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Wednesday, June 26, 2019
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Is Economic Collapse in the US Inevitable? – Part 3

Were it not for the incredibly massive financial strength of the United States and the dependence of other nations on the continuing solvency of America, our country could have failed and brought the rest of the developed world down with it on several occasions. The stakes are much higher now: the debt is higher, and the principle will never be paid down.Will we always be able to pay the interest debt; or will we fail and be forced to yield our sovereignty to other nations—such as China—to avoid outright financial bankruptcy with its attendant loss of power, influence, flexibility, and security?

Worldwide, there have been scores of threatening bubbles and crashes which caused untold hardship for private citizens and threatened the solvency of powerful nations:

  • Tulip Mania or Tulipomania was a speculative bubble in tulip bulbs that took place in the Netherlands from 1634 to 1637. When tulip bulb prices became worth the equivalent of tens of thousands of dollars (in current values), many Dutch tulip speculators became fantastically wealthy. Alas, tulip bulb prices eventually peaked and soon imploded, bankrupting scores of speculators and throwing the Netherlands into a mild economic depression that lasted for many years.
  • The South Sea Bubble of 1716-1720 was a speculative stock bubble in Britain which occurred at the same time as France’s Mississippi Bubble. Shortly after the stock speculation mania swept throughout Britain, with scientist Isaac Newton and author Thomas Swift (who wrote Gulliver’s Travels) taking part, the South Sea Bubble popped and caused a very severe economic crisis. When Newton lost a fortune in the crash, he famously remarked, “I can calculate the movement of the stars, but not the madness of men.”
  • Railway Mania was an economic bubble in the United Kingdom in the 1840s that involved a railroad development frenzy and a speculative bubble in the shares of railroad companies. Like the Dot-com bubble of the late 1990s, the British Railway Mania was the result of over-exuberance toward the business prospects of a disruptive innovation. As railroad stocks soared to astounding heights, railroad companies massively overbuilt thousands of kilometers of railway lines throughout the UK. When the Railway Mania bubble eventually popped, many railroad companies went out of business; railway stock investors were ruined; and enormous debts were left throughout the country.
  • Egypt learned the hard way the folly of allowing national debt to spiral out of control. The United States should take a lesson from Egypt’s experience. British strategic interest in Egypt intensified in 1869 when the Suez Canal was officially opened. The sailing times from London to Bombay were dramatically cut which required significant business decisions to take advantage of the new opportunities thus presented. The new canal was controlled by the Khedive Ishmael of Egypt, and the French government was initially a serious concern to the British. The British acted with uncharacteristic decisiveness and speed to outwit and outmaneuver the French and brought Egypt under Imperial British control. The first opportunity came with the realization in 1875 that the Egyptian Khedive had gotten himself and his country into serious economic difficulties. He had to stave-off creditors was by raising a seriously large amount of money in a short time. Benjamin Disraeli, prime minister of England, stepped in with alacrity and offered to buy all of the Khedive’s shares in the Suez Canal Company—forty percent of the holdings of the company. The speed of action on this event left the French out of the loop and reeling. Literally overnight, the British went from being a minority shareholder to being the majority and controlling shareholder and in a position to exert determinative influence on Egypt’s future.

Unfortunately for Egypt, the government and its businessmen were corrupt and wasteful. The Khedive embarked on an enthusiastic modernization program which proved to be more costly than the treasury could bear. Under Ismail, the Egyptian government debt rose from £3 million to nearly £100 million. Efforts to refinance the debt only made things worse because service fees on foreign loans absorbed a large part of their value. In one instance, Egypt received only £35 million from five loans worth £55 million; and because Egypt paid interest on the full value of the loans, the contractual interest rate of seven percent turned into an effective rate that went as high as twenty percent. By 1875, even though Egypt had repaid £29 million on its loans, it still owed £46 million, and the country was near bankruptcy—something like the current situation in California. As a result, the money raised by the sale of her shares in the highly profitable Suez Canal, and Egypt was only enough to keep her profligate government afloat for a few years. The government was heavily reliant on patronage; so, serious structural economic reforms were difficult to impossible to implement. Shortly, the Egyptian government was again in severe economic difficulty.

This time, the British and French governments joined forces to create a stewardship of the finances of Egypt. In effect, this stewardship was little more than a joint form of colonization. British and French experts were to be sent to the various government ministries in order to take control of day-to-day business of them. When the Khedive realized what his financial decisions had done, he became unwilling to agree to such loss of control. His protests were for naught. He was forced to abdicate and to be replaced by his son, Tawfiq. Tawfiq accepted the British and French presence and Egypt’s loss of independence as a necessary evil to be able to cope with the massive debt load he had inherited. By 1881, British and French stewardship brought Egypt’s finances under successful control, and Egypt became little more than a vassal state to those European powers. The governments of France and Britain sent representatives to oversee the Egyptian finances. In 1878 Britain sent a man to act as the Controller of the Revenue while the French sent one to serve as the Controller of the Expenditure. The French and British representatives remained until 1882. Chinese nationalists launched armed protests which resulted in Great Britain entering into conflict and then becoming locked into an occupation of the country for decades to come. Egypt lost its country to outsiders ultimately because it could not control its own debt.

Consider the next posting with its description of the serious portent for the American dream posed by the specter of unbridled debt.

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