The view from 2003

So anyway, while playing around on the Internet Wayback Machine tonight, I discovered parts of my old blog at blog-city, which I thought had utterly vanished into whatever hell it is that awaits all abandoned blogs, whether they are faithful subjects of the bloggod or not..

Doubtless, most of the entries  deserved such a fate, but I did discover one post that I wrote about 10 years ago in which I laid out a potential future for the good old US of A, based on my ideas about inflation and devolution, which I present unedited. There are doubtless some things that were insightful, some were way off, some were utterly stupid* or at least careless.  So I present it here, unedited and uncorrected, for your questions, comments, and snide remarks.

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"A Likely Scenario" Nov 25, 2003 

Terry Mom got me thinking tonight…

A lot of the stuff on this blog seems like “worst-case” scenario-kinda stuff, and perhaps it is, since I’ve always been one who figures if you’re going to spend the time planning, then it’s probably best to plan for things that need planning for.  There’s no need to plan for winning the lottery… the good stuff, well, that will just work itself out naturally.

Actually, that’s not quite true.  I’ve already decided that since my youngest son wants to be an architect, he’s going to study the Richardsonian Revivalesque style, so I can one day own a brand new building in brick with sandstone arches like they used to build them circa 1890.  Or something like the building in Ghostbusters… in other words, something other than the blasé glass-and-steel Lego rectangles we build today.  So that’s my plan for if things go well.  As of now, they are going that way, and I just bought my first commercial building, paid cash for it, and am paying cash to have it renovated so I’ll have a warehouse for my bookstore, an oversized office for me, a modern kitchen with amenities, and a fully-networked school room for the kids so they can continue to do their studies by themselves with me close enough by to help.  However much planning that takes, it’s micro planning, mundane details, and is really not worth sharing with anyone else since it’s by necessity specific to me.  I don’t expect anyone else to exploit the incredibly-leveraged-yet-no-capital-at-risk strategy I’ve pursued in business.  This market ain’t big enough for the both of us.

However, the fact that it’s leveraged toward governmental screwups of the aggregate money supply does give me pause, because the end result of those screwups is bad news.  Very bad news.  The end result of the macro-economic changes and trends I see and have exploited has a very bad result for the type of government and citizenry we have currently.

There’s a joke inside the beltway, though I don’t think it’s funny.  The joke is, “we’re all Keynesians now”.  Haha.  What it means, is that Demo or Republican, it makes no difference, both parties pursue a stragedy (spelled correctly) of pumping the economy full of newly-minted money in order to keep things moving.  It’s natural now for our entire financial system to wait with bated breath upon every word from the Fed Chairman.  If he says “Irrational Exuberence”, the stock market sells off, if he says interest rates will be held low “for a considerable time”, the bond market flies.  No one in government (or finance for that matter) finds that the least bit odd.  I do.  I find it both odd and dangerous.

The reason is fairly simple.  In the 17th and 18th centuries, America had a series of depressions.  They were short, sharp, and the people who bet wrong on the trend were usually quickly out of business, their bad loans were liquidated, their assets sold, and life went on.  1921, 1907, 1881, and all before, it was pretty much the same story.  However, the politicians got tired of the voters taking it out on them, so when Keynes came along and taught that the way to “manage” depressions was for the government to temporarily go into deficit spending mode, increase demand, and put everyone back to work, they jumped in with both feet.  Keynes taught that depressions ought to fought tooth and nail with newly-created money, then when times are good, the government can pay back the debt and everyone was happy.

However, Keynes also said, “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

Now what did he mean by ‘debauch the currency’?  He was referring to the centuries-old habit of reducing currency's value via clipping coins or debasing (adding base metals to the precious), fraudlently increasing the money supply so more coins could be spent by government at less cost.  One can debase paper money by issuing more of it than there is gold backing it.  That’s what we did most of the time, but that caused bank runs and depressions, so FDR took away the gold.  Or one can create the final, ultimate form of debasement: paper money with no backing whatsoever.  That’s what we have today,, debt money, and in increasing amounts.  John Law tried it in France, and the result was hyperinflation after a really really good time.  The US tried it during the revolution and afterwards, the result was hyperinflation.  The CSA tried it during the Civil War, and the result was hyperinflation, a continuing loss in value of paper money. Germany, Argentina, Italy, they all got the same result.  That’s what we’ve had since 1934 and continue to have.  It's a really good time.

However, the part about paying back the debt has been completely forgotten.  And since the government cannot stop its deficit spending, there is no reason to believe that the endgame will be any different than it has always been when that policy is pursued.  To think it’s different this time falls under what I have dubbed the “Everyone before me was a moron” fallacy, which I may elucidate on another time.  For now, we’ll assume that history has shown it’s a bad idea with bad consequences and go on.  That’s what a lot of this stuff points to: the noise here that shows that the bad things that always happen are happening now, and that none of us should be surprised when they happen in total.

But when will they happen?  Terry Mom got the impression from this blog that I think they are imminent, and I’ll admit that it does appear that that’s what I think just from reading this.  Is it?  “Imminent” means ready to take place immediately.  Could it?  Sure, but I don’t think it will, not yet.  Not because it can’t, but because men think in trends, that what goes up must go up further and what goes down must go down further.  That’s why the masses bought gold at the top but not at the bottom, and that’s why they buy stocks today.  Inertia in human consciousness means that habits (and therefore trends) go further than they ought to, and since we are on a good trend currently, I expect that in the short term, good things will continue to happen in the US, in other words, there’s time to prepare for a change in the trend.  The major trends driving organization size began in the 1980s with the introduction of the microprocessor and the handheld antiaircraft missile.  Layoffs and "jobjacking" are now permanent, as companies (but not governments) become smaller to survive in the new marketplace.  These trends have started, but are not widely recognized...rather inertia of thought makes all the 'solutions', like import restrictions, hearken back to a time that is gone.  However, inertia in thought and action also means that people do not change their attitudes or their actions until a crisis forces them to, and then they usually change rapidly and drastically.  It’s a lot like what Gould called “punctuated equalibria” in evolution… long periods of stasis followed by rapid changes.  I don’t see any evidence of the change in attitudes to reflect the new realities.  But they will.  They always do.

So I’m going to lay out what I think will happen, and why (although it will be in abbreviated form, since much of it is found in other entries).  I’ll even attach a timeline to it for context and reference, and so we can look back in 30 years and see how wrong I was.  I’m not the kind of guy who is afraid to go out on a limb.  I even bring my own chainsaw sometimes.

2003:  Interest rates are currently at a 40-year low, with GDP rising at a 7.2% annual rate.  The President, fairly high in the polls, along with a spendthrift congress, are piling another $400 billion social program which transfers money from the young to the old (the old vote while the young do not).  The budget deficit, officially at $400 billion, ran $69 billion in October, or a rate of $828 billion.  The dollar has been falling for 2 years, and commodities are at multi-year highs.  These trends will continue.

2004:  The dollar continues to drop, causing foreigners, who hold several trillion dollars’ worth, to lose money in exchange and they begin to sell bonds (according to the latest figures, they have already nearly stopped buying them, except the Japanese, who buy dollars and sell yen to keep the yen price low).  The drop in bonds causes long-term interest rates to rise to 6% and the Fed has no choice but to raise short-tem rates as well.  Inflation, currently officially at 2% but in reality at 3x that, kicks into higher gear, rising to 4% officially and 10% in reality.  This yields negative interest rates, so there is no incentive to save money (inflation is higher than the interest you can receive at a bank).  The President is re-elected.

2005:  After a significant (3-month) dollar rise, or counter-trend rally, it suddenly drops off as Saudi Arabia and Iran announce they will no longer price oil in dollars, but Euros (as Russia announced this year).  Fewer dollars being needed for trade means that other foreign central banks sell dollars as well.  This causes a spike in long-term interest rates (to a more normal 7%, then 8%, then 9%), which has a two-fold effect.  Not only does the budget deficit go up, but ARM mortgages do as well, causing a cascade of defaults.  Home prices drop and FNMA files for CH11 bankruptcy.  The deficit is now $800b officially, but official pronouncements says it’s ok because it’s still a low percentage of GDP (which is still rising).  But it’s not ok.  Gold hits a new all-time high of $900 as many Middle-East countries switch officially to the Islamic Dinar, a gold coin introduced in 1993.  The dollar tanks again, dropping another 25% in 6 months.  Inflation is heating up to the 8% level, and the Democrats start talking about the “misery index” of the mid 70s.  The Dow hits a multi-year low, wiping out many 401(k) plans that had 2 choices: negative interest rates on bonds or 100% exposure to stocks.  The new governor of Iraq asks the Americans to leave, as do the Germans and other "Chocolate Makers".  Europe creates a pan-European command, making NATO a hollow shell.

2006:  Unemployment, hurt by high interest rates and the business slowdown they caused, hits a 10-year high, and the Democrats take back the Senate and almost the House.  As a result, gWb is unable to get any legislation passed to do anything about the $1 trillion dollar deficit except raise marginal tax rates on “the rich”.  It does not bring as much money in as expected (it never does), and the automatic increases in unemployment insurance and interest on the debt send deficits spiraling out of control.  Capital flight is now hurting American business as foreigners sell American stocks and bonds ruthlessly.  Import prices skyrocket, but as the US does not produce consumer goods, the prices must be paid or the goods gone without.  The US reduces the issuance of bonds and simply prints money to make up the difference.

2008:  The baby boomers begin retiring, only to find that the inflation-adjusted payments of Social Security offer no solace. especially since their retirement savings did not rise as they thought it would.  Even Medicare does not cover all the drugs they need, but rather restricts their availability as many pharmacies cease acceptance of it, just as many doctors don’t take Medicare patients today.  Pittsburgh, Cleveland, and Boston, shrinking in population but with aging infrastructure, file for bankruptcy, as do 10 million Americans.  Houses in the suburbs now sell for 60% of their top prices, but there are no buyers as banks stop making loans greater than 15 year terms.  Most who took advantage of the low 1993 interest rates of 1993 to refinance at 125% of equity are upside down...they can't get out of their mortgages.  India and Pakistan go to war again, but this time it goes nuclear.  120 million people are killed or displaced.  The recession deepens as inventories rise, not from production, but from individuals selling the contents of their storage bins in the largest network of garage sales the world has seen.  Since these transactions are not reported, they are not taxed.  Every state raises taxes and cuts spending, and homelessness rises as mental hospitals are emptied.  Nursing homes empty as people can no longer afford them and they take grandma home.  The feds cap Social Security so only the poorest receive anything and payroll taxes are increased 50%.

2010:  Howard Dean, after losing in 2006 to gWb, wins the presidency with a takeover of the House of Representatives and a mandate to nationalize health care.  The deficit in his first 4 years hits $6 billion, and inflation hits 20%.  Long-term interest rates are higher than in the late 70s, but short-term rates, held low to “help the economy” completely destroy what is left of the US savings base.  Strikes abound in shipping and government as every state faces falling real revenues.  Those workers who lose jobs cannot hope to find new ones, and America sees the return of the extended family as parents and children move back in with anyone fortunate enough to have a job.  Gold and the Dow meet at 3000.  States begin to empty prisons, reserving space for “the worst of the worst”.  Unfortunately, there are more of “the worst” than any state plans for.  China attacks and takes Taiwan as the American military watches helplessly.  North Korea attacks the south and loses overwhelmingly, but 25,000 American troops are killed in the opening battle as Seoul is shelled mercilessly, causing a nationwide cry to “bring the boys home”.  The South African Government falls and the gold and diamond mines are nationalized.  The government, which eliminated the 30-year bond, now must roll over 5 and 10-year notes in a high-interest environment, causing the deficit to rise to unheard of levels.  It's unheard of because no one bothers to talk about it anymore.  Except the Libertarians.  Both of them.

2014:  Russia breaks into 3 more nations (the biggest is still called Russia), Northern Ireland gains independence, as does Quebec and the Basque area of Spain, and the governments of Italy and Mexico are overthrown, the latter sending hundreds of thousands of refugees north.  The US closes its borders, and having left Europe in all but name due to extensive defense cuts, and settles into a “Fortress America” mentality.  Dean wins re-election on a “New New Deal” platform and nationalizes transportation and the oil industry, since Islamic nations are now demanding gold in payment for oil.  Over the objections of environmentalists, the ANWR is drilled, but it will be 5 years before it causes a dent in America’s new energy crisis.  Gas is $8 a gallon, when available.  Urban riots break out sporadically as transportation breaks down causing empty grocery store shelves.  Terrorism has changed from a foreign threat to a domestic one, and the Know-Nothing (American) party makes its re-appearance as a white supremacist socialist party.  Blacks break from the Democrats into the Harold Washington party in the north and the King party in the South.  10 know-nothings win senate seats in the Texas senate and start making secessionist noises to escape the tax burden of the US and to take back "our oil".  The top income tax rate is raised to 80% on millionaires and a “Berlin Wall for Capital” is established to keep the rich from leaving the country.  Arizona and New Mexico file for bankruptcy, due to the costs of helping displaced Mexicans.  The $1000 bill is re-introduced into circulation.  Congress tries to cut spending, only to find that the voters will not stand for it, and besides, they've written automatic inflation adjustments into most spending plans, and issued inflation-indexed bonds.  Those funds are "non-discretionary".

2020: The Medicare program, once thought to cost $100 billion a year, now costs 5 times that.  Texas, with a know-nothing governor and senate, removes the National Guard from federal control and puts it under the control of the governor, who declares an emergency to quell riots in Houston.  Los Angeles burns, sending hundreds of thousands of looters into the valley and hills, where they are put down brutally by national guardsmen.  Idaho, Washington, and Alabama elect no-nothing governors.  Vermont elects a Socialist.  Massachusetts a Marxist.  El Salvador and Nicaragua go to war after 10 years of financing one another’s civil wars.  Mexico is now ruled by a military junta and refugees continue to stream into the American Southwest as far as Colorado and Kansas, and Nevada.

2025.  The federal deficit is now the size of the federal budget, tax rates are confiscatory, and people no longer have checking accounts because no one will accept checks and the interest paid is half the rate of inflation.  States quickly pass usuary laws, which, rather than bringing rates down, destroy the secondary loan market.  Nevada introduces gold and silver coinage to circulation to stop the 150% inflation, but it doesn’t matter… no one has anything worth gold and silver.  7 Southern states call for repudiation of the national debt (or at least national taxes).  Florida suspends mortgage payments, causing the bankruptcy of 4 of the top 5 banks in the nation.  The president nationalizes the banking system following a bank holiday.  5 northeastern states declare bankruptcy and The Dakotas, Minnesota, and Iowa open secret talks with Manitoba and Ontario about a new country.  The Federal army invades Georgia and South Carolina to keep them in the union.

2030.  No one uses Federal Reserve notes anymore, as 7 western states now have a state currency backed at gold valued at $5000 per ounce, Kansas has one backed by grain and Texas by oil.  Most transactions now take place in barter, and the federal army deserts en masse because they have not been paid in 6 months.  The last president of the US tries to bring back the draft, but is checked by 31 states’ governors who move to take federal lands, including military bases, into state hands.  Tanks, under the orders of 19 governors, roll in the streets of every city with more than 200,000 people, and farms' entire crops are often “bought out” at gunpoint by the army in cash, which moves food to the cities.  Alaska secedes peacefully, followed by most of the Pacific Northwest, although a coalition of Native tribes and white supremacists in Idaho and Washington immediately secede again. Elections in 2034 are cancelled.

2035.  Tanks rolling in the streets of Washington stop in front of the Capital and White House.  The president is arrested on charges of corruption, as are 40 congressional leaders in both parties.  40 more states secede into 5 new nations (California breaks into 3 parts, as does Texas).  The United States is no more.

Now, everything I wrote above has happened before, in Russia, Yugoslavia, in other lands, in other times, for exactly the same reasons.  Destruction of the currency destroys the commercial foundation of the land, which is main fabric holding the states together.  As that foundation is destroyed, people find solace in smaller organizations and groups and when they lose their financial security, they descend first into militarism and then into barbarism.

So maybe we have 30 years in my estimate if we continue along this path.  Maybe.  But the numbers don’t look good and the trends are all going the wrong direction, the direction of the Soviet Union, the British Empire, the Holy Roman empire.  As the financial and moral foundation crumbles, there is no reason to prefer a nation of 250 million people over a nation of 50 million, or 5 million.  This is what I see this path leading us to.  I hope for my kids’ sake I’m wrong.

But I don’t think I am.
* e.g. having Howard Dean elected in 2010, a year when there was no presidential election, and saying his deficit would be $6 billion over 4 years rather than $6 trillion, as I meant.