Our world has been cycling between chaos and order since the beginning of the modern economic era. We define the modern economic era as the period that started with the confiscation of America’s precious metals (mainly Peru’s and Mexico’s) in the middle of the 16th century and their importation into the European lands.

As precious metals began arriving in the port of Seville and the stock of capital rose, King Charles V found a legitimate financial base to increase the spending power of his empire and launch wars against the French, the Turks, the Dutch, and the rebellious German Protestant princes. The emperors of Europe invented the IOUs known as state bonds (assets in the hands of the holders but a liability by default). The trading of these paper “assets” required professionals and a banking class as well as a central bank. Welcome to the modern world of finance which through its disciplined and undisciplined methods keeps moving us in cycles of chaos and order.

Habsburg Spain became a state involved in perpetual wars. Four centuries later and after several bankruptcies, the Habsburg empire would be wiped out after another war it started against Serbia in 1914 at the insistence of the German Kaiser. In the meantime, the descendants of King Charles V declared bankruptcies a few times—abdicating the responsibility to repay their debt like Charles V abdicated the throne—all because of overstretching the public treasury with government spending to finance wars and please the public.

Between the 16th and 20th centuries, the world witnessed revolutions (French and American) that experimented with paper money, only to see that the ensuing chaos required an anchor to restore order. This order was found in the anchor of the gold standard, but the gold standard was abandoned at the start of WWI and the efforts to reinstate it—at pre-war parities—only generated excesses and bubbles that led to the Depression of the 1930s.

Let’s fast forward now to the end of WWII and the order that was established following the chaos of that war. The order that was established at Bretton Woods was replaced by the chaos of abandoning it in the early 1970s—all because of the excesses and overstretching in public finances in the 1960s to finance the war on poverty and the war in Vietnam. The abandonment of the Bretton Woods order in the early 1970s established a disequilibrium of printing money at will (also known as fiat money). The attempt to stabilize the disequilibrium via means of financial engineering and the invention of financial instruments (such as derivatives) resulted in more debts and a mechanism of levering up capital, creating mountains of unfunded liabilities. The cycle of order and chaos resulted in establishing a culture of enslavement in debt.

The debt cycle has resulted in myriads of zombie institutions and states that cannot be allowed to fail because the chaos that would ensue cannot be resolved with existing fiscal and monetary tools. It is at those moments in history that the drums of war—like the Sirens in Odyssey—lure the rulers of the world (disciplined and undisciplined alike) into the “high calling” of eliminating the disequilibrium. Elimination of the disequilibrium is supposed to bring death to the underlying chaos and give birth to order—only to be replaced by another chaos.

Before we close allow me to make just a brief comment on the North Korea situation. We missed the boat in the mid-1990s when preventive action could have been taken, as General Brent Scowcroft argued in an editorial in 1994 (see linked page). Failure to act decisively at that time allowed North Korea to exploit the situation by using the time designated for negotiations to build up its nuclear arsenal. North Korea now threatens to become the theater where the next chapter of order and chaos will be played out.

As I draft these words, I keep playing two songs that depict the chaos and order of our modern world. The first song below is known as “Rule Brittania” and you may recall the Brexit vote as you listen to it. As for the second song, we will let the lyrics speak for themselves.

Let Bob Dylan’s lyrics serve as the concluding remarks of this week’s commentary:

License to Kill

Now, they take him and they teach him and they groom him for life
And they set him on a path where he’s bound to get ill
Then they bury him with stars
Sell his body like they do used cars

Now, there’s a woman on my block,
She just sit there facin’ the hill
She say who gonna take away his license to kill?

Now, he’s hell-bent for destruction, he’s afraid and confused
And his brain has been mismanaged with great skill
All he believes are his eyes
And his eyes, they just tell him lies

But there’s a woman on my block
Sitting there in a cold chill
She say who gonna take away his license to kill?

Ya may be a noisemaker, spirit maker
Heartbreaker, backbreaker,
Leave no stone unturned
May be an actor in a plot
That might be all that you got
‘Till your error you clearly learn

Now he worships at an altar of a stagnant pool
And when he sees his reflection, he’s fulfilled
Oh, man is opposed to fair play
He wants it all and he wants it his way

Now, there’s a woman on my block
She just sit there as the night grows still
She say who gonna take away his license to kill?

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