Take A Breather: We're Not Collapsing. Not By The Next Election, Anyway.
Let’s see the situation for what it currently is, not what it could be.
Last month, Republican pollster Frank Luntz made an eyebrow-raising claim:
Yesterday, Luntz sounded like he felt vindicated:
The Fourth of July weekend has come and gone. I’m not quite sure what Luntz was getting at back on June 17, to be honest. Inflation was an issue on Independence Day in 2021, so I don’t know what new reality Americans have come face-to-face with over the weekend, other than the fact inflation has gotten really bad.
That said, I’ll say that there’s still time for Luntz to be vindicated - there’s always a signal delay and I do share the view that people aren’t quite as impacted by inflation as they could be. It’s the classic slow-moving train wreck - people realize it’s happening, but it’s not getting bad quickly enough to constitute an upheaval. This isn’t to say people aren’t being impacted - they clearly are - but, for now, life goes on. Inflation makes life more difficult, but it’s not a show-stopper.
The reason I bring this up is because America’s decline and collapse is a popular topic of discussion these days, but there’s a lot of misunderstanding about what’s actually happening to the country. Here’s a perfect example of what I’m talking about:
“Total legitimacy collapse” is quite the claim. If you ask the average person on the street, not a single one of them are going to know what you’re talking about. The idea that the country has reached a point where the public views the U.S. government as having lost any stake to claim as the authority defies reality. Americans may not like their government (I certainly don’t), but this doesn’t mean that they’ve decided they’re not going to listen to them anymore. The U.S. government still wields the ability to legally exercise violence against us and, as long as it does, most people will accept the state’s legitimacy, if begrudgingly so.
We’re not even seeing the mass civil unrest that typically accompanies political legitimacy crises. Some developed-world countries like France and Italy often seen major anti-government protests on an annual basis. Look at what’s currently happening in the Netherlands, a country considered by many to be a better place to live than the U.S.:
Things certainly aren’t tranquil in the U.S., as I’ve explained previously. But our protests seldom reach the size and scale of that in Europe, even factoring in the 2020 George Floyd protests and the recent demonstrations against the overturning of Roe v. Wade. Even if ours did, none of it means the entire political order is on the verge of death. Some countries deal with non-stop political crises, but they still manage to exist into perpetuity. Even Sri Lanka, which recently went bankrupt, has still yet to cease to exist as a state.
Predictors of imminent collapse cite looming federal-state legal disputes over abortion, guns, and illegal immigration, plus talk of nullification, but unless any of it results in some serious instability and unrest, any talk of a total legitimacy collapse is highly speculative, to put it kindly. If I were a betting man, I’d say it won’t be as nice a place to live as it once was, but the U.S. will still be around in its current form in 2032.
Going back to the topic of inflation, bad as it is in the U.S., it’s still not as bad as it could be:
Notice where many of these countries are located in the world and their internal situations. Many of these countries have dealt with instability for decades and are war-torn. Whether inflation is a cause or consequence of that instability is besides the point, which is that what America’s currently facing is probably the beginning of chronic inflation, but not the hyperinflation some people seem deeply worried about. Figures vary depending on how it’s calculated, but at worst, the U.S. inflation rate is currently between 10 and 11%. This is nothing to brag about and I’ve spoken at length about why inflation is a problem, but this is still a far cry from what many countries are dealing with.
Of course, the idea is to never end up in a situation where you have inflation over 30%, but the lesson here is that inflation is a political crisis for the Biden administration, not for the country. Not yet, anyway. Let’s see the situation for what it currently is, not what it could be.
And what is the situation, currently? Where exactly on the timeline is the U.S., exactly? Many people have created their own models explaining the life cycles of empires and they all have merit, but I personally prefer Ray Dalio’s model because it provides specific defining characteristics for each stage of the life cycle:
For example, you can determine fairly easily when something like the debt bubble started to balloon and when the gap between the wealthy and the rest of society began to diverge considerably. Likewise, the debt bubble bursting is a very specific event which you can pin down to a year when it started to occur. Having these well-defined stages serving as a frame of reference makes it easy to determine what point the U.S. currently is in its lifespan.
Going by the Dalio model, the U.S. is currently somewhere between the “Debt Bubble and Big Wealth Gap” phase and the “Debt Bust and Economic Downturn” phase. The U.S. has definitely been in a debt bubble since the late-2000s and the wealth gap is growing. However, the debt bubble obviously hasn’t burst, yet. This might seem unbelievable, given the amount of debt the U.S. has racked up, which is at least $30.5 trillion, and the debt-to-GDP ratio, which stands at an eye-popping 130%. At that point, you’re definitely in the danger zone, as Lyn Alden, one of the best financial analysts in the industry, explained in an excellent deep-dive into the topic of national debt [bold mine]:
More specifically, a study by Hirschman Capital noted that out of 51 cases of govt debt breaking above 130% of GDP since 1800, 50 governments have defaulted. The only exception, so far, is Japan, which is the largest creditor nation in the world. By “defaulted”, Hirschman Capital included nominal default and major inflations where the bondholders failed to be paid back by a wide margin on an inflation-adjusted basis.
There’s no example I can find of a large country with more than 100% government debt-to-GDP where the central bank doesn’t own a significant chunk of that debt. Central banks quickly increase their holdings of government debt when the debt gets that large relative to the size of the economy.
Even the US Congressional Budget Office shows that the current forecast is dire, despite the fact that for political reasons they never factor recessions into their forecasts, and recessions result in larger deficits when they occur:
So why hasn’t the U.S. defaulted [bold mine]? Back to Alden:
Many major countries like the United States, the United Kingdom, Canada, Japan, and China issue their own currency, and all or most of their sovereign debt is also issued in their own currency.
This makes the possibility of actual government default nearly impossible, because if push comes to shove, they can force their own central banks to print new base money and monetize the government bond issuance. Russia defaulted on government debt denominated in its own currency once, but that was a rare exception that they did by choice. Globally, such an event almost never happens.
However, government debt still matters, but in a different way. When debt levels start to get very high, their central banks start creating new base money to buy government bonds, either directly from the government or on the secondary market. This process is known a “debt monetization” and in the long run tends to lead to significant currency debasement.
Basically, when government debt as a percentage of GDP gets very high but is denominated in its own currency, rather than default in nominal terms, they “default” with inflation and financial repression. They hold interest rates low, have their central bank create new money to buy the bonds, and let inflation run high. Bondholders get paid back, but in weakened currency. As a result, bondholders lose purchasing power on their assets.
What she’s saying is that for now and into the foreseeable future, the likelihood the U.S. ends up like Argentina, Venezuela, or, more recently, Sri Lanka, and defaults on its debt and the economy collapses is highly unlikely. Nothing’s impossible, of course, but the conditions in the U.S. and it’s unique characteristics dictate that if the economy does collapse, it won’t be because of a sovereign debt crisis.
Does this mean the debt isn’t a problem? Not exactly. In fact, the U.S. would be totally screwed if it ever had to start paying back its debt:
When a country starts getting to about 100% debt-to-GDP, the situation becomes nearly unrecoverable.
What I mean by “unrecoverable” is that there is a vanishingly small probability that the bonds will be able to avoid default and pay interest rates that are higher than the prevailing rate of inflation. In other words, those bonds will most likely begin to lose a meaningful amount of purchasing power for those creditors who lent money to those governments, one way or another.
And as such, any country that starts getting up close to 100% debt relative to GDP, starts having a lot of its debt bought by its own central bank (aka “debt monetization”), rather than all of the debt being bought by private creditors. The debt load get so large that they would begin to crowd out available liquidity, and they become increasingly likely to provide negative inflation-adjusted returns during their duration, and so the debts start being monetized by the central bank at that point.
More:
When it comes to my analysis of monetary policy, fiscal policy, and inflation/disinflation in the United States from an investor point of view, I consider the US national debt as being beyond the point of recovery in any sort of real terms.
In other words, regardless of who is elected going forward, I view the range of policies that could potentially allow US government bondholders to be paid back with positive purchasing power to be vanishingly small. Neither Democrat nor Republican administrations will be able to solve the debt problem without holders of cash and bonds losing considerable purchasing power.
In case you didn’t catch it the first time, the U.S. debt cannot be paid back. Austerity, the act of reducing deficits through spending cuts, higher taxes, or a combination of the two, is likely to compound the problem, since money needs to be printed or collected via taxation and spent to pay off the debt (not paying it isn’t an option, either). Nor would austerity be politically popular, since it would have to cut into social spending like Medicare and Social Security, among the federal government’s largest expenditures, in order to make a dent in the debt and deficit. At this point, not spending money simply isn’t an option. If anything, we probably haven’t seen the worst of the spending and money printing yet.
The problem, as Alden explains, is that it all arrives at the same destination: inflation. Thus, what I see in both the near and far future for the U.S. is life becoming more expensive and quality of life declining. At times, due to cataclysms and unforeseen events, decline may accelerate, but over the long term, it’ll be a gradual development. Again, the proper term for the inflation the U.S. will experience is called “chronic inflation,” which is different from “hyperinflation.” The former constitutes high rates of inflation sustained over a long period of time, years or even decades, while hyperinflation is a massive increase in costs during a short period of time, usually within months or a few years. Recall that even Argentina suffered from chronic inflation and economic stagnation for decades before the bottom fell out completely in December 2001 and the economy collapsed. Rome wasn’t built in a day, nor did it collapse in a day.
I’m not trying to get too deep into the weeds, but it’s important to understand the particular nature of America’s debt problem, because it’s not the same kind of problem faced by other countries. The likelihood of the U.S. becoming an economic basket-case like Argentina or Zimbabwe is highly unlikely and it’s definitely not going to happen this decade, but there are people out there who want you to think it will. A debt bust is a major turning point in the life cycle of an empire, because it’s an event that correlates with the decline or downfall of civilizations, even the ones that don’t become great powers. Until the U.S. actually crosses this particular Rubicon and debt becomes a problem we can no longer ignore, I find it highly unlikely the U.S. will collapse, Balkanize, become embroiled in civil war, or any of these other nightmare scenarios people on the Internet and social media sound the alarm about.
As long as the U.S. Dollar remains the world’s reserve currency and our debt remains issued in dollars, both default and hyperinflation remain distant possibilities. I have to stress that I’m not predicting a bright future for America - the exact opposite, in fact - but I’m merely being specific about what things are going to look like going forward. I share the view that collapse, when it does occur, will occur very suddenly. It’s going to take a while for us to get there, however. Focusing on the topic of debt proves that this system can go on for a very long time and it’s going to take quite a number of twists and turns nobody sees coming to change that.
Going back to the Dalio cycle, if the debt bubble hasn’t burst and the economy hasn’t collapsed yet, that places the U.S. at or approaching the peak of its empire. This might be hard to believe, given the country has clearly seen better days (I personally consider the period of 1996 - 2000 to be the apex of our empire). It proves no model is perfect and no model applies in every case. Still, the U.S. still wields considerable power worldwide. Though countries like China and Russia are increasingly able to throw their weight around and pose a strategic challenge, there are still no countries out there capable of taking the superpower mantle from America.
It could very well be that the “peak” isn’t a singular moment, but an extended period of time, like most stages of empire are. So it’s possible the U.S. is at it’s height, it’s just at a later point in its height, just before the decline begins. I still believe the U.S., while not on the verge of economic or state collapse, is definitely in a superpower collapse, something I’ve talked about at length previously. Once it gets knocked off it’s perch, it’ll open up a world of possibilities for the U.S., most of it bad. Both Americans and the world won’t look at the country the same as they did before once it becomes apparent the U.S. cannot rule the world (as though it ever did). Alfred McCoy, a University of Wisconsin professor who predicts America will cease to be a superpower this decade, explained in a 2017 interview what he thinks the 2020s will look like. First, it quoted what was at the time his most recent book [bold mine]:
For the majority of Americans, the 2020s will likely be remembered as a demoralizing decade of rising prices, stagnant wages, and fading international competitiveness. After years of swelling deficits fed by incessant warfare in distant lands, in 2030 the U.S. dollar eventually loses its special status as the world’s dominant reserve currency.
Suddenly, there are punitive price increases for American imports ranging from clothing to computers. And the costs for all overseas activity surges as well, making travel for both tourists and troops prohibitive. Unable to pay for swelling deficits by selling now-devalued Treasury notes abroad, Washington is finally forced to slash its bloated military budget. Under pressure at home and abroad, its forces begin to pull back from hundreds of overseas bases to a continental perimeter. Such a desperate move, however, comes too late.
McCoy elaborates:
Moreover, there are going to be implications for the United States. Most visibly, I think that when the dollar is no longer the world’s unchallenged, pre-eminent, global reserve currency, the grand imperial game will be over. Look, what we’ve been able to do for the last 20 years is we send the world our brightly colored, our nicely printed paper, T-notes, and they give us oil and automobiles and computers and technology. We get real goods and they get brightly colored paper. Because of the position of the dollar. When the dollar is no longer the global reserve currency, the cost of goods in the United States is going to skyrocket.
We will not be able to travel the world as we do now. We won’t be able to enjoy the standard of living we do now. There will be lots of tensions that are going to occur in the society from what will be a major rewriting of the American social contract. This will not be pleasant. And arguably, I think it’s possible if we look back, we could see Trump’s election and all the problems of the Trump administration as one manifestation of this imperial decline.
McCoy was right on target, wasn’t he?
Even now, with the U.S. still a superpower, there’s the beginnings of chronic inflation, supply-chain issues, high energy costs, a brewing low-intensity conflict certain to be punctuated by outbursts of mass violence resembling a civil war, and increasing crime that could destabilize society. The future isn’t bright for the U.S. and the next 50 years are sure to be far worse than the last 50. But one step at a time, folks. A tragic fate may befall our beloved country, it just isn’t going to happen by the next presidential election.
I think those who believe collapse is nigh see an America vastly different from what it actually is. They’re living much farther down the timeline, at least a generation ahead, where all sorts of cataclysms, like debt default and hyperinflation, have actually occurred. They also tend to see any kind of stressor, like unrest, as indicative of collapse. But as I’ve said repeatedly to the point most of you are tired of hearing it, other countries are far worse off, yet life manages to go on. The reality is, most people aren’t willing to kick it all over the cliff just because things are bad. There’s a resiliency to humans and society that often goes unappreciated and this resiliency provides the buy-in necessary to keep it all going, even past the point of failure. Just look at what they’re doing in Sri Lanka, despite economic collapse:
Some say we’re going to go the way of the Soviet Union. Just like that. Maybe they’re right. It’s just not happening any time soon. We’re only just seeing the first days of the rest of our lives.
Max Remington writes about armed conflict and prepping. Follow him on Twitter at @AgentMax90.
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