Policy Reflexivity (a/k/a WWF presents Davos v. Rickets)

Anyone with a nuclear arsenal will be a contender.  (US, UK, France, Russia, China, Israel, North Korea - marginal)

The contender with a viable command and control system and a survivable leg of their nuclear arsenal will be a strong contender.  (US, UK, France, Russia, China - notionally)

The strong contender(s) with the political will to employ will be among the strongest.  (????)

The strongest with nothing left to lose will be the most dangerous.  (????)

It will be interesting. Sad but interesting.

I think the connections between the worldwide financial swindles and the grasp for the last resources is going to be the real driver to the world wide coup de grace of liberty and freedom.

The more things change...........

The death throes of every Empire have been characterized by the relentless pursuit of the "last resource".  In our case, it appears to be oil and the relatively cheap and easy energy and resulting growth that followed.

This too will pass, the next Empire will arise, the death spiral pursuit of the next "last resource" will take place and it all will be dutifully recorded (again) by historians and no one will learn the lessons.

Repeat ad infinitum.............

Interesting is an understatement, but it will be pretty exciting to be smack in the middle of it all.

Sorry for not taking the bait sooner, JO, but yes I agree that the war angle is a critical aspect of all this.

War between Japan and the USA was predicted by historians more than 30 years before Pearl Harbor. The reason they cited was that throughout history, any time that there was an undisputed economic superpower in the world (USA in the present case), that country tends to have military superiority as well and nobody dares mess with them. But each time in history than a runner-up has begun to match the de facto superpower in terms of productive economic capacity, those two countries have eventually gone to war. The reason for taking offensive action is often justified by some false excuse by politicians. So as Japan's industrial capability began to rival that of the USA, historians knew the two countries would end up at war, eventually. Their predictions were 30 years early. I generally believe the rationale that WWII and the conflict in Europe were not the real cause of Japan's decision to attack Pearl Harbor. I think they viewed the USA as their principal industrial competitor, and saw WWII as an opportunity to force the USA into conflict with Axis forces, and the Pearl Harbor attack was just a tactic to force the US into the game.

So by that logic, China and the USA have to go to war eventually. As Niall Furguson astutely points out in his recent article in International Affairs, it's extremely difficult to time these things. Sometimes economic tensions go on for several decades before the inevitable military conflict, while other examples can be found where some seemingly insignificant squabble escalates beyond reasonable proportion against the backdrop of economic tension, and war breaks out quickly and unexpectedly. The point is, nobody can say whether China and the USA will go to war in 2012 or 2052, but the stage is being set for that eventuality.

Although I am quite enjoying life here in Hong Kong for now, I'm convinced that sometime before my life is over, this will become an unsafe place for me to live. I rent rather than own real estate and am already researching my options for where's next after HK. I doubt that it will get unsafe for me to live here for at least another couple of decades, but as noted above sometimes things escalate suddenly.

But what I think is far more significant is the striking similarity between present day USA and the economic conditions that set the stage for Hitler's rise to power in Germany. Those who would dismiss a "new age American Hitler" scenario as nonsensical or impossible are not paying very close attention to history. Germans are not stupid. Quite to the contrary, they are known for being very logical, disciplined thinkers, hence their reputation for world class engineering. But after losing WWI, then the Weimar hyperinflation that (arguably) resulted from the financial burden of war reparations, the young people in Germany were facing a seemingly impossible struggle just to get by. It seemed to them like they were made to pay the price for the mistakes of a previous generation, and it just wasn't fair. Compare this with young Americans today who are slowly coming to terms with the reality that their prosperity was spent away by the Boomer generation living beyond its means on credit and government deficits. Like young Americans, young Germans of the day rightfully believed that it was unfair for them to be the victims of a situation not of their own making. And the living conditions were horrid. The scenario was one of financial distress being suffered by those who didn't create the problem and a feeling that foreigners were making it impossible for them to come out ahead. In these extremely difficult times, an otherwise intelligent and responsible people were ripe for having their emotions manipulated by an incredibly charismatic leader with a clear message: This is not fair to us, we did not create this problem, and we should not suffer because of foreigners. We need to rise up and claim what we deserve!

The parallels are striking, although most people refuse to see them. Hitler was a horrible man and Americans would never follow a guy like that, they exclaim in disbelief. Something like that is impossible in America! Ok, I agree - that would be impossible in America. Some other things that are equally impossible in America include the loss of Habeus Corpus and right to due process for all citizens, the right to privacy from search without a warrant issued by a sitting judge, and the rule of law protecting senior debt holders (i.e. GM bondholders) from subordination to interests (i.e. the UAW) that were not recognized as superior at the time the securities were issued. All three of those impossibilities have already happened in America. There is no sane reason to believe that a Hitler-like character couldn't rise to power. The difference between 1930s Germany and 20-teens America is that whoever rises to power in America has a working nuclear arsenal at their disposal.

I think the next 9/11-scale terrorist event occurring inside the USA will be the catalyst to make the rise of the next Hitler possible. Gerald Celente has been predicting another big attack in response to all the drone attacks in the Swat Valley, which most Americans aren't even aware of. Let's say this time the terrorists focus more on killing people than on the symbolic gesture of taking out a building that was an icon of western capitalism. Suppose they kill 30,000 Americans next time instead of just 3,000. Who knows what form the attack would take.

The key ingredient is the economic backdrop of despair and a widespread feeling of personal suffering for a problem that was not created by the people doing the suffering. We have that now in America and sadly it will get worse before it gets better. Then you have a terror attack that kills tens of thousands. Obama's first term is conveniently coming to an end. Enter Dick Cheney for President, campaigning on a strong message that Obama's peace and love approach didn't work, so it's time to take the gloves off, be willing to use our Nukes if necessary, and wipe out the threat posed by those stinking people in the middle east. The key thing to watch for will be when rhetoric is spread that says the people in Muslim nations are not human beings in the sense that Americans are. Every single mass genocide in history has been preceded by a propaganda campaign designed to persuade people that the enemy are not equal human beings "like us", but rather that they are some lower life form that has become a cancer that threatens society. In Germany there was a lot of propaganda about killing Jews wasn't the same as killing people; they were "just Jews, not people". So the American version of Hitler will need to persuade Americans that the other side are not full-fledged humans, but "Just Muslims" or "Just Arabs" or "Just Chinese" or something. The perfect time to persuade people of such a preposterous belief is right after a massive terror attack.

Although history does rhyme, and we are due for a "winter season" (fourth turning parlance), this time really is different: We have nukes now. When Hitler rose to power he wanted to have the whole planet for his master race, and wipe out everyone else through genocide. He did a lot of damage, but he didn't have the technology to really pull it off before he was eventually defeated. The next Hitler to rise to power in any Nuclear State will probably succeed at killing billions of people.

Gotta run - I want to enjoy the Dim Sum while I still can...

Erik

Erik, Hope your Dim Sum was good.

The difference on the positive side between now and the time of Hitler is that we have the democratization of information. And (hopefully) more people percentage wise are wise to the workings of the world. Sure there are still loots of sheeple, but I hold out hope that as we continue to move toward repeating the past the exponential growth of awareness will win out. That doesn't mean that I'm not planning for TSHTF. I just hope that its more like deer pellets and not elephant turds.

Steven

Great response Erik.

Deflation/Inflation kind of pale in importance when economic collapse is looked at through this lens.

It's interesting how these two things go hand in hand and run parallel with each other:

economic corruption -> lack of checks and balances-> transfer of wealth to a tiny minoriy -> Feudalism

Political corruption-> Scape goat-> simple solutions-> nationalism-> facism-> dictatorship (which is really just a type of Feudalism)

Steven wrote:

The difference on the positive side between now and the time of Hitler is that we have the democratization of information. And (hopefully) more people percentage wise are wise to the workings of the world. Sure there are still loots of sheeple, but I hold out hope that as we continue to move toward repeating the past the exponential growth of awareness will win out. That doesn't mean that I'm not planning for TSHTF. I just hope that its more like deer pellets and not elephant turds.

Good point but I wonder if it will matter what 'the people' want or desire. It seems more and more that government/ Wallstreet/ military just do what they want with little fear of any push back. Look at the corruption that Erik mentioned that has already taken place. Where is the outrage? Where is the concern? It seems like people are just asleep.

JO,

I don't think anyone's asleep. Rather, I think it's all about fear.

I saw an outstanding documentary shortly after 9/11 called Hijacking Catastrophe. It was all about how the emotion of fear has been used throughout history to quell public participation in government. They explained with shocking clarity how even in a technically free society, if you can get people afraid, they will put up with government totalitarianism, so long as some false promise of increased safety is attached. The key is that once people are afraid, their critical thinking faculties are bypassed and they stop critically analyzing even the most basic and obvious issues, such as whether or not the government actions actually do anything at all to achieve their advertised purpose of increasing safety.

To wit, consider the business shortly after 9/11 where you had to show your ID something like 5 or 6 different times before you could get on an airplane. Almost nobody questioned it. It never made any sense - even High School students have been shown to have the sophistication to obtain fake IDs if they want them, and even if there were a real purpose to the ID check, repeating it 5 or 6 times after it had already been checked served absolutely no useful purpose whatsoever. But nobody questioned it. The sheeple were relieved that "the government was doing something about terrorism".

Fear is the most powerful emotion. It shuts off critical thinking. The government knows this.

Erik

Erik,

Great point!  As someone who was in Lower Manhatten on 9/11, I could not agree more.  I know the fear that I personally felt kept me from critically questioning what was really going on for several years.  When I finally woke up, I can not tell you how mad (and ashamed) I felt for supporting leaders and media that were manipulating me in that way.  Hopefully more people will wake up and see what is really happening before it is too late.

I wanted to let this thread run on the momentum of the Davos v. Rickets Inflation/Deflation debate, but now that it's died down I'll weigh in with a few of my own views on what's likely to happen that will have a reflexive impact on public policy.

1. State Bankruptcy and how to disguise the inevitable bailouts

Quite a few states are just plain screwed, and their days are numbered as evidenced by the news on the Digest each day. This presents an enormous policy paradox for the Federal government. They can't really bail out any one state without bailing out ALL states, else the citizens of the states not being bailed out would justifiably revolt. But they really can't just sit back and allow California and Florida (likely to be first IMHO) to just go belly up to the point that law enforcement is cut off and mass crime waves ensue.

I predict that at first the feds will take a hard line - "NO STATE BAILOUTS", and keep a straight face until the first big mess happens in one of the most crippled states. Then they'll need to figure out how to disguise the inevitable bailouts so that Joe 6-pack can be persuaded it wasn't really a bail-out. The government's favorite tool for this purpose seems to be the federal "backstop", or loan guarantee. By granting a federal repayment guarantee to state-issued general obligation bonds, it will be possible for states like California to borrow indefinitely in order to finance their inescapable budget deficits.

Just as most people don't understand that the sneaky Christmas Eve move to backstop Fannie/Freddy debt indefinitely had the effect of increasing the effective national sovereign debt by 50%, it will seem to most people that "co-signing a loan" isn't the free handout that it really is. Or perhaps they'll find some other less obvious mechanism, who knows. But my point is that several states are going to need to be bailed out, and there is no practical alternative. The feds will have to figure out how to do it in a way that prevents the citizens of the other states from fully realizing that they are subsidizing the bailed-out states. In some respects, this is already happening. Many states are borrowing federal money to extend their unemployment benefits. On any reasonable credit analysis, they are not worthy borrowers and the federal money being "loaned" to them should be viewed as a grant that will never be repaid. But most people don't understand these things, so they don't yet realize that the states not in dire need are already effectively bailing out those that are.

2. Treasury Debt will be found NOT to be the most senior debt.

Most people assume that the formal sovereign debt of approximately $12.6 trillion has to be paid back because it's a formal debt liability, whereas the $100+ trillion in unfunded entitlement liabilities are not technically a legally binding obligation of the government, and therefore most people view these obligations as subordinate to the formal sovereign debt represented by treasury bonds.

I predict a reversal of debt seniority between entitlement obligations and formal debt. A staggeringly large percentage of retiring boomers have no private retirement savings to speak of, and are entirely reliant upon social security and medicare. So long as anything resembling democracy remains in the United States, the government is going to have to do something for these people. On the other hand, despite how "unthinkable" it may have been in the past, a default on treasury debt means for the most part that foreigners who don't vote get screwed.

I predict that this will be the biggest political issue of the late 20-teens and 2020s. There simply isn't any possible solution under the government's present revenue model. Too much has already been promised that the government simply has no way to deliver (see next item).

3. Fundamental Overhaul of Fiscal Policy and Major Social Changes

Under anything resembling the present tax system, there is simply no good way to make good on promises already made to millions of retiring boomers. It has been calculated that even if you don't consider multiplier effects, marginal tax rates would have to be doubled to fully service all of the entitlement obligations, and that would cripple the economy. Put another way, the Laffer Curve predicts that no possible amount of tax increases can pay for what's already been promised. And that's before the new healthcare entitlement is taken into account.

So there will have to be fundamental redesign of the government funding model. One approach (already being used by some other countries) is to sell off national assets to fund budget shortfalls. But even selling national parks is not a sustainable plan... Eventually you run out of stuff to sell.

My best guess is that the change will come incrementally, but it will probably be a continuation of the present push toward socialism. As economic conditions worsen and what's left of the middle class are forced to accept ever-decreasing standards of living, a national attitude will likely ensue that wealthy people don't deserve to be wealthy, and that their wealth should be confiscated. I predict that asset (rather than income) taxes will eventually be imposed. The super-rich and well-connected elite will be protected through their connections. Those with moderate wealth will loose most or all of it.

4. Declining economic conditions lead to fundamental change in attitudes toward environmentalism

As the California economy continues its death spiral, the Peak Cheap Oil shock will hit. Unemployment will be 20%+ and gas will suddenly cost upwards of $10/gallon. Under those dire conditions, perhaps even California liberals will come to the conclusion that allowing raw crude oil to literally wash up on the shores of Santa Barbara but keeping in place bans on drilling for it offshore wasn't the wisest policy choice. To save face, "new, environmentally compatible technology" will be cited as the reason it's suddenly a good idea to drill for that oil. But it will take 10+ years from policy reversal to online, operational oil rigs. Those will be difficult years for the California (and national) economy.

I also predict a new wave of conservation attitude. I would expect to see punitively high taxes on energy consumption by everyone other than the masses. In other words, a prevalent attitude that everyone should drive a motor scooter or Prius, and anyone choosing to continue driving a conventional car or truck should be required to pay a 200% tax on fuel. In other words, punish the guy you're jealous of, citing his impact on the environment as justification.

Those are a few thoughts, anyway. The real point is that the world isn't going to work the way it does today 20 year from now. It will change massively and unpredictably during that time.

Erik