Brilliant analyses and discussion! Thanks Mish!

These ideas are supported by a often overlooked political, social, and economic analysis of the Dutch, Spanish, British, and American empires that Kevin Phillips published nearly a decade ago (Wealth & Democracy, A Political History of the American Rich, 2002). In it, Phillips notes parellels in the flow of wealth, how wealth is created, and the strength of a democracy. The final stage of each empire was some form of creating wealth through paper instruments accompanied by senseless wars that further squandered economic, social and political capital.

Phillips was the Republican strategist who accurately predicted the shift in power to the Republican Party based upon the now infamous southern strategy that was in part based upon social reaction to the political movements & social change movements of the 1960s (The Emerging Republican Majority). He then was shocked by the rush away from true conservative economics by the Republican Party under Reagan and Bush, and published a book about the growing divide in the nation (The Politics of Rich and Poor). He has many other books. Definitely an author to know.

Until The gov. admits to having baked the economic cake, we won't move forward. The real value of the economy is overvalued by the amount of un-earned income, called debt, we have accumulated. All the gov. can figure at this point is pour on the un-earned income in the form of stimulousy money. Without that type of nonsense, the economy would retrace to a real value, then we could possibly move forward. We would have learned what it actually takes to pay back all the unearned income, and moving forward, we might even be more adverse to new debt accumulation. Ahhh, But then the gov. would default as it is only capable of functioning financially with ever increasing growth. It is a shame that the ideals our country was founded on have shrunk to this level of democracy. Thanks for the article.

IMHO, governments are already using war as a distraction.

Iraq and Afganistan are both "made up" wars that have done much to distract both politicians and the public from economic issues at home.

Terrorism is more properly conceived as a criminal justice issue, rather than a "war" between soveriegn entities.

Faber's remarks are a description of the current reality, not a prediction of some future reality.

Dear Mish,

Where I live there's a clear duality, either the Peso looses value and savers hop into Dollars or the other way around with some nuances. That's why I don't understand the part of the debate that says that everybody is going to debase.
Is it possible for ALL currencies to loose value at the same time? If inflation threatens all world economies, aren't savers going to selectively choose a specific currency as a keeper of value and therefore maintain that currency's value?

Many Thanks

Great, and chilling article. My two cents.

The great ship that carried the world to prosperity has tilted dangerously to one side. That great ship is the S.S. Carry Trade.

History of this great vessel of prosperity.

When developed nations no longer could sell enough goods internationally to support their living standard, they tried low interest rates. It worked. Economies moved out of recessions. Everyone seemed so prosperous, and the central bankers at the helm seemed so powerful, and really smart.

Investors borrowed in yen or sometimes U.S. dollars at low rates, converted the money to other currencies, and spent that money overseas in emerging markets where it turned poor countries into factories. But who would buy all those goods?

Simple, the buyers would also borrow. To keep their currencies low the Japanese and Chinese bought massive amounts of US debt, including long term bonds and mortgage backed securities (an explanation for the “Great Conundrum” of Greenspan). With low long term rates, real estate values soared and now rich consumers could borrow and buy the stuff made in emerging markets. With both purchasers and producers of goods getting easy cheap credit, the Great S.S. Carry Trade churned through the waves of liquidity, with rich producers and investors on the port side, and rich consumers on the starboard.

True, there were some stormy moments, especially in 2008 when investors panicked. Stock and commodity prices tumbled, currencies rates changed rapidly and those holding carry trades shoved each other aside for a place on a life boat or were thrown overboard by their nervous lenders. The battered S.S. Carry Trade seemed headed for a watery grave.

But now with US overnight rates now at zero, the S.S. Carry Trade has returned.

With a new twist. This time, so far, almost all the passengers are on the port side. No one wants to loan to the US consumer, and the US consumer may not even want to borrow (although I have my doubts about the latter).

For political reasons, Japan and the US can not raise interest rates. And so investors in the US can and will continue to borrow, convert some of that money to foreign currencies, driving down the USD (and making money from the currency move alone), and then buy anything, everything, and as long as others do it, the prices will go up and up and up, and…

Emerging markets will be buried in money, and can build mines and factories without limit. Someone will buy all the stuff, someday, right? The orchestra plays on. Everyone is rich and happy on the S.S. Titanic, I mean S.S. Carry Trade. Top financial bureaucrats in China and the US, and at the IMF can rant and rave about the course of the S.S. Carry Trade, but no one seems to be at the helm anymore.

It will be a fun and profitable trip, with lots of cigars smoked and champagne drunk, but how does it end?

What happens to an overbooked ship if all the passengers lean out over the railing on only one side of the ship?

And if you make lots of money, what good does it do you, if the result is financial shipwreck, political turmoil, and war?

Doesn't anyone have the political courage to pay the necessary price to avoid all of this?

Thank you. Bill

If this all comes about, the store of valve will be in precious metals.

I think the person with the courage has to be us. A leader who emerges out of this mess will be someone who is very angry. We will rally behind that anger and then we will find that the leader is really a very angry person who is out of control and undoing wrongs done to him/her many years ago. Beware this leader.

We've seen this play before in Germany.

all you have to do is read the Koran (sura 9:29), the Haddith and the Sunna to know that someone, somewhere will always be at war with everyone else unless they submit to their beliefs...

This is a very good point given the world has witnessed the likes of Lenin, Stalin, Hitler, Mao, etc in the last century. The bigger risk to the madman at the helm is the money that backs this individual. The Republican southern strategy unleashed the the right wing tea parties and this Party is still catering to its extreme ideological pure side. For all the faults of the Democrats, I don't see a demagogue on their side yet. Eisenhower's admonition against the military-industrial complex is alive and well. Who is the money behind the Iraq/Afgani wars? I am not advocating any conspiracy theory here, simply noting that our politicians are bought and paid for.