Stages of the Collapse

Simon Black, in a detailed article entitled What Are The Social Implications of Economic Collapse?, envisions the following stages:

  • Option 1: Continue borrowing, keep the party going.
  • Option 2: Inflation
  • Option 3: Austerity
  • Option 4: Default
  • Option 5: Economic Cannibalism
These are options available to the government. Mr. Black envisions them being exercised sequentially. As one fails, the next is attempted. In his words:

The first option (keeping the party going) is what has been happening for years. Politicians make small concessions to show they’re “serious” about fiscal discipline, cutting laughably small programs while dumping hundreds of billions of dollars into wars and entitlement programs.

The worse the debt situation becomes, though, the higher the borrowing costs become, and the worse the debt situation becomes. It’s not an enviable position. Existing lenders will continue backing away from the US Treasury market, giving option 1 a half-life measured in months at best.

In the longer term, only options 2-5 remain: inflation, austerity, default, and cannibalism. Each of these remaining options will shake the financial system to its core. More importantly, each of these has the power to create widespread social upheaval.

Option 5 is where the government takes the wealth of its productive citizens. Although Black does not provide details, one surmises that he refers to confiscatory tax policies on high earners, confiscation of IRA accounts (or at least forced investment into near worthless Treasury securities) and other unimaginables, at least in a country which used to be relatively free.

Presumably social unrest appears in stage (option) 2 when inflation makes it difficult for many to feed their families, becoming more intense with each subsequent stage.

Mr. Black has presented a road map with which I completely agree. Defining the exact ending of one phase and the beginning of the next will be difficult even as we move through them. The timing and length of each phase is not practical to estimate, although Mr. Black appears to believe that we are close to phase 2.

In my opinion, QE3 will mark the beginning of phase 2. QE3 will be called something else to attempt to fool the masses a bit longer. Regardless of what officials say, you will know QE3 has started when the Fed balance sheet begins to grow again. That is the simplest signal. Don’t watch their lips or listen to their words. Watch their actions.

Martial law is likely to be imposed around the beginning of phase 3.

The reason our economy will not respond to anything done by the government is that more and more people recognize the death spiral the country is in. Risk capital and hiring do not occur when expectations like these rule. Rolling back government was the answer, but past government abuses have sealed our fate. Any attempt to roll back government represents option 3, austerity. The dependent class will not allow that to happen, at least not without major civil unrest.

Read Mr. Black’s article and prepare as best you can for a future never imagined in our country! Welcome to a banana republic with ICBMs.

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  1. Where can reliable data on the Fed’s balance sheet be obtained? I agree with you that QE3 is a sure thing, but the Fed will no doubt try to conceal it from us.

  2. Hi Monty, I’ll give us a year, but total disaster before the next election. I think that the Fed can print money for about a year to finance the government while a stunned world (well, actually they probably know what’s coming too) drains our dollars and converts them to something tangible. The only reason I don’t think hyperinflation will hit immediately is simply because the “folks” just don’t have the money to spend and trigger the avalanche. Eventually, though we’ll be swept up in the dollar tsunami.

    China has for some time been buying up assets. By stopping their purchase of our bonds, they can plow the extra constant devaluing dollar they receive from us into the things that can help them survive or even thrive. The chinese need to develope their own domestic market and probably don’t have time to do this, but at least they’ll be better off than we will when we collapse. Speaking of China, would you say that their economic model is mercantilism? Could you talk about that some day? I think we need look no further than Wisconsin to see why neither party will implement austerity measures, there’s just way too many people out there that don’t care if our nation is destroyed and certainly a certain group who would love not to see a good crisis go to waste. Is Obama and is ilk as evil as I often imagine? I think yes.

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