death of an illusion...,

Reality Sandwich | We think that those Wall Street tycoons absconded with billions, but what are these billions? They too are numbers in computers, and could theoretically be erased by fiat. The same with the money we owe China. It could be gone with a simple declaration. We can thus understand the massive giveaways of money in the TARP, TALF, and PPIF programs as yet another exercise in perception management, though this time it is an unconscious exercise. These giveaways are ritual acts that attempt to perpetuate a story, a matrix of agreements, and the human activities that surround it. They are an attempt to uphold the magical power of the voodoo chits that keep the college grad on a career path and the middle-aged man enslaved to his mortgage; that give the power to a few to move literal mountains, while keeping the many in chains.

Speaking of China, I find it instructive to look at the physical reality underlying the trade deficit. Basically what is happening is that China is shipping us vast quantities of stuff -- clothes, toys, electronics, nearly everything in Wal-Mart -- and in return we rearrange some bits in some computers. Meanwhile, Chinese laborers work just as hard as we do, yet their day's wages buy much less. In the old days of explicit empires, China would have been called a "vassal state" and the stuff it sends us would have been called "tribute." Yet China too will do everything it can to sustain the present Story of Money, for essentially the same reason we do: its elites benefit from it. It is just as in Ancient Rome. The elites of the imperial capital and the provinces prosper at the expense of the misery of the people, which increases over time. To keep it in check, in the capital at least, the masses are kept docile and stupid with bread and circuses: cheap food, cheap thrills, celebrity news, and the Superbowl.

Whether we declare it to end, or whether it ends of its own accord, the story of money will bring down a lot with it. That is why the United States won't simply default on its debt. If it did, then the story under which the Middle East ships us its oil, Japan its electronics, India its textiles, and China its plastic would come to an end. Unfortunately, or rather fortunately, that story cannot be saved forever. The reasons are complex, so I'll just point you in the right direction if you want to research it yourself. Essentially, at some point China (and other creditor nations) will have to appreciate its currency, replace exports with domestic demand, and raise interest rates in order to combat disastrous inflation caused by its pumping yuan into its economy in exchange for all the dollars flowing in from its exporters. The result will be a run on the dollar, a global calamity that will put an end to money as we have known it. When that happens, our government will have only two choices: extreme austerity measures such as those we have long perpetrated on other countries through the IMF, or a bout of currency-destroying hyperinflation. The latter is probably inevitable; austerity would only stave it off temporarily. That would be the end of our current story of money, for it would render all financial wealth (and debt) worthless.

When money evaporates as it is doing in the current cycle of debt deflation, little changes right away in the physical world. Stacks of currency do not go up in flames (but even if they did, that is not too momentous a physical event). Factories do not blow up, engines do not grind to a halt, oil wells do not dry up, people's economic skills do not disappear. All of the materials and skills that are exchanged in human economy, upon which we rely for food, shelter, transportation, entertainment, and so on, still exist as before. What has disappeared is our capacity to coordinate our activities and focus our common efforts. We can still envision a new airport, but we can no longer build it. The magic talisman by which the pronouncement, "An airport shall be built here" crystallizes into material reality has lost its power. Human hands, minds, and machinery retain all their capacities, yet we can no longer do what we once could do. The only thing that has changed is our perceptions.