future of a whole generation. From it flowed the turmoil of Europe, the rise of Hitler and Nazism, and the eventual slide of much of the globe into a Second World War even more terrible than the First. (Ahamed, 2009) By understanding the past, we will see how history will repeat itself, except that the Greater Great Depression will be far worse because of the hyper-interconnectivity of nations coupled with stagflation, and the sheer size of financial liabilities which dwarfs the dangers of the 1930s. Inflation is basically when the purchasing power of money decreases therefore prices increase. An example of inflation is when you see prices at the gas pump jump from $2/gallon to $4 or when your groceries cost twice as much despite buying the same amount of food. Deflation is when prices drop as a result of unemployment or asset price depression (such as the recent drop in home prices), or high interest rates (set by the Federal Reserve whose mandate is to curb inflation and unemployment). If no one has money to spend, either because of not having a job or companies not being able to spend because of high interest rates, prices drop. Comparing the 1930s and the subprime crisis of 2008, there was a preceding decade of easy credit, over-borrowing, and excessive leverage (the use of debt to make investments), which eventually led to an asset bubble. (Ahamed,2011) The stock market crash of 1929 was the catalyst that exposed the shortcomings of the global economic order of that period. In 2008 it was the real estate crash. In both cases, the bursting bubble led to a serious banking crisis. In 1931, unemployment in the US was 15% (currently it is just under 10%); by 1933 unemployment in the US and Germany was at 30%. The high levels of unemployment led to violence and revolt in the US and UK. Berlin was almost in a state of civil war. During the elections of 1930, the Nazis, playing on the fears and frustrations of the unemployed and blaming everyone elsethe Allies, the Communists, and the Jews for the misery of Germany, gained close to 6.5 million votes, increasing their seats in the Reichstag from 12 to 107 There were coups in Portugal, Brazil, Argentina, Peru, and Spain. The biggest economic threat came from the collapsing banking system.(Ahamed,2009) Banks were closing their doors from one country to the next. WWII began mostly because of economics. Developed nations were all leap-frogging over each others currencies in a race to devalue by adopting beggar-thy-neighbor policies and protectionism as a means to export their way out of a global Great Depression. In other words,

to create jobs for the gangs of the disgruntled unemployed, every country tried to boost its exports by decreasing the value of its currency. Devaluing one currency meant an increase in another foreign currency giving that stronger currency more purchasing power, which created a short-lived competitive advantage for the exporter. For example, if the US dollar declined and the British pound appreciated, those pounds would be able to buy more American exports. The more exports America sold, the more jobs were needed to restock those goods and services. But when every country tried to devalue their currencies in a race to the bottom, no single country was able to gain a competitive advantage for very long, and the whole process became selfdefeating. This resulted in a loss of international cooperation for globalization, trade protectionism that resulted in tariff barriers, import controls, and restrictions on capital flows needed from country to country. These capital flow restrictions left countries like Germany without any money and so they were forced to cut back on spending abruptly (look at the violent protests currently happening in Greece due to austerity and spending cuts and imagine the protests in the US if Medicare and SS were cut). The same thing almost happened in the UK and so they were forced to leave the gold standard in 1931. Credit froze all over the world because of the inflexibility of the gold standard and the ensuing scramble for gold led to central banks tightening by raising interest rates despite double digit unemployment. John Maynard Keynes writings about the benefits of temporary deficit spending were not published until 1936. As TS Eliot wrote, In order to arrive at what you do not know you must go by a way which is the way of ignorance. There was no previous example liken to the Great Depression for government central banks to consult and therefore decisions were made that were the opposite of what should have been done. This is precisely why the current Federal Reserve slashed interest rates to bare bones and injected huge liquid capital into the system in 2008. They did it during the Asian Crisis of 1998 and again in 2008 with the $700 billion bank bailout (Quantitative Easing Part 1 or QE1 totaled $1 trillion) and again in 2010 with QE2s $600 billion buying spree of US treasuries. Yes, our own government is buying our own bonds. Thats like Wal-mart issuing a corporate bond to raise money and buying it themselves, essentially lending money back to themselves. The analogy stops working here but imagine Wal-mart having the power to print this money in a back room to buy these bonds. This quantitative easing is tantamount to the Fed printing money because they are less concerned about inflation and more concerned about deflation, as home prices have plummeted with 401k values, where American household have lost $14 trillion in net worth. To get the economy growing again, they need consumers and companies to start spending money. The US designed quantitative easing to devalue the dollar and increase asset values, and also to increase US exports because a stronger foreign currency allows more goods to be sold overseas.

The symbiotic relationship between the US and the rest of the world creates very real dangers. US monetary policy is imitated around the world, which means that when the Fed cuts interest rates, it puts downward pressure on rates everywhere, because no country wants its currency to appreciate strongly against the dollar. Although the Federal Reserve does not recognize it, it sets monetary policy not just for the US but also for the world. And what is appropriate for a US economy that is recovering slowly from a recession may be overly aggressive for emerging markets that are near full employment, creating inflation and asset bubbles in those economies.(Rajan,2011) In addition to printing money, the Fed is also allowing the dollar to slide in value to steal demand and jobs from other nations, much in the same way the US did during the Great Depression. Preserving and creating jobs is politically important during a recession. Hence, accusations of unfair competition are being levied against the Fed at G-summits. We must recognize that currency wars were waged then just as currency wars are being waged now. However, there are stark differences between the devaluing of the dollar then and now which gives credence to why the world is unlikely to see the spiral similar to the 1930s. In those days, despite the high unemployment, the US was running a large current account surplus and had enormous gold reserves, whereas today the US is running up huge current account deficits and has immense external liabilities. Secondly, policymakers have much more in their arsenal for promoting recovery such as the monetary and fiscal instruments of the Fed (ie, increasing or decreasing interest rates and/or the money supply). In those days, devaluation seemed to be the only tool in the shed. Thirdly, unlike the 1930s, the whole world is not stuck in depression as the emerging market BRIC nations (Brazil, Russia, India, China) have not only recovered, they are booming. The fear in those countries is not so much that the US is stealing jobs, but that their economies will experience easy credit, over-borrowing, and excessive leverage (which preceded the US bubble bursts in the 1930s and 2008) which will lead to financial bubbles of their own. Therefore, these countries have controlled capital, increased reserves, and allowed their currencies to appreciate somewhat-- in effect, the opposite of competitive devaluations.(Ahamed,2011) If, for all the previous reasons we will not see the competitive devaluations of the 1930s that spiraled the world into war, where are the dangers going forward? I believe the dangers lie in the eventual TOTAL collapse of the US dollar. Part 2- What happened in 2008? Money has no motherland; financiers are without patriotism and without decency; their sole object is gain. Napoleon Bonaparte. History guarantees that another disaster is yet to come. I can say this with certainty because human nature does not change and our selfishness has been documented with ever worsening crises. Since the tulip bubble of Holland in 1637, where certain tulip bulbs briefly became the

most expensive objects in the world,(Mackay,1841) to the recent subprime real estate bubble of 2008, the bursting bubble and the ensuing economic calamity led to a series of banking and sovereigndebt crises. It is never the asset bubble itself that is the real problem, it is always the bubble burst that exposes the root cause which is a malfunctioning global financial system. When the 1997-98 Asian Crisis blew up, Time magazines cover story in 1999 entitled The Committee to Save the World, described how close the world came to an economic meltdown because of the threats to the stability of the entire US financial system. The big Asian economies of Korea, Thailand, and Indonesia were on the brink of default and many of their largest corporations suspended payments on hundreds of billions of dollars of debt causing Asian currencies to collapse against the dollar. Russia defaulted on its debt, and the hedge fund LongTerm Capital had lost billions of dollars of investors capital. The crisis was averted by the Federal Reserve and the US Treasury committing billions of dollars of taxpayer money to stop a panic not experienced since the 1930s.(Ramo,1999) So one might argue that what happened in 2008 was just another business as usual crisis that was averted just like the 1998 crisis in Asia, the Latin American debt crisis of 1982 before that, etc. etc. My contention is that 2008 was no ordinary event and its blow up was a culmination of ever increasing size of bubble liabilities and financial innovations (derivatives). 2008 was another step towards a real meltdown. The financial crisis of 2008, the worst since the Great Depression, can be seen as the latest phase in the evolution of financial markets under a radical financial deregulation process that began in the late 1970s. Deregulation accompanied by rapid financial innovation stimulated powerful booms that ended in crises. But governments responded to the crises with new bailouts that allowed new expansions to begin. As a result, financial markets have become ever larger, and the crises have become more threatening to society, which forces governments to enact ever larger bailouts.(Crotty,2009) The crisis of 2008 was a product of bank speculation and gambling using highly leveraged derivatives in the lightly regulated shadow banking industry. Derivatives are financial instruments whose value depends on underlying securities. For example, a Microsoft stock options value increases or decreases depending on the price of Microsoft stock. This is a very simple example of a derivative. The derivatives that caused the disaster of 2008 were so complex and convoluted that no one knows how to valuate them because these derivatives were varied and multiple layers deep. The worlds derivatives make up a $600 trillion market. Stop and think about that staggering number. Our national debt is roughly $14 trillion. A mortgage-backed security (MBS) is a complex derivative that converts the cash flow from mortgages into tranches. Each MBS has different risk profiles because some mortgages are safer than others. The banks package these MBS tranches into Collateral Debt Obligations (CDO) to be sold to investors. As many as 1000 mortgages may go into a single MBS, and as many as 150 MBSs may go into a CDO. Because of the loose credit, over-borrowing, and over-leveraging (the same conditions that led to the 1929 stock market crash) banks were pumping out mortgages despite borrowers not being able to afford the homes they were buying in order to pump out

more CDOs. These were the subprime mortgages that were packaged into toxic MBSs. The values of the CDOs were so complex and nonlinear that it took powerful computers many days to determine their worth. Because these derivatives were so risky and so opaque, banks supposedly hedged those risks by buying insurance called Credit Default Swaps (CDS) which are another form of derivative that insured one party against losses from foreclosures by paying insurance fees to another party. However, since the value of credit default swaps hit $62 trillion in December 2007 while the maximum value of debt that might conceivably be insured through these derivatives was $5 trillion, it is evident that massive speculation by banks and others, not just hedging, was taking place By 2007 the credit default swap market had turned into a gambling casino that helped destroy insurance giant AIG and investment bank Bear Stearns, and caused widespread panic when Lehman Brothers was allowed to fail. Lehman was one of the worlds largest insurers in the credit default swap market. (Crotty,2009) Because of the governments light regulation on the banks, most of these transactions took place off-the-books, hence the term shadow-banking. When problems in the housing market triggered a wave of subprime defaults, the value of MBSs and CDOs collapsed, revealing to everyone the house of cards on which these [derivatives] were built. This naturally triggered a mass exodus from the asset-backed commercial paper market With the disappearance of their major source of funding, banks were forced to move these damaged assets [back on-the-books]. In late July 2008 analysts at Citigroup forecast that up to $5 trillion worth of [derivative] assets might end up back on bank balance sheets... seriously eroded bank capital. This in turn forced banks to try to lower their risk by reducing lending and raising interest rates, both to other financial institutions and to households. The resulting credit squeeze exacerbated the fall in home prices and rise in defaults, causing additional bank losses and panic, (Crotty,2009) much like the 1930s. In order to save the banks, the US government passed the Toxic Asset Relief Program (TARP) which basically transferred the toxic MBSs and CDOs to the government. In the wake of the 1998 Asian crisis and the crisis of 2008, some of the affected countries built up dollar reserves as insurance against future downturns and artificially pegged their currencies to the US dollar setting the stage for an even bigger catastrophe in the future. Also in the wake of the Asian crisis, structural flaws of the entire financial system created dangerous leverage made evident by the collapse of Long Term Capital which managed to control $125 trillion in derivatives products on a capital base of less than $5 billion. Yet 1998 and its dangerous leverage was quickly forgotten. Again, egregious leverage was seen in 2007 when Goldman Sachs used only about $40 billion of equity as the foundation for $1.1 trillion of assets. At Merrill Lynch, $1 trillion of assets was backed by a paltry $30 billion of equity Half of the spectacular rise in investment banks return on equity in the four years leading up to the crisis was generated by higher leverage rather than smarter investing or efficient innovation.(Crotty,2009) The crisis of 2008 almost led to another collapse of the entire financial system, which would have been the biggest collapse the world has ever seen dwarfing the Great Depression. The government recognized that this crisis was more significant because even though the crisis

originated in the US, it rapidly became global. The banks did not nearly have enough money to cover their losses and would have had to shut their doors like Lehman Brothers, spreading contagion to every institution in the world. Using the famous phrase of Hyman Minsky, the system was financially fragile and if it wasnt rescued by any means necessary, utter chaos would have ensued. One only has to remember what happened in the 1930s when banks shut their doors and credit froze catapulting the world into war, except nations were not as interconnected then or as dependent on each other; the magnitude of liabilities not nearly as great. Take a look outside and you will see corporate America and more importantly the corporate world. Many German cars are made in China, Chinese products are sold at Wal-mart, Korean semiconductor chips are found in American I-phones. Thanks to global supply chains, countries are far more integrated than ever before. Companies that produce for the domestic market and would normally be strong advocates of import restrictions are themselves dependent on imported inputs. Moreover, all the various General Agreement on Tariffs and Trade and World Trade Organization regulations impose severe limits on the trade restrictions permissible under international law.(Ahamed,2011) The solution to the crisis of 2008 was the faith and credit of US government. They first moved the toxic asset leverage off bank balance sheets and transferred them to government balance sheets. Lets say a man who was worth a million bucks, gambled at the casino and kept winning and winning. With those winnings he lived a lavish life, bought mansions and splurged for years. Then one day he gambled it all away at the craps table. He then used his then-good-credit and lost another $10 million to the casino. He then cash advanced on his credit cards, put the mansions up as collateral, then used his wifes credit, and then blew their kids college funds. At the end of the night, he owed the casino $100 million. So the casino sends out the goons to collect but obviously this man cant pay even if he were to rob 10 banks. But this man has a brother who is a powerful man with excellent credit but hes maxed out on it. The powerful man doesnt want to bail his brother out nor does he have any money to do it, but due to all the businesses they own together, this casino debt may very well bring down the whole family. Despite being maxed out, the casino knowing that the brother cant pay the debt is willing to extend more credit to the powerful man based on his credit and position because at least there is some chance of getting their money. After being relieved of his debt, if the gambler goes out and blows another $200 million off his brothers credit at the same casino sometime thereafter, do you think the casino will extend another line of credit or send out another line of goons? The US government printed imaginary money to pay the bills. That was the last line of defense. Toxic asset leverage was not deleveraged or sold. It was merely moved from the private balance sheets of the banks to the public balance sheets of the government. But those toxic assets are still there and so are the liabilities, the only difference is that those liabilities are now assumed by the US government. This is no solution at all, just a postponement for future politicians.

The dynamic of deregulation rolls on, leading to financial booms that eventuate in crises that lead to bailouts and thus to yet larger booms. After every rescue, financial markets become larger, more complex, more opaque, and more highly leveraged.(Crotty,2009) The next bubble which is sure to come will be the titanic mother of all bubbles because the US will not be able to bail itself out again. They will have already used their magic bullet of printing imaginary money backed by the faith and credit of the US government, thereby losing its credibility and creditworthiness. Even the US cannot borrow forever and the world will not only stop lending, they will look to get back what theyve already lent. Part 3- What is happening in the global economy today? Endless money forms the sinews of war- Cicero, Philippics The US is the greatest debtor in the history of mankind and the debt keeps piling higher. Going forward, I believe Stagflation (high inflation with low economic growth/deflationary pressures) is the greatest risk to the global economy. What we are seeing is a setup for stagflation reminiscent of the Jimmy Carter administration when interest rates were 20% amidst hyperinflation and high unemployment. This was a time when it was cheaper to borrow from the mafia than from the bank. Income taxes were 70% on the top bracket. Although interest rates are low now, they cannot stay at these levels indefinitely. Despite the anemic growth of the US economy, interest rates will eventually rise to quell the coming onslaught of hyperinflation as the US prints more and more paper dollars to sell US debt to foreign nations. The Fed knows and understands that inflation is a real risk stemming from the printing of money but their main concern is combating deflation and unemployment. Hyperinflation will be an unintended consequence. China is therefore trying to avoid what happened to Japan in the 1980s and is pegging their currency to the dollar. There is a distinction between the two economies of the US and China. The US relies on consumption as opposed to Chinas mercantilist, or export driven economy. Currencies are zero sum; as one currency falls another must rise. It has been the stance of the US to allow a depreciation of the dollar to narrow the trade deficit (loosely speaking the difference between domestic imports vs. domestic exports) thereby promoting manufacturing and domestic job growth, especially amidst high unemployment. For example, more exports in say, the auto industry, would require more auto workers at Ford plants, more parts to be manufactured etc., and more global demand of US products. This would hamper Chinas mercantilist economy most prominently because a devalued dollar restricts US consumption of Chinese products as a devalued dollar has less purchasing power. Fiat money is paper currency backed by the faith of a government. Since the dollar is the worlds reserve currency, trade imbalances are not as dangerous as they were in the 1930s because unlike Great Britain and Germany in 1931, the US is in no danger of running out of international reserves since it can print dollars at will, a competitive advantage that the French

Finance Minister, Valerie dEstaing in the 1960s called an exorbitant privilege.(Eichengreen,2010) Couple this fact with a coveted AAA credit rating and deep, liquid markets... In the natural order of the current system of floating currencies, one would expect a rise in the value of the Chinese renminbi (yuan) as the dollar declines, just as these declines are accompanied by a rise in the Euro or rise in the Yen. But China will have none of that and so they have artificially pegged their currency to the dollar so that a decline in the dollar results in a decline in the yuan, which is why Chinese products in the US are unusually cheap. China does this by buying up US treasuries, (essentially lending US money) which has resulted in huge foreign reserves and a budget surplus. This is reminiscent of post-WWII America which is in stark contrast to the US present day where we are running all-time high deficits. Protectionism will become a real threat only if Chinas peg prevents the dollar from falling and the recent monetary and fiscal stimuli fail to make a sufficient dent in US unemployment.(Ahamed,2011) In the 1980s Japan did something similar by lending the US money in much the same way as China is doing today. This helped the yen to remain lower fueling the exports of Toyotas and Hondas to satisfy the import driven society of the American consumer. Because the US is consumption driven and Japan export driven, the capital flow into the US from Japan allowed the American consumer to live beyond their means, while the Japanese people tightened their belts by increasing household savings and lived with austerity. The net result was that the true value of US debt that Japan was holding was greatly diminished because of the depreciation of the dollar and the concurrent rise of the yen. The yen increased in value from 300 yen/dollar to 100 yen essentially cutting the true value of their loan holdings by one-third. The US received real goods and services while Japan was left with pieces of paper that were losing value by the day. Because Japan focused on exports and foreign demand, they did not inhibit limits to domestic competition and did not foster domestic demand which caused prices to inflate and hurt domestic productivity. In other words, everything became expensive in Japan, while things remained cheap in America. Japan hit recession and in order to stimulate the economy, lowered interest rates to virtually zero. The slowdown in Japans domestic investment in recent years was partly a consequence of growing rich again and partly a consequence of an aging population, which has led to shrinking work forces.(Rajan,2011) The monetary easing did not have the effect that the Japanese central bank had wanted. Japan is still mired in a decades old recession. Using the case study of 1980s Japan, China is wont to allow a similar situation from happening where their mountain of US debt is whittled away by a decreasing dollar, as the US Federal Reserve continues to print money by their quantitative easing at a torrid and historical pace, while concurrent inflation is taking place in China. Hence, the accusations of currency manipulation at the G-summits and attempted deal makings of Ill stop printing money if you allow your currency to rise. By artificially pegging the yuan to the dollar, China is preventing the yuans rise to not only keep its US debt from depreciating but also to keep its exports healthy and robust. Furthermore, to prevent overheating inflation and rising prices, China is aggressively

tightening credit with interest rate hikes and capital controls. However that is causing problems of a different sort for China. It has caused social unrest because of the sharp divide between classes. A weak Chinese currency prevents its people from importing and the rise of a middle class. There have been little wage increases and per capita income pales in comparison to US counterparts. Thus far, China has used price controls to keep prices from rising eventually rising domestic prices will erode Chinas competitiveness even if it keeps its currency pegged at current levels. China is likely to let its currency appreciate rather than accept socially and politically destabilizing inflation.(Roubini,2005) There will come a time when China will be left holding pieces of paper while the US is consuming its goods and services much the same way Japan ended up in the 1980s. And when the US buys up all the worlds goods and services, China may end up buying them back from the US. Will China risk changing their domestic policy by departing from their mercantilist approach? Will China unpeg from the dollar and allow their currency to rise? Or will China someday decide to sell their mountain of US debt in the open market?

Another area of concern is the current state of the European Union and its currency. Germanys robust economy is essentially propping up the Euro as the IMF and ECB kick the proverbial can down the road regarding the near default junk status of Greek debt. Greece is relatively a small economy and in and of itself would not cause much of a stir but the worry is a contagion or domino effect on the weak economies of Portugal, Ireland, Italy, and more importantly the large economy of Spain. Credit default swap derivatives are in play yet again, this time insuring against defaults of weak governments. In order to approve more bailouts to prevent government defaults, the Germans are crying for more austerity measures from Greece and the like. Why should the hard working German people, who went through their own austerity, bail out the irresponsible Greeks sipping their drinks on the beaches of the Mediterranean? On the flip side, the Greek people are rioting and striking at the prospect of higher taxes, cuts in spending and government, and other austerity measures that they say are a consequence of corrupt government and greedy bankers. Why should the little guy get the shaft to pay off the German debtors? Why not just default and screw the banks? If Greece should default on its debts, the contagion effect it would have on the larger PIGS economies, especially Spain would probably cause the collapse of the Euro. An overnight disappearance of a currency has happened before, although not widely publicized and not due to default, when the European Currency Unit (ECU) was replaced by the Euro on January 1, 1999.

There are other bubbles outstanding such as a commodities bubble because currency is being debased (gold prices above $1500 per ounce, silver is at all-time highs). Banks have plenty of

capital from the influx of government injections, but they are not lending. Instead they have been buying commodities which was the trade of the past couple of years. Fiat money is inflating and therefore the race for commodities is on. In the 1960s, the Belgian economist Robert Triffin warned that the US would eventually be forced to supply dollars by running large current account deficits, financed by giving the world dollar-denominated IOUs. Such a scenario would lead to what came to be known as the Triffin dilemma: increased holdings of dollars around the world would erode the faith that the US would be able to repay gold to anyone who cashed in those dollars. In other words, the willingness to satisfy the demand for a liquid asset- in this case, dollars- would eventually erode confidence in its worth. Triffin was broadly right. In the early 1970s, the overhang of dollars outside the US became so large that the US had to abandon convertibility and the fixed gold price of $35/ounce.(Rajan,2011) The Nixon Shock occurred in 1971. I bring this up because the Triffin dilemma exists today as the USs exorbitant privilege of inflating the dollar by printing it in seemingly endless quantities will erode the worlds confidence in its worth. As in 1970s, there is an even bigger overhang of dollars outside the US and eventually foreign nations are going to want something for their dollars which the US will not be able to provide. If the US continues its role as consumer-of- last- resort, spender-tooreadily, and also lender-of-last-resort, as it has done in the recent past, it risks jeopardizing its creditworthiness. Not even the United States can borrow forever to fund its irresponsible macroeconomic policies by abusing its exorbitant privilege. The only cure for the USs consumption is to impose austerity measures, reduce the deficit, balance the budget, and make painful spending cuts to programs such as Medicare and SS. But this will be impossible because no one will vote for it and free market capitalism has proven that it would never happen voluntarily. We need a New New Deal but no one will get elected on that platform because the USs two-year electoral cycle forces excessive focus on short-term growth and employment. Politicians have only been dealing with the problems of today leaving the problems of tomorrow for future politicians. It is far better for Washington to act when it can on its own terms rather than wait until sharp falls in foreign demand for the dollar forces it to act. But as Herodotus observed mans nature as far back as the 5th Century BC, Circumstances rule men; men do not rule circumstances. The only way out for the US is to force its constituents to accept these measures, just like the Greeks are being forced to accept austerity measures despite the riots and violence in Athens. By the time events are dire enough in the world and America is forced to act, it will already be too late. Writing in the 1970s, the economic historian Charles Kindleberger argued that during a crisis the global economy can remain open ONLY IF one country is willing to provide leadership- to be the supplier of capital when others are in a panic, to keep its markets open in the face of protectionist pressure, and to act countercyclically as an economic locomotive for the world.

This leader has to have such a stake in the stability of the whole system that it will be willing to do more than its fair share in a crisis.(Ahamed,2011) Before WWI, the global economy operated well because Great Britain assumed the leadership role. But after the war, the UK was nearly bankrupted and no longer able to perform that function and the US was unwilling. Therefore, the Great Depression occurred because of this vacuum of economic leadership on the world stage. After 1945, the US, acutely aware that it had failed to step up to the plate between the wars, vigorously embraced the position of the worlds economic leader. Whenever a financial crisis hit or the world economy was about to falter, Washington acted as the lender of last resort, kept its markets open, and worked to sustain global aggregate demand. Today, the global economy has arrived at a similar inflection point. The US has been sufficiently weakened by its accumulated current account deficits, banking debacle, and foreign policy disasters that it is no longer able to single-handedly assume the role of global economic hegemon. Nor can any other single country take its place(Ahamed,2009) Professor Harold James of Princeton University concurs: like the UK of the Great Depression, the US [today] is unwilling and probably unable to act as the world stabilizer.(James,2009) If a country like China decides to change its mercantilist policies and starts to sell its dollar reserves it would be of great concern. If this happens in a controlled and quiet manner, things can potentially proceed as normal. However, if China began to demand something back from the US besides a mountain of paper dollars and the US cannot provide it, a Chinese sell-off of US treasuries can spark a conflagration of selling causing a massive global dump of the US dollar, the worlds reserve currency. One only has to revisit the German hyperinflation of 1923 where one US dollar was worth 4 trillion marks and banks were issuing 100 trillion mark bills. People were wheel barreling around loads of marks to buy a cup of coffee which would double in price before the first cup was finished; the mark had lost so much value in 1923 that it was being used as wallpaper. Or think on Hungarys 1946 hyperinflation, the worst in history, where banks were issuing 100 quintillion pengo bills. Could you imagine having to make change on a bill like that? If a country like China starts to sell its two trillion dollars worth of US debt rapidly, it would initially cause a steep rise in interest rates stoking fears of a global economic slowdown. This would cause a vicious domino effect of all other countries racing towards a mass exodus of the dollar, and since there would be no other safe haven (since the US was it), there would be no markets to keep open because all markets would have crashed, no currency to lend because of the dollars collapse, and no country to fill the ensuing leaderless vacuum. That would truly be the end of free market capitalism. If no single country was in a position to be responsible for stabilizing the global economy when it suffers this shock, is there an alternative mechanism?

Part 4- The End of Days? Let me issue and control a nations money and I care not who writes the laws.- Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild And after these things I saw four angels standing on the four corners of the earth, holding the four winds of the earth, that the wind should not blow on the earth, nor on the sea, nor on any tree. Revelations 7:1 The alternative mechanism may lie in a system similar to the Socialist Market Economy with Chinese Characteristics, introduced by Deng Xiaoping in 1978. Current Russian President, Dmitry Medvedev said in September, the experience shows the move from self- regulating capitalism to financial socialism is only one step. Martin Wolf, editor of the Financial Times writing about Bear Stearns, Remember Friday, March 14, 2008. It was the day the dream of global free market capitalism died. I believe the next bubble burst, whatever or where ever, will be the spark that ignites the dollars demise ushering in a new era of authoritarian socialist capitalism. It could be the commodities bubble or it could be the collapse of the EU or a combination thereof. The world has never been this connected. This international connectivity was restricted during the Great Depression by trade barriers and protectionism and globalization was thwarted by the iron curtain of communism after WWII. The grand social experiment of communism has failed however, because it was based on the assumption that people were inherently good which has been proven to be false by the fall of the Berlin Wall in 1989 and the demise of the Soviet Union in the 1991. This paved the way for globalization. The grand social experiment of capitalism is still ongoing and we have yet to see its ultimate outcome. From the mid-1790s when Adam Smith, the so-called Father of modern capitalism wrote about the invisible hand and self-regulation, capitalism has been evolving from each bubble to bust incorporating the lessons of each debacle. However, each subsequent bubble has increased in magnitude and scope when compared to its preceding bust. It is my contention that neo-classical capitalism will not be able to contain any more of these crises. Capitalism is based on two assumptions: One, people are selfish and two, that they are rational. Global free market capitalism or self-regulating capitalism has worked thus far because although the selfish assumption is correct, the rational part is only partially correct. Markets are mostly rational until extreme fear and panic is put into the equation; thats when rationality gets thrown out the window, along with constitutional rights and human rights (ie: Guantanamo Bay after 9/11, Japanese-American internment camps in 1942, Nazi extermination of 6 million Jews). When another meltdown occurs, the US has already used their magic bullet on the TARP utilizing their last line of defense which is putting up the faith and credit of the US government;

there will be no more confidence in the US (Triffin dilemma). The government bailed out the banks. Who will bail out the government when another run on the banking system takes place or when there is another credit freeze despite loose monetary policy? If faith in the US government disappears, a massive global dump of the dollar will take place (like the German mark in 1923 or the Asian currencies in 1998 [the only reason why the markets didnt collapse then was because the US acted as lender of last resort]), countries will be unable to keep their markets open, and no currency will be worth anything (like the ECU currencys overnight disappearance in 1999): That would lead to massive global military mobilizations after all markets have melted down. Go to now, ye rich men, weep and howl for your miseries that shall come upon you. Your riches are corrupted Your gold and silver is cankered; and the rust of them shall be a witness against you You have heaped treasure together for the last days. James 5: 1-3 And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name-Revelations 13:17 Fear will totally take over. The same kind of fear that brought the Nazis to power causing the extermination of millions of Jews who never believed that they would be persecuted. Fear caused Americans to throw out the constitutional rights of Japanese-Americans putting them into internment camps during WWII. Fear caused the development of Homeland Security after 9/11 and Guantanamo Bay. Those were very small events in comparison to the magnitude of the meltdown that is to come which will bring a fear to the world that has hitherto never been seen. I believe that at that time, many Christians will mistakenly call the end of days, recently reminiscent of Harold Camping. These Christians will mistake the four winds (Rev 4) with the seven plagues (Rev 15). With the collapse of the US and the global order, there will be no other entity to look to except a powerful religious institution with a global reach and a historical footprint. The four winds of Satan will no longer be held back. Just like Lehman Brothers was forced to fail, the entire world financial system will be forced to fail. And out of the rubble and wreckage, like an emergence from bankruptcy, a New Order. That religious entity will have to have enough influence to restore faith and confidence in the New Order and to do so it will be empowered by the military might of the US to spearhead a global revival. This reunion of church and state will introduce new neoclassical economics, a new world currency, a new world constitution, a new world religion. Prosperity and peace will be achieved for a brief time. The partnership will have saved the world and the world will marvel at it. And the people will remember the doom and gloom of the Christians that besmirched those efforts. And the last bastions of opposition will fight to partake of the new global prosperity. The recent and rampant uprisings in the Middle East are just the contractions before the birth of new regimes that yearn to join the New World. The poor parts of the world will emerge to join in the global interconnectivity. Just like the fall of the Berlin Wall when the East Germans celebrated

their reunion with the West and the whole western world rejoiced, the new establishment of Authoritarian Socialist Capitalism with Religious Characteristics will captivate hearts and minds. They will conquer the hearts and minds of the oppressed of Islam and the muted North Koreans and the unknown poor through the internet and information technology. And there will be an unprecedented period of global peace and prosperity before the Seven Plagues when many Christians will be lost because of the temptations and pressures to join the new world. For when they shall say, Peace and safety; then sudden destruction cometh upon them, as travail upon a woman with child; and they shall not escape. 1 Thessalonians 5:3 And as it was in the days of Noah, so shall it be also in the days of the Son of man. They did eat, they drank, they married wives, they were given in marriage, until the day that Noah entered into the ark, and the flood came, and destroyed them all. Luke 17:26-27 Here is where the righteous, girded with the character of Christ, will make their stand before Satan unleashes the seven plagues. Today is the day of salvation. We must put on the armor of God, which is His Character. Only by His Grace will we be able to stand in the midst of the fiery furnace. References 1. Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed; 2009; Pulitzer Prize Winner in History 2010 2. Currency Wars, Then and Now: How Policymakers Can Avoid the Perils of the 1930s by Liaquat Ahamed; Foreign Affairs; Mar/Apr 2011; pgs 92-103 3. Fault lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan; 2010 4. Currencies Arent the Problem: Fix Domestic Policy, Not Exchange Rates by Raghuram Rajan; Foreign Affairs; Mar/Apr 2011; pgs 104-116 5. Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay; 1841 6. Avoiding Another Meltdown by James Crotty and Gerald Epstein; Challenge: The Magazine of Economic Affairs; Jan/Feb 2009 7. Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System by Barry Eichengreen; 2010 8. The Three Marketeers by Joshua Cooper Ramo; Time Magazine, Feb 15, 1999 9. How Scary Is The Deficit? By Brad Setser and Nouriel Roubini; Foreign Affairs; July/Aug 2005 10. Fixing Global Finance: Who Broke Global Finance And Who Should Pay For It? By Harold James; Foreign Affairs; Jan/Feb 2009 11. The Financial Rebalancing Act: Stop Worrying About the Global Flow of Capital by Alan M. Taylor; Foreign Affairs; July/Aug 2011 12. The Great Crash, 2008: A Geopolitical Setback For the West by Robert C. Altman; Foreign Affairs; Jan/Feb 2009