Tuesday, September 23, 2008

Adieu, Stage 1 Collapse!

In February of this year, I wrote The Five Stages of Collapse, connecting each stage of collapse – financial, commercial, political, social and cultural – with a specific mental milestone, where faith in some aspect of our status quo is shattered in the face of dramatically altered circumstances. Here is what I had to say at the time about Stage 1: Financial Collapse:

Financial collapse, as we are currently observing it, consists of two parts. One is that a part of the general population is forced to move, no longer able to afford the house they bought based on inflated assessments, forged income numbers, and foolish expectations of endless asset inflation. Since, technically, they should never have been allowed to buy these houses, and were only able to do so because of financial and political malfeasance, this is actually a healthy development. The second part consists of men in expensive suits tossing bundles of suddenly worthless paper up in the air, ripping out their remaining hair, and (some of us might uncharitably hope) setting themselves on fire on the steps of the Federal Reserve. They, to express it in their own vernacular, "fucked up," and so this is also just as it should be.

The government response to this could be to offer some helpful homilies about "the wages of sin" and to open a few soup kitchens and flop houses in a variety of locations including Wall Street. The message would be: "You former debt addicts and gamblers, as you say, 'fucked up,' and so this will really hurt for a long time. We will never let you anywhere near big money again. Get yourselves over to the soup kitchen, and bring your own bowl, because we don't do dishes." This would result in a stable Stage 1 collapse - the Second Great Depression.

However, this is unlikely, because in the US the government happens to be debt addict and gambler number one. As individuals, we may have been as virtuous as we wished, but the government will have still run up exorbitant debts on our behalf. Every level of government, from local municipalities and authorities, which need the financial markets to finance their public works and public services, to the federal government, which relies on foreign investment to finance its endless wars, is addicted to public debt. They know they cannot stop borrowing, and so they will do anything they can to keep the game going for as long as possible.

About the only thing the government currently seems it fit to do is extend further credit to those in trouble, by setting interest rates at far below inflation, by accepting worthless bits of paper as collateral and by pumping money into insolvent financial institutions. This has the effect of diluting the dollar, further undermining its value, and will, in due course, lead to hyperinflation, which is bad enough in any economy, but is especially serious for one dominated by imports. As imports dry up and the associated parts of the economy shut down, we pass Stage 2: Commercial Collapse.

So far so good. In terms of mental milestones, we can tease apart financial collapse into a number of psychological levees that are being breached one by one. The first one to go was people's faith in home equity: that the value of their homes will serve as a nest egg to sustain them in retirement. What we have been witnessing for the past week or so is the demise of people's faith that their investment portfolio will sustain them. It is still easy to find investment advisers who will tell you to "go long on equities" because, you see, "eventually the economy will recover," but their reassuring words are starting to sound like a death rattle to all those whose retirement savings suddenly look laughably inadequate.

Eventually, faith in the magical, mystical properties of the US Dollar will be lost, but it seems very important to all concerned to make the process gradual. It seems safe to assume that in the limit, as time goes to infinity, the value of the US Dollar goes to zero:

limt→∞US$ = 0

It also seems safe to assume that it is negligible even for finite, foreseeable values of t. The problem is making it look like a continuous function. If the value of any given type of dollar-denominated garbage jumps to zero suddenly (because it cannot be sold at any price) then that produces a discontinuity: a rift in the fake financial space-time continuum.

This is what the current bailout plan is generally about. It is not about making anyone here happy: the fascists think that smells of socialism, the socialists think that it smells of fascism, and everyone (except for Bush, Paulson and Bernanke) agrees that it smells. Some people would like to see some heads roll, but as Robespierre discovered in the course of the French revolution, that just puts you knee-deep in headless aristocratic corpses, still with neither bread nor cake to feed to the peasants.

Speaking of peasants, everyone continues to repeat that the bailout is being financed by "the taxpayer," although it is unclear why our soon-to-be jobless and destitute taxpayer should be expected to cough up an extra trillion or more. The taxpayer may soon need a bailout too. If this mythical taxpayer actually tried to borrow her share of a trillion dollars against her future earnings, what sane person would want to give her that loan? Clearly, the gratuitous mention of the taxpayer is just a ruse designed to hide the rather obvious truth.

The bailout is actually going to be financed by foreign interests that hold US Dollar assets. Yes, the value of their holdings will go to zero, but they do not want this to happen suddenly. They wish to continue redeeming their US Dollar holdings for all manner of things of value, from capital equipment and intellectual property, which can be expatriated, to farmland and other means of production, which can be used in situ to grow food, mine ore, and so forth, which are then expatriated. There is some optimal function for this great unwinding, which will allow foreigners to expropriate the maximum amount of value in the minimum amount of time before their efforts to redeem their remaining US Dollar holdings stop paying for themselves in terms of the value of the available stuff.

As this process runs its course, the US will lose access to imports. Most significantly, it will find it more and more difficult to obtain the 2/3 of the transportation fuels that come from abroad, which are needed to keep the economy functioning. And that will bring on Phase 2: Commercial Collapse. That is probably what we are getting for Christmas this year, or shortly thereafter.

In the meantime, enjoy Stage 1. You will miss it once it's over.


Anonymous said...

Joy upon joy. Say the government just may be following your suggestions: http://www.armytimes.com/news/2008/09/army_homeland_090708w/
or maybe not. Is it a good idea to skip country while one can?

Dmitry Orlov said...

Thanks, Anon, for a good intro to my next subject. To quote a lyric from my favorite band, Leibach ("Neue Slovenische Kunst") - "You're in the army now!"

Anonymous said...

Dmitry, I wish I could somehow make myself say you're completely wrong about all of this, but I can't. I agree with you on all fronts.

I just feel that things are ripe for the next big debacle, and liquid fuels seem to be just the thing to take over from here. I'm in the South and we're experiencing mild panic every few days as stations run out of gas. On top of all of this we're edging more and more into complacency about our troubles and like Kunstler put it, the masses will probably say, "Fuck it," in the not too distant future. One by one, it seems, that what we previously regarded as off-limits or impossible are going by the wayside as events occur.

It's going to be sad to see where we all stand in 2 years time and to look back at what transpired, but I'm optimistic that in the midst of all this we can pull another miracle out of the hat and find a way to live more peacefully, happily, and richly (in the proper sense).

Chris R. said...

Under your scenario, I can envision a gradually increasing liquidation of natural resource holdings in addition to reaping the harvests of productive farmland. This would mean increases in mining (including mountaintop removal), logging (widespread clearcuts), fishing, and even exporting demolition remnants (bricks, wood, stone, metals). Essentially a "great dismantling" with Americans used as labor to make it happen. Fascinating.

Clifford J. Wirth, Ph.D., Professor Emeritus, University of New Hampshire said...

Here is the collapse in summary.

According to most independent scientific studies, global oil production will now decline from 74 million barrels per day to 60 million barrels per day by 2015. During the same time demand will increase 14%.

This is equivalent to a 33% drop in 7 years. No one can reverse this trend, nor can we conserve our way out of this catastrophe. Because the demand for oil is so high, it will always exceed production levels; thus oil depletion will continue steadily until all recoverable oil is extracted.

Alternatives will not even begin to fill the gap. And most alternatives yield electric power, but we need liquid fuels for tractors/combines, 18 wheel trucks, trains, ships, and mining equipment.

We are facing the collapse of the highways that depend on diesel trucks for maintenance of bridges, cleaning culverts to avoid road washouts, snow plowing, roadbed and surface repair. When the highways fail, so will the power grid, as highways carry the parts, transformers, steel for pylons, and high tension cables, all from far away. With the highways out, there will be no food coming in from "outside," and without the power grid virtually nothing works, including home heating, pumping of gasoline and diesel, airports, communications, and automated systems.

This is documented in a free 48 page report that can be downloaded, website posted, distributed, and emailed: http://www.peakoilassociates.com/POAnalysis.html

I used to live in NH-USA, but moved to a sustainable place. Anyone interested in relocating to a nice, pretty, sustainable area with a good climate and good soil? Email: clifford dot wirth at yahoo dot com or give me a phone call which operates here as my old USA-NH number 603-668-4207. http://survivingpeakoil.blogspot.com/

Anonymous said...

Neil Lori thinks the government will let us starve. Local governments will try to stop us from having chickens, ducks, goats and hogs etc.... in our yards. We will need victory gardens and local farms so that we can survive the collapse aka depression. Good job Dmitry. Neil Lori Greenhawk Patriot can be emailed at maverick17761784@yahoo.com

Anonymous said...

I hope the American management knows where the nearest plane to safety is at...

Anonymous said...

"Some people would like to see some heads roll, but as Robespierre discovered in the course of the French revolution, that just puts you knee-deep in headless aristocratic corpses, still with neither bread nor cake to feed to the peasants."

That means that there are fewer mouths to feed when there is, "neither bread nor cake." Every regime needs its garbage taken out. If the garbage had been taken out decades ago, we wouldn't be over-run with garbage up to our arm-pits.

Anonymous said...

I think the major factor in deciding where to ride out the storm is "how many people can the land support?" To find this out, simply look at the First Peoples' cultures and population densities. Here in the northwest, the population density and cultural complexity were quite high, and yet supported the people sustainably.

The worst places to live will be places that currently have high population density that could originally only support very low populations of nomadic people.

Also, weather is a factor. Around here, it get's cold and wet enough to be uncomfortable, but not enough to kill ya.

Earth Bound said...

Like your logic and the ability to articulate complex issues, Dmitry.

You did committ a cardinal sin of forecasters in this one though, you pinned a detailed timeline (this Christmas) on a rather vague issue.

Anonymous said...

CJW: That's about the thousandth time I've read your peak oil prognostication.

You can stop any time now. WE'VE SEEN IT.

Dmitry: I really can't believe this is happening. I've been preparing for five years, but now I just can't believe it.

Doesn't help that all around me it's just "The band played on."

Anonymous said...

I bought 100# of feed grade steam rolled oats, basically dirty oatmeal, this week at the feed store. Now I just need a better sleeping bag. Onward to stage 2!

Anonymous said...

Dimitry,thank you for the evaluation of our current state of affairs,and time line.I am basing decisions on some elective medical care ,and expenditures[glasses ect.] on it as it seems as good as any,and better than most.

I have a small holding in Oregon...3 acres,fruit trees,a garden,a wood stove,and a decent amount of privacy,although we have not developed a village yet,I know most of my neighbors.It looks as if this will be my little ship with which to weather the coming storm.
You have said to steer clear of anyone who is trying to make a political difference in the collapse.Were you referring to those who will try and mitigate the effects,?or those who are trying to re-build,initially.
I can see your point as involvement in any sort of political movement might be hazardous from the .gov point of view,but what of those who are trying to rebuild? At what stage should the attempt at re-construction of whatever will come after be attempted?


Anonymous said...

Here is the first article I've seen that actually uses the phrase "post-Soviet economy" for what might await the US.


Jan Steinman said...

anon of florida wrote: "Is it a good idea to skip country while one can?"

Been there, done that, have the T-shirt!

Thank you, Dmitry, for validating what I wrote way back in 2005: "Then came the Chinese invasion. Although it was not a "traditional" invasion, in the form of tanks and bombs, it was no less deadly, and did involve an army of sorts. China held countless trillions of dollars of US debt, and simply called in the notes in the form of real estate purchases after the land price collapse that came with the 2019 depression. The Chinese government filled empty cargo ships with their poor, underprivileged, and politically incorrect, and shipped them off to work the huge collective farms that they had purchased in the US, sending the food back to feed an increasingly unhappy and politically unstable middle class."

I looks like I underestimated by about a decade.

Anonymous said...

Annie, that's an excellent idea for determining the least-bad places to be. Do you have any resources with good estimates of population density 300 years ago? Preferably worldwide, divided by current population and displayed as a heat map, so I don't have to do any work at all for it :D

Anonymous said...

Basically it is my wish that none for this happens BUT... the money and debt and History seem to prove otherwise. It is good to know that things occur in arrestable stages(2) and will take some time to pan out. In the meantime, Hope all of you take pains to rediscover the Plains and valleys and forests of America and the self-reliance that built America in the 1st place (barring slavery & white indentures). Basically, it is not just America's belief in itself that is being tested. It is also the world's belief in America. If some of you manage to do well for yourselves and emerge victorious, good on you and God bless. For reference, www.Urbansurvival.com
(tell George Amman sent you!)

James Wilson said...

I'm writing this from my boat, "Jammin", (a 41 foot ketch) which is ready to drop the dock lines anytime now, i.e., when the time is here (probably head south, where you can still catch unpolluted fish, and make dingy raids on fruit trees, etc.). I will be following "Club Orlov" intensely for the signs to "pack it up".

I've written a blog on another website that may be of interest. In the article I try to figure out how we have been pushed into this corner. I would appreciate any feedback, here (or there). I guess I need to come to terms with the "how" of it, although the phrase "those who ignore the lessons of history, are doomed to repeat it" may be, in this case meaningless. The address:

As far as skipping the country, I would advise to make preparations.