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Interview: Straight Talk With Independent Journalist, Charles Hugh Smith, Part 1

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Charles Hugh Smith explains why the status quo is unsustainable in answers to questions submitted by readers.

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As interest rates rise and the stock market rolls over along with corporate profits, then another $10 trillion or so of bond and stock equity will evaporate. Given a decline of $20 trillion, then the Fed's expansion of its balance sheet by $2 trillion doesn't seem so mighty or irresistible.

As for the dollar's long-term viability as a store of wealth: There is precious little evidence right now for its long-term future, but the value of a currency is a political process more than a financial one. A currency is a claim on a nation-state's income stream and viability, so if those are devolving then so too will the currency.

Sentiment is so negative on the dollar that I expect the opposite to occur. How could this happen? A political change in 2012 might shift priorities and instill some confidence that the US is actually ready to deal with reality.

That said, assets such as income property, productive land and energy will retain value whether the dollar is destroyed or if it confounds us all by stabilizing. Wealth held in any currency carries intrinsic risk, but over the next few years the dollar may surprise us by strengthening considerably. That would give those holding dollars a golden opportunity to transform paper into real assets which have been depreciated by the global depression.

You make a key point about interest rates being subverted. I suspect that State manipulation can only run so far, and then market forces and asset deflation will kick in. Again, the high-probability catalyst in my view will be the public and political class's loss of faith in the Federal Reserve's manipulations of the economy. I expect 2012 to be a pivotal year.

3. Do you think we as a society/world are going to pull back from the brink of collapse we appear to be teetering on? Or do you think it's more practical to plan for how best to pick up the pieces afterward?

CHS:
There are numerous feedback loops at work and so things rarely proceed in a straight line. Governments will continue creating credit and money in hopes of overcoming the destruction of assets, and nobody knows how long that charade can continue. It may run longer than seems possible, just as the housing bubble ran for three years past what was already an unprecedented top.

I lean towards a "defense in depth" approach where we have an A, B, and C response. What can we do in present circumstances to increase our resilience and sustainability? That would be A (the simple things like conservation and cutting expenses) and B (harder things, like creating a new income stream or moving closer to your job/source of income). Option C would be a plan of action if things fall apart. Even then, most of us might be better off staying where we are, if we have a social network of support and sharing.

4. There is no shortage of criticism for the mess we find ourselves in. Far more scarce but much more important are solutions. How does the world restore fiscal "soundness" and what needs to be done to set the stage for a rebirth?

CHS: The reliance on credit rather than on capital will have to end, and that means the demise of the credit-based consumer economy run by the Central State and global cartels.

The State fiefdoms and corporate cartels have every incentive to maintain the status quo, so change will probably come from unconventional innovations. I'd like to see a private, asset-based global currency arise, for instance. Since it would not be a nation-state's currency, it would be relatively free of political intervention.

I tend to see parallel private-sector structures (opt-in, open-source) as solutions rather than counting on the bold revamping of status quo, Financial Power Elite-dominated structures. The incentives in these dominant structures are all to retain the status quo at all costs. So solutions which don't rely on their approval are more likely to occur.

5. How does the general citizenry take power back from the plutocracy you write about that has amassed a supermajority of wealth and power in the world?


CHS: I think voting against conventional politicos who are indebted to the status quo Power Elites and voting for any politico who dares to speak honestly about power structures and sacrifice is worth a try, as it is essentially cost-free.

Voting for third-party candidates seems quixotic but as the public loses faith in the traditional sources of authority then viable third-parties might arise, at least locally.

"Starving the beast" by eliminating debt and financial churn is also a twofer: It reduces the income streams of the Plutocracy and accumulates capital for households. A society without mortgages or credit cards would also be a society without "too big to fail" banks. Commercial credit of the sort needed for business does not require global investment banks or shadow banking empires.


Check back here for Part 2.
No positions in stocks mentioned.

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