"What the United States did not learn during the 1930s,
that is now in the process of learning, is that as borrower
instead of lender, in fact that a bankrupt on international
accounts, strongly industrial nation can exercise even greater
falls in the world of nations than a solvent creditor country
can exercise during its overwhelming creditor status."


    "Effectively speaking, the United States has compelled
the older nations of the West to pay for the overseas costs
of the US war in Asia. Whatever they may desire, the cen-
tral banks of Europe had no choice but to continue to
except the paper dollar equivalents annually created as the
domestic and overseas deficit of the United States increase .
Otherwise, the whole of shaky structure of the world monetary
system will collapse into rubble .America has succeeded in
forcing other nations to pay for its wars on a systematic basis,
something never before accomplished by any nation in history ."

    "Never before has a bankrupt nation dared insist that its
bankruptcy become the foundation of world economic
policy; that, because of its bankruptcy, all the nations
what their economies transferring its bankruptcy to
themselves, stultifying their industries, and paying tribute
to the beggar ."

Herman Kahn was the meeting's other invited
speaker. When I had finished, he got up and said, "You've shown how the United States
has run rings around Britain and every other empire-building nation in history. We've
pulled off the greatest rip-off ever achieved."

A number of trends that were merely implicit in 1972 have since become explicit. First
has been the U.S. Treasury's ability to run up an international debt of over $600 billion,
using the balance-of-payments deficit to finance not only its widening trade deficit but its
federal budget deficit as well. To the extent that these Treasury IOUs are being built into
the world's monetary base they will not have to be repaid, but are to be rolled over
indefinitely. This feature is the essence of America's free financial ride, a tax imposed at
the entire globe's expense.

Thanks to the $50 billion cumulative U.S. payments deficit between April 1968 and
March 1973, foreign central banks found themselves obliged to buy all of the $50 billion
increase in U.S. federal debt during this period. In effect, America was financing its
domestic budget deficit by running an international payments deficit. As the St. Louis
Federal Reserve Bank described the situation, foreign central banks were obliged “to
acquire increasing amounts of dollars as they attempted to maintain relatively fixed parities
in exchange rates.”7 Failure to absorb these dollars would have led the dollar’s value to fall
vis-à-vis foreign currencies, as the supply of dollars greatly exceeded the demand. A
depreciating dollar would have provided U.S. exporters with a competitive devaluation,
and also would have reduced the domestic-currency value of foreign dollar holdings.
Foreign governments had little desire to place their own exporters at a competitive
disadvantage, so they kept on buying dollars to support the exchange rate – and hence,
the export prices – of dollar-area economies. “The greatly increased demand for shortterm
U.S. Government securities by these foreign institutions resulted in lower market
yields on these securities relative to other marketable securities than had previously been
the case,” explained the St. Louis Federal Reserve Bank. “This development occurred in
spite of the large U.S. Government deficits that prevailed in the period.” Thanks to the
extraordinary demand by central banks for government dollar-debt instruments, yields on
U.S. Government bonds fell relative to those of corporate securities, which central banks
did not buy.
This inverted the classical balance-of-payments adjustment mechanism, which for
centuries had obliged nations to raise interest rates to attract foreign capital to finance
their deficits.

“foreign” capital, as foreign central banks recycled the dollar outflows – that is, their own
dollar inflows – into Treasury securities. U.S. interest rates fell precisely because of the
balance-of-payments deficit, not in spite of it. The larger the balance-of-payments deficit,
the more dollars foreign governments were obliged to invest in U.S. Treasury securities,
financing simultaneously the balance-of-payments deficit and the domestic federal budget
deficit.
The stock and bond markets boomed as American banks and other investors moved
out of government bonds into higher-yielding corporate bonds and mortgage loans, leaving
the lower-yielding Treasury bonds for foreign governments to buy. U.S. companies also
began to buy up lucrative foreign businesses. The dollars they spent were turned over to
foreign governments, which had little option but to reinvest them in U.S. Treasury
obligations at abnormally low interest rates. Foreign demand for these Treasury securities
drove up their price, reducing their yields accordingly. This held down U.S. interest rates,
spurring yet further capital outflows to Europe.
The U.S. Government had little motivation to stop this dollar-debt spiral. It
recognized that foreign central banks hardly could refuse to accept further dollars, lest the
world monetary system break down.

Not even Germany or the Allies had thought of
making this threat in the 1920s or after World War II, and they were not prepared to do it in
the 1960s and 1970s. It was generally felt that such a breakdown would hurt foreign
countries more than the United States, thanks to the larger role played by foreign trade in
their own economic life. U.S. strategists recognized this, and insisted that the U.S.
payments deficit was a foreign problem, not one for American citizens to worry about.

Despite a falling savings rate, however, the economy never has been flusher with savings and credit. The growth of savings, wealth and net worth is less and less the result of new direct investment in tangible capital formation, but  rather the product of rising asset prices for real estate, stocks and bonds. In balance-sheet terms, gross savings are soaring while net savings are zero or negative.
          This growth in net worth occurs despite the fact that most new saving is offset on the liabilities side of the balance sheet by growth in debt. The rise of net worth is the result of savings being lent to borrowers who bid up asset prices by using new loans and credit to buy property and securities, that is, wealth and financial claims on wealth.
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Today we can see that the problem with saving is not simply that it is “non-spending.” A rising proportion of savings are lent out or invested in loans and securities, dividend-yielding stocks and rent-yielding properties, to become interest-bearing debts owed by the economy at large. These savings expand of their own accord as their interest receipts are recycled into new loans and other income-yielding assets, growing in an exponentially rising curve. This exponentially rising curve is that of compound interest
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Let us return for a moment to Richard Price’s example of a penny saved at the time of Jesus being worth a sphere of gold extending from the sun out to Jupiter. Few investors buy gold, as it does not yield an income. The largest investment – and the most heavily debt-financed asset these days – is land. More credit does not expand the volume of land, which is fixed, but it does raise its market price. A rising volume of savings is channeled to buy a fixed supply of land. The financial system thus creates capital gains as the finite volume of property and supply of buildings and financial securities expands more slowly than the potentially infinite volume of loanable funds.

            Keynes did not anticipate that savings would be channeled in a way that bid up asset prices for securities and property without funding tangible capital formation. In the 1930s net worth was built up mainly by saving, not by asset-price inflation such as is occurring today. In traditional Keynesian terms, revenue or credit spent on buying property in place represented hoarding, not investment.

            Homeowners and investors imagine themselves growing richer as prices rise for their assets. Their net worth rises without their having to save. However, this rise tends to require more income set aside to pay debt service on the loans taken out to buy their property. Credit lent out in this way does not increase consumption and direct investment. It creates debts whose carrying charges shrink markets. Savings and debts rise together, so that there is no increase in net saving.

            New saving does occur as financial institutions recycle the receipts of debt service into new loans, whose carrying charges absorb yet more future income. The result is that gross savings (and hence, indebtedness) rise relative to national income. Stated another way, saving for many homeowners takes the form of paying off their mortgages