The following post was sent from one of the members of The Valley Grassroots.  The author has chosen to remain anonymous.

I was asked by some foreign friends my opinion of the present financial crises and decided to put my thoughts onto paper…. er into electronic form. They are a synthesis of my reading over the last few years, observations, experiences and opinion. No sources are offered, but with Google they won’t be hard for anybody to find if they think the subject matter is interesting enough.

­­The United States if often stated to be the engine of world growth.  The US is actually the mouth that consumes the greatest portion of world production and is the demand which encouraged, through globalization, creation of world excess productive capacity.  How did this occur?

Credit terms have progressively eased in the last few decades with larger and larger swaths of the American population being made eligible for progressively higher credit limits and more generous terms.  Purchases of real estate were always widely financed through loans.  Automobiles and other large purchase price items were added and with the rapid expansion of credit card possession every last item of retail purchase could and was financed by debt in the US by people starting at age 18.  Most services were eligible for finance as well, education financing being the most widely accessible with government aid and encouragement. In short, the American population was instructed, even through formal education, that total credit financing was THE normal way of life. Easily accessible credit by most of the adult population was practically limited only by the capacity to meet required payments on the debt.  In the case of credit card debt the required payment was little more than the monthly interest charge on the balance.

The capacity to service debt, perhaps counterintuitive to most, was enhanced by taking on very large debts, namely real estate, in an environment of rapidly rising real estate pricing… rising due to monetary policy, progressively easier initial credit terms and conditions, and fraud.  Real estate equity extraction through equity loans, refinancing and other financial products allowed continued growth in consumer consumption into the 21^st century and thus further overexpansion of world productive capacity.

Production center development has resulted in the mass migrations of populations to those centers from rural areas.  It may be to a large degree irreversible.  With the migration of labor away from rural areas, agricultural equipment and methods are modified to suit available labor.  Once the production changes have been made, accepting large numbers of returning laborers would be difficult, tend toward impoverishment, and thus social instability.  Continuing contraction in consumer demand and thus growing excess production capacity resulting in higher unemployment in production centers is already creating social instability.  What will these populations do when they can’t return as a productive unit to their original habitations and they are unemployed at their present habitations with no prospect for re-employment? Now that consumer credit and consumer demand are collapsing, social and political instability is the result. This should result in the Anarcho-tyranny state where the state claims more and more powers yet there are growing areas of no-drive zones.

Mexico an example?

Credit prosperity has resulted in mass migration to the United States as well, mainly from Mexico. The demand for cheap and willing labor has resulted in 10’s of millions of additional US residents in the last two decades. The last couple of years have witnessed reduced job prospects and a reversal of migration with a concurrent drop in funds flowing to Mexican families from the US.  The state of Mexico has entered a state of rapidly increasing entropy with its violent effects on the US southern border.  Is Mexico the first victim of globalization gone wild with Western credit expansion and subsequent collapse and would it be possible for the US military to subsequently incorporate it de facto into a more perfect North American Union?

Governments are attempting to re-inflate and stabilize financial markets; however those markets were valued anticipating continued highly unsustainable consumer credit and demand.  Their efforts have failed so far.  The collapse and instability of financial markets has lasted long enough to deflate consumer demand and confidence.  Governments will now attempt to support labor and production with massive public spending funded by their virtual printing presses.  This may slow the contraction for some time and return some stability to some markets. How long will this improvement last and will it succeed in improving consumer psychology?  How much and for how long can governments print currency (create electronic debits) and maintain confidence in themselves and their currencies?

Currency considerations

In the Western countries, populations have a great deal of trust in their governments’ ability to solve problems due to past stability.  In the USA this confidence remains almost entirely intact.  The strength of an advanced country’s currency, only a few months ago was a reflection of the strength of that country’s economy.  No longer is that the case.  Now relative strength is also dependent upon confidence in the ability of a country or region to address its problems in a timely manner.  Believing it will make it so for some time.  Growing social and political tensions in parts of the world may heighten trust in Euros and USDs as long as confidence and order can be maintained in the West.  The US military, as the largest and most able to project power, plays a large role in maintaining relative confidence in the USD.

Most all US residents have benefited from the credit bubble while very few have protested against it.  How does one protest against “prosperity”?  You too would be marginalized as was Dr. Paul by the political establishment.  Why would a capable person refuse to take part in it even knowing it would one day collapse?  ‘Make hay while the weather holds’, ‘don’t bury your talents’, ‘ride the wave’ and etc are all phrases that come to mind. Who could seriously conceive of an economic collapse after 70 years of prosperity anyway?  ‘The government simply won’t allow such a disaster again’, or if it does happen, ‘hopefully things will hold together as long as I live’ are more phases that come to mind.

Circumstances are shaping up differently now.  Most all who rode the wave failed to make a timely exit from the water and the baby bubble generation will find a more austere retirement than their financial planners promised…. if they get a retirement at all… and they don’t succeed in dumping the costs entirely onto the next generations.   It will be a tough lesson of the failure to protest and truly get involved in the policies of ones government.  The Bernie Madoff scandal is emblematic.  Here was a group of investors, receiving an unreal return on investment for years and years, many realizing that perhaps something was amiss…. but not wanting to ask too many questions and stop the gravy train, while trusting good ole Bernie was taking advantage of non-privileged investors to secure their returns.  Now it turns out they were in fact the rubes and are left holding fraudulent account statements. Is it much different than the citizens of the US allowing their government , government sponsored enterprises, and government regulated financial institutions to create financial instruments and exchange them for real goods and services from the globe knowing full well of the growing budget and trade deficits and national debt.  As long as those rubes keep sending us real stuff for paper why ask too many questions?  We came to rely on the stability of an unsustainable financial path and even kept much of the paper and electronic debits for ourselves, enough of it in fact to seemingly put our own future in peril.

On the fiat dollar:

Many people believe that the US dollar… or for that matter world currencies in general… are not backed by anything except confidence. That is not true. They are also backed by debt. That is currencies in part are backed by, and the demand for them is sustained by, the willingness and ability to acquire them in order to repay them and thus take them back out of circulation to maintain a limited supply. In the case of private debt it boils down to the desire of a person or entity to want to keep possession of whatever it was they purchased with the borrowed currency and to remain solvent. As the willingness or ability to repay is reduced or increased so too is the backing of the currency. We saw an example of this phenomenon the fall of 2008 when the US dollar was rising rapidly vs. other currencies when it was obvious the American economy was in a severe recession. The US dollar as the world reserve currency is used in transactions the world over and when short term credit was no longer being offered short term loans had to either be paid back or defaulted on. This created enough demand for US dollars to lift it from 1.6/1 to 1.25/1 verses Euros in a matter of weeks… which leads me to the positive note.

On a positive note:

Unemployment benefits in the United States are being extended and increased as the unemployment rate is skyrocketing. For those with low debt that have lost good paying jobs in liberal benefits areas this may be the best of times. Relative strength of the dollar vs. other currencies has made it possible to travel the world for free in your unemployed status if you are a relatively frugal independent traveler. I like to inform my foreign friends of this so they will know how easy it is for us Americans as long as our push button created global reserve currency is accepted so readily.