The Death of the American Dream and The Deceitfulness of Riches

The Death of the American Dream and

The Deceitfulness of Riches

Chapter 5

By Dene McGriff

Introduction

Americans used to be the most industrious, productive people in the world. From the early Nineteenth Century onward, the U.S. dominated the world as the most dynamic, powerful industrious machine and exporter the world had ever known. By the end of WW II, America was the greatest producer and creditor nation in the world.   Nearly all the inhabitants on the planet were indebted to the inventors of the Marshall Plan, as America poured resources into and opened their markets to other countries.

America was briefly distracted by the Korean War, the Cuban Missile Crisis and a few smaller skirmishes; but by the early 1970s it was getting bogged down in the Vietnam War and the Great Society. Up to 1971, debts between nations were settled by gold – a finite, fixed standard that kept countries honest. Then came the dollar standard. The biggest commodity, oil, was pegged to the dollar. All accounts were settled between countries in dollars. The dollar was considered to be the most solid, reliable currency the world had ever seen. But as America began to produce less and buy goods from other countries, our imports exceeded our exports.

The tide began to turn and America, the biggest creditor nation in the world was on its way to becoming the biggest debtor nation. America didn’t fall over night but gradually slipped over the past 35 years – with uncontrolled spending, loose credit, huge government deficits, unfunded social programs, military expansion and foreign exploits. Eventually debt began to add up.

Big business and the administration pushed globalization. It was good for business. After all wouldn’t you rather make the same thing for a fraction the cost here? The cost of goods produced abroad kept prices low and the consumer happy. Americans were hardly aware their jobs were disappearing.

Then the deception begins in earnest. The economy transitions from production to consumption. Buying and consuming more things becomes the patriotic thing to do. Banks shove money and credit cards at as. We are encouraged to take out loans on our houses, use our credit cards, whatever we can to keep the economic wheels turning. Now we see the government giving us $165 billion with the hopes that we will go out and spend it. The media, the government, business all encourage the feeding frenzy. Consume. Consume. Consume. Buy more and more. Keep the economy going. It doesn’t matter that we don’t produce any more. We are told we can get rich by consuming, by buying more and more things. So the producing nations (such as Germany, Japan, China and India) keep loaning us money so we can keep buying things they produce. Meanwhile American wealth flows to Arab countries, China, Japan, etc., and now over half of the dollars in the world are in foreign hands—and the American $48 Trillion-dollar debt just keeps on growing!

How much longer can this Ponzi scheme continue? How much longer will Americans continue to spend more than they earn? And what will the end of all this consumption be? These are the questions we will explore in this article. Where is the American dream taking us? To riches or rags?

If ever there was a deceived people, we Americans are it, especially us good ole “Laodicean Christians.” You may recall that there are seven letters to seven churches in Revelation 2 and 3, the last being Laodicea:

“I know your [record of] works and what you are doing; you are neither cold nor hot. Would that you were cold or hot! So, because you are lukewarm and neither cold nor hot, I will spew you out of My mouth! For you say, I am rich; I have prospered and grown wealthy, and I am in need of nothing; and you do not realize and understand that you are wretched, pitiable, poor, blind, and naked.” (Revelation 3:15-17 Amplified Bible)

The Laodicean church is descriptive of today’s western church (please see a description of the seven churches). It is completely blinded and deceived by its wealth and prosperity. The riches of the world blind the church to its own pitiful condition. American Christians, just like Americans in general, believe in the “American way” and the idea that God has blessed us. The question is, are these riches a blessing or a curse? Or are they really a part of the overall deception of the last days? We have accumulated more things than any other people in the history of the world.

In our Index you will find eleven articles I have written on economic issues over the past four years. I have been talking about the meltdown we are currently beginning to experience in these articles and in various chapters of the book “In Search of Babylon” where I discuss the housing bubble, the American commercial empire, American consumerism, the fiat money system and the Federal Reserve, etc. This was written several years ago. But the issue here is deception and how we are falling into a dangerous debt trap. We accumulate more and more things whether we can afford them or not. There is an end game we need to be aware of – for us personally and America as a whole. No nation has supported such huge dual deficits (budget and trade) each about six percent of total GDP and survived without a horrendous adjustment.

We have no idea how many misconceptions we have concerning money and the economy. We have been deceived by the government, the Fed, academics and the media pundits. They function more as cheer leaders than honest brokers of truth. More than likely, we are all willingly deceived because the raw truth is too ugly to face. So through the rest of this chapter I am going to make a statement regarding wealth and the economy which most consider to be true and look at the facts behind it.

1. Myth: America is and always will be the dominant economic power on earth.

America has dominated the world economy for nearly 150 years but 35 years ago began a long slow decline! By the end of the 19^th Century, shortly after the Civil War, the United States had become the leading manufacturer in the world, producing a third of the manufactured products ahead of Germany and Britain. Factories were burgeoning in the upper Midwest, the North East and out west the U.S. was becoming an agricultural powerhouse producing 80 percent of the world’s cotton. World War I devastated Europe and only America came out not only unscathed but with an industrial base and ability to produce goods that was unmatched by any country in the world. America had so much productive capacity relative to the rest of the world, the Great Depression was, in part, an adjustment or correction. Up to and after the Second World War, the U.S. was the great producer and creditor nation. The dollar became the standard currency for the world, especially for trading in oil. The whole world got hooked on dollars, on America and on selling to America.

After WWII, the seeds of America’s demise were planted. First, we had taken on the mantle of military leader of the free world with expensive bases in Japan, Germany and other parts of the world (followed shortly by Korea and then Vietnam). Our economic and military empire grew in power and influence. Please see “The American Empire Spreads – Confessions of a COG”, “The Building of an Empire, Commercial Worldwide Dominance”, and “The American Military – Who Can Make War With Him” for a detailed treatment of the expansion to American worldwide military and commercial dominance.

America’s tremendous productive capacity and international reach made this expansion possible. The result of this success, globalization, also contained the seeds which undermine the empire.   We seem to think that the loss of manufacturing jobs is a relatively recent event, but the globalization process got underway in earnest after WWII. No amount of cash gifts was going to help rebuild Europe, but the U.S. could certainly buy their goods and services. Thus, began the process as America began losing one industry after another (e.g. shoes to Italy and Spain, clothing to Asia and Latin America, and even automobiles to Germany and Japan).

The Bretton Woods Agreements in 1971 established the dollar standard for the world and ended the gold standard. This represents the beginning of the end for the dollar. It is from this date that we can begin to measure the rapid decline in the value of the dollar, the shift of the United States from the greatest creditor nation to the greatest debtor nation, and the shift of wealth from west to east. No nation in the history of fiat currency has been able to resist the temptation to print too much, spend too much and destroy it until its value is that of the paper it is printed on.

America was a juggernaut, the manufacturing nation of the world until it began to lose that base but it dominated the world for a hundred years as the producer nation! But if goods can be made for less in other countries, so much the better. The corporations make more money and Americans pay less for products. The loser in the globalization process is the average American worker and the winners are corporate elites. Why not have a global market and uses the cheapest labor? The trade off for America was the gradual loss of jobs against the introduction of less expensive products (everything from clothes, to electronics to automobiles). Lower prices kept down inflation and gave the average American a good feeling as they bought up WalMart’s wares. But once the manufacturing job is lost the replacement is not as good as seen by the chart to the right.

2.     Myth: America gets rich by innovating and consuming.

So what is wrong with letting the world do the work for us so we can enjoy the fruit of their labor? Short term, it all seems to be fine. They make. We buy. But, think about it. This is one of the greatest deceptions of our time. He who makes. He who produces, gets paid, adds value. Who makes the money – the person who buys the shoe or makes it? Some argue. We make money by thinking, by innovating. Yes, the elites of corporate America such as the top developers at Microsoft or Google innovate and become millionaires. But the work is outsourced to lower cost countries.

A few rich get rich from thinking, but most don’t. The workers lose their jobs because things can be made cheaper abroad. It is not just the loss of jobs, but entire industries. By 2004, 2.8 million manufacturing jobs had been lost during the Bush Administration alone. Not only have we lost jobs, but replacement jobs do not pay as well as we see above.

Once these jobs are gone, they are gone for good. If 70 percent of our GDP depends on consumption, and the other 30 percent work directly or indirectly for the government, who is really working? Who is making something of value? Or are we just trading services with one another, buying more and more things from other countries that they are producing with money that they have loaned to us! How could this be good? We can keep the charade going for a while, but not indefinitely.

Americans have negative savings. They spend everything they earn, take all the value they can out of their houses and now that there is no more home equity, they are running their credit cards up to the max! How long can this go on? The baby boomers are approaching retirement and what have they saved? If there were no other adverse economic issues, the fact that the boomers need to stop buying and save for retirement, will send the American economy into a tail spin. If you save, you stop consuming and that hurts the GDP.

If the boomers don’t have any savings, inflation will so erode their meager Social Security checks, they will have to work until they die; living on the subsistence of flipping burgers at McDonalds. Pat Buchanan recently observed, “This self-indulgent generation has borrowed itself into unpayable debt. Now the folks from whom we borrowed to buy all that oil and all those cars, electronics and clothes are coming to buy the country we inherited. We are prodigal sons, and the day of reckoning approaches.” (The Daily Reckoning, 2/15/08)

Do we really think we can grow rich by consuming? That’s what we are told. That’s why the government is going to give $600 to every working adult and $300 a child. Spend. Spend. Spend. That’s the American way! You know their greatest fear. The government is afraid you will either save it or use it to pay your bills. How could we possibly believe we can think and grow rich? I would like to point out that Bible prophecy tells us in Revelation 18 that there will be a great nation at the end of time known as prophetic Babylon. This nation will be a great consumer nation, a nation that all the nations of the earth will get rich from trading by sea with. Does that describe us, or what?

We are spending and not producing and our debt from mortgage loans, credit cards and borrowing has reached record levels. This applies to the Federal Government, businesses and families. What family or business can afford to go into debt thousands of dollars a month and not have to pay it off? Yet, it is okay for the government? If corporations kept books the way the Federal Government does, the whole lot of them would be thrown in jail. A half a trillion is our so-called Government debt but “entitlements” such as Social Security and Medicare amounts to an “unfunded obligation” equal to our basic debt (in other words, it’s the problem of the next generation), and military spending – the wars in Iraq and Afghanistan are also “off the books debt” amounts to another half trillion dollars. The great senator Everett Dirksen said, “A billion here, a billion there, and pretty soon, you’re talking about real money.” Now we say a half trillion here and a half trillion there... And this doesn’t even count the growing trade deficit which is now nearly another trillion! (Yearly)

3. Myth: We are told that recessions are bad and that the Federal Reserve has the tools to prevent it.

The more the Federal Reserve does to interfere with natural business cycles, the worse the final outcome. Recessions are a way of correcting imbalances. The Federal Reserve thinks they can prevent a recession by either easing credit by lowering the interest rates or by printing money. Both effectively increase the money supply. The best example was the recession of 2001. The markets lost a third of its value in the “dot.com” bubble, so the Federal Reserve lowered interest rates to 1 percent (the first time it was that low since the Great Depression). This had the effect of making the cost of credit not just free but below inflation, so everyone borrowed like crazy and we had another asset bubble – housing. (Please see the article I wrote several years ago on the housing bubble. It was accurate then and still coming true today)   It is disingenuous at best and deception at worst for the two “Fed Heads” Greenspan and Bernanke to claim ignorance about the result of lowered interest rates.

We are heading into another recession and the Fed has just lowered rates dramatically by 2 points with more to go (now down to 3.5%) and the Federal Government is giving away money it doesn’t have so we dear consumers will keep spending! This strategy will backfire, making the eventual adjustment longer and more severe, postponing the inevitable. When the Fed loans money below inflation rates, asset bubbles are inevitable and the fallout is painful as we have seen in the bursting of the dot.com bubble with the loss of $7 trillion in investment and now the real estate bubble loss where $2 trillion has already been lost and with more losses to come. These are real losses of someone’s retirement or home.

It is an illusion to think an economy can grow by consuming. Jobs are created when people save, not spend. When we save, business invests and creates jobs and value. The idea that debt and more consumption are the keys to our future is the greatest of all deceptions which will eventually drive the great majority of Americans into endless debt, grinding poverty and servitude to the corporatocracy.

The idea that we can cut taxes and give away $165 billion without knowing where it will come from is ludicrous. The idea of stimulating the economy as if we had an economic defibrillator to jump start its heart is nuts! Why wait for a recession to jump start an economy? Why not stimulate it all the time? So where is the money for the stimulation package coming from? Let’s face it. They will just dig the debt hole deeper. They will create it out of whole cloth and print it, causing the value of the dollar to continue to fall and prices to rise. Near the end of the 1990s, there was the tech boom with the markets hitting all time highs followed by the bust in 2001-2. The Fed pushed rates down and the extra liquidity rushed into housing. Today, we see assets such as real estate taking a big hit, but money is still abundant so there is a rush of money into commodities of all types, from precious metals to crops, eggs, milk, etc. Grain and corn prices are soaring because of subsidies for ethanol while food prices rise. The abundance of dollars at home and abroad has led to money creation and inflation around the world.

4. Myth: We have been told that rising prices are caused by inflation.

Rising prices is evidence of inflation but not the cause. The ONLY CAUSE of inflation is an increase in the money supply. The government and the pundits at CNBC, Bloomberg, etc. tell us that one of the main jobs of the Federal Reserve is to fight inflation and they do that by raising interest rates. They are partially correct because higher interest rates limit credit which limits money supply. But they are lying and deceiving to give you that impression. This gets into how the Federal Reserve works which I discussed in detail in an earlier article. As I have said before, the Federal Reserve is neither “Federal” (it is a private banking cartel) nor does it have reserves. But inflation is related to the amount of money in circulation and it is no coincidence that the dollar has lost 75 percent of its value since 1970. The chart to the right shows the increase in the money supply since 1960. You will notice they stopped reporting M3, probably so you won’t know that they are running the printing presses night and day cranking out dollars like there is no tomorrow.   It is estimated that money supply is increased at the rate of 13 percent per year (about three times the official bogus inflation rate), but the government no longer reports M3 money supply (how convenient to conceal their crime – the destruction of the dollar).

Our monetary system is the greatest illusion of all. When more money is printed, salaries increase, houses increase in value and everyone has the impression that they are richer. Yet inflation is the greatest tax of all as the dollar has less value every year. Since the founding of the Federal Reserve in 1912, the dollar has lost 98 percent of its value. It has lost 75 percent of its value since 1971. Talk about deception! You think you are earning more. You think your house is increasing in value. But all along, it is just your money decreasing in value.

We see deflation of the dollar and inflation all around us. As I write this, gold has reached $958.40 an ounce. The weaker the dollar, the higher gold will go. Eight years ago, it was below $300.   The Euro is close to $1.50 to the dollar. Eight years ago, it was at $.75 a decrease of half in the value of the dollar. Oil is closing at $101 a barrel compared to $12 ten years ago. The house my parents bought in a Los Angeles suburb in 1946 for $10,000 is valued at $475,000 today (after a drop of $125,000 from $600,000). Notice I said “valued at” rather than “worth.” Is a 60-year old 946 square foot, three bedroom, one bath house “worth” $465,000 more than it was when it was new or is the dollar worth less? Wait, you may say, there are issues of supply and demand. Okay, how about gasoline at 25 cents a gallon in 1971 and bread for 25 cents a loaf and both are over $3.00 today! All groceries are sky high. Bananas used to be on sale at 19 cents a pound just a few years ago – now 99 cents, apples a dollar each, and so on.

Your greatest enemy (not speaking spiritually) is not Al-Qaeda, China or cancer. Your greatest enemy is inflation because inflation robs you of your future, your savings and everything you own. Inflation gives you a soothing illusion that your wealth (house) is growing in value, you are making more money, but the day you retire, is the day you will see how impoverished you really are (unless you saved half of what you earned). The Federal Reserve is printing money, bailing out banks and corporations that made bad decisions, and now lowering interest rates again. Most middle class Americans are caught between inflation and deflation. Inflation is squeezing the family budgets. While deflation decreases the value of their assets (homes and investments).

Why does the government do this? So we can pay back debt with cheap dollars. There is too much debt at all levels: individual, family, community, business and country. We are desperately trying to inflate the debt away with dollars worth less and less.   But we need to be aware. The president and all the White House hopefuls “want to keep the phony boom alive - in the worst possible way, by providing more "stimulus" to consumers…that is, by helping them spend even more money they haven't got on things they don't really need. What this perverse economy really needs is not a shot in the arm, but a shot in the head.” (The Daily Reckoning, 2/15/08) This crisis of the inflated dollar is largely invisible. The FED, the media, the banks keep assuring us as they raise our credit limits, hoping we will spend rather than save. Talk about deception! The whole economic system is an illusion!

5. Myth: Government statistics tell us the fundamentals are fine – low unemployment, increasing productivity. GDP growth, low inflation, etc.

Does that make any sense whatsoever? The only reason “worker productivity” goes up is because there are less American workers and more abroad working for nothing to make the same widgets we used to make here. So higher paying jobs are replaced by lower paying jobs and we are better off? Unemployment is another beauty. Many experts believe the true rate of unemployment is actually double what is reported. If a person loses a job, and his unemployment has run out, he is no longer considered unemployed. Simple as that. If we used the same reporting methods as we did under Reagan, for example, inflation and unemployment would be double what is reported.

The government takes food and fuel out of inflation and computes the cost of housing based on the rental market. None of these things make any sense.   Why take out of the equation the very things most people, especially the middle class and poor, spend most of their money on? It is pure statistical “slight of hand.” I deal with this subject in detail in an article titled, “Lies, Damned Lies and Statistics: Government Economic Reports.” You can’t believe a thing you hear or read.

6. Myth: Trade deficits don’t matter.

After 1971 the U.S. trade surplus began to erode until 1977 when the balance tipped and we became a debtor nation (owing more to others than they did to us), but we had an ace up our sleeve called inflation (or another way to put it – devaluation of the dollar) so the higher the deficit becomes, the lower the value of the dollar. Sounds like a pretty good scheme, doesn’t it? For example, let’s say I buy a car from you for $10,000 and tell you I will pay you in full in five years. Inflation cuts the value of the dollar to 50 cents. I give you your $10,000 (now valued at $5,000). Would you be happy with such a deal?

How long do you think it will take before the countries holding our debt figure this out? How about a 30 year Treasury Note? What will that be worth in 30 years? Will a million dollars be worth a million dollars (plus interest) or a fraction thereof?   Let’s say Germany buys 30 year Treasury Notes in 1999. The dollar lost half its value against the Euro in the past eight years. Good grief, 22 years to go. Why would they continue to loan us money?

The dollar is riding on its reputation because relative to other currencies, historically it has been reliable. But look at the trade deficit. A deficit of $60 billion dollars a month is $2 billion per day being loaned to us by other countries so we can keep buying their things and go deeper into debt coming to over $800 billion a year! No country in the world has ever sustained such deficits without a total collapse of their banking system. There is a record and unsustainable trade deficit, out-of-control consumer spending and debt, record Federal budget deficits, short sighted monetary policy by the Federal Reserve increasing the money supply and encouraging borrowing by low interest rates, record business debt (how can General Motors continue with a loss of $40 billion!) and no savings or investment.

Already Middle Eastern countries are moving oil away from the dollar. Countries with huge surpluses are beginning to shed their dollars for other currencies. They are also coming over to America and going shopping – shopping for American companies. Oil rich countries are bailing out U.S. banks. Citicorp got a $7.5 billion injection from Abu Dhabi and is now fishing for $1 billion from Kuwait and $9 billion from China. Beijing has put $5 billion into Morgan Stanley and bought heavily into Barclays Bank. Money Week says, in a recent article titled “America For Sale,” “Foreign buyers set a record last year by purchasing $414 billion of U.S. assets - even more than they bought in the wonder year of 2000.”

The fact is there are more dollars today in foreign hands than in our own. Creditor nations such as Germany, China, Japan, etc. hold US Treasury bonds. As long as we control inflation and support the dollar’s value, they will continue to buy them so we will have more money to buy their products. But if they feel that we are purposefully letting the dollar slide in value so we can pay them back with cheap dollars, they may stop buying our debt. If this were to happen, the U.S. would have no choice but to buy its own debt and that is very, very, very bad. That is called monetizing your currency. Once a nation starts to print money to buy its own currency, we are going down the slippery slope of the Weimar Republic, Argentina or Zimbabwe where the currency is worthless and you have double digit inflation every day!

Money only has value if it is relatively scarce. Economies have a way of balancing themselves out, if the central government/banks will stop printing money, lowering interest rates and just let the adjustment take place. If the central bank keeps meddling and government keeps printing money and creating more debt, the final correction may well result in hyperinflation, deflation and a permanent lower standard of living and a wipe out of the middle class. If we think we can get away with letting the dollar fall so we can cheat the rest of the world without their knowing it, we are kidding ourselves. If we keep printing money and dropping it out of helicopters as Fed Chair Bernanke once suggested, we will destroy the dollar and the economy!

7. Myth: The economy will always grow and the American economy is powerful and resilient. House prices always go up. We now have the ability to mold our future through the genius of the Federal Reserve.

Americans, the American government and the Federal Reserve believe the above delusion. We imagine Chairman Bernanke standing behind an emerald curtain like the Wizard of Oz tweaking the dials of the economy, making the necessary adjustments to protect the dollar, promote business and bring about growth and prosperity forever and ever. Amen! He might as well be speaking Greek. It is so cryptic, but my what a smart man he must be!

Certainly, America is a rich melting pot of many innovative, entrepreneurial and hard working peoples who are blessed with abundant natural resources. We have an intoxicating optimism. The question is: Will the economy always go up? Can we really control our economic future? Can the Fed tweak interest rates and money supply to avoid recession? Can we build an economy based on ideas rather than production? Can we get rich by spending, by creating more dollars, more debt?

Japan was a country that thought it could manage its future. It was the miracle economy in the post war era. The economy grew five fold from 1971 to 1985 and then tripled again over the next five years, peaking in 1990. Japan was a roaring success and it looked like nothing could stop it as the second biggest economy in the world.

In December of 1989, the Nikkei peaked at 38,915 and in the following 21 months, it dropped 38 percent and as of today (2/20/08), it is at 13,592, 65 percent below its high 18 years ago! So markets never go down? Well, neither do home prices, right? Real estate values in Japan dropped 80 percent and 17 years later they have not recovered! This is called stagflation.

Japan tried many of the same things we have done. They lowered interest rates to zero (creating the “carry trade” – borrow money for nothing and invest somewhere else and then pay it back). The Japanese printed money like it was going out of style, and spent money on public works, infrastructure – chalking up huge deficits. But no amount of spending, printing or cutting worked. Japan is in the doldrums of the sea of sea of stagflation. The “Japan Miracle” was a hoax!

Japan is different than America in several important aspects. First, it was and still is a net exporter with a positive balance of trade. Second, the Japanese are savers relative to us with a 13 percent instead of a 2 percent savings rate in America. In the 1980s, it looked like Japan was going to surpass the United States as the largest economy in the world. So for those who look at supply and demand and insist that housing always goes up, look at Japan 18 years later!

Japan is still ranked the number 2 or 3 economy in the world depending on how you count it. Japan’s central bank tried all the tricks our Fed is trying by lowering interest rates to zero and increasing money supply by huge amounts. Consumer credit increased by 700 percent. The government spent billions in public works project and their deficit soared. But all the stimulus in the world did nothing to stop the slide which has gone on for nearly 20 years. Japan’s stock market didn’t rebound. Her housing didn’t rebound. Yet, Japan has huge trade surpluses and better “fundamentals” than we do. This is a clear warning to all the Pollyannaish who think like Herbert Hoover that things are always going to get better and better. Some times they don’t. Hoover’s misplaced optimism wrought tragic consequences to an America ill-prepared then, as now – notwithstanding the so-called “fundamentals are (allegedly) sound” rhetoric of the Bush Administration. . .

“We in America today are nearer to the final triumph over poverty than ever before in the history of any land. The poorhouse is vanishing from among us.” (Hoover at and during the CRASH!)

We seem to forget how far the stock markets fell in the US back in 2002. The Dow dropped 27 %, the NASDAQ 80% and the SP 500 went down 50%. This represented a huge loss of $7 to 8 trillion of someone’s money.   Real estate is another thing. Home prices nearly doubled in the past 10 years, more in some areas and less in others Historically, housing reverts to the mean adjusted for inflation as seen below.

This chart shows that previous booms have adjusted back to where they started. This means that housing prices will go back to 1997 levels after adjusting for inflation (if you’re lucky). Please see the chapter which I wrote on the housing bubble back in 2005. For those who believe the lie that real estate always increases, look at this chart again. It decreased for thirty years (from 1912 to 1942). The increase in value people think they have is no more than the deflation of their currency. We are not only seeing record foreclosures, but the price of housing is dropping like a rock in some markets. One of the worst happens to be here in Sacramento where we are down 35 percent from the peak with a lot more to go—with Northern California leading the nation in foreclosures! The more the government tries to intervene providing assistance to banks and home owners who took out loans they never should have, the longer and more severe the correction. Infusion of capital, lower interest rates and special programs may help in the short run but only make it worse over the long haul.

But there is something more than a mere housing bubble going on. Yes, there is the subprime loan problem – loans given to people who had bad credit and “stated income” (called “liar loans” in the industry) – but prime loans are defaulting as well. The real problem is another subject I have dealt with in the past and that is derivatives. These loans were packaged with better loans, re-rated and sold and resold multiple times. It is this repackaging of loans into derivatives that are bought and sold so many times, that no one knows what the risk exposure is, which, according to the chart to the left was nearly $130 trillion in 2006 and is about $150 trillion today. This is more than ten times the total world GDP!

The text book definition is as follows: “Derivatives are financial instruments whose value is derived from the value of something else. The main types of derivatives are futures, forwards, options, and swaps. The main use of derivatives is to reduce risk for one party.” (Please see my article on Derivatives)

The fact is they are like highly leveraged bets where you put up a small percentage of the total value against a certain outcome. There are winners and losers and no one really knows how much is out there. That fact is that banks all over the world are reeling from losses in the sub-prime market. They were supposed to spread and diffuse risk. Time will tell.

The result of all of this uncertainty is that banks don’t want to loan to clients or to one another. Thus, the credit crunch.   The problem is not just in the mortgage market. There are fewer student loans available as the credit crunch spreads and defaults increase. Now that home equity loans are not as available, credit card debt and default is increasing dramatically.

Families are being squeezed by rising fuel, grocery prices and just about everything else they buy. They no longer have access to home equity loans so they are tapping out on their credit cards. They are finding it increasingly more difficult to make home payments, pay increasing utilities and taxes as state and local governments struggle. The fallout on subprime loans has just begun and will continue throughout 2008 and into 2009, not to mention prime and Alta loans with Adjustable Rate Mortgages. Banks are not only facing mortgage loan problems, but people are beginning to default on auto loans and credit cards as noted in today’s (2/21/08) Wall Street Journal. Want some more bad news? How about corporate bond defaults? See the chart to the right from the same front page article? The economy is collapsing at every level – stocks, bonds, real estate, derivatives, credit cards, student loans, auto loans, etc. and like an avalanche the snow gathers more snow as it slides toward the bottom.

In spite of all the money the Fed is pumping into the economy, there is still a liquidity problem because people and business need to have faith in the trustworthiness of the financial system. And although we bought into the lies we have been told, let’s hope we aren’t collectively that stupid. One of these days, people are going to wake up and realize that it is not what they spend but what they save that matters. Yet, what we allegedly “saved” is rapidly loosing its value—note the Social Security fiasco! Pension funds are failing and losing value because of the dot.com bust and there on entanglement in derivatives.

One of these days business is going to wake up and realize that their CEO isn’t worth being paid hundreds of times above what the average worker is paid. These CEOs bail out in “golden parachutes” worth tens of millions just to get rid of them! One of these days, business will discover their market is gone. Henry Ford was criticized for building such an inexpensive car, but he said that he wanted it to be affordable to his factory workers. We seem to have forgotten this lesson as we gut the core jobs of Middle America and all become workers and consumers of the services sector.

One of these days, Americans are going to have to hunker down and start paying off their debt (what a novel idea) and saving some money. That government “safety net” may not be there for them. When they do that, they stop consuming, and when 70 percent of the economy is based on consuming, that will bring the economy to a halt. This is exactly what the government is afraid of and why it keeps cheering us on in our spending ways. Demographically, in the 1980s Japan was the youngest society in the developed world. Today, it is the oldest. They are in a savings rather than consumption mode as the chart to the right illustrates.

America is aging as well and about ten years behind Japan’s population curve. At the same time that our government is beginning to realize that there won’t be enough workers to support Social Security and Medicare and continue to cut benefits (or extend eligibility age), boomers – those born from 1946 to 1964 – will be forced to begin saving. This will be catastrophic for our consumer economy. For every one percent saved, GDP will decrease by .6 percent! Consumption is 70 percent of the US economy; so if it dropped by 8 percent as Japan’s did, GDP would go down 5.6 percent – a tremendous drag on the economy.

Boomers have gone into debt like all Americans; put their kids through college; vacationed and had a wonderful time. Now, as they approach 65 (like me), you begin to look at what you have to live on, the weakening of the dollar, the increase in the cost of all basics and it is not a hopeful picture; and, “planning” on working full tilt” for the next fifteen years or until I die isn’t a “maximum thought” process! Worse yet, being a Wal-Mart Greeter does not sustain one’s fancy. According to studies, most people do not have adequate retirement and the senior population is the fastest growing cohort world wide. The same demographic trend that hit Japan is now upon America. Demographic change alone will drive the economy into stagnation for years to come.

8.     Myth: Debt doesn’t matter. Our economy is resilient and it is low in terms of percent of GDP.

If you or I took on the mantra that debt doesn’t matter and carried it out to its logical conclusion, pretty soon we would be in bankruptcy court or jail. If a business tried it, they would be out of business. Somehow governments think they are above natural law – that they can spend, borrow and print, spend, borrow and print without suffering any consequences. In our case the benevolence of other nations is the only thing that keeps us afloat with an infusion of $2 billion every single day!

You can’t keep spending someone else’s money. These creditor countries expect to be paid and paid in dollars that are worth a dollar! Bills have to be paid. Accounts have to be balanced.

Our national debt is out of control. It is no longer the little thing we had at the end of WWII after waging a costly war when it was just four hundred billion. But it has doubled since George Bush took office and it is rising geometrically to nearly $10 trillion! The interest payment on the debt is the third largest line item in the national budget of almost half a trillion dollars! The cumulative trade deficit is about $6 trillion and at 5 percent interest, that is another $300 Billion in debt payment. California just announced that it has a $16 Billion short fall. The city of Vallejo announced it will run out of money in April (2008) and be bankrupt. Cities and counties are funded by property tax rolls and as property values drop, along with one in twenty houses empty, local government is laying off workers and cutting services.

Debt matters. The piper has to be paid. America may not be able to continue to spend a half trillion a year on military spending and another half trillion on its wars and overseas bases (Read: $1 Trillion). The cost of maintaining an empire has brought down every empire in history!

The idea that we can think and become rich is a little crazy if you look at our schools, our literacy rates, our educational scores compared to other countries. Yes, Google now has a greater capital value than General Motors but only a few thousand American employees compared to GM’s 128,000. A thinking company doesn’t need that many employees, and they can outsource real work to places like India. Even Dell and the other electronics companies don’t make products here. Globalization is a fact. You can’t turn the clock back. He who makes the product, makes the money. The few thinker/elites will still make plenty but the average worker in America will lose his $30 an hour job to the worker in China or India who works for $5 a day. At the beginning of the 19th Century, China and India produced a quarter of the world’s GDP. Given time, they probably would again.

The bottom line is the corporatocracy doesn’t care about your debt or mine, the government’s obligations or condition. A multinational corporation is just that – multinational. They don’t belong to any nation. They don’t care about government as long as it leaves them alone and they can make money. They will go to where they can find the cheapest labor. Oh, and by the way, the middle class in India with a population of almost 1.2 billion, exceeds the entire population of the U.S. and Canada. They are above the law, amoral money machines that produce and sell. We’re just the biggest cop on the block to look out for their interests. That’s why they need us and why you need to stay tuned for the next chapter, “The Deceit of Empire.”

Concluding Comments

The purpose of this chapter was to show the deceitfulness and myths propagated about our economic system. As a matter of fact, everything is upside down. We are told to spend rather than save. We are told to trust the dollar while the policy of the Federal Reserve and government is to debase it. They both continue utterly reckless policies of encouraging debt at all levels (rather than savings and investment). It reminds me of the time I was evaluating the USAID projects in El Salvador in 1986. I asked the Minister of Health why his budget hadn’t gone up with the millions we gave him. He said it went to the war. I noted that 95 percent of the money was in the form of a loan that had to be paid back and asked him how they planned to do that? He didn’t really care. It wasn’t going to be his problem. I wonder if that isn’t the attitude of our leaders.

Unfortunately, the increasing national debt, unfunded liabilities such as Social Security, Medicare, Military retirements and benefits, etc., comes at a time when the baby boomers are beginning to retire, and Americans are in deep in debt and the work force is shrinking. The chart to the right tells it all even though it ends with 2003 (it’s still going straight up). There is a tremendous disparity in the rate of growth in national income and debt.

How on earth could we be so gullible to have gotten ourselves into this position? There truly is such a thing as “the deceitfulness of riches” as this chapter is entitled as quoted from Matthew 13:22. When our government and the media keep encouraging us to spend more and more; when they lower the interest rates to below inflation levels, it is an invitation to borrow more and more. This is exactly what so many did with their home equity line of credit.   They would run up credit cards and then pay them off with another withdrawal from the house ATM.   In parts of California, you could have a job that was paying $50,000 a year but a house that made twice that…or at least, that is what they “made” on paper. Everyone was in on the scam – the real estate industry, mortgage brokers and yes, Bush and Greenspan.

Think of it – your initial home mortgage is $350,000 and it “appreciates” during the California “housing boom” until it reaches $600,000 in “value.” Then, with all that “equity” you’ve made in your home – and with all the educational money needed for your kids, and to buy out those high-interest-rate credit cards (thereby “consolidating your debt” and using your home, by increasing your mortgage payment and securing additional “tax” breaks) – so now instead of owing $330,000 on your home (because you’ve faithfully been making “payments” to decrease the principle, just a little) – you suddenly owe $430,000 on your home. Then, the “bubble bursts” on the housing market and your real estate value decreases by 2009 by nearly 50% from its original $600,000 value to a meager $300,000. Now, you’re literally “upside down” in your lovely home. You’re $130,000 in debt if you sold your home at top dollar—better ride this bitter pill out for the next 15 years or so until you can at least exclaim: I broken even on the house! But, if what happened in Japan happens in America, forget about them chickens – they’ve come home to roost, and they’re not leavin’ the plantation.

My favorite writer, Bill Bonner of the Daily Reckoning, concluded a recent article with these words:

“Mr. Market always has a trick up his sleeve. What if his big surprise is that this downturn doesn't go away after six months? What if house prices grind downward for five years…or more? What if we have begun a major bear market on Wall Street, with the Dow falling, in real terms, for the next 15 years? And what if Warren Buffett is wrong? What if America has topped out? What if, after 232 years of coming up in the world…it will go down for the next 232? What if it is now smart to short the United States - its currency, its stocks, its labor and even its military?

“The U.S. enjoyed an extraordinary run of good luck. It had rich farmland…with huge oil deposits under it. It had energetic labor and low taxes. It had innovators, risk takers…and a government that left them alone. It had thrifty, hard-working people who asked for nothing but the chance to work. This combination of hard work and good luck put America on top of the world. But that's the trouble with being on top of the world; there's no where to go but down. Now, the U.S. is a net importer of food…and fuel. Its government seeks to control not only the lives of its citizens, but the fates of other peoples half way around the globe. Its citizens work harder than ever…but they are now competing with people who work even harder than they do…people who are willing to work for one tenth the compensation and then save half of what they earn. These same U.S. citizens are bending under the heaviest burden of private and public debt the world has ever seen, while their government encourages them to spend more.

“Here's a surprise for you, dear reader. What if this great economy didn't ‘emerge even stronger’…but instead was crippled, and never recovered?”

So what does all this mean? If we are living in the “last days” as I believe we are, we will experience the greatest deception of all time. There will be wars, rumors of wars, famines and pestilence. There will be false prophets claiming to be the Christ, deceiving the multitudes. The Prince of this World is trying to deceive and enslave us all and the best way to do that is to get us beholden to his world system, deep in debt, caught on the treadmill of life with our heads barely above water. Then, one day the Antichrist is going to come along with a plan. The cash system is broken. It doesn’t work any more, so he’s going to introduce a new system that will be foolproof, scam proof and help track those bad terrorists. All it entails is a mark implanted in your right hand or forehead that triggers electronic accounts so you can buy and sell without worry or care (Wow! No one can steal from you, because we’ll be living in a cashless society!) It is known by Christians as “the mark of the beast.”

One more thing . . . I get a lot of emails and one of the questions sure to come up goes like this. How can America be prophetic Babylon and crash economically? And that is a good question. I present this from a very practical stand point, using sensible economic principles. But one thing we have learned is that these mega trends don’t necessarily happen over night but develop over time.   There are strong indications in the Bible which I discuss in other places that suggest that the rich get richer and the poorer. There is a consolidation of wealth as I indicate in my comments on the third seal or the section referring to the black horseman:

Revelation 6:5-6 speaks of scarcity, economic chaos, inflation and the concentration of wealth in a few. “A quart of wheat for a denarius and three quarts of barley for a denarius; and do not harm the oil and wine” refers to the average person working all day just for enough food to keep alive while the wealthy enjoy their excesses. We see the cracks in the foundation of our economy today which will lead to depression and a massive deflation of the value of the dollar. The gospels also speak of famines and troubles.

There are several essential characteristics in determining the identity of “Prophetic Babylon” as portrayed in Revelation 16, 17, 18 and 19. Chapter 16 talks about the tripartite city of Babylon: religious, commercial and military. Chapter 17 describes Babylon as the apostate church linked to and later betrayed by the Antichrist. Chapter 18 describes Babylon as a commercial power that is a consumer nation and finally Chapter 19 talks about political and military Babylon. I would refer you for details to my book, “In Search of Babylon”. Doug has written many articles on the issue such as his e-books on the “The Antichrist and the Gog/Magog War” and his recent e-book on “The Prophetic Sequence”. So briefly, the essentials to identify Prophetic Babylon are:

1.     It is apostate (fallen) Christian religion – a militant, political-religious amalgamation.

2.     It is a consumer nation and the whole world gets rich trading with her by sea.

3.     It is has the most powerful military on the earth and a worldwide reach (which we also get from Isaiah, Ezekiel and other prophetic books)

4.     It is a friend of Israel and signs a defense treaty with her which it breaks at the mid point of Daniel’s Seventieth Week.

So to end this discussion, the elite class in prophetic Babylon will maintain her wealth (see the luxury items traded in Revelation 18). That doesn’t mean that the average citizen will not be in dire straights. They will. It also does not conflict with the fact that, in spite of its economic excesses, she is still willing and able to support a military with a world-wide reach (and is the only nation on earth that can). The next chapter in this series will be on the “Deceit of Empire.” Empires do not die that quickly, especially when they sit on someone else’s oil.

What does this mean to us as a practical matter? The economic trends discussed here will happen and there will be the natural adjustments caused by our debt, the consequences of globalization, etc. But at the personal level, it will require a gargantuan effort to get and stay out of debt, in order to not be enslaved by the world economic system. And above all, we should seek to deepen our relationship with the Lord and one another, because we need to have an “ear to hear what the Spirit is saying” and we need the fellowship and encouragement of our brothers and sisters.

Dene McGriff, Sacramento

February, 2008

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