Source: V K’s Diary
In the early 16th century the Spaniards captured large parts of what is now known as South America. The area had large deposits of silver and gold. As I write in my book Easy Money: Evolution of Money from Robinson Crusoe to the First World War: “The precious metals were melted and made into ingots so that they could be easily transported to Spain. Between 1500 and 1540, nearly 1,500 kg of gold came to Spain every year on an average from the New World.” i
Gold wasn’t the only precious metal coming in. A lot of silver came in as well. As I write in Easy Money: “One of the biggest silver mines was found in Potosi, which is now in Bolivia, in 1545. Potosi is one of the highest cities in the world and is situated at a height of 4,090 m. Given the height it sits on, it took Spaniards sometime to get there. Here a mountain of silver of six miles around its base was discovered.ii The mountain or the rich hill, as it came to be called, generated nearly 45,000 tonnes of silver between 1556 and 1783. iii”
Most of this new found silver was shipped to Seville in Spain where the mint was. In the best years some 300 tonnes of silver came in from silver mines in various parts of South America.iv
Once the gold and silver started to land on their shores, the Spaniards became proficient at spending it rather than engaging themselves in productive activities. Easy money had spoiled them and they produced very little of their own. Once this happened everything had to be imported. Weapons came from the Dutch, woolens from the British, glassware from the Italians, and so on.v It also led to Spaniards buying goods like bangles, cheap glassware, and playing cards from foreigners for the sheer pleasure of buying them.
As Thomas Sowell writes in Wealth, Poverty and Politics: “The vast wealth pouring into Spain [in the form of gold and silver from South America]… allowed the Spanish elite to live in luxury and leisure, enjoying the products of other countries, purchased with the windfall gain of gold and silver. At one point, Spain’s imports were nearly twice as large as its exports, with the difference being covered by payments in gold and silver… It was a source of pride, however, that “all the world” served Spain, while Spain “serves nobody”.”
Dear Reader, you must be wondering, why have I chosen to point out all this history so many centuries later. The point I am trying to make is that there is an equivalent to what happened in Spain in the 16th century in this day and age. It is the United States of America.
Like Spain, the total amount of good and services that the United States imports is much more than what it exports. The ratio of the imports of the United States to its exports was around 1.23 in 2016. The difference between the imports and the exports stood at $503 billion. In fact, if we look at the imports and the exports of goods, the ratio comes to around 1.51.
The point being that like Spain, the United States imports much more than it exports. Spain had an unlimited access to money in the form of gold and silver mines of South America. This gold and silver over a period of time was mined and shipped to Spain and in turn used by Spaniards to buy stuff from other parts of the world.
What is the equivalent in case of the United States of America? The dollar. The US dollar is the international reserve currency. It is also the international trading currency. As George Gilder writes in The Scandal of Money-Why Wall Street Recovers But the Economy Never Does: “Today it [i.e. the dollar] handles more than 60 percent of world trade, denominates more than half the market capitalization of world stocks, and partakes in 87 percent of global currency trades.”
Spain had almost unlimited access to the gold and silver from South America. Along similar lines, the United States has unlimited access to the dollar. Other countries need to earn these dollars by exporting goods and services. The United States needs to simply print the dollars (or digitally create them these days) and hand it over for whatever it needs to pay for.
While the unlimited access to gold and silver was Spain’s easy money, the dollar is United States’ easy money. And given this, it isn’t surprising that like Spain, the United States imports much more than it exports. This basically means that the country consumes much more than it produces. Also, while the Spaniards had to face the risk of gold and silver ultimately running out, the United States does not face a similar risk because dollar is a fiat currency unlike gold, and can be created in unlimited amounts. As long as dollar remains the global reserve currency and trading currency, the United States can keep creating it out of thin air. Of course, the role of the United States in global politics will be to ensure that the dollar continues to remain the reserve and trading currency. Having the biggest defence budget and military in the world, will help.
The supply of silver in Spain peaked around 1600 and started to fall after that. But the spending habits of people did not change immediately, leading to Spain getting into debt to the foreigners. The government defaulted on its loans in 1557, 1575, 1607, 1627, and 1647.vi
One impact of access to the easy money in the form of gold and silver, was a huge drop in human capital in Spain. As Sowell writes: “What this meant economically was that other countries developed the human capital that produced what Spain consumed, without Spain’s having to develop its human capital… Even the maritime trade that brought products from other parts of Europe to Spain was largely in the hands of foreigners and European businessmen flocked to Spain to carry out economic functions there. The historical social consequence was that the Spanish culture’s disdain for commerce, industry and skilled labour would be a lasting economic handicap bequeathed to its descendants, not only in Spain itself but also in Latin America.”
So, what is human capital? Economist Gary Becker writes: “Economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.”
What is happening on this front, in case of the United States? As Michael S Christian writes in a research paper titled Net Investment and Stocks of Human Capital in the United States, 1975-2013, published in January 2016: “The stock of human capital rose at an annual rate of 1.0 percent between 1977 and 2013, with population growth as the primary driver of human capital growth. Per capita human capital remained much the same over this period.”
So, over a period of more than 35 years, the per capita American human capital has remained the same. And this is clearly not a good sign.
Further, unlike Spain which ultimately ran out of gold and silver, given that there was only so much of it going around in South America, the United States does not face any such risks given that dollar is a fiat currency and can be printed or simply created digitally.
But like Spain, the access to this easy money will ensure that in the years to come, the United States will continue to import more than it exports. This will go against the new President Donald Trump’s plan to make America great again. His basic plan envisages increasing American exports and bringing down its imports. But as long as America has access to easy money in the form of the dollar, the chances of that happening are pretty low because it will always be easier to import stuff by paying in dollars that can be created from thin air, than manufacture it locally.
What the ‘Deep State’ Is Really Up
RANCHO SANTANA, NICARAGUA – Here at the ranch, the days go by quickly.
A walk on the beach. A long, slow afternoon…reading, writing…listening to the waves.
Dinner under the stars.
But back in the US…more blow-ups…more contretemps, confusion, and chaos…
What is really going on?
‘De Facto Coup’
Over the weekend, the term ‘Deep State’ lit up the search engines.
Yesterday, Google counted more than 32 million inquiries.
There were features on the Deep State – the ‘shadow government’ that runs the country no matter who’s in power – in The Washington Post, The New York Times, The Atlantic, and The New Yorker.
The Trump administration, too, has been focusing on the Deep State. White House Press Secretary Sean Spicer:
I think that there’s no question when you have eight years of one party in office, there are people who stay in government – and continue to espouse the agenda of the previous administration.
So, I don’t think it should come as any surprise there are people that burrowed into government during eight years of the last administration and may have believed in that agenda and want to continue to seek it. I don’t think that should come as a surprise.
Meanwhile, news website Breitbart (formerly run by President Trump’s chief strategist Steve Bannon and closely connected to the Trump White House) claims the Obamistas are staging a ‘de facto coup’ against Team Trump.
What to make of it?
On Friday, we bent to a tough job.
Our hands shook as we put on our glasses. Our knees cracked as we stooped to wonder: Is there any Truth in public affairs?
What we came to understand is that, often, there is none.
Ignorance is one of our charms here at the Diary. Not that we are more ignorant than others; we just take it more seriously.
We appreciate it. And since we are so chummy with ignorance, we see it everywhere. In every headline. Every public announcement. Every speech on the floor of the Senate…and every crackpot comment from every halfwit voter in the empire.
If something happened in your backyard yesterday, in broad daylight, you might know something about it. Or if you tell us about your life…about your people and how they live…
We will listen with both ears.
But give us the unemployment rate. Tell us why Rome fell. Explain the Virgin Birth…
Go ahead. We need a laugh.
Give us a skunk, flattened out on the highway. We will have a fairly good idea of what happened. With a little imagination, we can even guess what was going through the skunk’s mind as he put paws to pavement.
But fair trade? ‘America First’? Gender equality? Deep State? Orthodoxy? Heresy? Truth?
A brush fire is a real thing. It will burn your fingers. It will destroy your house.
Even with something as real as a fire, the heat diminishes fast as you get farther away from it.
An economic policy…or any sort of public ‘news’…has little real meaning to it in the beginning… And then what little sense it once made disappears as you move away.
You already know our Iron Law of Truth: Any event or idea loses its real meaning by the square of the distance from it, the size of it, and the time elapsed after it.
By the time you read about it in the paper, there is hardly a trace of truth left.
‘Stop watching the news,’ says our friend Rolf Dobelli (recalled to us by another friend, Marc Faber).
‘News is to the mind what sugar is to the body… The media feeds us small bites of trivial matter, tidbits that don’t really concern our lives and don’t require thinking.’
Before we know it, our brains have rotted out.
The more thoughtful pieces of news pretend to tell you something important. But often, the real information content is low, misleading, or false.
Last week, we looked, for example, at Newt Gingrich’s comment…that the press was out to get Donald Trump because ‘he is determined to pursue an agenda which benefits the American people instead of the establishment elite [aka the Deep State].’
But by defining the Deep State as mere holdovers from the Obama era, he either misses the point or intends to mislead: The Deep State doesn’t care what party is in power.
It doesn’t care what agenda President Trump is supposed to be determined to follow. It doesn’t care what Sean Spicer…or Newt Gingrich…or Breitbart says.
The Deep State is non-partisan, non-denominational, and gluten-free. It is whatever it has to be to survive and flourish, no matter what the headlines say…and no matter who sits in the Oval Office.
‘Just keep the money flowing. You can think whatever you want,’ the Deep Staters say.
Funding for the Deep State
Inside sources say, for example, that Trump’s anti-trade agenda, headed by the obnoxious crackpot economist Peter Navarro, may already be in retreat.
This is almost surely a good thing; there is no theory or experience that shows limiting trade helps people prosper.
But that’s not really why he’s being sidelined. The Financial Times reports that Navarro is being edged out – not by the Obama leftovers, but by the Goldman guys Trump put in his administration.
The Wall Street contingent knows how the game works: Yes, the U.S. imports more than it exports. And this results in a trade deficit. But the difference is what keeps the fake-money system going and funds the Deep State.
It works like this…
The US ‘prints’ fake dollars and sends them abroad to pay for its imports.
These dollars wind up as foreign exchange reserves in countries that run trade surpluses with the U.S.
Then, instead of just holding the dollars as reserves, these trade-surplus countries use them to buy US financial assets – mainly Treasury bonds – from Wall Street.
This may be bad for Main Street. But it’s great for Goldman Sachs and the rest of the Establishment Elite.
[New readers, please stay tuned – tomorrow we will retrace our steps… and bring you more fully into the conversation.]
Answering the rumors of internal battles, the Trump Team issued a note saying that both sides – the Goldman guys and the ‘America First’ crony traders – were working together for the ‘benefit of all the American people.’
Who benefits from the import tax?
What about those who buy imports? What about those who own factories overseas that export to America? Are they included in ‘all Americans’?
And how about those who depend on illegals to cut their lawns or build their buildings?
Just so it is clear: Team Trump is not talking about all Americans. Some Americans will benefit…at others’ expense. Just like they did under Bush, Obama, and Clinton.
And so far, which Americans have benefited most?
Why, the most elite of the Establishment Elite…of course.
Shares in Goldman Sachs are up 37% since the election.