It's only a game

Some take the game seriously, too serious, in fact, that their zealousness is preventing others from joining in the fun. If it were a typical game, it wouldn't have mattered. But this is a life-and-death game, you lose, you're dead. As for the winners, they'd soon find out that as the others are increasingly pushed out, the game is about to end. The end means the end for all, the winners included.

The game is, of course, the wealth accumulation game. To keep the game going, the winners, if they are sensible enough, should throw some of their winnings to the losers so that the game can keep on going for the benefit of all while waiting for the successor game (the Fifth Kondratieff Wave) to be ushered in.

In a philosophical break from this rigorous pursuit of wealth, we should sit back and reflect on the wise words of the following people, some deceased, some still winning and one fictional:

If only the winners could see the lighter side of the game, their views of the losers probably wouldn't be so harsh. After all, they could be winners only because the greater others have been losers.

The deathly embrace of deflation

It seems that the US economy is slowly out of the woods with key economic indicators registering improved readings. Don't be easily swayed by these fickle numbers since up-and-down gyration around the mean is a natural short-term pattern. Look at the direction of the main pattern and you'll see deflation unfolding on an unprecedented scale. The indicators that matter - the labour force participation rate, the Case-Shiller house index and the total credit - are stalling, if not declining. What we need to understand are the factors that cause deflation and whether there is anyway to prevent it.

Deflation is basically the obverse of inflation. If you recall the picture of inflation in an earlier post, then deflation is just the opposite of it. It can either be the goods or services production growth outpacing the money supply growth (left panel of left picture) or the fall in money supply getting ahead of the fall in goods or services production (right panel above).

It's a deflation double whammy if a fall in money supply is accompanied by increases in goods or services production. As if that's not strong enough, we can add into the concoction, a slowing population growth, which by implication means a faltering consumption, to give us a treble whammy. Capitalism has been popularly likened to riding a bike; you must always move forward to avoid falling. With a treble whammy, it's like being in a plummeting stalled aeroplane, recovery is out of the question. You'd be lucky to survive.

We'll address only one cause of the oncoming deflation: the precipitous fall in money supply. The other two - increase in goods and services production, and the falling population growth - have been explained in several of my earlier posts. The continued growth of an economy has always required an increase in credit since higher economic activity entails more money or credit to facilitate economic exchange.

However most of this credit is expected to vanish, if not voluntarily, then through harsh means when businesses are shuttered, homes dispossessed, and banks folded. Credit is only as good as the income that sustains it. The income is now gone since in the maturing phase of a Kondratieff Wave, a few producers have cornered the market to themselves. When credit's gone, our financial savings will similarly vanish since savings are all supported by credit.

However in our modern day, the government has stepped in between the creditors and debtors as a backstop to halt the systemic transmission of credit defaults. The government would take up the debts of failed debtors thus safeguarding the creditors' assets. That's why the debt deflation crisis has been averted. No, the right word is deferred. Past governments, including those of ancient civilisations, confronted the debt crises head-on. If the leaders had brains, they annulled the debts, and if they hadn't, they literally lost their heads.

Our modern leaders are smart at seeing the small picture only, totally out of their depth in facing the enormity of the debt deflation crisis. Every problem that arises is tackled in a local manner, while the underlying debt keeps building up for the eventual explosive climax. Obama's major failure is his inability to discern the future economic pattern. The more he claims victory over the recession, the more he'll lose his credibility once the pattern starts moving against his premature declaration.

Technically the government can keep on taking over failed banks and corporations while continuing its major deficit spending. But all governments, no matter how great they are, have limits. And these limits are being reached in the fourth Kondratieff Wave. We only need to look at warfare's 4GW to see how governments will evolve during this crisis. Remember that developments in war presage changes in government. Even before this crisis has reached its extremes, governments all over the world are straining to prevent the fracturing of nation-states. As nations get smaller, their capacity to absorb debts becomes weaker.

With weak or no governments, how do communities get out of the debt deflation crisis? Since most modern leaders are nitwits, we have to look elsewhere for guidance, this time to the northern Thai village of Santi Suk, as reported in the Wall Street Journal, 7 January 2009. Following the 1998 Asian financial crisis, the villagers, facing a shortage of money, took it upon themselves to create their own money, on the advice of two young foreigners from international volunteer organisations.

They've been using that money for over 10 years and a result of that local money, the villagers have become more self reliant. Since the money has no value outside the village, there's no need to keep it for wealth accumulation. The money encourages local shopping and local production of goods. The money is also safe since it is not used elsewhere. So thieves have no incentives to steal the money. That actually is a foretaste of how the future economy would function. Every community would have to be self-sustaining. If you want to save, do it in precious metals. The money must be left to circulate in the local system.

Can our leaders and policymakers be creative in their thinking as these villagers? Fat chance. They're blinkered by the existing monetary systems that they can't see the forest for the trees. And we'll all be dragged along into this march towards self-destruction.

Monetary pointer to economic inequity

Issues of economic equity have been brought to the fore by the various Occupy movements. But can we achieve economic equity by redistributing wealth through taxation? In a situation in which wealth distribution has been so badly skewed, that looks increasingly difficult. To discover the solution, we'll defer as usual to the ancients.

Before delving into economic equity, however, we need to understand the two key roles of money in ancient societies. A good place to start in understanding money is the book, Debt: The First 5,000 Years, written by, mind you, not an economist but a brilliant anthropologist, David Graeber. Another recommended reading is Credit and State Theories of Money by Randall Wray. Money, as we should be aware by now, is mostly credit, so a study of debt is effectively a study of money.

There are actually two roles that money has played over the ages. One is the use of money as an end in itself. This was the custom of  materialistic societies, accumulating wealth in the form of money, or rather credit. Money in these societies was used to generate more money. The other type of societies used money to facilitate economic exchange. Money in itself didn't serve any other purpose. Of course, the first group would also use money for economic exchange, only that money also carried the important function of wealth or capital accumulation.

In the first case, the societies knew the means of restoring economic equity to enable them to return to normalcy. With the second case, the societies who restricted money's role to economic exchange however did not suffer from economic inequity. So they were never bedevilled by any economic imbalance though their lives might not be as economically prosperous as those of the first case. Once we grasp this key concept, identifying the solution to an end-of-cycle crisis is straightforward. The only problem is whether the leaders have the guts to implement it.

Let's see how ancient societies accumulated wealth. Wealth can be only stored on a widespread scale if credit money is predominant. Even now, although paper money has no intrinsic value, no one would think of keeping large sums physically with them. The risk of being robbed or being subjected to the ravages of misfortune makes it too perilous to keep it in its physical form. Similarly, storing wealth as precious metals exposes yourself to the same kind of risk. Other forms of storage, such as land makes it hard to liquidate in time of need. So ancient societies ingeniously invented credit but this presupposed a strong state to ensure that both parties to the debt agreement upheld their part of the bargain. With credit, there's no limit to how much wealth you can accumulate.

The earliest civilisation that's known to employ credit is Mesopotamia. Credit was recorded using clay tablets sealed in clay envelopes. The envelopes would be broken on repayment. The envelopes could be used as money for settlement of economic exchange as the tablets were engraved with payments to the bearer. Mesopotamia also had gold but it was kept in the safest place, its temples. The temple priests issued loans on the strength of the temple gold, this being the earliest form of banking. Through this means, the gold didn't have to physically circulate.

The debts bore interest. Debt payday was harvest time. Should the harvest fail, the debts could not be paid. The state handled this debt crisis by annulling the debts during the spring New Year festival or whenever a new ruler was sworn in. Debtors' cultivation rights were also restored and those held as debt pledges released. The state could do this as it held absolute power; the notion of democracy was non-existent. In our modern civilisation, the government would defer, instead of solving, this crisis by lowering the interest rates or backstopping not the borrowers, but the creditors, through the socialising of debts. This would work for a time. Eventually the debts would catch up on the borrowers or in the latter case on the government as the government would eventually be paralysed by the sheer volume of debts.

How about the second type of societies where debts were not prevalent? The best elucidation, cited in Graeber's book, that superbly encapsulates in one paragraph the role of money in these societies originates from Al-Ghazali (1058-1111 AD), an Islamic sage:

Dirhams and dinars are not created for any particular purpose; they are useless by themselves; they are like stones. They are created to circulate from hand to hand, to govern and to facilitate transactions. They are symbols to know the value and grade of goods.

These societies did not practise usury. Although the Islamic societies during the Middle Ages are not considered ancient, one ancient society, Ancient Egypt before the Iron Age also did not impose interest on loans. It did not have to carry out debt annulment but just before its Late Period (732-30 BC), evidence of debt cancellation exists suggestive of credit accumulation and interest imposition.

Perplexingly, there are Muslim organisations now, disdainful of interest, but attempting to resurrect the gold dinar in order to store wealth in a non-depreciating currency. They fail to grasp that Al-Ghazali himself would have disapproved of their ill-thought-out project since monetary wealth accumulation would necessitate interest charging. And such accumulation would inevitably result in debt crises, something that the Islamic societies of the Middle Ages did not have to suffer. If you need to store wealth, do it in precious metals instead of currency.

Although societies that did not impose interest could avoid debt crises, they suffered from a serious weakness. Capital accumulation was weak. This was glaringly exposed in the Islamic caliphates after the Middle Ages. As long as they could raise vast quantities of gold and silver from expropriation of temples and palaces or from extraction from Central Asian mines, the Islamic caliphates could afford to employ troops to maintain or expand their territories.

However as the states in the West began to rise on the back of technological innovation, the Islamic empires began to decline. Technological innovation entails capital investment and it is here that the West with its strong credit accumulation trumped the Islamic states. In the West, credit or capital was available to anyone that could repay it with interest while in the Islamic world, only the governments had access to it.

It is not that the Islamic traders did not use credit in their trades. But credit in Islamic commerce was based on trust and therefore not easily available to those not within close circles. Their credit did not bear interest but was based on profit sharing. As a result, all parties to the arrangement must trust each other. Otherwise one party with knowledge of the business would cheat on the others.

All these contrasting features between the West and the Muslims were on full display in the Battle of Lepanto on 7 October, 1571. It was a naval battle off the western coast of Greece, between the fleet of the Ottoman empire and that of the Holy League which was made up of Venice, Spain and the Papal states. It was also notable as being the last naval battle in which galleys, powered by oared rowers, were used.

The Ottomans had more fighting men and galleys but the Holy League held the technological advantage. The League had more big guns, 1,815 against 750, and were of much better quality than those of the Ottomans. Their guns fired to the sides of the Ottoman ships, blasting and sinking them. The League also brought in a new type of huge vessel, the galleas, a forerunner of the galleon. It used both sails and oars, so it could carry more cannons, almost fifty. The Ottomans on the other hand relied mainly on galleys. And they were still stuck to the old-fashioned way of using the beaks of their galleys to ram and sink enemy ships. The guns that they had, fired high volleys and did not cause major damage to the League's ships.

The Christian soldiers were similarly better equipped. They wore steel breastplates and armed themselves with harquebuses while the Muslims, relied generally on recurved bows, their firearms being limited. It was a one-sided battle with the Muslim fleet almost annihilated. The outcome was decided by the lopsided number and quality of firearms. The root cause however was the easy availability of capital that had enabled the West to pursue innovations in firearms and shipbuilding.

The Ottomans' dearth of capital was demonstrated by the huge treasures of their admirals that were plundered by the Christians on board the Ottoman galleys. Ali Pasha, the commanding admiral of Ottoman fleet alone had 150,000 gold coins. Such hoarding of wealth implies that capital was not widely available for investment in the Ottoman empire and that the threat of seizure or confiscation was always looming.

As we go back to the current debt crisis, it's obvious that the solution lies in debt annulment. We know that won't be the case with the creditors now holding the upper hand. The only other alternative is inflation, a temporary dose of hyperinflation would surreptitiously wipe out the debts (see "Mugabe to the rescue"). But with politicians and policymakers idiotically enamoured of low inflation, not realising that it actually benefits creditors at the expense of debtors, that option is effectively shut out.

More interestingly, how would the future turn out for the role of money? Obviously, after the fifth Kondratieff Wave, estimated to end by 2080, technology advancement would have slowed down. Nation-states would fracture to smaller communities based on trust. Capital accumulation would no longer be an advantage as much as a disadvantage with more recurring debt crises. The only role for money of course is to facilitate trade exchange. For this we can rule out wealth accumulation and interest-bearing credit. Money as we now know it won't be the same, ever.

Demystifying the inflation conundrum

Some economists worry that uncontrolled inflation will soon surface following the money printing antics of the central bankers. Still others believe that deflation will arise instead. So what to make of this contentious issue? If economists themselves can't agree on how a major situation will unfold, can we dummies, with no formal learning in economics, be more prescient than them? Worry not, you only need to know a little bit about money to trump them. Once you understand money, you can easily grasp the cause of inflation, hyperinflation and deflation. For this post, we'll deal with inflation to be followed by deflation in the next post. As we are dealing with the real world, our lodestar to understanding money is economic history, not economic theory which is good only for the surreal world.

To know what money is, you don't need to rely on the economists' M measures, i.e., M0 to M3 or sometimes M4. Same goes for the velocity of money, a crackpot idea that should have never seen the light of day. Those are red herring measures which serve more to distract than illuminate. The only measure that should be used is total credit. Credit is money. In fact between 95% and 98% of money is credit except in a hyperinflationary environment wherein physical money will drown credit. So under normal conditions the physical bills in your pocket don't make a dent to the money supply.

Economists who fear unconstrained money printing by central bankers are exposing their money ignorance (See "Money 101 for the Fed"). How much cash do you carry on your body or stash under your pillow? Compare that with the amount you keep in the bank and invest in bonds. If the cash that you keep in its physical form is more that 5% of your total cash holdings, you belong to the 1%, at the bottom, that is. Your cash in the bank is not sitting there idle. The bank will lend it to someone. So instead of tallying the cash, you can get the same effect by looking from the opposite angle, that is, the amount of credit drawn by the various borrowers. However credit from the bank is only one element of the total credit in the system. Credit also arises from bonds issued by corporations, municipalities and the government.

What about the newfangled financial instruments, such as the alphabet soup of derivatives? No need to feel overwhelmed. Their only impact is to make credit widely available. They don't reduce the risk though they may lower the price, i.e., the interest rate, of credit because more money now gets to the market and the cost of the intermediary, that is, the bank has been eliminated.

However money is only one of the causes of inflation. Recall the 4C framework of currency, capacity, consumption and communication. In simple terms, if the goods or services production lags the supply of currency, the result is inflation (see left panel of left picture). In rare circumstances, goods or services production may decline at a faster rate than that of money supply; that also leads to inflation (see right panel of the same picture). Another combination which only Robert Mugabe can magically conjure is a fast climbing money supply accompanied by a declining goods or services production. This is hyperinflation.  Note that hyperinflation is a state in which price increases are experienced daily while inflation monthly. Hyperinflation disastrously disrupts an economy that only insane politicians would allow it to proceed indefinitely.

What drives the movement of each component of the 4C? The supply of goods or services is dependent on advances in capacity and communication. Every Kondratieff Wave has witnessed a significant leap in both capacity and communication, resulting in lesser input for greater output. Even now a disruption in either capacity or communication could drive costs or prices up. The recent Pakistani blockade of the border crossings along the Afghan-Pakistan border has driven the cost of delivering fuel to NATO's remote outposts to US$400 a gallon.

The supply of money on the other hand depends on the increase in credit unless we talk of hyperinflation which requires the government to print money and spend it. However in most true representative democracies, it's not possible for governments to create hyperinflation because there are enough checks and balances to constrain their budgets. Only autocratic government can foster hyperinflation. Weimar Germany, the post WWI German government, although democratically elected, was different because of its unique circumstances which will be explained later.

Direct borrowings by businesses that bypass the bank usually through corporate bonds cannot be blamed for contributing to inflation. A non-financial business is restricted in the level of debt that it can raise relative to its capital, this proportion being termed the gearing or leverage. A gearing of 3 to 4 would have been the maximum tolerable for a non-financial business. Financial corporations however have a tremendous ability to create credit or money. Usually, they could push the ratio to 15 although the excessive risk takers among them have stretched this ratio to the extreme limits, with disastrous consequences. The gearing of Long-Term Capital Management which succumbed in 1998 skyrocketed to 292 (including total derivatives) or 62.5 (based on assumed risk only), while in the 2008 failures of Bear Stearns and Lehman Brothers, they were having ratios of around 35 and 31. The financial corporation thus are the obvious culprits for any inflation fostered by excess money supply.

So the rule for inflation in most modern democracies is this: for normal inflation, it is always caused by increased financial institution lending, not government printing unless it is hyperinflation in which case, the culprit will always be the government. But excessive lending need not necessarily lead to inflation if the goods and services production capacity can match the increased money supply. As is typical of any 60-year Kondratieff Wave cycle (see left chart from The Economist for the fourth wave which began in 1960), the first half of the wave is always plagued with capacity constraint but the second half is blessed with capacity surplus. So even though there may be pockets of inflation during the second half, they are mainly due to short-term inelastic supply of certain goods, such as houses and oil. Their prices are doomed to fall when the capacity bottleneck is broken. A similar portrayal of the inflation chart of the third Kondratieff Wave for the period 1900-1960 however would not appear so clear cut as the two world wars distorted the inflation numbers.

As for consumption, since the start of the Industrial Revolution, it has been benign because population growth has always been growing or at least hasn't faltered. But that's about to change with the fourth Kondratieff wave. The entry of women into the labour force has escalated the opportunity cost of raising kids. Women's total fertility rate (TFR) is falling all over the world, in some places, such as Japan, even below replacement rates. Population declines mean that consumption would now count far more towards contributing to deflation (less goods consumed means more goods available at a given money supply).

Although consumption now struggles, capacity flourishes. It is obvious now that we need less manpower to achieve a given level of production. What happens to the unneeded manpower? In the past, they could move from agriculture to industry or migrate to the new world of the Americas. Even up to the third Kondratieff Wave, manufacturing was still employing many workers. That enabled many to move up to middle class status. That has now changed as technology has automated many tasks while globalisation, aided by containerisation, has offshored tasks requiring many workers to foreign countries with cheap labour. Those in middle class  now are being demoted to lower class, worsening the wealth and income gap between the upper and the lower class.

One more issue that has been confusing us is whether inflation is cost-push or demand-pull. Generally, since the Industrial Revolution it's been demand-pull as mankind's ingenuity has enabled it to break the supply constraints. On occasions, when cost-push arose, the situation wouldn't last long, meaning round about 10 years. Take the 1973 oil crisis. The oil prices jumped then because the producers hadn't been exploring for new oil fields as prices had remained low despite the increasing demand. We've been fed the story of how Paul Volcker tamed the inflation in 1981 by hiking the interest rates to more than 19%. That's a half-truth. If Volcker had been Fed Chairman in 1974, his action would have needlessly put a great number of people out of work for a prolonged period. Luckily it was the early 1980s because by then the oil producers' spare capacity was reaching record highs, so the convulsions wrought on the economy by the sky high interest rates didn't last long. Compare this with the oil price hike that pushed oil to more US$140 per barrel in July 2008. That didn't have much ripple effect on the inflation numbers simply because of excess capacity in goods and services production. The goods and services producers had to absorb the higher energy costs and soldier on with wafer thin margins.

Let's get to the hyperinflationary world of Weimar Germany to see why it happened and why it wasn't a disaster it had been made out to be. In reality it was a relatively short-lived episode lasting from July 1922 to November 1923 but has been given too much bad press and wrongly accused of fostering the rise of Hitler. The cause of the hyperinflation was money printing by the German government during World War I. To finance war spending, the German government issued bonds which were subscribed fully by the Reichsbank through the issuance of new notes. These notes then circulated through the economy. However rationing and price controls during the war postponed the consumption of goods and price inflation. After the war the new socialist government increased spending to pay for higher wages and compensate displaced war victims at a time when capacity was still constrained. Prices rose but then stabilised after February 1920. The government however continued printing money. Prices held steady until May 1921 before continuing their rise, finally erupting into hyperinflation in July 1922.

Wasn't it easy to kill off hyperinflation and if so, why did the German government continued with its money printing madness? It actually was but the German economy then was burdened by war reparations which amounted to US$64 billion in gold. Had Germany paid the war reparations, its currency would have depreciated and the economy would in time regain its competitiveness, given the industriousness of the German people. But after a string of defaults by Germany in its war reparation payments, France and Belgium occupied the Ruhr in January 1923. In response, Germany printed more money to pay the companies, that suffered from the occupation, and their evicted workers. This was the trigger that unleashed the hyperinflation. However by November 1923, the hyperinflation was subdued through the replacement of the much devalued Papiermark by the Rentenmark at the rate of 1 trillion Papiermark for 1 Rentenmark, which was in turn replaced by the Reichsmark the following year. The reparation payments were rescheduled to more manageable terms. The sum was eventually reduced to US$29 billion in 1929. Money from abroad to invest in the stabilised German economy especially from the US provided support for the Reichsmark.

How bad the impact of the hyperinflation, it didn't lead to the rise of Hitler. Hitler attempted a coup d'état only in November 1923, about the time the hyperinflation was tamed. If hyperinflation was the villain, Hitler's popularity would have plummeted right after his failed coup d'état. To be sure, the conditions in Germany during the inflationary years were chaotic with lots of violence but that was to be expected of a losing combatant which had lost territories and had war reparations to settle.

However such conditions paled in comparison with the economic depression that afflicted Germany beginning in late 1929. This time the German economy instead of being flushed with money as in the hyperinflationary years was now short of funds as the Americans had pulled out their money for more profitable stock market speculation on Wall Street. Export markets dried up and banks were hit with closures. In 1932, the year before Hitler's ascent, Germany's unemployment rate was 25%. These negative conditions smoothened Hitler's rise and his eventual consolidation of power.

So which is worse, hyperinflation or deflation? Surely it's deflation. The conditions we're in now are ideal for a deflationary environment. The economists who have been warning us about the danger of money printing and hyperinflation very soon have to eat humble pie as prices data all over the world are pointing towards lower inflation. It won't be long before deflation rear its ugly head and these very same economists will be warning of deflationary dangers instead.

Charles de Gold

'Tis the season to be protesting. Day by day, as more countries are being sucked into the vortex of protest, it's opportune to reexamine another protest movement, this time the one that rocked France in 1968. The US had suffered from protests since 1965 supposedly arising from disaffection with the Vietnam war. Yet similar outbreaks in many European cities in 1968 had nothing to do with the Vietnam war. Of all such protests, the most violent was reserved for France.

It's also fitting that the French president then was Charles de Gaulle, its first president under the Fifth Republic. He led the writing of the Fifth Republic's constitution which transformed the parliamentary system of the Fourth Republic into a strong executive presidential system, one that fits De Gaulle's personality. De Gaulle once said, "A true leader always keeps an element of surprise up his sleeve, which others cannot grasp but which keeps his public excited and breathless." How true. Read the biographies of most strong leaders, you'll find that they relish in keeping their populace guessing as to their true intentions and actions. Except when it comes to economics, because in true poetic justice fashion, it is economics that keeps the leaders guessing for answers. And invariably the answers always elude them.

De Gaulle was soon to find out how easy it was to be outwitted by economics. On the last day of 1967, he addressed his countrymen, "It is impossible to see how France today could be paralysed by crises as she has been in the past." It was a bit premature. 1968 was to be the year of protest movements. Till today nobody knows why the wave of protests erupted in 1968. The stock answer has always been youth rebellion, a sort of culture issue that leaves more questions than answers.

We've seen how a similar movement in the United States had been triggered by slowing income growth that was addressed only through higher female labour force participation rate (LFPR) which impact was felt from the 1970s onwards. Without the high female LFPR, real income, instead of stabilising, might have been deteriorating. The benefit of the high female LFPR has now run its course. As the LFPR keeps drooping, real household income will surely follow suit. Those not participating in the labour force will be willing fodder for the barricades.

There was one common economic theme between the 1960s and our present times, to wit, the low inflationary environment. Everybody loves low inflation unaware that low inflation benefits creditors more than debtors. As the economy forges ahead over time, there'll be more debtors relative to creditors. If no structural changes arise, the ownership of wealth will be heavily skewed, favouring the creditors at the expense of debtors. It'll take a barrage of violent agitations to knock some sense into the politicians, prodding them to change course by tolerating high inflation and curtailing free trade and free capital movement.

Like the US, France enjoyed a prolonged period of economic prosperity right after World War II. That's why de Gaulle was blindsided by the protests. However he had been reelected for a second term in 1965 by a narrow margin. That should have signalled him that dangerous times were just around the corner. Money was becoming short in supply. It was still the era of Bretton Woods in which fixed exchange rates ruled.

Although the US was still notching current account surpluses then, its balance of payments were registering deficits because of the direct investment in European countries by its corporations. Nowadays the US current account is in heavy deficit but instead of the foreigners offsetting the deficits with long-term investment in the US, they are buying short-term bonds which give them the smug feeling of increased wealth. So either way, when the US current account was in surplus or is in deficit, the foreigners have been benefitting from US money.

Towards the late 1960s, the US were suffering from declining gold reserves. President Johnson attempted to limit the outflow of gold first by having a voluntary restriction on overseas investment in 1965 and when this didn't work, a mandatory one in 1968. Both had temporary effects as the overvalued US dollar was the cause of the gold outflow. The French franc was similarly overvalued. De Gaulle wrongheadedly believed in the gold standard and the benefits of a strong currency. In fact he had been calling for the price of gold to be increased to $70 per ounce to spite the US.

During the same period, both the British and French were also losing competitiveness as a result of slower productivity growth. Britain had been suffering from large current account deficits that made sustaining a strong pound untenable. To stem the loss of reserves, British Prime Minister, Harold Wilson devalued the pound by 14 percent on 18 November 1967 from $2.80 to $2.40. The Bank of England had earlier in the day spent ₤200m worth of gold and dollar reserves trying to shore up the pound. The devaluation did improve Britain's economy and reduce its current account deficits. By 1969, its balance of payment recorded a surplus although in the 1970s, Britain continued to fall back to deficits because of the oil crisis coupled with stubbornly low productivity.

De Gaulle however refused to countenance such a move. Being a prudent man, he was also stinting in public spending, refusing to invest on education, roads, telecommunication, housing and social services. In his private life, he took great pains to separate his official from personal expenses, which he paid out of his own pocket. As can be seen in the chart below (from Reinhart and Rogoff), in the 1960s, the French government was reducing its share of spending as a proportion of GDP. A more accurate measure would be total debt as a percentage of GDP but such a measure for France in the 1960s is not available on the web.

France was thus suffering from a shortage of currency. Its government was reducing its relative spending while at the same time, its corporations were having problems with their export markets as a result of the overvalued franc.

It is not surprising then that the protest started in May 1968 with students at the University of Nanterre. It then spread to workers who were demanding for higher wages. As the wages demand was met, the economy became more uncompetitive without a franc devaluation. Capital flight ensued. De Gaulle survived the 1968 riots but not a referendum the following year in which he had staked his presidency. He resigned from office in April 1969.

The currency shortage was eventually resolved by a 12% devaluation by his successor, Georges Pompidou in August 1969, four months after De Gaulle's resignation. De Gaulle may have foresight in political and military matters - he was one of the first among the French generals to appreciate the significance of the third generation mobile mechanised warfare that was eventually employed by the German army - but his weakness in grasping economic issues was to eventually lead to his downfall. Though he was an upright person who believed strongly in the virtue of savings, in politics, honesty and prudence don't make for a brilliant statesman.

Now more than 40 years have passed since the violent protests. Yet the current crop of EU leaders have learned nothing from the mistakes of De Gaulle. They are repeating the same errors and sharing the same perverted beliefs held by De Gaulle, that almost brought France to its knees in 1968. Only that this time it's not only France that will bear the brunt of the upheaval but the whole House of Europe, paving the way for its eventual collapse.