August 27, 2012
Part 1: THE STORM
With all the study and thought that are required to make sense out of how the Great Unraveling will play out, we seldom take time to think of what it will be like on the other side. Those of us who are, by nature, long-term thinkers and/or optimistic, have a vague picture in mind of a rebirth of libertarian thinking, and a vibrant economy. However, we tend not to think too much more about these hopes than that, because we are caught up in the Great Unraveling itself — a very time-consuming topic.
The other day, an associate whom I like to think of as having a decent, if not holistic, view of the present depression, commented to me, “I wish we could just have the crash tomorrow and everything that goes with it, so that, next year, we can get back to normal.”
Oops … maybe his expectations are a bit more simplified than I thought. And, if others share his view, possibly the topic needs a bit of fleshing-out. While it may not be ready to be a prime topic of the ongoing conversation, possibly an outline of what may happen after all the fireworks have gone off would be in order.
Ten Years Down and Ten Years Up
Economic wizard (and favourite ‘Uncle’) Harry Schultz stated back in the early 2000’s that what he anticipated was “ten years down and ten years up.” At the time, many thought that his projection was extremely prolonged. I didn’t think so. People do commonly seem to take the view that, once the various crashes have taken place, we simply walk out into the sun, brush the dirt off the knees of our trousers, and, with a spring in our step, walk into the bright new day.
However, a depression is not at all like that. It is more like a town after a hurricane has hit. The storm may have been swift, but the recovery is not. Power lines are down. Roads are blocked. Homes and stores have been destroyed. Having personally been highly involved in the reconstruction of a small country after the devastation wrought by a category five hurricane, I can attest that, even if the population is hardworking and motivated (which they were), the task of rebuilding is monumental, and the time period required to achieve it is prolonged.
I see the period after the various crashes very differently from those who anticipate immediate recovery symptoms. This is not because I imagine myself a visionary; my view is based on history. If we look at the economic collapses of the past, (inclusive of their possible knock-on effects, such as hyperinflation and destruction of the currency), from the fall of the Roman Empire to Weimar Germany, to Argentina and Zimbabwe — take your pick — the pattern is extremely similar.
So, let’s have a look at that pattern and ask ourselves if the present situation might not play out much the same (except far worse and more prolonged, as the conditions that led to this particular depression have been more extreme). The various stages are likely to be a given, but the various factors within each stage are a bit more uncertain. In every major economic collapse, some combination of these factors takes place.
Also, consider that the stages themselves are like dominoes — they almost always fall in order. The reason? Details change in history, but human nature remains the same. The same knee-jerk reactions by people will repeat themselves over and over. (As an example, we are now experiencing a decline in exports from the First World. I believe that a repeat of the disastrous Smoot-Hawley Tariff of the 1930’s will be passed in America, which undoubtedly would trigger increased hardship for Americans.)
Stages of The Crash
The stages are laid out below. The first three have already occurred.
1 INITIAL CRASHES
- Crash of the residential property market
- Crash of the commercial property market
- Crash of the stock market
2 INITIAL KNOCK-ON EFFECTS OF CRASHES
- Loss of homes
- Loss of jobs
3 IMMEDIATE ACTIONS BY GOVERNMENT
- Bailouts for select groups
- Dramatic increase of debt
- Politicians going in the opposite direction of a real solution
The first knee-jerk reaction began immediately, with the Government attempting to “make the problem go away” as quickly as possible. Almost invariably, at this stage, the corrective strategy is hastily prepared and shortsighted, assuring further deterioration of the economy.
In this stage, the politicians on both sides fail to focus on a real solution. Instead, their primary focuses are, first, to avoid a painful real solution, and, second, to engage in finger-pointing, each political party blaming the other for the problem. The problem worsens steadily until one of the next series of major dominoes falls. This is usually sudden and triggers the toppling of other dominoes.
4 SECOND WAVE OF CRASHES
- Major crash in stock market
- Currency plummets
- Increased bankruptcies
- Increased unemployment
5 INTERNATIONAL TRADING PARTNERS REACT
- Foreign countries refuse to accept more debt
- Foreign trade slows dramatically
At this point, the Government introduces dramatic change, such as ill-conceived protectionism, which backfires almost immediately.
6 GOVERNMENT INSTITUTES DESPERATE SELF-DESTRUCTIVE MEASURES
- Defaults on debt
- Restrictive tariffs on imports
- Currency controls
7 ECONOMY REACTS IN LOCKSTEP TO GOVERNMENT ACTIONS
- Hyperinflation — dramatic increase in food and fuel costs
- Massive unemployment
- Extensive foreclosures
- Extensive bankruptcies
At this point, the dominoes are tumbling quickly, and a rapid unraveling of control is about to take place.
8 SYSTEMIC COLLAPSE
- Bank closures
- Extensive homelessness
- Food and fuel shortages
- Electric power becomes sporadic, blackouts common
As these factors unravel, the public mood turns to a combination of blind fear and anger.
9 SOCIAL COLLAPSE
- Crime rises dramatically (particularly street crime)
- Food riots
- Tax revolts
- Squatters’ rebellions
10 MARTIAL LAW
- Creation of special army to address “domestic terrorism”
- Random killings become commonplace
At first, the authorities focus mostly on violent subjugation and arrests; then, as prisons quickly become hopelessly overcrowded, camps become the norm. Soon, these too become unmanageable, particularly as a result of high cost of food and manpower. At that point, the solution turns to the killing of anyone who is suspected of a crime and, more frequently, anyone who is not submissive. (This will not resemble the Gestapo of the late 1930’s. It will be less organized and more chaotic.)
If revolution is to occur, it will happen at this point. Many people will feel that they have nothing to lose, and anger will be at its peak. If revolution does take place, it will not be an organized movement as such. It will be spontaneous, and breakouts will manifest themselves like popcorn popping, largely at random, with ever-increasing frequency. At some point, it may possibly evolve into something more organized.
Part 2: THE RECOVERY
By the time the breakdown of the global economic system has occurred, the currency, be it the US dollar or the Euro, will have collapsed. At this stage, will the country reach a Mad Max scenario (minus the leather outfits and interesting vehicles)? Not likely. Even if the breakdown is severe enough that roving marauders exist, human nature dictates that people in general will not devolve into a condition in which most of them drive around in a state of eternal warfare. The true nature of the majority of any people is primarily to eat, obtain shelter and protect their families.
Therefore, corrections invariably begin to appear from the ground up. New means of currency will spring up, and bartering is likely. (In the case of, say, Zimbabwe, the US dollar took over as the illegal default currency. However, such a luxury will not be available this time around, and paying for goods will require less predictable methods.) In the US, Utah has already passed legislation allowing gold to be used as currency, and nine other states have quickly followed. This is a positive sign, both in terms of foresight and in terms of states acting individually, possibly even in defiance of the central Government.
Although the Government is likely to try to retain controls on trade in commodities, a strong black market economy will appear, particularly with regard to food and fuel. Although it will be illegal, this will represent the first true beginning of a recovery.
The timeline for recovery will, I believe, be as Uncle Harry predicts — about ten years. Why? Well, on the economic side, a debt-cleansing cycle normally takes about seven years and is characteristically deflationary. To truly return to prosperity, there is no escaping this stage of the recovery, and long-term payback does not a vibrant economy make. It is slow and grim, as is deflation. It does, however, help people to get accustomed to living frugally, saving, and eventually investing. In short, it creates a mindset which is conducive to sound economic principles, which, after the recovery, will be necessary to create a return to prosperity.
The nature of the recovery, however, will depend very much on the level of collapse that has occurred in the central governments. If they have survived largely intact, it is most likely that the recovery will be longer, as the Government is likely to, first, employ techniques that salve the population, but do not solve the problem, and, second, very possibly resume the goal of collectivism in general, possibly with the UN as the centre of a One World Government with Agenda 21 as its general living plan.
If this were to take place, I think it likely that the First World would slide into a socialist slumber, possibly along the lines of East Germany in the communist era. If so, it could be many years before the rebirth of the First World, as, most assuredly, the Second and Third Worlds would not be sitting idly by. They would constitute the driving forces for commerce and development for an extended period, limiting the opportunities for the First World to reactivate itself.
However, the greater the degree of the collapse of the central governments, the greater the likelihood that the individual countries involved would come back sooner. I cannot emphasize this point too strongly.
Recovery in Europe
For Europe, this could conceivably be a return to individual countries as they were before the misguided concept of the EU reared its ugly head. (After all, the EU was created by the national leaders, for the national leaders, not for the benefit of their citizenries.)
Prior to the EU, Europe had been, for hundreds of years, a series of competing countries. If one drifted too far in the direction of oligarchy or socialism, it eventually collapsed and its people then de-camped to a great extent to the other European countries in search of work. Many sent their earnings home, which eventually led to the rebuilding of that country. In this manner, Europe enjoyed a fluid rebalancing that kept the continent, as a whole, very vital.
The EU has been constricting this organic structure, assuring that, when one went down, they all went down. It is conceivable that Europe will return to this natural format as it recovers from the depression — if Brussels has sufficiently exhausted its control.
Recovery in the USA
The same is possible in the US — a return to what the US was supposed to be in the first place — a confederation of small “states” (a word that, in the late eighteenth century, meant “country”). If this were to occur, the American states would have an exceptional opportunity for true progress. First, some states (like, say, Texas) that had been generally productive and supportive of business principles, would now be free of a federal government that took in its tax dollars and delivered them to nanny states such as Illinois or California. As a result, Texas would recover more quickly, while the nanny states would continue their decline.
With the Federal Government removed from its role as the collector and dispenser of wealth, in a short time, it would be clear to all, regardless of what political views they held, that the “working” states were doing much better than the “entitlement” states. The fifty states would have the opportunity to compare the various governmental experiments of their fellow states, each having the opportunity to borrow ideas from those that came up with the best ideas. In such an atmosphere, rhetoric tends to go out the window. The proof is in the pudding, and the best pudding would attract the most followers. Increasingly, the citizens of the entitlement states would try to move to the working states as they became converts to the clear examples of progress. A very healthy process.
The fifty states may possibly choose to remain separate; they may form a series of confederations (most likely based upon similarity of economic and political philosophies); or return to a United States. This will be, in large part, determined by whatever level of control the Federal Government continues to hold at the bottom of the depression, and how clever the Federal Government is in convincing the states that a central government is needed.
Again, I stress that the speed at which the First World recovers as a vibrant economic force will depend, in large part, upon the degree to which the central governments have retained or lost control. The more severe the collapse, the greater the likelihood of loss of control, and the better the future.