The End Of The World And Other Doomsday Events

The end of the world or how do we get there from here.  In the novel, War of the Worlds, invaders from outer space are flying around in their fantastic vehicles blasting our military forces and wrecking cities. The ordinary farm is left alone and none of these invaders travel to Kansas or Oklahoma to do battle with tornadoes.  Well, the Martians weren’t exactly crazy, just stupid.  All they had to do was wait a few decades and find that the world had undergone a transformation into total stupidity and mindlessness.  The key to all end of the world scenarios is that one never gives sufficient detail as to how we got there.  An invasion by another world power and the gigantic struggle for survival.  The mad cow diseases that turn us into zombies.  The alien invaders who use some sort of vegetable pod to turn our minds into vegetables overnight.  Of course the electricity keeps working, automobiles still run, and food appears on the table.  Reminds me of the sixties drama series, Combat.  Sgt Saunders must have received a dozen purple hearts or more and it only took a week or two to recover from his wounds.  At least they let soldiers die in the the series unlike a competing drama where our American heroes were super troopers and no one ever died but the enemy.  Funny, the series lasted longer that the real war.  But I digress for a purpose.  Fiction allows us to magically skip to the chase without all the details that would bog down the story.  Real life isn’t so fortunate.

The depression that started at the end of 1929 took a few years to unwind.  It didn’t stop when FDR was elected and through some of his bungling, was made worse.  The “recession” of 1937 assumed a recovery when the country had not made it out of that depression.  In fact, we, as a country, were out of the depression because we had geared up for a full scale war in 1942.  Not that war is a good policy to end depressions, insure full employment, and renew one’s industrialization capacity.  We paid for that war well into the fifties.  And for years we were blithely taught that the depression came because of the excesses of the roaring twenties, the main cause was bootleg alcohol and crime.  I might agree with the idea of crime although if one were looking for criminals most of them were in Washington D.C. sitting in Congress or government offices.  Actually, one can trace the roots of that depression to excessive credit creation that had been created by the first world war and then the coming of our modern industrialization during the twenties.  By then Ford’s assembly line techniques had been adopted wholesale throughout the country.  There had been booms and busts prior to that time,  William Jennings Brian preached against the “Cross of Gold”, or hard money.  What the history books fail to tell you is that the period between 1860 and 1900 had seen real estate booms in farm land.  The crisis wasn’t about whether we should have only a gold standard or a bi-metal standard, the crises was about credit and debt.  It was about interest rates.  When interest rates rise, debt becomes more dear.  When deflation comes, debt becomes hard choices.  Easy credit and inflation make debt sustainable.  Deflation, often caused by recessions and higher interest rates makes debt agonizing.  So it was the cause of the foolish farmers speculating in farm land against the shrewd Boston bankers taking unfair advantage of the yokels.  Well, not quite.

The question is whether today resembles the history of that fifty or sixty year span?  You see, it just wasn’t us, it was the rest of the world that was caught up in the paper chase of easy money.  Fruit companies had been taking over Latin American countries to produce pineapples (which were unknown in the new world) and then bananas (the kind we eat no, not the plantines that had grown naturally).  One can drive from Colima to the west coast of Mexico and see hundreds of bananas plantations today where none had existed a hundred years ago.  Of course sugar cane is still the king crop in that country along with some pineapples plantations.  But for that matter, Florida and California never had orange groves with navel oranges before Columbus.  An orange, before the turn of the last century used to be a rare and precious gift often given to children (whose parents could afford such gifts) on Christmas.  Imagine if you had to pay twenty or thirty dollars per orange today.  In a depression food is often the first commodity to feel its effects.  In the coming depression, and it will come since the laws of mathematics have not been suspended for our personal benefit, the cost of food will rise greatly.  We Americans do not understand that so much of our fruits and vegetables are imported.  Before the 1950s we were used to seasonal vegetables and fruits, now we are supplied all year long with these same fruits and vegetables grown in the southern hemisphere.

So why is a depression coming?  Why did the one last century happen?  Excessive credit and lack of ability to pay.  What is the iron law of debt?  Debt is either repaid or defaulted.  We like to think that there is a third state that exists by can kicking, but that lasts only as long as one has a road left to kick the can.  We forget that all roads lead to dead ends and that dead end is called a depression.  The first big crunch will come from a crisis of derivatives.  With over 550 trillion dollars worth and no reserves o cover them, the defaults on debt will start the credit events and the supposed settlements.  When Russia defaulted on her government bold (the old Czarist regime issued debt), Europe was not immediately plunged into depression, but it was a few of the dominoes that started the cascade falling.  The Greeks will most likely default on their government bond debt.  Why?  Because if the credits take haircuts for the Greeks then they have to do it for Spain, Italy, Portugal, and Ireland.  The EU cannot give in without destroying itself.  Yet if the Greeks default then other countries are encouraged to do the same.  Either way, the EU is now a zombie, it just doesn’t know its dead.  But Europe isn’t the only hot spot of risk.  The Chinese believe that the iron law of debt has been suspended just for them.  They are consuming debt like drunken sailors on liberty after years at sea.  The AIIB project is financed solely by debt.  Trillions and trillions worth of very large scale projects are being planned and in the first stages of construction.  The problem is that one can’t eat debt, it has no nutritional value.  The whole country is corrupt.  Imagine piloting an oil tanker where the compass is wildly inaccurate, your speed is unknown form one change to another and seems to have a mind of its own, your steering may or may not work at times, and all the reefs are hidden and your radar and sonar don’t work, and it is the darkest night of the year.  If Mao came back from the dead there would be ten million fewer Chinese today.

The collapse will be financial, at first.  That hits the developed countries first since so much of their employment relies of financial services.  It is the defaults that bring down the banks first.  Capital controls and bail-ins (your savings are taken to save the bank) become the norm.  And as the first default start, more keep coming because it is a ponzi scheme of debt.  The shake out is that much of the “loss” is paper.  But those who lose their capital lose their ability to continue playing the game.  Corporations that have issued bonds to buy back shares of their own stock to boost earnings will soon find themselves unable to raise new capital for investment in their respective businesses.  They may even find their bonds will be recalled or their holdings of company stock, against which such bonds were issued are now worthless.  This financial depression works in rather non obvious ways.  when the public stops buying your automobiles, that is one thing, but when your stock values are near worthless, you’ve got real problems if your debt is secured by them.  On the public side, there are so many public pensions whose investments are in stocks and bonds that will see a rapid drop in value to the point that their retirees may see half or more of their current incomes cut over a very short pensions, perhaps a quick as two or three years.  Remember, most economies run on consumer spending.  When consumer spending decreases a recession usually occurs unless that spending decrease is rapid, then it is a depression.

The Federal Reserve has all those Treasuries, MBS (mortgage backed securities), and other “investments”  back by repurchase agreements.  But if those banks and hedge funds and other institutions have lost significant portions of capital and have little to no operations funds, then the Fed is stuck with “investments” that have no relative value.  What is the value of an asset if no one can buy it?  To be sure, electric power will still be provided but the demand will be scaled back.  Unemployment will be the theme of the day.  If individuals can’t obtain loans to buy houses or vehicles, what will be left?  Imagine that there are no funds to loan to buy an automobile on credit,  What happens to Detroit and all the automakers in the country?  It won’t matter if one is union or non union, you all will be out of a job.  We already have a huge oversupply of vehicles right now, sitting unsold.  You see, the general public is greatly over burdened with debt.  That is why all that talk about America bouncing back and is on a path of new growth was a lot of hope and stupidity and lies.  We have never recovered from 2007.  Certain parts of the economy have improved temporarily, but there is nothing lasting about any “recovery”.  Well, unemployment is down.  Is it really?  well, it depends on who you count as unemployed.  I guess if you’re not drawing unemployment insurance and still don’t have a job you are not unemployed.  Put that fantasy in your government supported pipe and smoke it.  Fast food joints will rapidly go out of business as more unemployment hits.  All that hoopla about a living wage will disappear as one no longer has a minimum wage job.  Fast food is expensive food and one of the first businesses to go in a depression.  Marginal business will disappear and those employees will be jobless for the long term since their limited skills are in over supply.

What I am trying to paint is a picture of an economic shutdown that is not exactly ordered or disordered, but lumpy, if you like.  some industries, some corporations, some small businesses will be hit hard at first and then a general shut down of the economy.  Food imports may be cut drastically and exports (what little we have to export) will be in dribbles and drabs.  One thing that will happen as wages deteriorate is that we create a few manufacturing jobs in this country.  But most of the machinery will be computer controlled.  We will not see the return of the machinist operating lathes and drill presses and milling machines.  The type of work that will be needed will be of two types: very skilled labor including university trained employees; and unskilled to semi-skilled labor that is paid low wages.  The majority of the working age population will be fighting for the second type of employment.  And with a drop in personal income cities and states will find that they must abandon unionized workers, they must clear out the departments to the barest of bones, and the pension systems will take massive hits in funding and payout.  Property taxes will need to be cut and the educational establishment that has grown fat on strikes, obscene wages and retirements and expensive facilities will be cut as well.  The public will not have the means to continue that ponzi scheme and will be unwilling to listen how “it’s for the children.”  Fire and safety will take it on the chin as cuts in spending demand an end to police and fire unions, excessive compensations, defined benefit packages and luxury retirements and benefits.  This unwinding will take a very long time and there will be a great amount of pain.  I would think that we might, at some stage, see the national guard in each state taking over the policing operations until such time as local governments become stabilized.

Finally, we may actually see a change back to decent government policies and the passage of decent laws.  That we may get a few good laws will be true but I also fear we may get some bad ones as well.  And I’m sure that being the true progressives they claim to be, the Clintons will give up their fortune for the good of the country so they can both identify with the little people again,  You see, that is the other question.  With the depression and the rise of progressive idealism, will the people demand givebacks from those who profited so basely off the public teet?  Should we take their millions and billions, or what may be left of their assets?  Will we demand the return of a good five cent nickle?  I am not soothsayer.  This is what I would believe, based on a little history, of what will happen in the next few years.  Truth is, it may take another ten years for all this to start, or it could less than a year.

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