Stages of Collapse Revised: “Joined at the Wallet”

My neat and tidy taxonomy of collapse, “The Five Stages of Collapse,” has been read more than 70,000 times just on my blog alone since I first published it in February of 2008. It continues to be popular: there were over 10,000 hits to the page just this year. People must still be finding it helpful.

And yet collapse has not gone according to plan. What caused me to write the initial article was the financial collapse of 2008, which was shaping up to be a game-ender for Western finance. It still is, I believe. Back then, I wrote of the “credit event” of 2008:

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.

I thought that government interventions in private finance would prolong the agony somewhat; what I didn't think was that they would prolong it even onto the death of the governments themselves! The effect of the interventions since then, in the US and in Europe, has been to knock down every firewall between public and private finance, to the point that now we are faced with two monstrous, and monstrously sick, conjoined twins, and the death any one of them is sure to spell the death of the other. Trying to separate them with a cleaver will be of no use: they will simply hemorrhage red ink and die sooner than they would otherwise.

Perhaps their early demise would be useful. Now that economic growth is pretty much over and done with, big finance and big government stand directly in the path of an orderly shriveling-up of the global economy. What I mean when I say “an orderly shriveling-up” is a process by which the economy shrinks at a healthy rate, corresponding to rates that were once considered to be a healthy growth rate, but in a way that allows most people to survive by providing a few essentials, such as food, shelter, security, access to medical care, ability to raise children and so on.

The endless fervent prayers we hear for nonexistent and physically impossible economic growth are telltale: without growth the temporary tricks used by government and finance to keep the game going have to be seen as permanent tricks, and as permanent tricks they do not work. There is the trick of “hiding the garbage” on the balance sheet of central banks. It would work if the garbage (loans gone bad) were to some day be worth something, which it might have if there were to be growth. Without it, they remain garbage. Another trick is to extend government guarantees to massively raise the amount of available bail-out funds; this trick would work if growth were to resume, in which case the guarantees would never need to be used. As it is, they are guaranteed to be used, and since the public funds behind these guarantees don't exist, the pretense of there being trillions of bail-out funds available is sure to wear thin quickly.

I wished for an orderly cascade of collapsing institutions, with enough of a gap between them for public psychology and behavior to adjust to the new reality. But almost four lost years of both government and finance betting on a future that cannot exist, doubling down every time they lose again, have dashed those hopes. The effect, I think, will be to compress financial and political collapse into a single chaotic episode. Commercial collapse will not be far behind, because global commerce is dependent on global finance, and once international credit locks up the tankers and the container ships won't sail. Shortly thereafter it will be lights out.

The Five Stages of Collapse was a nice theory. If only we had been so lucky! I am writing this to warn you: don't look for anything quite so tidy. Oh, and happy Halloween!

Where's Muammar?

Auf Deutsch—Vielen Dank, Alexander!

[48-hour update: Muammar is in his home town of Sirte, dead. He died like a warrior, surrounded by his loyal followers, who fought on against insurmountable odds until the very end. He is survived by his enemies, who, if they are lucky, will die the death of cowards—in a hospital bed, fussed over by money-grubbing physicians. And if they are not so lucky—imagination runs wild. Being the scum of the earth is not illegal, but there is most likely a limit to how long people will be willing to go on believing that. I raise my glass of tea to Muammar, a unique and colorful dictator who made other bloodthirsty tyrants look like mice.]

It's been over seven months ago that I commented on the fact that not all is going according to plan in Libya. The Langley, Virginia chapter of Al Qaeda had decided to overthrow Muammar, for all the obvious reasons. The British jumped on board, mostly because they are British. The French jumped on board because Muammar had put up some communications satellites that were undercutting France Telecom's ability to gouge and fleece poor Africans. Everyone else was  disgusted.

They've been overthrowing him continually for seven months now. At this point, he appears to be close to 90% overthrown, but the remaining 10% are proving to be slow going. It remains to be seen whether “Operation Suck 'Em Dry” will go according to plan, or whether it will result in pipelines and installations being blown up sporadically for years on end, as it has in every other oil-producing place that's been bombed into submission, invaded and ransacked.

Also, nobody seems to know where Muammar is. Now, some other overthrown dictator might be feeling low around now, but that's not our Muammar! My feeling is that, wherever he is, he is probably having a good time. But seeing as even his most stalwart supporters are ready to concede that his return to power in Libya is, at this point, unlikely, I thought it would be a good time to share with the world my Muammar scrapbook.

And if he is in your area, please be hospitable. He is not a bad sort. Things got out of hand; he didn't mean it; he is sorry. All he ever wanted was to be a non-pro-Western Arab dictator, for a change. Who can blame him for that?

With Mr. 0

Being polite to some sleazebag

With Vova

With... WUGGHGHGH!

Puckering up for Yasser

With his good friend Mandela

Crossroads Lecture on “The Fall of the American Empire”

Photo credit: David Reid

Update: We managed to completely fill Orcas Center. As one of the organizers said afterwards, "The 99%ers loved it, the 1%ers hated it." I prepared for this eventuality by providing a few shiny new dimes: the 1%ers got a 1% refund on the $10 ticket. I suppose the 1%ers didn't much like my characterizing them as "Bums with money."

Here is the mp3 of the talk.


Sunday, October 9 at 2 p.m. at Orcas Center

From the Crossroads Lecture Series Committee

The Orcas Crossroads Lecture Series presents Dmitry Orlov’s lecture, Fall of the American Empire next Sunday, October 9, 2 pm at Orcas Center, including a reception and book signing with the speaker following the presentation.

Update: Here's a write-up from a local paper.

Living on Stolen Time

Extracting the Stone of Stupidity

Consider a flame; a jet of methane, for example, injected into an oxygen-rich atmosphere and set alight. Now try to describe the shape and structure of the flame mathematically, in a way that will allow you to accurately predict how its shape and structure respond to changes in various conditions—oxygen concentration, gas pressure and so on. You will quickly discover that the mathematics of the problem can be derived from basic physical principles but is intractable: there are equations that accurately describe the situation, but they are too difficult to solve. Often the easiest solution, one that is practical in the case of a simple gas jet, is to build a physical model or a prototype, test it, and make some observations and measurements that characterize the system. But what if that's not possible? Then the usual recourse is to build a computational model that simplifies the physics in various ways and brute-forces the solution by crunching through lots of numbers.

A flame

Now consider that same flame again from a slightly different perspective: what's actually going on? Yes, the character and behavior of the flame are difficult to characterize and predict with great accuracy, but suppose you already know what a gas flame looks like, and just want to know what it is. Here, the equations are simple. First, methane oxidizes to carbon monoxide, hydrogen and water vapor, giving off energy (heat and light) in the process:

CH₄ + O₂ → CO + H₂ + H₂O

Next, the hydrogen oxidizes, giving off more water vapor and energy:

2 H₂ + O₂ → 2 H₂O

Finally, the carbon monoxide oxidizes as well, producing carbon dioxide and more energy:

2 CO + O₂ → 2 CO₂

This is quite typical of how we go about explaining just about everything we encounter. To understand the flow of traffic, we think about individual vehicles and the interactions between them. To understand epidemics, we think about the course of the disease in individual patients and the spread of infection from patient to patient. To understand how an industrial chemical affects an ecosystem we look at its effect on individual cells in individual organisms. We take a specimen, study its behavior, and extrapolate it to the population as a whole. This approach gives at least the illusion of explanatory depth; more importantly, it often allows us to establish cause and effect relationships and, based on them, make constructive changes that decisively influence the outcome: impose speed limits, quarantines and environmental regulations, respectively.

Let us try to apply this same approach to a truly complex system: the economies of US and Europe, in the state in which we currently find them: raging government deficits, staggering levels of bad debt, continuous government bailouts and infusions of free money by central banks, record levels of poverty and long-term unemployment and underemployment, and a lack of any meaningful economic growth. Specifically, let us try to characterize the effect of the continuous monetary infusions, bailouts, and stimulus spending. The economics profession has failed to do this and so amateurs are forced to step into the breach. The economists' usual excuse is that it's all very complicated; sure it is, so is a gas flame.

All money is debt. It is created when someone takes out a loan, promising to repay it (with or without interest) with proceeds from his or her future labor. If that promise is broken, the money ceases to exist. In the normal course of affairs, the lender then “loses” the money. If the lender loses more money than he happens to have, then the lender is bankrupted and, economically speaking, ceases to exist as well. What happened during the financial collapse of 2008 is that the real estate bubble burst and many loans went bad at the same time. The response was not to liquidate the lenders who lost more than they had, but to prop them up by issuing further loans that were not supported by any specific mechanism or realistic chance of repayment—just the compulsive thought that big financial organizations must not be allowed to fail because that would irreparably damage the system. Propping up bankrupt institutions by issuing fake money (or, more precisely, fake debt) has been assumed to be less damaging to the system than doing nothing.

This assumption would perhaps have been justified if the financial difficulties were, as was once thought, temporary in nature, that the economy would roar back to life and growth would resume. Now, three years later, we find ourselves back where we started, and this assumption no longer seems tenable. It is not clear why growth should resume, as many factors, persistently high energy prices among them, continue to weigh it down. We shouldn't bet on any more economic expansion, at least not in the developed world. As Richard Heinberg argues persuasively in his latest book, The End of Growth, growth has reached its limits, which are both numerous and insurmountable.

There is a plain and simple distinction between the two kinds of money: real money, which was lent into existence with a specific and realistic promise of repayment by a specific party, and fake money, which was dreamt into existence by a central banker without anyone specifically promising to repay it. Suppose a person walks into a grocery with fake money in his wallet, and buys something. This is no different from paying with counterfeit money: the grocer is getting robbed. But there is also a difference: the officially issued fake money is indistinguishable from real money. But just because you can't spot a fake doesn't mean that you aren't getting robbed. And so the fake money mixes with the real money and sloshes about the economy, robbing each person who touches it, until everybody is poor. Since poor people can't pay back big loans, the central banker's conceit that the fake money is debt seems rather unjustified. It is owed by the central banker to the central banker, and it would be foolish of us to expect him to ever work it off.

I am using the word “robbery” here not to indicate moral indignation or feigned umbrage, of the “I am shocked! Shocked to find that gambling is going on in here!” variety. I might even say that sometimes robbery is justified (“expropriation” or “commandeering” are its more polite, civilized variants). I am using it because the trick—paying with a fake—is an obvious one, and the result—the robbed party becomes poorer—is obvious as well. And so whether it is a retiree spending his deficit-financed social security check at the dollar store or a banker spending his bailout-financed bonus on lavish gifts for his trophy girlfriend, or a construction worker drinking his economic stimulus-financed paycheck at the bar, somebody somewhere is getting robbed—and becoming poorer.

Rest assured, I am not advocating letting people starve or forgo beer or anything of the sort. A warm bed and three squares a day is, to me, a human right. I am not interested in policy (nor are policymakers interested in me). But I am interested in making a specific prediction: that government and central bank efforts to stabilize the financial system and restart economic growth will do the exact opposite: they will destroy that which they are trying to save more completely although a little bit later. They are living on stolen time.

The alternative (in case policymakers suddenly decided to pay attention and were capable of taking on board such a radical notion) is a jubilee: full repudiation of all debts public and private and a ban on all repayments, repossessions and collection activities. This would force a full shutdown and cold restart of the financial system. But it will probably have to happen anyway. In the meantime, do your best to avoid getting robbed.