Aftershock and Bubblequake – the viewpoint of David Wiedemer
What is the message of Aftershock and Bubblequake written by Dr. David Weidemer, Economist?
I just finished reviewing the book Aftershock, a recent publication on economic trends which are now developing as well as a history of past bubbles which have emerged within our global economy. This book is written by Economist, David Wiedemer, Madison, Wisconsin. David is chief economist for the Foresight Group: www.theforesightgroupinc.com. Overall, I tend to agree with much that David presents in his recent book. What do I agree with and what do I disagree with?
David presents the theory that our Keynesian based economic system is designed to produce a series of bubbles or psychological extremes which then lead to an ‘aftershock’ which punctures the prior bubble, which then leads to another bubble and another ‘aftershock’, etc., etc. He has identified a total of six major bubbles…four of which have been punctured to date…with two still pending. What are these bubbles and what is causing the bubblequake?
The four bubbles which he thinks have now been punctured are:
1. The real estate bubble 2. The stock market bubble 3. The private debt bubble 4. The discretionary spending bubble
These bubbles can be basically defined as ‘psychological’ in nature as people ‘blow-up’ these bubbles with easy credit and money created by our commercial banking system. Consumers, investors, entrepreneurs, and our government obtain easy credit via our Keynesian economic policies and then ‘blow-up’ markets or sectors of our economy to create a bubble situation. After a bubble reaches a certain threshold level the bubble gets punctured and the ‘aftershock’ is the consequence. We could imagine the tsunami in Japan as a type or model of this process. Pressure gets built-up within a fault line on the ocean floor and eventually this pressure bursts forth and causes an earthquake which then causes the tsunami which then creates an aftershock or consequence to the lifestyle of people and the overall economy.
David also presents the view that these bubbles (being psychological in nature) do not reflate after bursting. What happens is that each bubble once it is deflated tends to stay deflated. Then a new psychological bubble is created to keep the overall economy from a total collapse. The next two bubbles which are now developing and which are destined to burst in the near future are:
The dollar bubble is being caused primarily by the policies of our Federal Reserve System and specifically by the QE policies of Ben Bernanke and his FOMC committee. What we are doing now is increasing the monetary base via ‘printing’ of money to prevent an immediate collapse of our economy. David calls the Fed’s policies ‘printing’ of money where I use the term ‘digitizing’ of money. In reality, the Fed no longer actually ‘prints’ currency notes as they now just ‘key in’ numbers or digits into their master money computer at the NY Fed building and then they use these digits to purchase assets from whomever they desire…currently mostly U.S. treasury securities.
The dollar bubble will develop as our currency is inflated by the actions of the Fed and our commercial banking system and this action will then lead to a major inflation in asset prices down the road which then will lead to a rejection of the dollar as a viable world reserve currency which then leads to another ‘aftershock’ or dollar collapse. In conjunction with the dollar bubble we will experience a major government debt bubble which can not be repaid as we do not have the revenue to service this growing debt which is now unsustainable. This debt bubble will then lead to another ‘aftershock’ as the market refuses to accept our debt and as higher interest rates create an impossible situation for servicing this debt. Basically, I have also expressed these sentiments in my blog for the past three years. What do I disagree with and what is David missing within his overall analysis of our economic situation?
What David is missing, in my opinion, is an understanding of the causes of this bubble crisis and the nature of our money as it has evolved. The real cause of our current bubble situation is our monetary unit…which we call the ‘dollar’. When our country started our monetary unit was a real physical item from nature (silver and indirectly gold). Our ‘dollar’ was defined, tied, and convertible into these physical items until the final severance in 1971. The decision of our then President, Richard Nixon, to severe the convertibility of our foreign held ‘dollars’ into our gold at a fixed number ($35 for one ounce of Au) created a new ‘dollar’ with no relationship to physical reality. What is a ‘dollar’ with no tie to physical reality (silver or gold)?
A ‘dollar’ with no definition, tie, or convertibility to an item from nature (silver or gold) creates a psychological ‘dollar’. This new psychological ‘dollar’ then creates a global floating currency system…all fiat currencies…with no tie to physical reality. This happened in 1973 and 1974 with the restructuring of our currency system to a set of currency index numbers. See this website for the history of our ‘dollar’ and the establishment of the ‘dollar’ index: http://en.wikipedia.org/wiki/United_States_dollar. The history and the nature of our monetary unit is the key to understanding why we have all these bubbles and aftershocks and then a total collapse of the currency system for the entire planet.
David also does not seem to understand the real role for money in our economy. Money, in reality, is a tool for the valuation of assets. All goods and services within our global economy are ‘valued’ via a currency unit (mostly the U.S. dollar). When our monetary unit is severed from any relationship to physical reality (nature) then all becomes subjective when we ‘value’ assets. A subjective unit (our dollar today) distorts all valuations and prices and creates bubbles, inflation, deflation, unsustainable debt, the dollar crisis, and all the other monetary issues which affect consumers, investors, entrepreneurs, and state policy makers. Money is the lifeblood of our Capitalistic system and a monetary unit with no tie to physical reality eventually must ‘crash and burn’!
In conclusion, I would say that much of what is presented in David’s book, “Aftershock”, is sound and his overall advice is also sound. His interpretation of history, however, is much different from my interpretation as he feels that FDR’s policies were sound policies and I would differ with him on this interpretation. He also thinks that Keynesian economics is basically a viable economic philosophy for our future. My view is that Keynesian economic philosophy is totally out-of-touch with a sound monetary view for our future. How can digits within a computer screen serve as a sound monetary unit for our future. This type of digitization of money leads to centralization of all monetary creation within a single world banking authority and control of the entire world economy by a few elite bankers or financial policy makers. How can this lead to a free market economy or a viable system for the valuation of goods and services? All subjective systems have collapsed in time and a digitization of money would be the ultimate subjective system. Who has the insight, objectivity, and wisdom to administer money creation for all 6.8 billion people on this planet. Personally, I think we need to give much more thought to the details of money creation and the role which money plays within our economic system.
We can witness the distortions of money creation today by observing the consequences of the current policies of our Central Bank (the Fed). Are any of the current QE policies of Mr. Bernanke and his committee leading to stability, growth, and confidence? A one world reserve currency with a one world central authority is unlikely to remove any of these distortions or volatility. Anyway, the book was excellent and I, personally, agree with the bulk of the message. Enjoy and let’s keep watching world events!