Understanding the Nature of a Worldwide Monetary System Collapse

@Alessandro: 

Compounding Interest is the fundamental weak link of the monetary system, in this you are correct.  However, the other functional problems also include trade imbalances which occur as goods are moved across borders and revalued, the desire of each trading entity to want to take a profit from the trades, the desire of the intermediaries to want to take profit from the trades and the mispricing and externalization of costs involved in natural resource depletion.  All of these factors impact to one degree or another in a monetary system collapse. It is an error to focus solely on the interest charges here as the prima faica cause of the collapse, although they most certainly powerfully induce collapse the longer a monetary system runs.  They are not the ONLY cause though, and I would caution against makng it all about interest charges.  It is not.  Its about fundamental valuations and the profit taking mechanism in the monetary exchange medium.  Interest charges are a subset of the problem, not the whole problem.

RE

@Alessandro: 

Interest charges are a way of the investor participating in the profit of the investment.  The other way is to use the money for a share of equity in the venture.  A problem arises when the venture is not profitable.  That leads to your argument in support of forgoing interest on ventures that are not profitable.  In our system, of course, the lender can also lose part or all of the proncipal via bankruptcy.

We have a financial crisis because too much of the "investment" in recent years has been made in things that do nothing of utility.  Investment vehicles (and derivatives based on those vehicles) that do nothing more than layer additional leverage onto other leveraged investments add no value to the world - they just compound the risk associated with any deficiency in the original underlying asset, a house, a corporate loan, etc.

Which brings me one final comment on RE's article.  The arguments outlined there are related to the idea that the financial system of the last century depends on inflation (currency devaluation) for its very existence.  When the compounding of leverage reaches the breaking point the deleveraging has deflatioanry elements and the financial system can not withstand that stress and risks collapse.  RE has given illustrative examples involving world trade that help one to understand this.  The Austrian school has been harping on this aspect of finance, but most Austrian adherents do not give as much of a sense of how the world can progress out of this mess as RE does in his essay.  RE brings forth the concepts of resource constraints and sustainability which are ultimately at the core of improving world finance and commerce.

This is an outstanding discussion topic, one deserving of a world stage.  So let's try to do it justice here.  I hope other members of this community will add to this.  I am thinking particularly of Derryl, but I do not want to diminish the value of others whom I do not mention.

Since John invited me to chip in my 2 bits I will.  Warning: long comment ahead!

John wrote, 

"The arguments outlined there are related to the idea that the financial system of the last century depends on inflation (currency devaluation) for its very existence.  When the compounding of leverage reaches the breaking point the deleveraging has deflationary elements and the financial system can not withstand that stress and risks collapse."

This is a point I have been trying to make since the crisis began in 2008.  In order for our monetary system to continue to function without system-wide loan defaults due to a straightforward arithmetic shortage of money, new money needs to be constantly flowing into the system and adding to the total money supply.  If you look at the history of money supply growth since the current system began in 1913 it is a history of ongoing money supply increase, with a brief downturn during Depressions.  It is no accident or tragedy that the money supply is always increasing, and thus diluting the value of all the money that existed before.  Money supply growth is a necessary feature of the monetary system we are using.  This becomes very apparent in the aftermath of a burst bubble, like now, where fast money supply growth is suddenly reversed and money supply starts to shrink.  QE by the Fed and Treasury are slowing the decline in money supply, but decline is the secular trend.  It ends in Depression.

Alessandro brings up "the interest problem".  This problem, just like the impossibility of monetary profit in a zero-sum money supply system, has nothing to do with economics and everything to do with monetary arithmetic.  It is not "good" or "bad" uses of money that cause financial crises.  It is monetary arithmetic that is causing these recurring problems.  Good and bad uses of money are the subject of microeconomics, individual firms and households (and nations, in RE's global context) gaining or losing from their own good or bad economic behavior.  The monetary system is macroeconomics.  We have plenty of micro malinvestments, but our fundamental problems are macro, not micro.

All of our money begins its existence as a "loan" from a bank.  Even Federal Reserve Notes are "loaned" to the commercial banking system against securities provided by the banks to the central bank.  The total amount of US$ loans outstanding is the total amount of US$ money outstanding.  100% of the US$ money supply is owed by somebody to some bank as repayment obligation of an outstanding loan balance.  As loans are paid down, money supply decreases.  As new loans are taken out, money supply increases.

The interest problem and the profit problem are 2 aspects of the same arithmetic problem.  I take out a $1000 demand loan at 5% interest for 1 year.  The bank credits my bank account with the $1000, which I spend into the economy.  So my bank has added $1000 to the money supply and I have added $1000 to the circulating money supply, out in the economy where I spent the money.  At the end of the year I have to take $1000 out of the economy to repay my loan principal, and I have to take an additional $50 out of the economy to pay the 5% interest to the bank.  The bank only created $1000 of "money", but it created $1050 of monetary "debt".  Every loan ever made carries an interest obligation so every borrower owes more money back to his bank than the amount he took out.  Where does the money come from to pay the interest?  

Short answer?  It doesn't.  The money to pay the interest doesn't exist.  If the average interest on all outstanding money is 5%, then there is 5% more debt in the American money system than there is money.  And given the kind of monetary system we have, where ALL money begins as debt-at-interest to the banking system, there is no possible exogenous source of money (except counterfeit) to solve the interest problem.  It is arithmetically impossible for everyone to repay their loans plus interest.  At best everybody could repay 100% of their loan principal and there would be zero money left in the system.  But there would still be monetary "debt" in the system even if there was no money at all, because everybody still owes "interest" on money that no longer exists.  But as long as people keep taking out new loans and spending the money into the economy, there is new money available to pay interest on old debt and the system appears to be working.

The same problem applies to profits.  Consumer debt confuses the time-duration aspect of the profit problem, because borrowing against your future income today adds new debt money to spend into the economy today, at the expense of creating a hole in your future spending when you have to pay that loan back.  So we can ignore consumer debt because, except for the same old interest problem, consumer borrowing, spending, earning back and repaying zeroes out over the life of the loan.  Consumer debt makes monetary profits possible today, but when your economy reaches that hole in its future when it's time to repay the money everybody spent on past consumption, your money supply starts shrinking and profits turn to outright losses due to lack of money to back up demand for products.  That's what started happening in 2008, as RE explains, in the whole world.

So ignoring consumer debt, and assuming that the nation's businesses borrowed all the money that is in existence, and invested that money into the economy to produce goods, the businesses collectively distributed 100% of the economy's "money" into the system as their "costs of production".  So Costs = Money Supply.  Like interest, where does the money come from for them to sell their goods at a profit?  Short answer?  It doesn't.  The money to earn profits was never distributed into the economy as incomes.  So unless banks create additional money as consumer debt (or as new business investment loans), it is impossible for businesses in aggregate to earn profits.

Businesses collectively distribute 100% of the nation's monetary incomes as their costs, so at best they can recover all their investment and break even.  Once they get all their investment money back the consumers of the nation have zero income-money left to buy the remaining goods that are for sale.  Businesses earn incomes by selling their wares.  Businesses earn profits by selling their wares at prices above cost.  Consumers earn incomes by working for businesses, or they get it from governments who tax those incomes and give money to themselves and all the other recipients of government spending.  Governments merely redistribute national income.  They don't add to it.  Only businesses can ultimately create national income, under the workings of our monetary system.  So business costs = national income.  No profit is possible in this simple arithmetic equation, because the money for profits does not exist.

The profit system only appears to work if the circulating money supply keeps increasing:  businesses are continuously taking out new loans to expand their capital plant (paying out incomes that can be used to purchase past production of final demand goods), and if consumers are continuously taking out new loans to buy stuff.  "Investing" is actually "spending".  Investors spend money in the expectation of earning back more money than they spent.  Consumers do not expect a monetary profit from their spending.  Consumption is "final demand" for all economic goods.  But whether money is spent on consumption or investment, it is nevertheless "spent", and one person's spending becomes the other person's income.  So national spending = national income.  The nation cannot spend more than its income, unless somebody is adding new money into the system as new debt.  Without the constant ongoing spending of new debt money, business profits in aggregate are arithmetically impossible.

When people "save" part of their income they remove that money from the spending stream.  Their income was some business's "costs", so if people remove money form the economy by saving it then businesses cannot even recover the costs they spent into the economy, let alone earn profits.  It is human nature to save, but our monetary system cannot accommodate that human need without creating perverse and unnecessary consequences.  Our monetary system cannot satisfy our economic needs and it does not match human nature. 

I "believe in" capitalism.  Given human nature as it is, the profit motive really does motivate us to work, innovate, invest, and all the other good thing people do to create wealth.  We even accept a moderate level of taxation, sharing our productive output with governments and their beneficiaries, because capitalism makes us rich enough that we can "afford" to lose a portion of our wealth.  For capitalism to work we need a monetary system that allows people to earn profits.  But as I outlined above, our monetary system is essentially a zero-sum accounting system.  Spending causes incomes.  Incomes permit spending.  There is nothing left over to allow profits, or savings, or interest.

A nation's people cannot permanently spend more than they earn, in order for businesses to recover not only the costs they distributed as the nation's income but also some profits that motivate them (I should say "us", as I am a small business "capitalist") to keep investing and producing and hiring workers and buying from suppliers and paying taxes.  We have seen that in aggregate there can only be as much money in the system as the total principal balance outstanding on all US$ loans; and there can only be as much national income as businesses collectively spent as their cost of production, so in aggregate neither interest payments not profits are possible under the current operation of our monetary system.  And savings?  Fuggetaboudit.

Interest (or dividends), as John mentioned, is saver's way of participating in the profits of investments.  When we are old and feeble we need to earn interest on our savings in order to survive.  So interest is not evil.  It is necessary.  And the prospect of profits is the only thing that reliably motivates us humans to work at all (even caveman hunters "spend" their time and effort hunting game, and unless they earn more calories from the game they kill than the calories they spent hunting, they will be "losing calories" and they will die; even caveman hunters need to "profit" from their work).  So if interest and profits and savings are good and necessary, but not possible in our current monetary system under any conditions other than constant economic and monetary growth out past the Earth to the Moon and Mars and the stars, we should tweak our monetary system to make these good things at least arithmetically possible, should we not?

If we accept that we have to pay "taxes" in our capitalist monetary system, then there is a simple and fair way to tax all money.  The banking system has already been doing this since 1913, as TBP contributors are painfully aware of, by inflating the money supply.  But why should banks enjoy the privilege of creating money and charging interest on it?  Governments, not private banks, have the constitutional obligation to provide for their nation's money.  So instead of funding government spending by taxing people's private sector incomes, governments could fund all or some of their spending by creating and spending their own "free" money into the economy.  This adds money for people to pay interest on their old bank loans, and it adds money for investors to earn as profits, and it adds money for people to save.  Money supply inflation devalues people's money, and that devaluation is a "tax".  So without changing current government spending, creating and spending their own money could reduce government's need to tax us, and it would end the scary and unsustainable increase in government debt.  Why "borrow" money that is created by your banking system, when you can create that money debt-free for yourself?

I have been advocating a different way of getting additional money into the system.  Government creates debt-free money and gives it to all citizens in the form of a monthly "stimulus check".  I've suggested $1000/month.  Eventually this would allow all current bank debt + interest to be paid out and would replace that bank-debt money with a supply of non-debt money and banks would be reduced from their current money-creating heights back to their socially useful role as financial intermediaries, taking savings on deposit at 3% interest and lending them out to qualified borrowers at 6% interest.  Under this alternate "stimulus checks" system governments would still have to tax people to get their spending money, and this would help keep a check on government spending and control of the free market economy.  Eventually there would be enough total supply of non-debt money in the system and the stimulus checks program would either have to end, or be continued along with increased taxation to reduce circulating money supply and the inflation it causes.  

With $1000/month checks to everybody, nanny state welfare of all kinds could be reduced or eliminated. Americans would have money to pay off their current debts (a condition of the program would be that nobody can spend any of their checks until they have paid out all their existing bank debt), which would restore solvency both to households and the banking system that lent them money.  It would restore saving and it would add to spending, which puts the economy back to work making stuff to sell to consumers (after the unsustainable trade issues RE addressed are dealt with) The arithmetic problems of our monetary system would be solved, allowing capitalism to flourish without periodic money supply declines (Depressions) and ultimate collapse of the unsustainable system.

Similar solutions were advocated during the Great Depression by people like CH Douglas ("social credit") and Silvio Gesell (coupon money).  The banking system, of course, objects to such a change as it takes away their power to own and operate the world.  As financial intermediaries between savers and borrowers, banks are an essential element of a free market capitalist economy.  As creators and owners of the world's money, banks are a plutocratic government that rules the world with absolute power over our economic life and death.  Which kind of monetary system do you prefer?

@derryl: 

I had to stop reading at the one year pay back example because I disagree that fake money was created when the interest is paid back. The key is, what did that person produce in that one years time with the loan, and, what would have happened without the loan.

Those are the two variables that allow for additional money to be created. At some point however, there is too much money in the hand of the wealthy, and anytime that money is pulled from their clenched fist, they expect more in return.

But eventually, they have so much money that to create more and more profit for themselves personally will actually destroy the economy.  Remember what Gore Vidal said, Socialism is for the rich (too big to fail),  and free enterprise for the rest.  However, at some point.  If the fees associated with free enterprise are too "rich", the entire system will fall apart, and the wealth of the rich will shrink in dramatic fashion as the overall economy collapses.

@derryl: 

How did I KNOW Derryl would not be able to resist this thread?  LOL.

More from me later tonight.

RE

@JohnLounsbury: 

Responded to in the main John.

RE

You guys' sophistry dazes and confuses me. 

Where I think you are all wrong, including RE, is in failing to account for the value of the things that are being created for society through the interest bearing transactions.  "Wealth" is far more that just the amount of money you possess. 

If I have $20,000 of what you guys call "weatlh" and I take that "wealth"  and buy a new car with it, the world still has the original $20,000 (now in the hands of the car company) and a new car.   Where once existed just $20,000,  there now exists $20,000 and a valuable transportation asset.  Wealth has been created!  It would make no difference whatsoever if I borrowed the $20,000 rather than owned it myself as both the $20,000 and the transportation asset are both in existence, except that some of the value I received in the form of a new car is transferred to the person I borrowed the money from in the form of interest.  The $20,000 can now be invested into building another car and process begins anew, leading to the creation of another car, with the original $20,000 still in existence!  Now there's "wealth" flying around everywhere!

Things get screwed up when somebody jacks with interest rates in a manner that gives me (or, more accurately, my wife)  incentive to buy a McMansion rather than collect interest from loaning the money to someone to buy something he really needs, thereby increasing the "wealth" of society.   Malinvestments abound.  I don't give a flying crap whether malinvestment is a "macro" issue or a "micro" issue, it stops wealth creation, period.

The big problem is that natural resouce scarcity is treated as an externality for which no one bears the cost.  Nationalizing natural resources seems too awful to even consider, but I can't think of anything else.

@Gaffer: 

I thought I did mention that what interest rate charges produces is a key component to the value of the interest that is being charged, it was kind of my main point actually.  The problem is its not any bodies business how loaned money is spent as long as it is paid back on time.

As gaffer eloquently states, "....Nationalizing natural resources seems too awful to consider, but I can't think of anything else". (end quote).

A prime example of this would be someone who receives generous income from the petroleum industry.  If they use their profits to buy hummers and gas guzzling vehicles, we have created a self repeating cycle that strangles the future of the planet.

@derryl: 

And given the kind of monetary system we have, where ALL money begins as debt-at-interest to the banking system, there is no possible exogenous source of money (except counterfeit) to solve the interest problem.

And given the kind of monetary system we have, where ALL money begins as debt-at-interest to the banking system, there is no possible exogenous source of money (except counterfeit) to solve the interest problem.

Your analysis of the debt-money system is quite astute and on that very basis I caution you not to see that paradigm as an all consuming set of rules for market law. It's easy to get lost inside the belly of the beast and you just gave us a pretty nice tour.

Not all money is debt-at-interest in nature, simply all legal tender. Your statement above is false but I see your reasoning and it is based on perceiving the nation's debt based fiat currency as the only way of creating liquidity and servicing debt. Gold money (or silver), particularly fully gold backed digital currency fill the liquidity needs as this asset money is entered in circulation, debt-free, and allows for fiat to flow where it is most needed, to those who have debt. When that fiat currency is used to service fiat based debt and is removed from circulation, the gold and silver based currencies will have made up the potential shortfall in liquidity had the fiat game been the only one available as you have already described. The market is not limited to using fiat as currency. Legal tender "status" simply means that it cannot be refused.

Keep in mind that unlike fiat currency which gets created and destroyed, gold money remains.

Never forget the gifts of the Magi.

@bobby: I thought that Brazil waspretty smart about the use of sugar ethanol until I saw a special on Energy.  It showed cane fields as far as the eye could see--an ocean of cane fields that made enough ethanol for just 20,000 cars per day.  It may work in Brazil but it won't "scale up" for the US.

@cpigeon: 

The Japanese water powered car:  Unfortunately, the energy inputs are still greater than the outputs.

The president of the company said they had "succeeded in adopting a well-known process to produce hydrogen from water to the MEA", similar to the mechanism that produces hydrogen by a reaction of metal hydride and water.

Metal hydrides will react with water to produce hydrogen.  The "catch" is that metal hydrides that react with water don't occur naturally. So, it takes energy inputs to make the metal hydrides -- all require significant energy inputs to produce. The car isn't really running on water. It is running on a combination of water and a very reactive compound that must be replenished.

stuckin: look up Rothman Technologies in Tornoto , Canada, its been done....

@bobby: Brazil is about the only country in the world with enough intense sunlight and water to produce enough sugar cane to make this work.  If we convert the entire NA corn crop to ethanol, we'd only get one month of liquid fuel.

"Bottom line: the technology is here" -- but its still ungodly expensive - similar to what Eisenhower said, a dollar spent subsidizing alternative energy is a dollar taken from a poor child.  Even If energy produced by these technologies grows by 1000% they'd still only provide 10% of our current energy usage!

@flash: 

The Industril Policy article you linked was a interesting spin on how the subsidized factory production model took hold, and the implications with respect to the permanent war economy are impossible to deny.  Not sure exactly how quickly we will reorganize round small manufacturing though.  The problems of finding an adequate substitute for the current form of money remain an intractable problem for the most part.

RE

@ReverseEngineer:

It appears to me that a purposely  overly complicated monetary system coupled with  corrupt government, dwindling resources and an  increasing  population of  unemployed of slow learners  is fatefully coalescing into the perfect storm.

@Anonymous: If everyone alive today lets it. 

@JennJohnson: When you look at the amounts of money involved in credit default swaps the world over - many time the total world GDP - it seems a complete restructuring, one more representative of reality, will take place.  Maybe that's a better word than "collapse."

@JennJohnson: 

Well, social collapse and monetary system collapse aren't perfectly synonymous terms, although the first generally will follow the second.  Exactly how we access and allocate the resource base after MSC would be the determining factor in whether or not it results in SC, or rather how deep that SC is.

Regardless of whether we salvage the social system at some level however, this monetary system is TOAST.  Its a mathematical impossibility to salvage it.

RE

@JennJohnson: 

The problem is the promotion of innovation usually requires government intervention or tax incentives.

@Thurston Howell: 

Weren't you the voice of Mr. Magoo?

RE

What do you think of Nathan Martin's noble effort at monetary reform?

@ReverseEngineer: 

@flash: 

Nathan's website is a little diffuse and I am reading through parts of it.  He appears to be fighting the good fight.

RE

@ReverseEngineer:  Money and finance is not my forte' which is why I'm interested in input from those with greater depths of knowledge on the subject.

thanks.

@ReverseEngineer: 

Your conclusion, Ironically enough, points to the stupidity of the excessive interest rate charge game.  You stated..."The money we pitch out MUST represent the resource base, and it must decrease in supply in tandem with it.  That is the only way it can WORK  The paradigm of Capitalism does not WORK this way, it is predicated on return on investment which CANNOT occur here.  It’s a mathematical impossibility until Available Energy is once again growing and not shrinking."

The farther people are in debt, THE LESS interest rates they should be being charged as long as they are paying down their debt.  Paying down debt means they are no longer over excessively consuming more than they "deserve".  But when the banksters perpetually enslave these debtors for their own profit gain, they force these people to continue to overconsume just to tread water.  This in turn leads to an increase in resource drain and leads to more and more wars as well.

@Alessandro: 

Excessive interest rates accelerate the collapse, but any interest rate at all in an economy undergoing shrinkage is mathematically impossible.  Then you have to factor in how money gets drained out from an economy through balance of payments mismatches and the paradox of thrift, which itself is exacerbated when money starts earning any interest.

The Banksters will keep upping the interest rate to compensate for increasing defaults.  This is the only thing they can do to try to stay solvent.  It only works for so long, until a critical point where the interest rates cause a cascade of even more defaults.  Lowering the interest rates don't stop the defaults, it just slows them down some.  The bank is still rendered insolvent this way, because cash flow is negative.  Its an unresolvable problem unless you introduce non-debt based money into the system, but as I have argued with Derryl, this money itself will get consumed too rapidly in the deleveraging rocess worldwide to do much good.

Anyhow, I don;t disagree with you that high rates of interest will accelerate the crash, I merely try to point out to you that any interest at all is not possible to pay at this time nd that there are more factors to consider beyond the interest rates.  You don't seem to have any interest in anything other than interest though. LOL.

RE

@LucasJackson: 

When you look at the many depletion issues we are faced with, its not entirely clear that the NA Continent is THAT much better off than Asia, which of course has a MUCH larger land mass.  Depletion of the aquifers here in the FSofA is a major concern for the future, as is the distribution of water flowing off the slopes of the Himalayas toward China and India.  On balance however, given the relative population sizes, I would count NA as in overall better shape than most of Asia.

Far as New Gold being extracted, up here on the Last great Frontier, the take was about 800,000 ounces I believe.  To extract it however took an ungodly amount of energy I am sure.  Would you consider it a good use of a limited resource like energy to dig up a shiny metal which mostly just sits in basement safes of Gold Bugs around the world?

Is there any way out but Hyperinflation?  Wrong question.  Hyperinflation is not a way out, its just a finalization of the crash process. Hyperinflation renders the currency worthless, at which point nothing can be valued, nothing can be bought or sold.  It is no different in its final result than hyper deflation, which takes all the currency out of existence. While it is true all Fiat currencies fail, it is ALSO true that all PM currencies fail, which is WHY we have Fiat money to begin with.  If PMs could have kept working, we would still have them.  They do not keep working.  They crash just as often as Fiat does.  In biblical times they resorted to the Jubilee, ad that was when they used Gold as currency.  Did not work then, will not work now.

RE

@ReverseEngineer: 

it is ALSO true that all PM currencies fail, which is WHY we have Fiat money to begin with.

Trash talk ! Gold has never failed. It has never gone bankrupt and never become worthless.  The only problem past monetary gold systems have had is poor liquidity and digitizing the weight has now solved that distribution problem. Gold payments now have lightening speed.

Why don't you dig up a few horror stories on gold backed digital currency if you can find any ?

@therooster: 

 Gold doesn't have to lose its value to become unusable as a currency.  It merely has to become unavailable to use either through a balance of payments deficit or the paradox of thrift.

Gold still had value in England in 1692, just the problem was the treasury was bankrupt of gold due to costs incurred in the War with France, so there was no gold for the sovereign to pay the soldiers with, and no circulating gold in the marketplace.  Hard to use something as currency if its not around to use.

I suppose under your infinitelly divisible, perfectly liquid transfer of fully backed Gold Title over the internet, the English Sovereign could have kept funding the war simply by further dividing up the last Gold Sovereign in the Empire into nanograms and pitchingthe digibits at the soldiers. Assuming the soldiers felt their lives were worth nanograms of gold, this might have worked.  Elsewise, a bankrupt nation is SOL if it has no gold and nothing anybody wants to buy who still has some gold.

RE

@ReverseEngineer: 

Gold doesn't have to lose its value to become unusable as a currency.  It merely has to become unavailable to use either through a balance of payments deficit or the paradox of thrift.

Although you're not saying the words, you're referring to a historical hoarding issue.  Poor circulation and distribution. When gold does not have proper valuation and is perceived to be undervalued, people will "hold on for another day". Do you now see why the development of the real-time valuation was so important and why the fixed peg between gold and dollars had to be removed ?  It was a liquidity issue.

@LucasJackson: 

"New timber is being felled."

the timber business   is all but dead with equipment sitting idle all over the country.

If I had known then what I know now , I would have  clear cut my timber ,sold the property and relocated , possibly out of these fascists states.

@flash: 

Relocate to where?  Alaska?  LOL.

Nowhere left to run, nowhere left to hide.

RE

@ReverseEngineer:

Cold climes would never even be considered.

I'd rather die warm than be a shivering  survivor.

I haven't searched in earnest  due to family issues, but I'm chomping.

But  I have given  LA some  thought -bayou country-houseboat maybe?

@flash:  i have been to C.A. (central america not Kalifornia) and find it intriguing for a possible relocation scenario.  Maybe a nice 52 footer off the coast of Belize? 

@LucasJackson: 

One problem I've  mulled over while contemplating a move south of the border is in the advent of a global economic collapse how important would a Gringo's  property rights -or life- be to a impoverished population?

I'm good on the climate though.

@flash:  Belize has good private ownership rights for US ex-pats. Also no extradition treaty with US so a lot of white collar crooks go there.  Exchange rate was 1USD=2Belize Dollars.  They speak mainly english.  If shit goes haywire it might not be that cool to be the "odd man out" if ya know what I mean.  I have to check into their firearms laws there as well. I think this whole think will blow over and life will go on, but it does not hurt to have a Plan B.

@LucasJackson: 

Thanks.I'll keep that in mind while I vainly try to convince my family that this powder keg is about to blow.

And In their minds they pity the fool.

 I would so love to be wrong.

@LucasJackson: 

Belize?  You are joking right?  A tiny state surrounded by Mejico, Honduras and Guatemala?  There's a real recipe for a survivable Nation State in a monetary system collapse. NOT.

Most of Belize land mass besides the Maya Mountains is below 500ft above sea level.  If anybody there has anything worth stealing, they'll be overrun in no time by coastal pirates.  Does Belize have any Oil?  Does Belize have an army that can stand up to Mexican Drug Lords?

You can do a LOT better than Belize.  For an Anglo, I suggest New Zealand or BC in Canada.  My neighborhood here in the Matanuska Valley is officially CLOSED.  We have enough people already.  No more immigration to Alaska!

RE

@ReverseEngineer:  I would rather stay in my remote corner of Colorado than try to ride it out in Alaska.  Interesting and weird ideas you have regarding retreat locations.  Most literature I have read rules out Alaska as a viable location due to short growing season, extreme climate, lack of non-imported goods and consumables.  Belize interests me because it is not a military power, the islands are sparsely populated, not a lot of material wealth to attract looters, mild climate.  Plus it is helpful to be at or near sea level when you live on a boat!

@LucasJackson: 

Alaska's primary source of food for the human population has never been from the land, its from the offshore fisherie.  The fisherie up here remains highly productive, and for so long as it does there is an ample food supply.  In addition, while the grwoing season is short, the days are very long and tubers particularly grow very well.  Potatoes and Carrots are mostly locally grown for the market here in the Mat-su Valley.  Obviously as well, we can build a lot more greenhouses from all the glass on abandoned McMansion Vacation homes around here :-)  Prior to colonization and the destruction of the indigenous people here, Alaska supported around 60,000 people. Nowadays there are 10X that number, but chances are many will leave as job opportunities dry up, and in any event I think we still could locally feed 600,000 just on the Crabs if we stopped shipping them everywhere in the world.  Not  very varied diet, but I suspect we could trade crabs for produce grown down in WA and OR pretty easily.

Though the climate is cold for much of the year, AK still has abundant fossil fuel energy available to compensate.  The coal mine in Healy would heat all our homes for centuries if we don't ship it out.  There are actually some local oil wells which will still produce here in the Cook Inlet as well, and NG is available also.  Also, phosphates are in ample supply for the manufacture of fertilizer due to the vulcanism which is a major feature of Alaskan geology.  It is also not out of the question that we will drill the ANWR for Oil.

Living on a boat changes the equation some, Belize might work for a while, but I suspect Piracy to be a big problem down in that neighorhood as time goes by.  However, you do have mobility to get out asuming you are not the one falling victim to pirates too early on.

Main reasons I like Alaska is first off it so fucking cold up here most people don't WANT to come here.  The second reason is because it is a very defensible location because of the geography.  Mountains, lots of them.  Really BIG Mountains.  Mechanized armies simply cannot function well in the mountains.  Its why Switzerland was able to stay neutral though WWII; its why we cannot subdue the Pashtuns in Afghanistan.  Mountains are the Great Wall that God Built to protect the Independent Souls of the world.

RE

@Gaffer: 

I agree. Money is the grease that brings consumption and production together.

Right now, for the first time, really, the marketplace can control the gold monetary market which includes and embaces John Q's market influence and participation.

RE seems to prefer to live in isolation. He has the right, IMO.  I prefer to share and trade. I have the right, also.

@therooster: 

I hardly live in isolation Rooster.  I work with an organization serving around 1000 families.  I live in a small community yes, but it is not isolation.

RE

@ReverseEngineer: 

Don't be gobblin down your money !

@ReverseEngineer: 

Good. I hope that we can agree that liquidity is an important issue on the basis of our relations with other people.

Perhaps you have a local currency that is highly trust oriented, which I think can work well when the people are tight ?

The point is that the liquidity issue should be tackled in one way or another.

Ironically, the biggest challenge that gold systems of the past had was overcoming poor liquidity. Fortunately, real-time valuations and weight splitting have arrived.

@therooster: 

I would be comfortable running a straight accounting system with my friends with nothing whatsoever to back it up in terms of coinage.  What would back it up is what we produce in any given year.  There just aren't that many of us here that this would be all that hard to do.

Insofar as liquidity being a problem, it can be along with fungibility.  Not precisely the same concepts but close.  However, the main problems for any currency system at all are compounding interest, balance of payments and the paradox of thrift.  These are the challenges gold has never met, and I doubt ever can meet even if it is infinitely divisible, perfectly liquid fully backed gold title available at the speed of light over the internet.

RE

@ReverseEngineer: 

Interest is only a problem when currency is created from debt, exclusively or something that is very close to it. When you can enter an asset currency into circulation by way of work (instead of a loan) , then you can make up for the "currency shortfall" as a function of supply that is created when you enter other currency into circulation as debt.  Be careful. It's not the interest that is the problem.  It's the fact that P & I overwhelms the currency supply (P) if assets are not introduced debt-free. When assets are introduced, debt is manageable because the books can then balance.

This same quality of debt-free (unencumbered) money also helps for existing debt to be serviced. It allows fiat to flow where it's needed most, to those who have debt, while the asset currency makes up for the liquidity vacuum.

Eg : You buy gold from me in order to deposit into your goldmoney.com account because you want to circulate asset money. You have the gold money and I now have the fiat money. I can now spend the fiat or service debt with it.  Either way , it will find a need for its debt servicing support and go back to its creator.  It will be used to pay down debt and the currency will be withdrawn so that the supply of fiat in circulation falls back ..... but the potential void has been filled by your gold money. This is how asset money drives debt money out of circulation. Gresham's law no longer applies in real-time context because gold will not be hoarded on the basis of being able to get fair market value in terms of purchasing power. Hoarding was a function of fixed rates of exchange. People would hold on.

It's all good.

Never forget the gifts of the magi ...... I may have to crow three times.   :-")

@therooster: 

Interest becomes a problem when Assets lose their value.  This is the problem we have now.  Its impossible to value any asset right now, from the cars you own to the house you live in to the gold in your basement safe.  Assets are not static in value EVER, and they can in fact become liabilities.

Gold as an asset depends on people's perceptions of its value, which can change depending on what its supply is relative to everything else extant in the society.  If there are few of the essential commodities necessary for existence extant in your society, gold will hold little value.  eople will not trade their last loaf of bread for any gold at all.  If there is plenty, gold being scarce will hold larger values, which only leads to it being used as a store of wealth rather than a currency medium.  The stuff just won't circulate, regardless of whether its value is free floating or fixed.  The tendency is to hoard it regardless, because of its physical properties of resisting rust and decay. Beware of Magi Bearing Gifts.  You are getting a Trojan Horse.

RE

@ReverseEngineer: 

The current asset price problem (not value) is based on currency manipulation.

The asset values are fairly constant ..... it's the prices that change. Notice the distinction.

You won't find the bubbles that cause a yo-yo effect in a gold based money system.

The gold currency would greatly reflect on the real value pricing, unless of course, there's a supply/demand shock for the underlying asset that's being priced, such as a bad freeze in the agricultural sector. That's not a currency manipulation, however. That's a supply shock in terms of market fundamentals.

Gold as an asset depends on people's perceptions of its value, which can change depending on what its supply is relative to everything else extant in the society.

Good grief, you can say that about anything. I dont give a rat's ass about gold as an investment. Gold is a form of money. It's the supporting of liquidity within the economy that is of most concern to me. It's about economic trade.

If anything, gold production is on decline, so market fundamentals are in favour of a dollar price rise. That's fine because as long as gold trades in real-time (and can be split) , a gold money system can never have too little gold. It can only have too much based on the theoretical danger of inflation. Not likely , RE , not likely at all !  Are you going to start turning lead into gold ? If not, then there are no fundemental gold problems in the market to prevent gold from making a success out of a Millennial gold system.

If there are few of the essential commodities necessary for existence extant in your society, gold will hold little value.  people will not trade their last loaf of bread for any gold at all.

I'm inclided to agree but only on the basis that this condition you describe has been precipitated by a lack of production and productivity, most likely because there was too much debt in the currency system and it killed economic activity. Not my bag, man. I'm on to a solution but you keep running back to an old wineskin. No wonder you keep going back to these guns'n butter scenarios as you have little regard to how they can be averted. You cannot apply debt money principals to a gold money paradigm no more than you should be casting Shirley Temple in a slasher movie.

My apologies for not logging in to write the last post. An oversight.

@therooster: 

No apology necessary.  Your "New Wine, Old Wineskins" tag line identifies your posting as well as your nom de plume :-)

RE

@therooster: 

Actually, casting Shirley Temple in her heyday in a Slasher movie probably would be a blockbuster.  Imagine the possibilities of Freddy Kruger lurking behind the stage as Shirley sings “The Good Ship Lollipop”!

Be that as it may, asset price is not strictly a function of  currency manipulation.  Assets can lose value when there is a paradigm shift.  Very expensive Square Riggers lost about all their value with the advent of screw propeller driven cargo ships.  Expensive saddles lost their value with the advent of the automobile.  Today, McMansions in the far flung suburbs are losing their value because its no longer possible to afford the energy required to commute 50 miles each way to work every day.  SUVs are losing their value because its no longer possible to afford to fill them with gas and burn it at 10mpg.

Gold has none of the utility value that any of these assets had in their heyday, its value has always been based simply on its scarcity, its durability and the perception people have that it is a store of wealth.  Once that perception changes, for whatever reason, its value can fluctuate dramatically.  The mere fact that most people these days do not possess any gold at all already meaningfully changes the perception of its value.  As I mentioned as well, scarcity of goods with real utility also will meaningfully impact on the value of gold.

At least in the FSofA at the moment there does not appear to be a real scarcity of goods, just a real scarcity of money available to J6P and a scarcity of jobs by which he could earn some money.  I do not see the mechanism by which “fully backed Gold Title” (since the actual gold itself would mostly not be held by anyone who does not already have some) will be distributed out to J6P, nor do I see how it will engender new job creation when we have a decreasing amount of available energy to work with.

Also, as you know I really don’t see the validity of the New Wine in Old Wineskins analogy you always make.  Wine of any age is just  liquid, and Wineskins of any age are just containers for liquid.  You could put Old Wine in a New Wineskin or New Wine in an Old Wineskin just the same, as long as the container held enough volume to fit the liquid.  In any event, I am not trying to put Gold into any Container at all here, all I am doing is pointing out the limitations it has for representing real value in any quantity whatsoever.  However liquid you make it, however small you divide it up, you still face the same problems of aggregation, you still face the same balance of payments problems, you still face the same problems of compounding interest as long as you continue along the paradigm of capital accumulation and investment, which really is just loaning money with the expectation it will return more later in the form of dividends or the appreciation in the price of a stock.

So, I remain unconvinced that Gold is a solution to the monetary dilemma we are faced with here, and your injunction to remember the Gift of the Magi does nothing to convince me either.  If you can demonstrate to me exactly how infinitely divisible gold will get distributed out and how it will create jobs and how it will avoid the problems associated with compounding interest, then I might consider this a more valid solution.  So far you have not done that, at least to my satisfaction. Old Wineskins and Magi Gifts are not a sufficient explanation for me to understand how this is going to work.  This may be a failing of my imagination or it may be a failing of your ability to make clear the concepts, or some combination of the two.  If some third party here understands what you are saying and can explain it in another way, that might be helpful.  Otherwise, we seem to be stuck at an impasse, it’s a Failure to Communicate.

RE

@ReverseEngineer: 

Be that as it may, asset price is not strictly a function of  currency manipulation.  Assets can lose value when there is a paradigm shift.  Very expensive Square Riggers lost about all their value with the advent of screw propeller driven cargo ships. 

That's an fundamental issue of something that currency trades for, not a function of the currency. It not a manipulation of market fundamentals by man.  It's a non-issue in this discussion because we are determining an optimal currency concept while taking asset values into account that may be manipulated by an underlying currency. Your comment , although true , falls outside.

Gold has none of the utility value that any of these assets had in their heyday, its value has always been based simply on its scarcity, its durability and the perception people have that it is a store of wealth.  Once that perception changes, for whatever reason, its value can fluctuate dramatically.  The mere fact that most people these days do not possess any gold at all already meaningfully changes the perception of its value.  As I mentioned as well, scarcity of goods with real utility also will meaningfully impact on the value of gold.

Gold's value is as money, not in its non-financial utility use. It's the stability of gold that makes for good money and that is said from a gold paradigm, not a fiat paradigm. I don't confuse gold as an investment/store of value vs gold as money as most do. Liquidity and store or value are important qualities. The rare nature of gold is part of its intrisic value of forcing it finished supply to adhere to market laws ..... that's a value.

At least in the FSofA at the moment there does not appear to be a real scarcity of goods, just a real scarcity of money available to J6P and a scarcity of jobs by which he could earn some money.  I do not see the mechanism by which “fully backed Gold Title” (since the actual gold itself would mostly not be held by anyone who does not already have some) will be distributed out to J6P, nor do I see how it will engender new job creation when we have a decreasing amount of available energy to work with.

Liquidity is very key .... preferably without the blowback of debt. Liquidity is crap right now. Ask people trying to get financing.

Also, as you know I really don’t see the validity of the New Wine in Old Wineskins analogy you always make.  Wine of any age is just  liquid, and Wineskins of any age are just containers for liquid.  You could put Old Wine in a New Wineskin or New Wine in an Old Wineskin just the same, as long as the container held enough volume to fit the liquid.  In any event, I am not trying to put Gold into any Container at all here, all I am doing is pointing out the limitations it has for representing real value in any quantity whatsoever.  However liquid you make it, however small you divide it up, you still face the same problems of aggregation, you still face the same balance of payments problems, you still face the same problems of compounding interest as long as you continue along the paradigm of capital accumulation and investment, which really is just loaning money with the expectation it will return more later in the form of dividends or the appreciation in the price of a stock.

The old wineskin cannot contain the new wine. It will burst. Do you know the history of the parable ?

The real-time, floating currency environment affords new applications. This could not be "poured" into the 19th century, as an example of incompatibility. The 19th century could not "contain it".

So, I remain unconvinced that Gold is a solution to the monetary dilemma we are faced with here, and your injunction to remember the Gift of the Magi does nothing to convince me either.  If you can demonstrate to me exactly how infinitely divisible gold will get distributed out and how it will create jobs and how it will avoid the problems associated with compounding interest, then I might consider this a more valid solution.  So far you have not done that, at least to my satisfaction. Old Wineskins and Magi Gifts are not a sufficient explanation for me to understand how this is going to work.  This may be a failing of my imagination or it may be a failing of your ability to make clear the concepts, or some combination of the two.  If some third party here understands what you are saying and can explain it in another way, that might be helpful.  Otherwise, we seem to be stuck at an impasse, it’s a Failure to Communicate.

Answer me this without wandering or pandering to be right for the sake of being right, please.

If a currency can enter circulation, debt free, as an asset and it has a distribution system that supports very good liquidity, would that be a good currency system for stable and gradual growth ?

As far as entering that currency into the economy, consider the following at the micro level. Hopefully, you will see why we simply have a marketing problem and not a problem that goes back to systemic design -->

I'm an exchange provider. You have cash as a function of some savings.  You buy some gold from me for deposit into a gold backed digital currency system.  You now have gold money, completely debt-free and unencumbered and that gold is completely liquid with a simple mouse click

I, on the other hand, have fiat currency as a result of your purchase. I am free to pay down debt or spend this money and on the basis that I spend it, it will likely end up back at the creator's doorstep on the basis of fiat demand in order to service debt. The debt repaid on the fiat and is removed from the books and currency destroyed ....... but the gold you bought (for the application of money) has now filled the currency supply void for the sake of liquidity. Available currency has no net change, while debt has been reduced.  Voila !

It's my opinion that Gresham's law applies in a non real-time context. When gold finds its "monetary price", people are more apt to feel that they are getting a fair trade and are much more apt to "let go". Gold hoarding of the past was mostly a function of people not feeling that could get fair value. Real-time gold solves this issue on the basis of gold finding "its price" in order to enhance lquidity. When the market determines this (or comes close) good money will drive out bad money. Greshams law is now reversed because of real-time valuations and because gold currency is easy to move. Debt will leave while gold fills what would otherwise be a vacuum.

Comments ?

@therooster: 

"If a currency can enter circulation, debt free, as an asset and it has a distribution system that supports very good liquidity, would that be a good currency system for stable and gradual growth ?"

Big IF question.  How does the currency enter circulation debt free and what makes it an asset?  How do you intend on getting your debt free asset money to the population at large?

Asuming you can explain that, no I don't think that would be a good currency for stable and gradual growth as long as Available Energy is decreasing.  I don't think ANY currency can in and of itself provide a means for growth if the resources are not there to support the growth.  All a good currency could do is accurately mirror the underlying the growth or shrinkage of an economy.  An asset based currency, IF you were able to get it distributed and IF the asset had a universally accepted value which did not change as the underlying economy changed MIGHT be able to mirror the real economy accurately, but no asset including Gold has a Universally accepted value that does not change.

If Gold gets any real traction as a currency medium again I will be surprised, and it will be interesting to see how it gets distributed out.  Meanwhile, I will drink new Beer out of new Cans until they disappear from the shelves, and not worry too much about the Old Wineskins.

RE

@ReverseEngineer:  Hello old bean! Long time no type for me, but have grown interested in your thoughts here.

Value is a slippery little bugger I've wrestled with myself. The folly of economics is it thinks you can establish and fix value monetarily via some absolute like gold, when in fact value arises out of ever changing relationships between ever changing variables. From the human perspective the most important generators of value are energy and the capacity of the environment to support human life (and perhaps yield surplus). Is there a currency that can tie itself fast to this obvious truth and remain uncorruptible? The now deceased Dr Arthur Shaw thought so:

http://www.grb.net/

Perhaps you've heard of him already. Either way I'd be interested to hear your thinking on his thinking.

A thought for the day: economics can attribute no value to air, because air can neither be owned nor controlled, and is everywhere available to everyone (except for underwater of course). Is this inability of economics to deal with an essential environmental variable like air a hinderance? Or a boon for clarity in preventing "mission creep"?

@Toby: 

Been a while indeed, old chap!  Good to hear from you.

Not previously aware of the work of Shaw, but I will give it a read tonight.

Far as the air goes, Capitalistas haven't been able to own and sell that one...YET.  However, I could imagine a city where the air was so polluted everyone had to carry bottled oxygen around, which most certainly would be sold for a profit.  The Slogan of General Air Company, "As long as you breathe, we OWN you".

RE

@Toby & @ ReverseEngineer....Well, in terms of pure economics -- yes you could safely say that air has no value at all. Although I must concede that Ben appears to be doing quite well with "thin air" in support of his quantitative easing and dollar value.  But I guess I digress, this activity could hardly be called good economics I'm thinking. There's probably another less flowery description for it. Best ask Ben maybe. Nah, bad idea....

@slowsmile: Correct. The last chance America had to blow its collective deficit spending wad was 2009. Instead, the bloated public entitlements were paid alongside the TBTF crooks. These have zero incentive to identify top-notch innovators and fund them. I imagine the citizens will call for a Consititutional Convention by the 2012 elections and begin restoring the Republic, more like a restructuring.

It is going to take several years to clean out the political system from here, only for the citizens to be dictated demands by sovereign powers on debt obligations. It is going to get messy. However, I am long the American people. PERIOD. I do not believe these powers are going to pleased with the final outcome down the road. A shame mankind refuses to learn from history.

@slowsmile: 

The assumption in this argument is that the absolute resource base of the ME, Brazil, Russia et al is significantly greater per capita than the resource base in NA.  I am not sure that is true on any level, for any number of reasons.

First off, I would not strictly count the resource base of any country or land mass simply on the basis of how much Oil still is sitting under that particular plot of land.  I do not know, nor does anyone else I think exactly how much accessible oil Russia has at a high enough EROEI to make it significantly profitable to drill for, and then bring to market across expensive to maintain pipeline structures, which in many cases have yet to be built.

For countries in the ME which still currently sit on quite a bit of Oil, they are subject to the fight for that Oil from everybody else.  Just because it sits under whare you live does not mean you can PROTECT your ownership of it or bring it to market either.  Iraquis might by birth in theory "own" the oil they live on top of, but if somebody more powerful subdues them and takes it, they lose the ownership of it.  They are not rich because they live atop the oil, they are just a target for others who want the oil they have.

Beyond all that, the actual VALUE of the oil here will diminish over time. This because it is a complex infrastructure that is necessary to make use of that oil.  If you do not have factories that can make a profit building ICE that will use the oil, the oil has less and less value.  At the point where you cannot keep the whole energy production and use paradigm functioning, the oil will become in practicality VALUELESS.  This is not as far away as most people think it is.  No more tha 50 years IMHO.

That is not the end of the devolution analysis either. The fact is that the actual FIGHT for control of what oil is left will burn or render iretrievable many currently active production facilities for oil.  If as is quite posible the Israelis Glaze Over Ira with a few nukes, its going to be quite impossible to go drilling there for a good while, at least not without all your oil workers succumbing to some serious health issues.  Building Robots to do the work will take some time also.  The FIGHT to get the remaining resource itself takes that resource out of general circulation.

Oil also is NOT the only resource to consider here, another imortant one is WATER.  the ME is noticeably LACKING in water resource, and this will impact their survivability even if they have plenty of oil in the ground.

By no means can you predict the ME States or the Ruskies will come out on top here as we spin down.  Each neighborhood has assets and liabilities to be considered, and prime among them is the population base itself.  How the remaining human beings interact with each other, whether they cooperate or fight will determine how successful they will be as much as the absolute resource base.  Those who cooperate and work together will WIN.  The Meek Shall Inherit the Earth.

RE

@ReverseEngineer...I certainly agree with most of your points, but perhaps America's foreign resource protection methods are noticeably running out of steam now.  Within 6 months of Sadam Hussein threatening to sell Iraqi oil for Euros, America had attacked and overthrown his regime and were in full occupation. But Iran has also surpisingly and successfully rebelled and is also blatantly inventing her own WMDs; she sells her oil in anything but the dollar and has done so for a while now -- the Iranians have even set up a major independent oil trading bourse at Kish Island in Iran -- all up and running, no dollars sales allowed. So even with Iran rapidly approaching nuclear ballistic capability as well as selling their oil in Euros -- America, Israel and Europe can do nothing. I fully agree with their constraint, better the devil you know than a truly nightmare oil scenario. I wrote about this here:

Iran: All Tough Talk, No Real Solution

My own belief here is that Russia is using Iran (and probably Afghanistan) as a pawn to strain and drain America's martial capability. Russia can do this with impunity and will gain considerable advantage, because if there is an eruption in the ME and Iran is attacked or bombed, brother Shi'ites in Iraq will rise up in rebellion against their American-led democracy and the Hezbollah(Shi'ites) in Lebanon will follow, and probably the Gaza Palestinians will all rise up together for a full tribal brew in the ME against Israel and whoever else. And all oil will stop flowing from the ME. And if this happens, which country becomes the prime producer of oil and gas?

Russia. 

Regarding water, there are only three regions/countries in the world with their own sustainable and natural freshwater supply. Canada, Brazil and Russia. Ah yes, Russia again !!

So Russia seems quite well positioned here.

The weakest link here is perhaps Israel who are, at the moment, obeying America's wish for restraint against Iran. But as that time approaches when the Iranians have a fully working nuclear bomb, Israel may well consider that they must attack preemptively for their very own survival as a nation. This can be their only valid reason for a war, but it's effect will make the world completely naked and barren of its most essential energy resource. 

@slowsmile: 

It seems to me you are applying geopolitical game theory of the Trilateral Model, doing a kind of Kissinger/Brezhisnki analysis.

I will agree with you that the Ruskies have some cards to play that they are currently using, and so in fact do the Chinese.  However, I think the trilateral model will break down with the failure of the conduits.  I do not see it as possible that any of the 3 major powers wil be able to exert sufficient hegemony over all the conduits so as to render their particular geopolitcal sphere any more sustainable than any of the other ones.

What that means in racticality is that each of these places will become more embroiled in internal conflict than in international conflict.  It is a race to the bottom here, and devolution of the conduits means devolution of each of these societies.  They simply will be too busy fighting amongst themselves to have resources to fight each other meaningfully.

RE

@ReverseEngineer...Between China, America and Russia, Russia has the most valuable and numerous essential resources, China has the largest manufacturing base and America is left with just her martial capabilities. As I see it, if China and Russia ever become economic partners, this would perhaps also be the worst economic scenario. Because Russia and China are the perfect economic fit -- one with all the resources, the other with all the workers and manufacturing capability. Lucky, really,  that these two are still both bickering and vying geopolitically for that Top Dog position.

@slowsmile: You and I seem to agree on where all of this is headed which is a ME war with Russia as the benefactor. Such a conflict at America's weakest economically would be a disaster so that is why it is so likely. The consensus for such a conflict seems to be this year. I believe your enemies attack you when least expect it.

2013 is the year I expect the ME conflict and 2015  (The Year of the Ram) will be a major conflict between North Korea and South. This conflict would quickly spread into the Sea of Japan and become a world war. History is repeating. I expect it to all be over by 2021.

The bad news about my forecasts Slowsmile is I have been correct about them within a month since 2002. I creep my business partner out. I have told him he needs to be able to be completely self-sustainable before 2013, unless he wishes to be waiting in line for his 1,500 calories per day like in the Soviet Union of old.  

@JasonRines: 

I don't have any problem with your timeline Jason, or your choices of hotspots which will ignite.  The problem I have with history repeating here is that I don't see how the US, China or Russia could mobilize large invasionary forces and move them around the oceans of the world without them being sunk like so many sitting ducks.

In WWII we could land a large invasionary force on the beaches of Normandy because the Krauts didn't know until the very last minute exactly where our ships were  or where they would land.  Nowadays, the Chinese and Ruskies would know the minute the ships leave port and take them out with missiles launched from submarines 300 miles away.  Similarly, we would know the minute a Chinese troop ship left Hangzhou.

Its one thing to move around the small armies in all these proxy wars, its a whole different set of problems once the 3 major powers are confronting each other directly, and that is without even considering the Nuke options. By the 2015 date you mention all 3 of these economies will be in such a world of shit its hard to imagine how there will be any political cohesiveness inside these nation states.  Chinese provinces are already breaking out in revolts.

I see World War coming down the pipe here, but it comes in the form of many Civil Wars mirroring the many Sovereign defaults happenning now.  The logistics of the large nation states fighting each other would be extremely difficult to overcome.  Not impossible of course, but even if it does occur it won't last long.  The hardware will go down to the bottom of Davey Jones Locker faster than anybody can build new ones.

RE

@JasonRines: 

So then how would you figure the war to be fought?

RE

Jason...I completely agree that we are headed for various conflicts, though my own timeline is between 2012 - 2016 -- very similar to yours. The first event will, perhaps, arise from a Chinese Taiwan takeover by the Communists. This takeover will succeed. From this point, North Korea will pose problems  -- but this really depends on how ill their leader -- Kim Jong Ill -- really is. His son and possible successor has, apparently, been completely educated in the West, so he might actually have a brain in his head.

Iran is the greatest threat to stability, this war could kick off within the next 18 months or so -- Israel will attack first as is her historic habit, a huge ME Muslim Shi'ite tribal uprising will ensue and the ME oil feed will all but cease, which is bound to greatly reduce pollutants like methane and carbon dioxide in our atmosphere, and should send proponents of Climate Change energy reduction into a fit of ecstatic glee(sic)...

America will be further drawn and emboiled within the ME conflict, because of her continued and dangerous presence and  involvement with Afghanistan and Iraq -- she will simply have no choice. Russia will be sitting quietly, moving her loyal and bought international pawns deftly this way and that in the ME conflict, continually drawing deep blood from America both economically and martially. There would be minimal support from Europe towards involvement in this ME conflict, Putin's hand on Russia's oil and gas tap into Europe would be the only necessary method of persuasion here.  

There will be trouble between paranoid Japan and China, as you say, but there may even be martial problems arising between Russia and China soon. China has a habit of reclaiming ancient lands that aren't hers. With a land army of 3 million, who's going to argue? China has done this with Tibet and various border areas of India, but the real reason for this is China's growing and desperate need for water -- both to feed her voracious industry, as well as for farming and keeping her populace fed. Lake Baikal, a huge Russian freshwater lake on the very border between northern western China and Russia that holds 20% of the worlds freshwater supply, will be the ultimate Chinese goal. The reason, again, will be to ostensibly to reclaim this area -- once known as the Xiongnu region of Old China --  that the Russians "stole" quietly from China between 1628-1658 with no treaty or purchase agreement. Reclaiming this area would solve many of China's current water, farming and food problems. This conflict will probably be fought as a conventional border war, since it would be really dumb to radioactively pollute the very resource that you are fighting over.

And I still hold that if there is any direct, serious conflict that arises between the US and China, then the Dragon's only possible means towards any martial advantage is by a discreet and preemtive biological attack on the US mainland. Also add to this that humanitarian principles have never been such a big strong point with the Chinese Communists. And this is the only way you can conquer without making the conquered lands entirely radioactive, barren and useless for thousands of years. China needs food and water after all. It's not a nice thing to consider, but it makes perfect logical sense to me.