Economic Armageddon Is Coming

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The US and other modern industrialized nations are headed for economic collapse. Political excesses created unwieldly and insolvent social welfare states in every modern democracy. The notion of providing for those who cannot or do not provide for themselves has limits. As Lady Margaret Thatcher expressed the problem:

The trouble with Socialism is, sooner or later, you run out of other people’s money.

The Political Problem

Those dependent on the welfare state are unaware that their benefits are not sustainable. Most believe tomorrow will be like today and the checks will keep coming from Mother Government. Political power was gained based on promising these benefits. No politician will risk his position by trying to reduce them. No democratic society has ever rolled them back via peaceful political means.

Governments in the developed world are out of money. They can either cut back the welfare state or attempt to fund it by ever-increasing taxes. The latter route represents economic suicide as increasing taxes destroys the economy. The former route represents political suicide. Dependency, once accepted as a way of life, cannot be cured without jeopardizing the existence of government and society.

The Extent of The Financial Problems

The financial hole dug by most social welfare states is too deep to get out of. The finest turnaround manager in the world, unconstrained by politics, would  be unable to remedy the problems. The mathematics of the problem are just too far gone. Radical cost-cutting and proper economic policies can no longer work. Hope and change may work in a political campaign, but slogans carry no weight against the iron laws of arithmetic.

The world is on the verge of massive sovereign defaults.  To appreciate the enormity of these problems, see Welfare States R.I.P.

The best resolution of the problems would be to default on the unsustainable promises and debt. While not honorable, it is the only option that can reverse the inexorable debt death spiral that is destroying all welfare states. Without a liquidation of excess liabilities, economic growth cannot resume and economies will shrink and eventually implode.  Japan, more than two decades into its economic purgatory, has managed to stall the implosion but not avoid it. The US and other countries are on the same path.

Welfare states have become zombie economies. These “walking dead” are shells of what they once were. A failure in one probably produces a domino effect that dooms all.

Two course of action can be pursued:

1. The Economic Solution

This solution requires that government spending be brought into line with revenues and held there (or below) for a lengthy period of time. That requires reneging on many social promises and possible sovereign debt defaults. A depression would occur. Homes would be foreclosed and businesses closed.

Wealth, defined in terms of physical assets, would be re-allocated. New owners and uses of assets would result. So, too would a complete cleansing of the cancer that prevents economic growth. The economy would be traumatized, but recover rather quickly so long as government refrained from intervening. Pain and suffering are inevitable. Civil unrest is probable and so is the risk that government(s) could be overthrown.

This solution is horrible in every sense but one — it is the better of  two alternatives.

2. The Political Solution

There is no political solution, although that will not stop politicians from pretending there is. “Pretend and extend” is all they can do. Intervening with additional stimulus and more printed money buys some time, but worsens the economic problems. Problems and distortions are made bigger, requiring even more adjustment when they inevitably occur. Pursuing this strategy flirts with currency destruction which would destroy the savings and fixed incomes of the middle class.

The end result is the same as the economic solution — a complete and total collapse of the economy. The difference is that the collapse is more severe and that many may be destroyed in a hyperinflationary blow-off. Since 2008, the money supply has almost quadrupled. Most of that money lies dormant in the banking system. Had it been loaned, we would have massive inflation today. Instead, it sits there like dry tinder awaiting a spark to ignite it.

The Road Ahead

The productive world has allowed its wealth to be squandered by profligate politicians and their governments. Unsustainable welfare states (Ponzi schemes in a sense that even Ponzi himself could not have imagined) consumed capital rather than allowing its re-investment and growth. Without capital growth, real wages must shrink and that is exactly what is happening today.

The world is in for a long period of stagnation, retrogression and conflict. The next hundred years could very well be referred to by future historians as an Economic Ice Age.

Short-term, this generation cannot avoid another Great Depression. The proverbial butterfly flapping its wings in Greece, Spain or other places could be the catalyzing event. On the other hand, it might be possible that the form of Japanese purgatory that much of the world has entered could be sustained for a decade or so.

Protecting Yourself

The changes coming are going to destroy people and fortunes. Some entrepreneurial types will stay ahead of events, protecting or even increasing their wealth. Most people, however, will be caught off-guard, trusting investment methods and guidelines that worked in a sane world but no longer work in the new world.

The economy and society could end up in ashes. What is impossible to predict is the route that leads to this point or how long it takes. Knowing an apocalypse lies ahead is not enough. Knowing what lies between here and there is the difficult issue for those trying to protect their wealth.

The period ahead is not a time to be aggressive. Preserving your wealth is apt to make you a relative winner in terms of what is coming. But be careful when you measure wealth. The dollar is no longer a reliable numeraire. Wealth measured in nominal dollars is likely to grow as a result of inflation. Wealth measured in terms of purchasing power, however, is the critical  measure. Maintaining the purchasing power of your wealth will be difficult to do.

Soon I will be announcing a new website that will deal with investing in front of approaching doom.

14 Comments

  1. Investments for impending Socioeconomic Meltdowns should be in material goods–trade and survival items are ideal as well as maintanence items; Small-arms ammunition will be far more valuable than Gold or Silver in a longterm Civil Unrest scenario–5.56 and .7.62×51 rifle calibers, 9mm and .40s&w Pistol Calibers in addition to reloading components and equipment….

    The top items to stockpile? Cheap butane lighters, condoms, medical supplies, chlorine bleach and aluminum foil will be amazingly valuable for bartering…candles, oil lamps/lanterns, wool blankets and fire-building materials will all be in short supply…think beyond food/water and start preparing–only those with the vigilance and forethought to prepare now will live long enough to see the restabilization

  2. “The best resolution of the problems would be to default on the unsustainable promises and debt. While not honorable, it is the only option that can reverse the inexorable debt death spiral that is destroying all welfare states. Without a liquidation of excess liabilities, economic growth cannot resume and economies will shrink and eventually implode.”

    Isn’t the Bernanke buying every single MBS he can get his grubby little hands on right now? Perhaps the exact “unsustainable promises and debt” that created this crisis will be the very same to be defaulted? The FED owns them….he can rip them up too! That would be the opposite of Obama’s lapdog Geitner minting a $Trillion coin and depositing it with the Bernanke, but with more effective results.

    My name is Brian Clark, and you heard it first from me.

  3. Global economic collapse? Hyper-inflation? Currency collapse? Bank holidays?

    Hah! Small potatoes! Humanity (a.k.a.: ewe-man-unkind) faces bigger problems… any one of them enough to trigger a major EXTINCTION event. SOME of these problems are:
    1. Global climate oscillation
    2. Exponential growth of the human ‘pop-ewe-lation’
    3. Rising seas inundating ALL coastal cities
    4. Acidic oceans destroying ALL corals and mollusks
    5. The collapse of all major ocean fisheries
    6. Global soil depletion
    7. Global habitat depletion
    8. Species diversity destruction
    9. GMO ‘Frankin-food’
    10. Hundreds of Fukushima ‘nuke plant timebombs’… waiting to happen
    11. Ozone depletion and collapse of the Earth’s biosphere
    12. A dearth of fresh water sources (i.e.: aquifer collapse) for sustaining human civilization and other life forms on the planet
    13. Cancer causing fungicides, herbicides, pesticides, and insecticides in the soil, air and water.
    14. Anti-biotics and ‘whore-moans’ in all agribusiness husbandry (pigs, chickens, cows, etc. Indeed! Ask yourself why six year old girls are developing ‘watermellon tits’.
    15. Massive deforestation in the Amazon and other parts of the world

    The list is endless! Sad to say… baboony humans are clever, colorful, creative and imaginative… but most of them lack prescience and common sense. Too many baboonies are $ociopaths at best, psychopaths at worst. This probably explains why the Amerikan sheeple-people allegedly voted to re-$ellect President Cheney (and Bush the Lessor) in 2004.

    I predict that faster poo-food Amerika (the corn syrup land of perpetual war profiteering, gratuitous violence and mindless material consumption) will NOT exist (as we presently recognize it) by 2050 or 2060. The evil empire will have completely collapsed by that time! Gone! Kaput! Yesss… and by 2100 humanity will be perched at the edge of EXTINCTION. Praying to Muhammad-mad-mad or Jeezass or reading the damn bible will not save us. Only common sense will save us.

    I shall leave ewe-folks with two things here! Old Coyote Knose…
    1. WHERE THERE IS NO INSIGHT, THE PEOPLE PERISH!
    2. WHOM THE GODS WOULD DESTROY, THEY FIRST MAKE MAD!

    R.R.R.

  4. The problems have been very expensive “Free trade” and debt-money – the twin engines of the First World’s planned destruction. Only a public central bank, public election financing, and a democratically elected WTO-IMF etc can restore real freedom and independence.
    Otherwise, the police state is now here to protect the ruling elite as they take us down.

  5. The difficulty I have with the concept of “investing” these days is that the methods available have been so distorted along with the entire financial market, that there seems no avenue available wherein the risk can be accurately determined. So the traditional method of balancing risk with potential return is no longer valid.
    - Bank savings, or CD’s? Real returns are negative.
    - IRA’s? Increasing rates of taxation eliminate any advantage of deferred taxation and the government will soon likely “nationalize” the accounts anyway, leaving individuals with the same meaningless IOU’s that are piled up in the Social Security Trust Fund.
    - Stocks? Inflated, distorted, and increasingly dominated by alg0-driven computer trading that relies on public perception or rather deception.
    - Metals? Grossly manipulated by a few paper traders to the benefit of the government who wish to disguise the current state of the economy from the sheeple and maintain “public confidence”.
    - Offshore? Big Brother’s arm is reaching ever further to penalize, tax, seize or criminalize such activity.
    - Land? Because of “property taxes” you never own land, just rent it from the government with seizure of assets resulting from any taxes not paid. And if the land has been in your family for generations, it is likely now deemed to be much more valuable (in inflated FRN’s) so eventually the inheritance tax will prevent you from keeping it.

    One by one our government is establishing ways to confiscate and control all real assets with the ultimate result that all citizens are reduced to being equally poor and dependent on the dole in one form or another. So if you can or have devised a way to defeat this objective and protect individual assets, I certainly look forward to reading about it in your new website.

    Sic Semper Tyrannis!

    1. Ken, good synopsis of a depressing outlook. However I’m sceptical that such an Argentine scenario is ready to ocuur here the USA. Rapid and catastrophic collapse leaving most the population in desperation would have to occur first and even then I’m not so sure all the spirit of ’76 would be completely eliminated. Only the Lord knows for sure.

  6. We’ll see how long the central banks can play the Japanese gambit. I think this is the way we will go to avoid total chaos as long as possible. If so, we should have some time to make preparations. I look forward to a lively discussion of such via ur proposed venture. Too many blogs take on a sky is falling, panicked tone. Thanx, Monty

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