oftwominds-Charles Hugh Smith

This Week's Theme: The Coming Great Depression

I have been asked to address the coming Great Depression which is slowly but surely enveloping the globe. The irony of doing so in Thanksgiving week is not lost on me, and I want to preface my commentaries by saying that I do not tackle the subject cavelierly. There will be great suffering, on many levels, and the entire point of analysing the situation is to lay the groundwork for alleviating the suffering by getting to the root causes of the financial, social and environmental disasters which are unfolding globally.

Let's start with the view of the U.S. from orbit. The first thing you notice from actual orbit (as opposed to "the long view" metaphor) at night is all the bright lights. In the daytime, you would see thousands of contrails from all the commercial airliners in the air.

The one key fact about all this energy useage is that about half comes from overseas; it is purchased from other nations and shipped great distances. This energy comes in the form of liquid petroleum, a highly energetic and easily transportable form of energy of which the "cheap and easy to get" kinds are now in permanent decline.

To those who don't believe in "Peak Oil," please note that regardless of all other conditions, estimates, theories, etc., the cheap-and-easy-to-get oil will soon be consumed. Every other form of fossil fuel will be costly to extract and refine.

Switching to a metaphorical "view from orbit," we see the primary fact of the U.S. economy is that it no longer produces a surplus. The nation consumes more than it produces, and has borrowed the difference for the past 27 years--more or less the time period of "The Great Bull Market" from 1982 through 2007.

These two facts are not unrelated; it was not mere coincidence that borrowing at every level of the U.S. economy increased in that time frame until it reached unimaginable quantities (and velocities) in the 2002-2007 timeframe.

From time immemorial, civilization has required a surplus to be earned from the labor and harvest of a tribe or people. If you consume the entire fruits of your collective labor, you have no surplus to trade with other peoples, no surplus to invest in roads, ships, additional fields, waterworks, armies, permanent structures (religious, communal or private), no "savings" for lean times, and certainly no surplus to pay anyone in the tribe to practice art or music.
An economy which creates no surplus cannot save any surplus to invest ("money" is nothing but a means of exchange and a store of surplus labor/energy). That economy is doomed to eating its seed corn, after which it collapses. Throughout history, ecological/environmental changes (unremitting years of poor rainfall and harvests) and/or regional conflict (unending wars which consume whatever surplus remained) have led to the downfall of great civilizations.

Now an empire has certain advantages over a tribe or city-state or even a nation. Through its power, both "hard" (military) and "soft" (financial, cultural influence, diplomacy, threats, etc.), the empire can coerce vassal states to sell their surplus goods and services at immense discounts to the empire, which then consumes the goods or re-sells them at enormous profits.

The empire can also create and sustain markets in vassal states for its goods and services, which it sells at a premium either directly or via the legerdemain of currency manipulation/control.
But when the empire consumes more than it gathers in surplus, then it too declines. It can mask the decline by stripping assets and surpluses from vassal states for a time, but eventually this exploitation reaches extremes which power revolutions and rebellions. With its surpluses gone and its populace weakened by decades or centuries of living off the fat of the land, the empire loses its military grip over the vassal states.

Once it has lost its ability to extract resources and goods at a discount and its markets for its own overpriced goods, the empire declines to mere nationhood or implodes into various political pieces (nation-states, client states, federations, etc.)

At home, the empire's populace has grown accustomed to consuming the surpluses of others. Creating surplus has been replaced with an obsession with consuming surplus, in ever more extreme and outlandish fashions. Both the refinement and brutality of human nature reach apogees in this blow-off of others' surplus; violent bloodsport games are enacted (in stadiums or via computer screens), absurd costuming and spectacles become commonplace, rare and exquisite foodstuffs are imported, prepared and squandered, and every excess in religion, art and sport is surpassed by an ever more outrageous waste of surplus.

Borrowing, either outright loans or via the legerdemain of depreciating currency, grows to the point where everyone is indebted to someone somewhere. Entire governments balance precariously on the high taxes extracted from the few remaining productive enterprises in the home empire, and on funds borrowed to pay the interest due on previous gargantuan loans. (See French and Spanish empires for examples.)

"Rights" abound in the empire doomed to implosion/decline: not just the right to free speech and the right not to be unduly harrassed by authority, but the "right" to bread, shelter, entertainment, etc. When the bread runs short, the ugly mobs demand their "rights;" ironically, when bread becomes a "right" (a.k.a. an unearned entitlement), then it suddenly becomes scarce.

And when it becomes scarce, then the quality plummets, and those demanding their "rights to decent bread" ate issued weevil-riddled biscuits. And since there is no surplus, and no incentive to create surplus (whatever surplus is created is quickly appropriated by the debt-burdened government), then those lined up for their "rights" have to take the weevil-riddled bread and like it. Or not.

And then the mobs have to be controlled with a "whiff of grapeshot" (Napoleon) or they consume the crumbling bones of the empire piece by piece until nothing remains except resentments, unanswered demands, and eventually, either ruin or nostalgia.
That's how you get a global Depression.

Two totalitarian empires were attempted in the 20th century, both based on an unparalleled propaganda machine, unparalleled state control of every aspect of the economy and society, and the coercion offered by great military and secret-police organizations.

Both empires failed. Complete expropriation of rights and property is exploitation to such an extreme degree that it sparked resistance, and the old model of empire, i.e. one built on and sustained by wealth creation via trade and "soft power", had a great defender (the U.S.) Blessed with immense resources, a large and active populace and popular political principles, the U.S. created a "win-win" alliance which destroyed the Nazi empire militarily, and ground down the Soviet empire, which was doomed from the moment it failed to create any surplus on its own.
Now the U.S. empire faces unprecedented challenges, just at the point in time it has succumbed to all the temptations of debt and consumption of others' surpluses which brought down previous empires. The home populace of the empire is restive with demands for "rights" even as its own productivity (as measured by the surplus of production over consumption) has declined into deficits which require stupendous borrowing just to sustain current spending on "bread and circuses."

Even worse, an illusion of "growth" and "wealth" has been created by the FIRE economy (finance, insurance and real estate) in which shuffling paper and bits of data pass for actual productive activities when in fact they created nothing.

The cost structures of the unproductive parts of the economy (government, medical care, etc.) have skyrocketed at rates double or even triple the growth of the economy as a whole; the total tax burden (property taxes, payroll taxes, junk fees, permits, income taxes, business taxes, phone taxes, fuel taxes, sales taxes, etc.) have outraced both income and the overall economy, channeling whatever surpluses have been created into unproductive bureaucracies consumed with papershuffling.

Like the frog being boiled alive, we do not seem to be aware of the heat rising. To take but one example: it now costs at least four year's pay to go to a hospital in the U.S. and have a medium-scale operation. The numbers are less important than the ratio, but those of you "in the business" know that if we take the median wage in the U.S. as $40,000, then a few days in the hospital is one year's pay (not intensive care, mind you, just a "regular" stay), the operation a year or two's pay, and another year for post-op care and medications.

Intensive operations cost ten year's pay, of course, if not more.

Did an operation and a few days in a hospital cost 4 year's pay in 1970 (the last gasp of the 25-year postwar Bull market)? No.

Now that we all have the "right" to operations which cost 4 to 5 or even 10 years' pay, where are all those decades of pay going to come from? the math is painfully simple. If we all get to have medical care which consumes (costs) 5 year's pay, then collectively we each need to save $200,000 or pay "medical care" taxes equivalent to $200,000 in order to pay for that consumption.

And if we also have the "right" to consume medications which cost another year's pay or two, then we better make it $300,000 each, or maybe $500,000 because we also have the "right" to unlimited MRI tests, etc.

But we as an empire have chosen the "easy way out" just as previous empires did: borrow the surpluses of others to consume, either directly via selling Treasury bonds, state and local government bonds, mortgage-backed securities, etc., or the appropriation of their wealth via management of our currency which they are forced to use.

Ironically (or not), once this care becomes a "right" (i.e. nearly "free" to consumers) it suddenly becomes scarce (expensive) and the quality goes down. Any system set up on this model eventually implodes under its own weight: cost structures with essentially no limit (no worker can be fired, no test denied payment, etc.) skyrocket, demands for "rights" increase, and the system collapses when there is no longer enough surplus wealth appropriated from abroad to pay the rising costs.

That collapse of high cost structures no longer supported by surplus wealth appropriated from trading partners is the essential cause of the coming Great Depression. Once the U.S. has to face its vast deficit between its saved/invested productive labor and its consumption, then the high cost structures will topple one after the other: first the auto makers, and eventually the entire Medicare/Medicaid industry.

The math is painfully simple: no cost structure can grow at two or three times the rate of the overall economy forever. We're about to experience the breaking point, and whether we in the home empire state like it or not, consumption will have to realign to match production minus savings for investment. Borrowing to fill the difference has worked for a long time, but it never works forever.

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