This 1987 book foretells much of what has happened in the intervening 21 years, and is still ongoing today. Essentially, there is a shift in power from large-scale megapolitical units such as nations to smaller entities which can exercise considerable military force. Things will get tough as the big powers-that-be bow out far less than gracefully. Be forewarned. There are two more books by these authors that will be excerpted shortly.
EXCERPTS
The greatest profits can always be had by buying when prices are most depressed by pessimism.
In our view, you must turn to megapolitics to find the answers to the deepest puzzles of economic and political life. We believe that the worldwide economic collapse that began in 1929 had origins in the hidden workings of megapolitics. We think that megapolitical forces are now at work undermining the basis of today’s prosperity.
“Megapolitics” literally means “politics in the largest sense.” It is the study of raw power. It is an attempt to analyze the most basic factors that govern the uses of power in the world.
Technology influences our perception of reality itself. In the seventeenth and eighteenth centuries people thought in terms of “a clockwork universe”. No one would ever have thought that way without a clock. The key to the hidden workings of history is technological.
[Technology] and other megapolitical variables ultimately determine how power is exercised. Because power sets the rules by which the economy functions, the meanderings of megapolitics can determine whether we have prosperity or depression.
Only when one nation has an overwhelming share of economic resources and power does the world economy seem to function smoothly. Only then is there likely to be free trade and open movement of goods, services, people, and capital across borders. The last Great Depression coincided with a significant megapolitical development – the effective collapse of that day’s dominant power – Great Britain. A similar erosion of American power is now well advanced.
But upheavals that would threaten your investments will not just threaten your investments alone. They could threaten your livelihood, your plans for retirement, and the hope for a good life for those you love.
The slowness of most people to think deeply about the world around them gives a great advantage to people who do think.
Weapons technology is the major megapolitical force that determines the power equation. When it is cheaper and easier to project power from the center to the periphery, the number of political units in the world declines. Those that remain are more encompassing. And economies tend to prosper. When it becomes more costly to project power and cheaper to resist, borders and barriers proliferate. The number of political units in the world multiplies. Economies stagnate.
It took power to knock down barriers to trade, including high tariffs, so that capital could be invested freely, and raw materials and manufactured goods could be transported cheaply to market. It took power to transform the legal systems of technologically backward societies to forms that allows for property ownership and investment.
It is a very rare characteristic for people to anticipate developments before they occur. Why? Because they seldom think about the deepest causes of what goes on. By concentrating on surface appearances, people can be easily misled.
… megapolitical forces that make the world poorer are more likely to be self-reinforcing. As people become poorer, they cannot afford the costly weapons needed to sustain more encompassing political ecologies. So the prospect of successful offensive action declines. As borders and barriers proliferate, everyone becomes poorer. The process feeds on itself.
Almost all [military] massacres occur when you are following tactics that used to work. This is just another way of saying that reality tends to change much faster than perceptions of reality.
Except in North America, where World War I provided a brief impetus to growth, the following period was one of stagnation. Real income sagged. Debt skyrocketed. Trade barriers emerged everywhere. Commodity prices sagged, then collapsed. Output shriveled. International debts were repudiated right and left. A wave of bankruptcies spread across borders, with no effective lender of last resort to halt the collapse. Unemployment reached unprecedented levels. The Great Depression had arrived.
As menacing as terrorism is, however, what is at stake is not merely a matter of containing terrorists. It is a matter of economic stability. The shifting balance of power in the world is the most important hidden threat to the economy today.
Today, if we think about it at all, we take for granted that one predominant power succeeding another will respect the rules of international trade and investment, and extend full protection of those rules to the displaced power. But this assumes far too much.
There is no necessity that any nation be clearly dominant. At times, the world economy has operated from a scaffolding built and maintained by weak hands. This made it prone to collapse.
For most of the nineteenth century, the United States was content to ride free on the international order provided by Britain.
Part of the reason for the growing interdependence of U.S. and British investment was that London was the world’s most highly developed capital market. By comparison, Germany had and still has only rudimentary stock markets. American investment poured into Britain for the same reason that Japanese investment comes to the United States today – it is the only capital market large enough to accommodate the cash.
Thirty years passed between the effective collapse of British authority in World War I and the assumption of American hegemony in 1945. These were thirty of the worst years in this or any century. Thirty years of chaos, years of horrible wars and depression.
As it happened, the world economy had a new and more vigorous champion in the United States. Thirty years of chaos was all it took to make the transition. We may not be so lucky the next time around.
We are living in another twilight hour in the cycle of power. In Southeast Asia. Iran. Lebanon. Latin America. Africa. The sun is setting now on the American Empire, as it once set on the British Empire.
As this century progressed, the military cost differential favoring the cosmopolitan powers reversed dramatically. Putting air or naval power to work at the other end of the globe requires increasingly huge investments. Estimates of the full cost of an American aircraft carrier battle group now range as high as $20 billion [1987].
Disorder today is far more threatening because of its collapsing scale. It is micro-disorder, motivated by the discontent of small groups. As the margins of American power recede at the periphery, the raw power of these groups rises. So does their ability to disrupt arrangements they do not like. They cannot be stopped, as World War II was stopped, by forcing the surrender of a large-scale network of command. There is no single chain of command that has the authority to stop terrorism. Nor can anyone negotiate a compromise to meet demands of many of the small groups now wielding military force. A reversion to a lower scale of military technology, with increasing advantage to the defense, means a reversion to a smaller scale of political unit. It means a reversion to grievances that are local, tribal, idiosyncratic, and sectarian. Grievances that mark deeper divisions of religious belief and ethnic animosity. Grievances that in practical fact cannot be negotiated because they are hopelessly overlapping and contradictory.
… to whom would capitulation in the Middle East be offered? Abut Nidal? The Hezbollah? The Jewish Defense League? The question answers itself. Any accommodation that would satisfy one small group would infuriate the next. The declining scale of military technology means that peace will be the hostage of an increasing number of restless souls. How bad can matters get? The final level of disintegration will not be reached until there is a change in the cost trends explained above.
The transition from feudalism that brought Europe from a collection of petty feudal interests to the modern system of independent nation-states was marked by the Hundred Years War, a war named by an optimist. It actually lasted 116 years.
The United States could decisively project power in Grenada. It cannot deter the Sandanistas. Nor stop terrorists. And no one even dreams that force could be effectively used again to prevent the confiscation of property or to insure fulfillment of contracts such as payments of debts. In spite of trillions spent in military budgets, America has not exercised such real power for more than a decade [1987]. The Pax Americana lasted little more than a generation, from 1945 until Vietnam.
Whenever a far-reaching event happens, the first question you should pose to yourself as an investor is, “Why did this event happen now, and not five years ago – or ten years from now?”
In the era before widespread expropriations, major American companies could help defend their properties by encouraging anti-Communist sentiment. This helped bring popular support for military action abroad to police the safety of investment.
Firms with high-tech, low-scale, portable investments dependent upon foreign parts and service tended to survive best in areas of property rights instability. If companies move their assets, or withhold needed supplies and repairs, they could not be so easily pushed around by foreign governments.
As an investor, you should remember that multinational firms will be increasingly vulnerable as the technology involved in their operations matures … As the Socialist government in Greece, among others, has convincingly demonstrated, a cheap and effective way to seize assets from private investors is to regulate companies into bankruptcy. They then take over the shell that is left behind.
In some countries, with prominent examples in Africa, the analogy between the government and the street gang has become complete.
The United States no longer has the financial resources to enforce stable international monetary arrangements. That is why the Bretton Woods system of fixed exchange rates collapsed. This is why the value of major currencies fluctuates up and down like a yo-yo.
Default is coming. It is coming for the same reason that it always comes. Ever since the Middle Ages, the decay of power has been a leading indicator of financial upheaval.
A debt crisis is only incidentally a problem of money. It is a problem of power.
Debt proliferation reflects the decay of the predominant power. An important factor here is the decay of military capacity to police the security of international investment. This leads to a breakdown of the global system, as local elites usurp property rights and impose restrictions on trade that damage the world as a whole.
The rising nations have large profits to invest because they are gaining a greater share of the world sale of tradable goods. Those profits go into the only capital markets large enough and safe enough to accommodate them – those of the once-supreme power.
International debt expansion continues until the sovereign debtors have milked the once-dominant power to the limit.
Remember that a bailout of the banking system, which the authorities will surely attempt in the event of a debt collapse, does not necessarily mean a bailout of bank holding companies or shareholders. Depending on the political climate and administration at the time the music stops, there might even be a de facto nationalization of major American banks – an outcome less farfetched than it may seem … In a time of crisis, the government may be the only entity large enough to save the vulnerable banks.
Soviet Communism, based on economic monopoly, cannot thrive or even survive in a decentralizing world where monopoly is deadly. Although they may not know it, the dilemma Marxists face today is that their system is fundamentally at odds with the technological foundation upon which modern economies are developing.
When Communists suppress price movements in a dictatorial economy, they also suppress the information needed to move scarce resources to the point of greatest need. For that reason, a Communist system uses resources inefficiently, a point that led [N.G.] Pierson to suggest that famine could be a problem in Communist systems. Years later, the Soviets collectivized agriculture and proved him right.
Because computers bring to small firms techniques of management, communication, and finance that were formerly available only to the largest enterprises, they reduce economies to scale even in low-tech or no-tech fields. If this theory is right, the optimum size of almost every enterprise in the world has been reduced – a development that spells trouble for the giant, old-line manufacturers in the West, but is even worse news for Communist economic systems.
Surprisingly, it is far more common for workers to exploit capitalists. In general, this is the function that labor unions perform. They raise wage rates above the market-clearing level.
The American proportion of total world capital markets is dramatically higher than it would be if Russia had not destroyed its own. This has enabled the United States to attract a greater share of foreign investment, subsidizing trade and budget deficits far larger than America could otherwise support.
We believe that developments in China, and to a smaller extent, the USSR, could strengthen deflationary forces in the years to come. China has already moved from being a buyer to a seller of grains. Within the next few years, the disciplined Chinese labor force will be producing manufactured items for export. As this trend develops, it will place downward pressure on Western prices and wage rates. A Chinese worker will toil for an entire day for the pay that a U.S. auto worker receives in seven minutes.
Print enough money and inflation will result. No doubt about it. And if banking authorities wanted deflation – as they almost never do – they could have it by simply slashing the money supply. Remember that, if you remember nothing else.
Roughly speaking, you get inflation when financial assets fall in value relative to real assets. You get disinflation or deflation when financial assets rise relative to real assets.
Increases in the money supply may be absorbed as higher financial asset prices. This means greater value for bonds and stocks, not higher prices for goods.
Black Thursday, October 24, 1929, the day the stock market collapsed, was also the day Herbert Hoover indicated that he would sign Smoot-Hawley. We doubt that this was a coincidence … Be alert to similar bad news today. Passage of new protectionist legislation could mean the downfall of the stock market, widespread debt default, and a business contraction of the sort that has not been seen since the 1930s. Watch for it.
A flattened yield curve is an omen of bad economic times. When the yield curve flattens it is usually because short rates have risen. Recession is the usual result. Only one other time has the yield curve flattened because of collapse in long-term rates. That was in 1927. The result was depression.
Governments are broke, more broke than they ever were in the thirties. Those who expect inflation are right to point out that all that stands between governments and the abyss is the printing press.
It is therefore our prediction that the long-run instability of money will eventually have to be corrected through a return to gold. Such a reform may be years away. It will probably happen only after a crisis. We think it is more likely that the return to gold will happen as a general act of governments attempting to solve a deflation than as a desperate measure to correct a hyperinflation. Either is possible. But if the economy should fall into the abyss of deflation, a remonetization of gold may prove to be the “politically practical” solution – in a way that gold did not seem politically practical during the inflation of the 1970s.
If gold is remonetized at a high price to reliquefy a deflated world economy, it is almost a political certainty that many governments will institute a windfall profits tax on gold owners. They may go further and confiscate gold as the United States did during the Great Depression. Therefore, holding more than trivial amounts of gold as a hedge against deflation may be futile, unless you can afford to store it in a safe location, such as in Switzerland. The shrewd investor should take note and be prepared.
Within your lifetime or that of your children, persons without sufficient means to protect and support themselves may become economically superfluous. Indeed, they could become even more useless than the slaves of ancient times, who at the darkest moments of bad luck could at least command the means to survive so long as hard labor was in demand. Someday, technology may antiquate even that security. With nothing to offer and no way of making a living, people without capital could be truly dispensable in a violent world.
If a free flow of goods and capital is maintained, investment will migrate to other countries, where costs will be lower and opportunities greater. This will lead to surplus capacity for the world as a whole.
That added burden of unproductive government expenditure, especially for military purposes, tends to raise costs and create institutional rigidities that reduce its capacity to make the most of emerging opportunities. We believe that it is no coincidence that every transition of economic predominance going back centuries has involved the rise of a new power enjoying much lower taxes than the one it displaced. The nations rising to positions of clear manufacturing supremacy all did so at times when they enjoyed the advantages of cheap defense.
It is only when one nation’s costs for projecting power are low that the perverse impact of power in the world is likely to be minimized. When the superior economy can employ power cheaply, it can knock down barriers to trade, reorganize political institutions to reduce their drag upon the economy, and police the security of investment internationally. When the military costs for the predominant power are high and rising, this is an indication that the megapolitical conditions for optimum growth have passed. Unless some new invention miraculously reduces military costs, the leading nation will falter under its heavy burden.
A declining scale of production increases the role of market forces in the setting of wages and prices … industries with high fixed costs tend to be characterized by non-market wage rates, otherwise known as “exploitation of the capitalists by the workers.”
Another important characteristic of declining scale is to eliminate middle-management positions. Smaller operations require fewer layers of bureaucracy between the top management and the floor worker. As the scale of industrial operations falls, many middle management jobs will be eliminated along with well-paid jobs for low-skill production labor.
The reduction of start-up costs means greater independence for enterprise, independence of government, commercial, and investment banks, and even independence of public investors.
The economics of material plenty would turn the economics of scarcity inside out. The new economics would have a negative sign. It would be the economics of exclusivity and privacy. People would aim to escape congestion, in other words, to escape other people.
Unlike the old industrial technologies with their roots in the science of the nineteenth century, economies organized around the new technologies will offer little prospect for the accumulation of capital to unskilled or semiskilled labor. In short, working for a living will become much less rewarding than thinking for a living. And indeed, even many forms of thinking will be better done by machines harnessing advanced forms of artificial intelligence.
Barring an unprecedented recovery based upon the Information Revolution, the workings of the product cycle will eventually reduce the United States, in relative terms, to a latter-day version of Spain, a once-predominant economy, beggared by uncontrollable costs and massive deficits.
In the long term, radically decentralizing technologies could undermine the economics of the city. Most large cities are already suffering from the decline of manufacturing and the fall of the relative value of unskilled and semi-skilled labor. Cities are essentially artifacts of centralization.
If past patterns apply, exchange controls are likely for the United States. Therefore, investors with large holdings should diversify internationally. Get your money out now, while you can … You will not go far wrong by keeping substantial funds in Switzerland, Germany, Britain, Holland, or even Austria.
“Always leave a profit for the other guy.” This Rothschild principle is among the most important of all the rules of prudence. You will not go broke making profits.
QUOTATIONS
Eric Drexler
With advanced technology, states need not control people – they could simply discard people … States have needed people as workers because human labor has been the necessary foundation of power. What is more, genocide has been expensive and troublesome to organize and execute. Yet, in this century, totalitarian states have slaughtered their citizens by the millions. Advanced technology will make workers unnecessary and genocide easy. History suggests that totalitarian states may then eliminate people wholesale.
Nathan M. Rothschild
The best time to buy is when blood is running in the streets.
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