Rob’s comments below are in italics.Derek’s comments below are in normal font.

I’ve come across some numbers regarding the United States’ current financial position. Now, of course, the debt numbers we’re talking about run into the trillions. Bear in mind that a trillion dollars represents in round figures the lifetime earnings of a million people.

I will put a link into the episode we did on big numbers, where we explored the true scale of millions, billions, and trillions.

Yeah thanks. So now we’re talking entirely in trillions. The US stock market valuation (equity stocks in United States corporations) is $42 trillion, and $22 trillion of that is held by overseas investors. So if they start to have reservations about the dollar’s ongoing purchasing power, this could itself trigger a stampede.

Then you’ve got the US government debt, which is now up to $38.6 trillion. It seems to add a trillion every time I come back and have another look at it! Once again, a substantial portion of that is held by foreign investors.

I had to go back and see how much China holds. China, of course, has to tread a fine line. It doesn’t want to get left holding the baby if the value of the dollar goes into free fall. At the same time, it obviously doesn’t want to be blamed for crashing the global financial system by holding a fire sale. But it’s been steadily reducing its dollar holdings by amounts that are pretty big movements when we’re talking about national currency reserves.

When the music stops you don’t want to be the one left without a chair.

That’s right. For those figures there, of course, you’ve got a vast amount of US consumer debt as well. That also runs into the trillions. But the context is that the United States’ GDP is about $31 trillion a year. But bear in mind that much of that is imported goods, paid for with dollars created out of thin air. A lot of it, as we’ve discussed, is either financial transactions or replacing things that become obsolete or worn out, rather than the creation of any novel wealth.

But either way, those liabilities, if you add them all up, vastly outweigh the actual economic activity going on in the United States.

I was motivated by this because there are various discussions about, well, yeah, this will take years to play out. But I thought it was worth revisiting the hyperinflation in Germany in the 1920s. At the time of the Versailles conference, it was apparent to people who were really on the ball that Germany would never be able to pay the reparations imposed on it for the cost of the First World War.

That much was obvious to me as a 13-year-old sitting in history class 80 years later, too.

Yeah. It appears that spinning up the printing presses was a colossally naive move. The alternative view is, of course, that the German finance minister was not at all stupid, and he was not economically naive, and he knew perfectly well what he was doing. This was to essentially inflate the debt to the point of non-existence.

In fact, even after that conference, the German economy appeared to be holding up quite well. The stock exchange was still rising. That continued until December 1st, 1921, when the German stock market peaked and began to decline. It took less than two years from that point to the point when they threw in the towel, discontinued the Reichsmarks, and issued the new currency in Deutschmarks. This was in November 1923.

So from the beginning of December, when the economy turned round, it took 23 months for the fall to happen. By the time they abandoned the Reichsmark, the exchange rate, which I hadn’t picked up on, was actually $4 trillion to one Reichsmark.

I’m not sure what the exchange rate was. I’ll check up on that and we can add a note to the page when we publish this. But in round figures, it would have been somewhere around parity. All of the currencies were broadly similar at the beginning of the 20th century.

The exchange rates were in single digits, whether one, two, three, or four, depending on the direction. So these astronomical amounts persisted in some European currencies before the euro was introduced. I remember thinking, you know, why are these Spanish pesetas such tiny amounts? What about the lira, which was running at 2000 to the pound when I was travelling in Italy. If you needed change from a 100 lira note, they gave it to you in sweets. Of course, this was all because of the collapse of the currency values during the war. The French franc had been broadly in the same ballpark and was replaced by francs at the rate of 100 to 1 after the Second World War.

So basically, the German currency went down and down in value until it was literally one-trillionth of its value at the beginning of the First World War. That is essentially what happens when confidence is lost, and it is lost through the process of currency debasement.

For instance, the $38 trillion US federal debt had gone up from $14 trillion in 2007. So it increased by a factor of about two and a half in less than 20 years.

I’m deeply suspicious about the accusations of incompetence as well. I think it has been allowed to happen.

Well, when you’ve got debts on this scale, it’s obviously physically impossible for them to actually be repaid in reality.

Yeah, because there’s not enough wealth in the world. The GDP of the world wouldn’t scratch the surface.

If they attempt to, they’re now caught between a rock and a hard place. They can’t repair it, and any attempt to have another round of so-called quantitative easing will accelerate the evaporation of confidence worldwide. So we could certainly be looking at something far less than the two years it took for the German currency to collapse in the 20s. Bearing in mind that we live in a much more rapid world in every respect now.

The feedback loops are everywhere.

Yeah. Which reinforces my prediction that we’d see something dramatic sometime this year. The other thing, of course, is that all the time, American government securities are being retired at the end of their time, and they can no longer sell long-dated bonds. So it’s all being refinanced by short-dated ones, and the prevailing interest rates are going higher and higher.

Which ties into what I was talking about recently: the market interest rate is determined by both the basic rental of money, which has historically been about two and a half per cent. Plus factors to allow for your evaluation of the likelihood of default and your estimation of the likely buying power of the currency when you repossess it at the end of the loan period.

It comes back to confidence, doesn’t it?

How that process had been short-circuited by the ongoing creation of new currency. It looks like that levitation effect has now run out of steam, and so all the feedback loops are going to be going in the opposite direction.

This is the situation we’re in, and it also explains the hysterical and reckless attempts to do things like attempt to seize Venezuelan oil. Which one way or another is not going to happen. There’s no doubt that the American oil companies would like to go in there. They’re not going to go in there if any people they send in to manage the oil wells and the refineries are in danger of getting sorted, and there’s no way that the Americans can provide security.

So that is the main thing on my mind when I look at the global financial situation. Of course, you know, we’ve now got the Singapore Gold Exchange opening vaults in Hong Kong and Saudi Arabia. At some point in the future, we’re going to see convertibility of the Chinese Yuan into gold. At some point, that’s going to become a fixed rate.

This will be a full circle back to the situation of America at the end of the Bretton Woods Conference in 1946, where because the dollar had a fixed exchange rate to gold and America had the gold, and nobody doubted it at that time. The dollar was as good as gold, which is why it became the reserve currency and people were prepared to hold it.

Plus, there was the deal Kissinger made with Saudi Arabia: they would always sell oil for dollars, would not present them for conversion to gold, and would invest them in US government bonds and other US securities. Which was a confidence trick that held up for 50 years and is now running out of steam. So the only question is how rapidly and what form the ensuing chaos takes.

We were talking last week about the various promises that Trump made, pre-election, and we omitted one…

Which was perhaps the most important one: the promise to audit the gold in Fort Knox. At the end of Bretton Woods, it was asserted that the American Treasury’s gold holdings at Fort Knox would be audited annually. In fact, they were only audited once over the next 10 or 12 years, during the Eisenhower presidency. They haven’t been since. There was a publicity stunt within the last decade. I can’t remember exactly when they took a bunch of American politicians on a sightseeing tour of Fort Knox, opened one or two vaults, and showed them cages full of gold bars.

Nobody actually checked whether it’s real gold. Nobody actually checked whether there was anything behind the front row. Nobody looked in more than a very tiny proportion of the total vaults in the building. Nobody even counted the number of bars in the ones they looked at. So it was purely a PR exercise.

So nobody knows whether there’s anything significant there at all or what relationship it has to the nominal holdings of the US government or the US Federal Reserve balance sheets.

We let the fox guard the hen h...