What does this decisive year hold? Read here the surprising answers!
THE WESTERN INDUSTRIALIZED nations are coming off 1984 from a welcome year of moderate to amazing economic growth. But what will 1985 bring? These nations have ridden out an 18-month upward cycle since the deep recession. Some economists now look for economic downturn. Others expect 1985 to continue economic growth, though not at the explosive levels in the Gross National Product (GNP) seen in 1984. Why conflicting predictions? Because economists and financiers do not understand the real causes of today's financial troubles. They are looking to material explanations only — and often to the wrong material sources for their decision making. This year harbors both potential ills and explosive progress. Will the worldwide economy lustily expand? Or will we see crippling recession begin again in the last two fiscal quarters? Nineteen eighty-five will also mark the time when the United States once again becomes a debtor nation, owing more to other nations than is owed to it. Since 1914, U.S. banks have stoked the financial boilers of Europe and Asia with hefty loans. What will happen now to the United States with twin towers of massive national deficits and negative balance of trade payments hovering ominously overhead? As Paul Volcker, chairman of the U.S. Federal Reserve, declared last May, "The net [positive] investment of the United States overseas, built up gradually over the entire postwar period, will in the space of only three years — 1983, 1984 and 1985 — be reversed. The richest economy in the world is on the verge of becoming a net debtor." To help us understand the confusing financial times we live in, let us first look at 1984 — a year of stunning financial growth.
What Happened in 1984?
Embarrassed economists quietly put doom — saying predictions in the trash. U.S. consumers, contrary to the same projections, led a surging economy that rippled throughout the world. U.S. production soared, housing orders kept construction crews busy and consumers enjoyed a real rise in income. However, outside U.S. borders things were not so rosy as many nations enjoyed only moderate growth. The Germans watched the deutsche mark shrink to record lows against an interest — fueled U.S. dollar. Britons sighed as the pound — once the world's economic standard of exchange — bottomed out at a mere fraction of its former worth against the same U.S. dollar. Europeans watched America continue its economic turn toward the Pacific nations of Japan, Indonesia, Australia and New Zealand. The Socialist COMECON nations — the Soviet counterpart of the European Community — enjoyed modest economic growth, but the Soviet Union in particular continued to worry about its agricultural ability to provide food for more than 268 million people. Weather has brought a mixed blessing for Soviet crops in recent years. Even the Latin American debt crisis seemed to take a needed breather. In the words of William E. Brock, President Ronald Reagan's chief trade adviser, "The international financial community can assess its management of the international 'debt' crisis of 1982-83 with a certain sense of satisfaction." But Ambassador Brock qualified his compliment to international financiers with this warning: "Many of us in international trade view the current situation [near the end of 1984] with lingering misgivings. For the moment, the most critical stage of the crisis appears to have passed, although any fluctuations in interest rates would have a dramatic effect on debt levels."
Two Key Factors to Watch
Western industrialized societies generally are blessed with an educated labor force, access to adequate natural resources, modern factories and developed markets for goods and services. But two important factors must be present also for a free-market economy to grow. They are the oil that reduces economic friction and allows a national economy to produce at high volume. The two factors? Cooperation and confidence. There must be confidence in the economic system if a nation with a free-market system is to have a strong economy. Banks in particular must earn the trust of depositors. Bank customers must feel confident that their banks are sound, that their deposited money will continue to earn a profit and that bank officials will continue to correctly discern acceptable risks. Banks provide much of the needed cooperation in this competitive world. They organize loan syndicates that provide vast amounts of capital for growing industries, provide advice and help bring people together for further financial growth. Though industry may possess adequate capital, a trained and cooperative labor force is needed to produce quality goods and services. When labor strikes against industry, the economy begins to suffer. And public confidence starts to waver. If enough people begin to believe the economy is headed for a downturn, a snowballing effect may occur. Subsequent investments and risk — taking ventures suddenly dry up. As people hold their money instead of spending and investing it, the economy begins to contract instead of grow, and the nation enters a recession. Of course, this is a simplified sketch of complex economic events. But it does happen, and many economists are now looking at this phenomenon.
What Will 1985 Bring?
As a gauge to measure the necessary cooperation and confidence, or the lack of it, what financial institution should you watch? The international banking system! In this competitive human age, political and economic forces are closely intertwined. No individual institution is as influential as the bank. Despite the image of the none — motional, intellectually cold banker, the banking business is actually the most personal and subjective of all businesses. Anthony Sampson, author of The Money Lenders, points out: "However complex and mathematical the [banking] business has become, it still depends on the assessment of trust with very human failings." Want to start a new business or finance an expansion of your existing industry? You must first convince a loan officer or bank board of directors that you are a worthy risk. These officers use both objective and subjective factors to reach their decision, regardless of whether the loan is for a used car or a new hydroelectric dam in South America! Why are banks so concerned with risk? In addition to profitable interest, the loans (considered assets in the banking system) they make affect the general trust their depositors have in their institution.
How Banks Create Money
John Kenneth Galbraith once declared: "The process by which banks create money is so simple that the mind is repelled." Too few realize how banks create money to loan. Most of the money that a bank loans exists only on paper — no currency is printed or precious metals purchased to back it up. Consider this simple example: You deposit $1,000 in a U.S. bank. The Federal Reserve sets a limit (which changes from time to time) on how much of that money can be loaned out. For this example, say it's 90 percent. This means the bank must keep at least $100 in the bank to protect you. The bank, over a period of time, loans out the other $900 in the belief that most of the time they will have enough money on hand from other depositors to pay you back your $1,000 should you come in and demand it. As your money passes from bank to bank, financial institutions may continue to legally reloan your money until almost $9,000 is levied against your original deposit! As long as banks are held high in overall public confidence, this type of financial behavior continues smoothly. But, as in the case of the Continental Bank of Illinois, this can quickly collapse into crisis if public confidence wanes in the ability of banks to make quality loans.
The Continuing Crisis
As 1985 dawns, an incredible amount of money is still owed to governments and private banks by nations in Latin America. Even though the financial system doesn't generally accept the concept of national bankruptcy, Latin American nations could be forced by circumstances to repudiate part or all of their enormous debts. The unsettling element in this is that nations in this world have a long history of doing this very thing! Who remembers that King Edward III bankrupted two major banking houses in Italy in 1327 when he repudiated English debts? Or that even the United States was considered a terrible risk in the mid-1800s in the Civil War period? Less than half a century later, the United States found itself a creditor nation to the same European countries after the First World War.
Birth of the Eurodollar
As American economic might continued its unprecedented growth after the Second World War, European nations and private firms began hoarding U.S. dollars for their exceptional value. International banks held increasingly larger amounts of U.S. currency. The U.S. dollar slowly became an accepted international medium of exchange. In the late 1950s, the phenomenon known today as the Eurodollar was born. Today, about $200 billion Eurodollars slosh around the world, beyond the control of the United States, but directly affecting it. Eurodollar expansion reflects the unfulfilled need for an official international currency. The Europeans pooled their resources in the late 1970s to create the ECU, or European Currency Unit. This was done to facilitate easier exchanges between Continental banks. But even though the Eurodollar reached stratospheric heights against other European and Asian currencies, it remains threatened by the mammoth U.S. deficit and negative balance of trade. Some officials and economists are comparing U.S. financial decisions and conditions with the events that led to the decline of the British Empire. U.S. Senator Lawton Chiles of Florida said in 1984: "We've seen these [economic] turning points happen to other nations. The beginning of this century saw it happen to England, which although its power seemed to have never been greater, was already paying the price for its far-flung empire." Economist Charles Schultze compared the impact of the U.S. deficit to the decline of British power: The British Empire "didn't go downhill by falling off a cliff. They went slowly... the deficit is like a slow poison. It will not show up as a cyclical concept, but in the long-term capacity and dynamism of the economy." What is the price of being a debtor nation? Senator Chiles explains: "With huge uncertainty in the Persian Gulf, we are vulnerable to a big upturn in the price of oil. And we are just as exposed to decisions by foreign nations to put their investments elsewhere. If oil goes up, if foreign investments in our economy decline sharply, [then] every debtor nation in the world will face a crisis."
One World Economy?
Many economists call for the official recognition that today's world economy is more closely bound than many would care to admit. These same prominent economists assert that nations must eschew their individual national interests in favor of what's best for the bigger world economy. "The crux of the problem is whether leaders in both industrial and developing countries have adjusted intellectually and emotionally to this being one interdependent world," says Singapore Prime Minister Lee Kuan Yew. Adds Walter Wriston, former chairman of Citibank: "Whether we like it or not, mankind now has a completely integrated, international financial and informational marketplace capable of moving money and ideas to any place on this planet in minutes." Dr. Albert Bressand (deputy director of the Institut Francais des Relations Internationales-IFRI) warns that nations must recognize the de-facto existence of intertwined global economy and make appropriate changes. Will the world ultimately be forced to embrace the reality of a global economy to save itself from the fear of international debt collapse? Indeed! The source of this foreknowledge is available in a book widely translated in dozens of languages, but rarely, if ever, consulted in economic matters.
A Look into the Future
The terrible irony is that this book explains the underlying laws of economics — the means to avoid fiscal disaster — but economists have not generally realized it. We call it the Holy Bible. This book explains the cause of inflation (Hag. 1:6-11), the biblical rules governing interest rates (Ex. 22:25), the only fully effective way to adjust for long-term economic growth (Lev. 25), and a truly equitable welfare and social security system (Deut. 26:12-15). You see, these laws explained in the Bible are just that — laws. But they differ from the laws that human legislators enact. God's laws cannot be defied without incurring a visible setback. If they are defied, the adverse effects accumulate. You perhaps have read in the pages of The Plain Truth that actions based on greed cause much of this world's economic evils. Yet the Bible forbids these very actions. Can you imagine what the fiscal outlook would be like today if that single precept was widely followed? "These are principles that no one could follow in today's business world," some may respond. There are only two basic ways of life. Economics and politics know little, if anything, about these. Humanity has but two choices: to embrace a way of life summarized as the way of giving, of outflowing love; or a way of get, of competitively taking with no concern for others. The latter way of life is sadly in operation in virtually every nation today. What if the nations were to follow the way of give and concern in economic planning? God himself would intervene to bring prosperity and full employment! "'Prove Me now in this,' says the Lord of hosts, 'if I will not open for you the windows of heaven and pour out for you such blessing that there will not be room enough to receive it'" (Mal. 3:10, Revised Authorized Version). These are not lightly made statements — they are authoritative promises that God fulfills to those — individuals and nations — who seek to obey his way of life. God is not against people profiting by their labor, as long as they're honest profits. God wants us to "prosper in all things" (III John 2, RAV). We announce in the pages of this magazine a way of life that economically and spiritually benefits both yourself and your neighbor. If you want to understand the economic, political and spiritual events to transpire during 1985 and beyond, we have two free booklets to offer you. Never Before Understood - Why Humanity Cannot Solve Its Evils and The United States And Britain In Prophecy. These eye-opening these booklets are presented free in the public interest. God's ways are simple, yet pro-found. God help the people — the economists, politicians and common folk alike — to understand and apply them!