The third and last book by investment advisors Davidson and Rees-Mogg. I sure wish they could write another circa 2008. This volume talks in detail about how things had progressed through 1997, pretty much on track from their projections in 1987. The struggle continues between large and small scale forces of violence, wealth, and government – but the mega states appear to be gradually losing. Davidson and Rees-Mogg have numerous suggestions about how the affluent can avoid the carnage. For the rest of us, their megapolitical insights indicate what to watch out for, and when to run for the hills as best we can. Be forewarned.
Excerpts
We believe that much can be learned by analogy between the situation at the end of the fifteenth century, when life had become thoroughly saturated by organized religion, and the situation today, when the world has become saturated with politics. The costs of supporting institutionalized religion at the end of the fifteenth century had reached a historic extreme, much as the costs of supporting government have reached a senile extreme today.
The changes implied by the Information Revolution will not only create a fiscal crisis for governments, they will tend to disintegrate all large structures. Fourteen empires have disappeared already in the twentieth century. The breakdown of empires is part of a process that will dissolve the nation-state itself.
As technology revolutionizes the tools we use, it also antiquates our laws, reshapes our morals, and alters our perceptions.
In cyberspace, the threats of physical violence that have been the alpha and omega of politics since time immemorial will vanish.
The state has grown used to treating its taxpayers as a farmer treats his cows, keeping them in a field to be milked. Soon, the cows will have wings.
Western governments will seek to suppress the cybereconomy by totalitarian means.
There is a high probability that some who are offended by the new ways, as well as many who are disadvantaged by them, will react unpleasantly. Their nostalgia for compulsion will probably turn violent. Encounters with these new “Luddites” will make the transition to radical new forms of social organization at least a measure of bad news for everyone. Get ready to duck.
… information technology will destroy the capacity of the state to charge more for its services than they are worth to the people who pay for them.
Instead of relating to a powerful state as citizens to be taxed, the Sovereign Individuals of the twenty-first century will be customers of governments.
The civic myths reflect not only a mindset that sees society’s problems as susceptible to engineering solutions; they also reflect a false confidence that resources and individuals will remain as vulnerable to political compulsion in the future as they have been in the twentieth century.
In our view, the key to understanding how societies evolve is to understand factors that determine the costs and rewards of employing violence.
We put violence at the center of our theory of megapolitics for good reason. The control violence is the most important dilemma every society faces.
It is precisely the fact that violence does pay that makes it hard to control.
Conventional thinkers of all shapes and sizes observe one of the pretenses of the nation-state – that the views people hold determine the way the world changes.
… formulations of economic justice in the modern context presuppose that society is dominated by an instrument of compulsion so powerful that it can take away and redistribute life’s good things. Such power has existed for only a few generations of the modern period. Now it is fading away.
We expect that representative democracy as it is now known will fade away, to be replaced by the new democracy of choice in the cybermarketplace.
The civilization that brought you world war, the assembly line, social security, income tax, deodorant, and the toaster oven is dying. Deodorant and the toaster oven may survive. The others won’t.
Every social order incorporates among its key taboos the notion that people living in it should not think of how it will end and what rules may prevail in the new system that takes its place.
Part of the reason that Rome fell is simply that it had expanded beyond the scale at which the economies of violence could be maintained.
The most profound causes of change are precisely those that are not subject to conscious control. They are the factors that alter the conditions under which violence pays.
Other things being equal, the more widely dispersed key technologies are, the more widely dispersed power will tend to be, and the smaller the optimum scale of government.
… politics in the modern sense, as the preoccupation with controlling and rationalizing the power of the state, is mostly a modern invention.
As we write, there is as yet little evidence of an articulate rejection of politics. That will come later. It has not yet occurred to most of your contemporaries that a life without politics is possible. What we have in the final years of the twentieth century is inarticulate disdain.
This is worth remembering as you plan ahead. The twilight of state systems in the past has seldom been an polite, orderly process.
As the millennium approaches, the new megapolitical conditions of the Information Age will make it increasingly obvious that the nation-state inherited from the industrial era is a predatory institution.
Another revealing hint that mass democracy is not controlled by its customers is the fact that contemporary political culture, inherited from the Industrial Age, would consider it outrageous if policies on crucial issues were actually informed by the interests of the people who pay the bills.
During the Industrial Age prior to 1989, democracy emerged as the most militarily effective form of government precisely because democracy made it difficult or impossible to impose effective limits on the commandeering of resources by the state.
… we expect nationalism to be a major rallying theme of persons with low skills nostalgic for compulsion as the welfare state collapses in the Western democracies.
A delicate etiquette shrouded straightforward analysis of labor relations during the industrial period. One of its pretenses was the idea that factory jobs, particularly in the middle of the twentieth century, were skilled work. This was untrue. Most factory jobs could have been performed by almost anyone capable of showing up on time. They required little or no training, not even the ability to read or write. As recently as the 1980s, large fractions of the General Motors workforce were either illiterate, innumerate, or both. Until the 1990s, the typical assembly line worker at GM received only one day of orientation before taking his place on the assembly line. A job you can learn in a single day is not skilled work.
The ability of workers to coerce their employers into paying above-market wages depended on the same megapolitical conditions that allowed governments to extract 40 percent or more of the economy’s output in taxes.
Information technology is making it plain that the problem faced by persons of low skill is not that their productive capacities are being unfairly taken advantage of, but rather the fear that they may lack the ability to make a real economic contribution.
For the first time in history, information technology allows for the creation and protection of assets that lie entirely outside the realm of any individual government’s territorial monopoly on violence.
One bizarre genius, working with digital servants, could theoretically achieve the same impact in a cyberwar as a nation-state. Bill Gates certainly could.
Private financial institutions and central banks will adopt unbreakable encryption algorithms when they realize that the U.S. government – and it may not be alone – has the capacity to penetrate current bank software and computer systems to literally bankrupt a country or sweep the bank account of anyone living almost anywhere.
The fact that the fading industrial era’s first stab at conceiving the information economy is to think of it in terms of a gigantic public works project tells you how grounded our thinking is in the paradigms of the past.
Soon after the turn of the millennium, anyone who pays income taxes at rates currently imposed will be doing so out of choice.
In the 1980s, it was illegal in the United States to send a fax message. The U.S. Post Office considered faxes to be first-class mail, over which the U.S. Post Office claimed an ancient monopoly. An edict to that effect was issued reiterating the requirement that all fax transmissions be routed to the nearest post office for delivery with regular mail.
… the view that the state improves the functioning of the economy by massive reallocation of resources is an anachronism, an article of faith roughly equivalent to the widespread superstitions at the close of the Middle Ages that fasting and flagellation were beneficial for a community.
… we believe that foreign aid and international development programs have had the perverse effect of lowering the real incomes of poor people in poor countries by subsidizing incompetent governments.
The ideology of the nation-state was that life can and should be regulated in a positive way by subsidizing undesirable outcomes and penalizing desirable ones. To be poor is undesirable; therefore, the poor were subsidized. To become rich is desirable; therefore, punitive taxes were laid on the rich to make life more “fair”.
As new, more market-driven forms of protection become available, it will become increasingly evident to the large numbers of able persons that most of the supposed benefits of nationality are imaginary.
Sovereign Individuals will also have to cope with the corrosive consequences of envy – a difficulty that sometimes detains monarchs, but which will be more intensely felt by persons who are not traditionally venerated but invent their own sovereignity.
The “losers and left-behinds” in the Information Society will surely envy and resent the success of winners, especially as the deepening of markets implies that this will be increasingly a “winners take all” world.
While the leading states will no doubt attempt to enforce a cartel to preserve high taxes and fiat money by cooperating to limit encryption and prevent citizens from escaping their domains, the states will ultimately fail. The most productive people on the planet will find their way to economic freedom.
Governments in the industrial era priced their services on the basis of the success of the taxpayer, rather than in relation to the costs or value of any services provided.
… it is to be expected that one or more nation-states will undertake covert action to subvert the appeal of transience. Travel could be effectively discouraged by biological warfare, such as the outbreak of a deadly epidemic. This could not only discourage the desire to travel, it could also give jurisdictions throughout the globe an excuse to seal their borders and limit immigration.
The United States is one of just three jurisdictions on the planet that impose taxes based on nationality rather than residence.
The United States has the globe’s most predatory, soak-the-rich tax system. Americans living in the United States or abroad are treated more like assets and less like customers than citizens of any other country.
As the larger, more inclusive national grouping begins to break down, with the more mobile “information elite” globalizing their affairs, the “losers and left-behinds” fall back upon membership in an ethnic subgroup, a tribe, a gang, a religious or linguistic minority. Partly, this is a practical and pragmatic reaction to the collapse of services, including law and order, formerly provided by the state. For persons with few marketable resources, it often proves difficult to purchase access to market alternatives to failed public services.
By eliminating the beneficial impact of competition in challenging underachievers to conform to productive norms, the welfare state has helped to create legions of dysfunctional, paranoid, and poorly acculturated people, the social equivalent of a powder keg. The death of the nation-state and the disappearance of income redistribution on a large scale will no doubt lead some among the more psychopathic of these unhappy souls to strike out against anyone who appears more prosperous than they. Therefore, it is reasonable to suppose that social peace will be in jeopardy as the Information Age unfolds, especially in North America and in multiethnic enclaves in Western Europe.
If the past is a guide, the most violent of the terrorists of the early decades of the new millennium will not be homeless paupers but displaced workers who formerly enjoyed middle-class incomes and status.
… the most predictable and vulnerable assets of the rich in the coming Information Age may be their physical persons – in other words, their lives. Which is why we fear Luddite-style terrorism in the coming decades, some of it perhaps covertly encouraged by agents provocateurs in the employ of nation-states.
When state and local taxes are considered as well, democratic government at all levels confiscates the lion’s share of each dollar earned in the United States. Predatory tax rates made the democratic state a de facto partner with a three-quarters to nine-tenths share in all earnings. This was not the same thing as state socialism, to be sure. But it was a close relation.
Hong Kong, of course, is not a democracy. Indeed, it is a mental model of the kind of jurisdiction that we expect to see flourish in the Information Age. In the Industrial Age, Hong Kong had no need to be a democracy, as it was spared the unpleasant necessity of gathering resources to support a formidable military establishment.
Now that information technology is displacing mass production, it is logical to expect the twilight of mass democracy.
A system that routinely submits control over the largest, most deadly enterprises on earth to the winner of popularity contests between charismatic demagogues is bound to suffer for it in the long run.
… our expectation is not that politics will be reformed or improved, but that it will be antiquated and, in most respects, abandoned. By this we do not mean to say that we expect to see dictatorship, but rather entrepreneurial government – the commercialization of sovereignty.
It will be perfectly reasonable for you and significant numbers of other future Sovereign Individuals to “vote with your feet” in opting out of leading nation-states to contract for personal protection with an outlying nation-state or a new minisovereignty that will only charge a commercially tolerable amount, rather than the greater part of your net worth. In short, you would probably accept $50 million to move to Bermuda.
… it is doubtful that firms will be able to survive the increasing penetration of market forces into what have heretofore been “intrafirm relationships”. As a result, firms will tend to dissolve as information technology makes it more rewarding to rely upon the price mechanism and the auction market to undertake tasks that need doing rather than having them internalized within a formal organization. As information technology increasingly automates the production process, it will take away part of the raison d’etre of the firm, the need to employ and motivate managers to monitor individual workers.
We believe that as the modern nation-state decomposes, latter-day barbarians will increasingly come to exercise real power behind the scenes. Groups like the Russian mafiyas that pick the bones of the former Soviet Union, other ethnic criminal gangs, nomenklaturas, drug lords, and renegade covert agencies will increasingly be laws unto themselves. They already are.
The end of an era is usually a period of intense corruption.
Unfortunately, you will not be able to depend upon normal information channels to give an accurate and timely understanding of the decay of the nation-state.
The deeper and richer textures of history are precisely the parts that tend to be edited out in the twenty-five-second sound-bites and misconstrued on CNN. It is much easier to convey a message that is a variation on an already understood theme than it is to explore a new paradigm of understanding.
As we move toward the next century, a high proportion of people in the growing cognitive elite have been given little religious or moral education in the family. The commonest religion of the elite is an agnostic humanism … A godless, rootless, and rich elite is unlikely to be happy, or to be loved. This inadequacy of the initial moral education of what will be the dominant economic group of the next century is likely to be reinforced by their life experience.
In every field it has been the radical who has won, and the conventional thinker who has fallen behind, who has literally fallen out of the race. Our politics may be led by conventional thinkers – Bill Clinton, Helmut Kohl, John Major – but our most successful businesses are led by radicals with a keen understanding of the new technological world; the archetype is Bill Gates. Conventional thinking has been discredited by its inability to deal with the rapidity and the sheer force of change.
Of all the nationalities on the globe, U.S. citizenship conveys the greatest liabilities and places the most hindrances in the way of becoming a Sovereign Individual. The American seeking financial independence will therefore obtain other passports as a necessary step toward privatizing or denationalizing himself. If you are not an American, it is economically irrational to become a resident of the United States and thus expose yourself to predatory U.S. taxes, including exit taxes.
The fastest-growing and most important new economy of the next century will not be China but the cybereconomy. To take full advantage of it, you will need to place your business or profession on the World Wide Web.
Thinking about the end of the current system is taboo. To understand the great transformation in the Information Age, you must transcend conventional thinking and conventional information sources.
Quotations
Frederick C. Lane
… one of the most distinctive characteristics of governments is their attempt to create law and order by using force themselves and by controlling through various means the use of force by others.
Chinese Proverb
Of all the thirty-six ways to get out of trouble, the best way is – leave.
Alan Greenspan
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
Christopher Lasch
Ambitious people understand, then, that a migratory way of life is the price of getting ahead.
Showing posts with label James Dale Davidson. Show all posts
Showing posts with label James Dale Davidson. Show all posts
Tuesday, July 15, 2008
Sunday, July 13, 2008
The Great Reckoning: Protect Yourself in the Coming Depression by James Dale Davidson and Sir William Rees-Mogg - Excerpts
This is the second book (1993) in a series of three written by investment advisors Davidson and Rees-Mogg. It is a fascinating history and commentary on megapolitics and the changing scale of violence in the world since World War I. They argue powerfully that economic power is shifting away from mega states like the U.S. to smaller entities, corresponding to decreasing scales of effective military force. Lots to consider, much to draw from the lucid writing style, and not a dull moment. Be forewarned.
Excerpts
History shows that once nominal growth slows in a heavily indebted economy, there can be no recovery until the excess debt is eliminated.
Just as we believed it was impossible to sustain an economic system which attempted to prevent anyone from profiting, so we believe it will prove impossible to sustain a political economy which attempts to prevent anyone from losing.
In a world with growing legions of unhappy losers, it may be important for you to anticipate coming episodes of delusional thinking.
The industrial economy based primarily upon the manipulation of raw materials at a large scale is giving way to the information economy based upon the manipulation of data at a small scale.
By 1992, gross interest on the national debt claimed 62 cents of every dollar of federal income tax.
More than you may now imagine, you are vulnerable to financial, economic, and political collapse. You may even be vulnerable to physical violence.
The Information Revolution made possible by the microchip helped overturn Communism and will contribute to the death of the welfare state.
Estimates of total losses in the Japanese property market range as high as 50 percent or $10 trillion, a loss wealth equivalent to every stock market on earth plunging to zero. Even more modest estimates, in the range of $3 trillion, amount to a loss of wealth roughly equivalent to that if all China had disappeared.
… the theory of “megapolitics.” According to this theory, historic changes in the ways that societies organize are largely determined by the physical limits on the exercise of power. In essence, we imagine how the world would change if there were no laws or constitutions, and human affairs fluctuated solely according to the changing dictates of physical force … As technology and other factors change the limits within which force can be exercised, they change society … Yet even the most polite and prosperous nations ultimately have no choice but to evolve according to the changing costs and rewards of projecting and resisting power.
You can depend on the fact that normal channels of information will seldom give you advance warning of major political and economic events.
Before violence in society can be controlled, the costs of policing violence must be low. It must be relatively easy to overpower those who act in violent and predatory ways. Whether this is possible depends on many factors beyond the reach of political authorities.
The 1990 will be a cold decade for the weak who must battle the strong for the savings of the thrifty.
… the ultimate logic of the Information Revolution is to undercut the effectiveness of offensive weaponry and undermine all organizations operating at a large scale.
Future aggression will be undertaken by guerrilla war, subversion, and terror, tactics that cannot be countered by cruise missiles and bombardments targeted from space. Henceforth, Third World dictators will rely less on armies and more on terrorists. When they gain nuclear weapons, they will deliver them by overnight express, not by missiles that can be shot down.
The military equipment and structure the United States has purchased with trillions in Cold War spending is largely unsuited to combating the threats of the 1990s. The new and ancient enemies of Western civilization that will emerge to disrupt the peace will not be continental powers like the former Soviet Union, or even anachronistic 1930s-style dictators like Saddam, but small countries and fragments of countries, bands of terrorists, religious fanatics, drug lords, and criminal gangs.
For forty-five years, the map of Europe was frozen by the Cold War. This was the longest period of stable borders in Europe since the fall of Rome. The 1990s will be a boom time for map-makers. It will be a period of devolution, not just in Europe, but throughout the globe. Multi-ethnic empires will come apart. We will see the breakup not just of the Soviet Union .. but of India, Canada, China, Yugoslavia, Ethiopia, and other countries.
In the days before TV newsmen started describing every story as a “crisis”, the word was not merely a term of suspense. It had a specific meaning now largely lost. A “crisis” was “a turning point, a critical time, or a decisive turn.” It was “a state of affairs in which a decisive change for better or worse is imminent.”
A society that has no use for information about getting ahead is likely to have little use for reason, either. Its day-to-day life is likely to be ridden with demons and delusions.
The hope that government can provide everyone with a high standard of living, good health, and security against misfortune, quite apart from his abilities and values, has been an article of faith in all Western democracies for most of this century. It is now an anachronism, bound to be disappointed, no matter how reckless the monetary or fiscal policy any set of leaders chooses to adopt.
There is a widespread assumption that economic progress since World War II has become permanent. Practically everyone in modern industrial countries accepts the unargued conviction that another depression is no more likely than an invasion from Mars. This illusion is part of a general overestimation of the powers of governments.
People who live in delightful, well-mannered suburbs, who never have to physically contest for their lives and property, often fail to grasp the subtle logic of violence. It is a mistake seldom made by hardened criminals. Criminals are normally connoisseurs of power’s subtleties.
The challenge to prosperity is precisely that predatory violence does pay well in many circumstances. War does change things. It changes the rules. It changes the distribution of assets and income. It even determines who lives and who dies. It is precisely the fact that violence does pay that makes it hard to control.
The ultimate cure for violence is superior force. It sounds like a simple contradiction, but it isn’t. To achieve peace, a society must find ways to muster enough force to suppress predatory violence and curtail the incentives to use it.
Settled agricultural society made both taxes and crime paying propositions. Where there was accumulated wealth to take, there was always someone willing to take it.
Miniaturized technologies miniaturize institutions. In time, the microchip will destroy the nation-state. It will give small groups and even individuals the capacity to employ violence in ways that could overturn governments and destroy large organizations.
When megapolitical conditions make the attainment of sufficient military power dependent upon greater national wealth, as has generally been the case in recent centuries, leaders have stronger incentives to tolerate the emergence of private property rights, sound money, and economic freedom.
Unfortunately, the trend of technology is increasing the number of groups that can employ predatory and destructive violence.
The breakdown of large political systems and the proliferation of borders and barriers are likely to be inimical to economic growth and human freedom.
Since the eighteenth century, those who have thought systematically about the rise and fall of nations have noted similar symptoms of decline: high taxes, high prices, widening gaps between the rich and poor, strong special-interest groups, failures of motivation, a decline in education and everyday competence, a high tendency to import, high budget deficits, and more.
A characteristic of empires in their twilight is that they are burdened with high costs and inflexible leadership. In each case where a predominant country has faltered since the sixteenth century, it did so after its leaders stiffly resisted efforts to cut costs to competitive levels, opting instead for higher taxes and more spending. In each case, resources were fatally overextended. Economic supremacy was forfeited to another country enjoying lower taxes and lower costs.
The educational system of a hegemonic power is likely to be geared toward training mandarins. It is a cliché that an Oxbridge education earlier in this century trained students for the civil service, rather than civil engineering. America’s elite education today is also more adept at training persons to redistribute income than to produce it. Ten lawyers graduate in America for every engineer, as compared to ten engineers for each lawyer in Japan.
The combination of vast law firms, litigation for profit, tight government regulation, and grotesque costs is regarded by many economists as one of the reasons why American industry has ceased to be competitive with Japan.
With health care bankrupting many individuals, while making small and even large businesses less competitive with foreign companies that operate without such hideous costs, it was all but inevitable that a cry would rise up for adoption of a latter-day version of the National Health Service. People going broke always wish for someone else to pay the bills. It is a marker on the road to bankruptcy. As in so many other respects, history repeats itself.
Typically, economic downturns sharpen the demands of selfish, local interests and reduce international cooperation. Indeed, this is one of the chief reasons that slow growth periods are times of protectionism and trade war.
The message of history is that cooperation declines along with economies. As world growth prospects diminish, ethnic solidarity and nationalism increase. Horizons narrow. Groups tend to hoard political advantages and seek regulations that reserve for themselves as much as possible of the smaller pie.
Military defeat in Afghanistan meant not just the end of the Soviet empire, but the public disgrace of the command economy in Russia as well. It meant the end of a century of enchantment with the doctrines of Marx. His ideas will still be in books. And many of them will still be believed. But they will be believed mainly in American universities and backwater, Third World mining towns. Marxism at long last ceased to be a contemporary ideology.
The building of factories for mass employment, along with the spread of firearms, gave unskilled workers a rare opportunity to seize wealth. Every such shift of megapolitical power engenders a new ideology to justify the new outcome.
What is happening is not that capitalists are suddenly succeeding in exploiting the workers, but rather that technological change is making it more difficult for workers to exploit the capitalists.
The advent of large-scale enterprises in the late nineteenth and twentieth centuries enabled labor unions to extract higher wages for their members – higher than would be justified by their true economic contributions. They did this by threatening to strike, or, in many cases, sabotage the operations of the enterprises in which they were employed … In essence, industrial workers received a political payoff in addition to their economic wage – a legalized shakedown payment for not sabotaging the operations of the firms where they worked.
The decay of union power as economies move into the Information Age is hardly a random development. It is a predictable consequence of the declining scale of enterprise and therefore the increasing costs of redistributing income through disguised blackmail. Both the economic base and the class ideology of socialism are in rapid decline. The industrial worker, having had his summer of class power, must now give way to new interests and ideas, based on emerging rather than declining technology. Because unions can no longer extract political blackmail from employers as readily as they used to, it is hardly surprising that the share of income claimed by essentially unskilled workers is falling while the percentage earned by the well-educated and the capitalists is rising.
One of the mysteries in the ordering of human life is the way that otherwise inadequate or even dysfunctional social systems can be made functional by religion.
Freedom of religion is possible only where governments function competently on a large scale. It was the advent of new megapolitical conditions – the Gunpowder Revolution – that made religion, in Radcliffe-Brown’s words, “primarily a matter of belief.” The new technology of power facilitated the development of markets and the growth of the nation-state, developments that altered religion’s previously crucial role in organizing social life. The fact that freedom of religion became possible in the most advanced economies over the past few centuries is itself evidence of religion’s declining importance. Religion could only become a matter of choice when it no longer mattered so much what religion one chose.
Part of what makes Islamic law effective in discouraging crime is that it is “old-time religion”, unamended by modern sociology and sophisticated apologies for crime. All religions discourage theft and murder. But where Islamic law is in force, this discouragement does not speak in a soft voice.
As the scale of enterprise rose over the past five centuries, and banking developed in its modern forms, it became ever more difficult for a nation operating under Islamic law to compete. A strict prohibition on lending for interest prohibits a passbook savings account, as well as a fixed-interest government bond.
In the Information Age, the traditional Islamic prohibition against usury will be less damaging to economic efficiency. Even if it is not set aside by an Islamic Luther, the falling scale of enterprise implies lower capital costs, and thus marginally less damage done by limiting debt markets.
Long wave crises in the economy recurring every fifty to sixty years are often associated with human life span. It is commonly argued that individuals who experienced the previous crisis must die out before their descendants can repeat their mistakes. There is logic in this. But it is possible that the causality is reversed. Humans may be limited to an adult life span of fifty to sixty years because crises recur with that rough frequency.
If there is a depression as we expect, one of its consequences is likely to be a thoroughgoing disillusionment with government, and government promises on intervention to forestall fluctuations of the business cycle. Nonetheless, so long as governments retain substantial resources at their disposal, there will always be a demand for rationalizations of far-reaching government actions.
Ironically, the best place to look for a market to go straight down is in the richest country. It is there that the bias towards optimism is likely to be most acute. The best place to find a stock that will shoot straight up is in an underdeveloped market in a poor country, because savings there will tend to be hidden under the mattress, and potential investors will persistently overlook opportunities.
A wicked feedback of perverse incentives reinforces the criminal values and delusional thinking that trap the underclass in poverty. This trap is shut all the tighter because its outlines are hidden by the miasma of race.
Recent estimates suggest that fully one-third of the adult population of the United States cannot perform simple arithmetic calculations. Anything more complicated than flicking to the channel with the music videos, and they are over their heads.
Far more than is commonly acknowledged, poverty is not the cause but the consequence of perverse values and antisocial behavior.
Claims of “racism” do not explain the failures of the underclass. But they bode ill for the future of major cities in the United States, and, to a lesser extent, Europe. They fit into an ancient patter of delusional thinking among the poor that has often culminated in violence. That such claims are now so prominent is itself a hint of both megapolitical vulnerability and economic closure.
By the peculiar logic of the welfare state – which seeks to prevent anyone from losing – to be a victim is to be a winner. The more victimized one is, the higher the recompense he can claim.
The turn away from analytic rationality and the blinking of facts by black leaders are sell signals for the central city. Historically, the claim for rewards based on status rather than achievement has been associated with economic decline. And that, in turn, encourages dishonesty, counterproductive behavior, and delusional thinking.
A general characteristic of the destitute is that they are prone to delusional thinking. They are far more likely than the rich to believe in black magic, the evil eye, predestination, astrology, and confining cultural taboos.
… the function of the delusion – to exonerate the loser from responsibility for his misfortune. The poor man’s pig cannot simply die. It must have been killed by the village “sorcerer”, who usually just happens to be the person in the village who is most successful at fattening his own pigs. It is not incidental that the farmer with the pigs is also likely to be most able to bear the burden of redistribution. For the sorcerer or conspirator to achieve this amazing feat requires that he possess occult knowledge not generally available. It also requires that the inner circle to which the sorcerer belongs have some wicked purpose. This could be devil worship, cannibalism, repugnant sexual practices, a commitment to enslave the world – or whatever seems likely to disqualify the conspiracy from common sympathy. The wicked purpose is essential. Otherwise the loser is still subject to the reproach that he failed to obtain the powerful knowledge himself. To be entirely exonerated, it must appear that he could not be privy to the occult knowledge without forgoing his moral standing – or even risking his soul.
Lacking an infrastructure capable of securing property and policing the safety of individuals, Third World countries have fallen prey to economic destitution, rampant crime, corrupt police, and guerrilla war. In these circumstances, the distinction between ordinary criminal gangs plundering the public and guerrilla movements imposing “taxes” has blurred. This is especially true as modern technology has made it easier for rebellions to sustain themselves with little or no outside help.
The drug lords are the wealthiest people on the planet … The drug cartels are not rinky-dink, back-alley criminals. They are financial superpowers, endowed with all the worst possible traits for attacking the foundations of social order. They are unscrupulous. Violent. Adept at clandestine organization. And richer than governments.
A stable system of property rights, an honest political force, and a dependable judiciary are historical accidents, rare in the experience of the world. They are hard to create, and easy to destroy, especially under current technological conditions, which make it easy for small groups to wield effective military power.
If governments, even in countries like Germany, Sweden, and France, cannot create jobs at tolerable costs during times of relative prosperity, what is the basis of confidence that they can do so in the face of true depression conditions?
We have argued that government spending per se did not cure the depression. Then what did? The answer is obvious, but not simple. World War II. The outbreak of a devastating war in Europe and the Pacific did restore demand to languishing sectors. Far from confirming the hypothesis that government spending can easily prevent depression, the World War II experience raises many doubts. Its effect did not merely rest with the fact that the war was expensive. Rather, a great part of World War II’s impact was that it curtailed supply, destroyed competitive capital, killed talented personnel, and reorganized world monetary, trade, and property rights.
The guerrilla wars that flared into the open after World War II were set in motion by the bitter reaction of peasants to the impoverishment that followed the collapse of the world price of rice.
The economies of much of Asia, Africa, and the Americas had experienced little or no growth for centuries before they were opened to European contact and their institutions forcibly changed. A reversion to old forms of misgovernment and institutional weakness could hobble growth into the indefinite future.
Dozens of economies, from Ethiopia to Mozambique, are not just temporarily depressed. They are collapsing. Falling apart at the seams. When slumps extend from years to decades, and the infrastructure decays, the roads fall apart, bridges wash away, and copper wire from the telephone lines is hammered into bracelets, this is not a temporary departure from the path of economic growth. It is something more permanent. Then end of the line.
The immense, and false, assumption was that the authorities could counteract a depression if one began. This proved untrue in 1930. It is no more likely to be true in the 1990s. Even recognizing that a slump is underway is often beyond the vision of the authorities.
We believe that a major reason why underdeveloped economies are more prone to inflationary than deflationary crises is that the great majority of assets in such economies are tangible assets, like land, mineral deposits, buildings, livestock, equipment, and inventories that cannot be completely wiped out by inflation. A plot of land and a buffalo will still be worth something, no matter how ruthlessly governments devalue the currency.
Personal property taxes are not well suited for an age of intangible assets that can be moved or hidden. But this won’t necessarily prevent some hard-pressed state and local governments from reaching for confiscatory personal property taxes in a slump – especially in jurisdictions where the owners will be a racial or ethnic minority distinct from the majority of voters. A wealth tax at the national level is also a possibility, in spite of the fact that it would be an obvious violation of the U.S. Constitution. The constitutional amendment that provided for an income tax did not repeal the earlier ban on a capital tax. But such niceties may not withstand the rush of circumstances. Remember, Franklin Roosevelt confiscated gold, which was a clear infringement of the prohibition against taking property without compensation.
The balance sheet of the United States has been run into the ground, not by the rich, but by politicians catering to constituencies who want something for nothing … part of the problem has been the growth of income redistribution – which reflects the deteriorating capacity of governments to maintain order.
We expect that taxes on the rich will rise in the coming depression, especially income taxes, because deflation increases the return to creditors.
As you consider the future, remember, it is unusual for a debtor country to allow its citizens free latitude to move capital outside its borders.
There is a likelihood of a surge of downgrades in asset prices of municipal bonds that will be triggered by defaults and redemptions of muni bond mutual funds that will drive down prices in illiquid markets. We anticipate a multi-stage process of collapse for instruments of state, municipality, and agency debt – much like that undergone by Third World debt during the 1980s.
We are optimists in believing that America will take a deflationary course, and thus retain its institutions. But make no mistake. At the depths of the coming depression, the very survival of the U.S. government will be widely questioned. Disillusionment and delusion will abound. Violence will be widespread. Tribal and nihilistic antagonisms will lead to greater terrorism, especially in the cities of America.
Part of the reason that Americans save so little is the assurance that they will be protected from many of the high-cost contingencies, like retirement security and medical care in old age, that induce savings in the first place. Too much income redistribution and too much income equality can actually undermine stability.
We can forecast with firm conviction that the government will not acknowledge that a depression has begun until it has been underway for eighteen months to two years.
A major confirmation of the onset of the depression will be a concerted effort on the part of political authorities to locate scapegoats for the slump. Every slump and market crash in history has been blamed on something other than a decline in economic prospects. The pattern is infallible.
Governments hungry for reelection will panic as the asset deflation gathers force. Their first response will be an attempt to counter the contraction with easy money.
Many believe that services are depression-proof. This is wrong. Spending on services is relatively stable in an ordinary recession, because most recessions are inventory adjustments. A depression is a different story. Services are slower to fall, in some cases, but when they do, they take longer to recover.
Insurance coverage will change to reflect the hardening attitude of society toward drug addition, alcoholism, and “illnesses” that reflect life-style choices. When potential employees are eager and plentiful, there will be less reason for employers to foot the bill for personal difficulties.
Within three to four years of the onset of the slump there will be significant reforms in the practice of law in the United States.
Oil was only one of three industries (the others being food and tobacco) to report net profits in 1932, the deepest year of the depression.
Because the U.S. government in particular is insolvent at its current level of promises, you almost can count on seeing more regulation that will do the wrong thing. It will protect dying industries, suppress innovation, and slow the transition to the new economy. The glacial pace of court action to resolve bankruptcy filings and provide clear titles to repossessed properties will also inevitably retard the adjustment process.
… it is more likely than most people now imagine that public schools in the United States will more or less disappear in the coming decade. Educational entrepreneurs will enjoy a rare opportunity to compete in providing effective elementary and secondary education to children whose parents will be able to spend vouchers on their services.
The hope of thinking people must be that the retrenchment leads to a more enlightened, nonlinear liberalism with enhanced appreciation for the market as a complex system, not to a fascist closure of the economy.
The U.S. government is destined to become the world’s largest pawn shop, converting and liquidating assets inherited from bankrupt financial institutions, failed government-sponsored enterprises, and citizens defaulting on government-insured mortgages.
To protect your liquid funds we recommend that you buy Treasury bills to park cash. U.S. Treasury bills will remain the lowest-risk debt instrument issued in America.
In investment, it is when things look their best that false values are being created. It is when things look their worst that the foundation for growth is being rebuilt.
Quotations
Daniel Patrick Moynihan
From the wild Irish slums of the 19th century Eastern seaboard to the riot-torn suburbs of Los Angeles, there is one unmistakable lesson in American history: a community that allows a large number of young men (and women) to grow up in broken families, dominated by women, never acquiring any stable relationship to male authority, never acquiring any set of rational expectations about the future … that community asks for and gets chaos.
G.J. Whitrow
Since the state of equilibrium between survival and starvation which they normally experience is often finely balanced, it is not surprising that they usually consider it dangerous to deviate from their traditional customs and habits.
Excerpts
History shows that once nominal growth slows in a heavily indebted economy, there can be no recovery until the excess debt is eliminated.
Just as we believed it was impossible to sustain an economic system which attempted to prevent anyone from profiting, so we believe it will prove impossible to sustain a political economy which attempts to prevent anyone from losing.
In a world with growing legions of unhappy losers, it may be important for you to anticipate coming episodes of delusional thinking.
The industrial economy based primarily upon the manipulation of raw materials at a large scale is giving way to the information economy based upon the manipulation of data at a small scale.
By 1992, gross interest on the national debt claimed 62 cents of every dollar of federal income tax.
More than you may now imagine, you are vulnerable to financial, economic, and political collapse. You may even be vulnerable to physical violence.
The Information Revolution made possible by the microchip helped overturn Communism and will contribute to the death of the welfare state.
Estimates of total losses in the Japanese property market range as high as 50 percent or $10 trillion, a loss wealth equivalent to every stock market on earth plunging to zero. Even more modest estimates, in the range of $3 trillion, amount to a loss of wealth roughly equivalent to that if all China had disappeared.
… the theory of “megapolitics.” According to this theory, historic changes in the ways that societies organize are largely determined by the physical limits on the exercise of power. In essence, we imagine how the world would change if there were no laws or constitutions, and human affairs fluctuated solely according to the changing dictates of physical force … As technology and other factors change the limits within which force can be exercised, they change society … Yet even the most polite and prosperous nations ultimately have no choice but to evolve according to the changing costs and rewards of projecting and resisting power.
You can depend on the fact that normal channels of information will seldom give you advance warning of major political and economic events.
Before violence in society can be controlled, the costs of policing violence must be low. It must be relatively easy to overpower those who act in violent and predatory ways. Whether this is possible depends on many factors beyond the reach of political authorities.
The 1990 will be a cold decade for the weak who must battle the strong for the savings of the thrifty.
… the ultimate logic of the Information Revolution is to undercut the effectiveness of offensive weaponry and undermine all organizations operating at a large scale.
Future aggression will be undertaken by guerrilla war, subversion, and terror, tactics that cannot be countered by cruise missiles and bombardments targeted from space. Henceforth, Third World dictators will rely less on armies and more on terrorists. When they gain nuclear weapons, they will deliver them by overnight express, not by missiles that can be shot down.
The military equipment and structure the United States has purchased with trillions in Cold War spending is largely unsuited to combating the threats of the 1990s. The new and ancient enemies of Western civilization that will emerge to disrupt the peace will not be continental powers like the former Soviet Union, or even anachronistic 1930s-style dictators like Saddam, but small countries and fragments of countries, bands of terrorists, religious fanatics, drug lords, and criminal gangs.
For forty-five years, the map of Europe was frozen by the Cold War. This was the longest period of stable borders in Europe since the fall of Rome. The 1990s will be a boom time for map-makers. It will be a period of devolution, not just in Europe, but throughout the globe. Multi-ethnic empires will come apart. We will see the breakup not just of the Soviet Union .. but of India, Canada, China, Yugoslavia, Ethiopia, and other countries.
In the days before TV newsmen started describing every story as a “crisis”, the word was not merely a term of suspense. It had a specific meaning now largely lost. A “crisis” was “a turning point, a critical time, or a decisive turn.” It was “a state of affairs in which a decisive change for better or worse is imminent.”
A society that has no use for information about getting ahead is likely to have little use for reason, either. Its day-to-day life is likely to be ridden with demons and delusions.
The hope that government can provide everyone with a high standard of living, good health, and security against misfortune, quite apart from his abilities and values, has been an article of faith in all Western democracies for most of this century. It is now an anachronism, bound to be disappointed, no matter how reckless the monetary or fiscal policy any set of leaders chooses to adopt.
There is a widespread assumption that economic progress since World War II has become permanent. Practically everyone in modern industrial countries accepts the unargued conviction that another depression is no more likely than an invasion from Mars. This illusion is part of a general overestimation of the powers of governments.
People who live in delightful, well-mannered suburbs, who never have to physically contest for their lives and property, often fail to grasp the subtle logic of violence. It is a mistake seldom made by hardened criminals. Criminals are normally connoisseurs of power’s subtleties.
The challenge to prosperity is precisely that predatory violence does pay well in many circumstances. War does change things. It changes the rules. It changes the distribution of assets and income. It even determines who lives and who dies. It is precisely the fact that violence does pay that makes it hard to control.
The ultimate cure for violence is superior force. It sounds like a simple contradiction, but it isn’t. To achieve peace, a society must find ways to muster enough force to suppress predatory violence and curtail the incentives to use it.
Settled agricultural society made both taxes and crime paying propositions. Where there was accumulated wealth to take, there was always someone willing to take it.
Miniaturized technologies miniaturize institutions. In time, the microchip will destroy the nation-state. It will give small groups and even individuals the capacity to employ violence in ways that could overturn governments and destroy large organizations.
When megapolitical conditions make the attainment of sufficient military power dependent upon greater national wealth, as has generally been the case in recent centuries, leaders have stronger incentives to tolerate the emergence of private property rights, sound money, and economic freedom.
Unfortunately, the trend of technology is increasing the number of groups that can employ predatory and destructive violence.
The breakdown of large political systems and the proliferation of borders and barriers are likely to be inimical to economic growth and human freedom.
Since the eighteenth century, those who have thought systematically about the rise and fall of nations have noted similar symptoms of decline: high taxes, high prices, widening gaps between the rich and poor, strong special-interest groups, failures of motivation, a decline in education and everyday competence, a high tendency to import, high budget deficits, and more.
A characteristic of empires in their twilight is that they are burdened with high costs and inflexible leadership. In each case where a predominant country has faltered since the sixteenth century, it did so after its leaders stiffly resisted efforts to cut costs to competitive levels, opting instead for higher taxes and more spending. In each case, resources were fatally overextended. Economic supremacy was forfeited to another country enjoying lower taxes and lower costs.
The educational system of a hegemonic power is likely to be geared toward training mandarins. It is a cliché that an Oxbridge education earlier in this century trained students for the civil service, rather than civil engineering. America’s elite education today is also more adept at training persons to redistribute income than to produce it. Ten lawyers graduate in America for every engineer, as compared to ten engineers for each lawyer in Japan.
The combination of vast law firms, litigation for profit, tight government regulation, and grotesque costs is regarded by many economists as one of the reasons why American industry has ceased to be competitive with Japan.
With health care bankrupting many individuals, while making small and even large businesses less competitive with foreign companies that operate without such hideous costs, it was all but inevitable that a cry would rise up for adoption of a latter-day version of the National Health Service. People going broke always wish for someone else to pay the bills. It is a marker on the road to bankruptcy. As in so many other respects, history repeats itself.
Typically, economic downturns sharpen the demands of selfish, local interests and reduce international cooperation. Indeed, this is one of the chief reasons that slow growth periods are times of protectionism and trade war.
The message of history is that cooperation declines along with economies. As world growth prospects diminish, ethnic solidarity and nationalism increase. Horizons narrow. Groups tend to hoard political advantages and seek regulations that reserve for themselves as much as possible of the smaller pie.
Military defeat in Afghanistan meant not just the end of the Soviet empire, but the public disgrace of the command economy in Russia as well. It meant the end of a century of enchantment with the doctrines of Marx. His ideas will still be in books. And many of them will still be believed. But they will be believed mainly in American universities and backwater, Third World mining towns. Marxism at long last ceased to be a contemporary ideology.
The building of factories for mass employment, along with the spread of firearms, gave unskilled workers a rare opportunity to seize wealth. Every such shift of megapolitical power engenders a new ideology to justify the new outcome.
What is happening is not that capitalists are suddenly succeeding in exploiting the workers, but rather that technological change is making it more difficult for workers to exploit the capitalists.
The advent of large-scale enterprises in the late nineteenth and twentieth centuries enabled labor unions to extract higher wages for their members – higher than would be justified by their true economic contributions. They did this by threatening to strike, or, in many cases, sabotage the operations of the enterprises in which they were employed … In essence, industrial workers received a political payoff in addition to their economic wage – a legalized shakedown payment for not sabotaging the operations of the firms where they worked.
The decay of union power as economies move into the Information Age is hardly a random development. It is a predictable consequence of the declining scale of enterprise and therefore the increasing costs of redistributing income through disguised blackmail. Both the economic base and the class ideology of socialism are in rapid decline. The industrial worker, having had his summer of class power, must now give way to new interests and ideas, based on emerging rather than declining technology. Because unions can no longer extract political blackmail from employers as readily as they used to, it is hardly surprising that the share of income claimed by essentially unskilled workers is falling while the percentage earned by the well-educated and the capitalists is rising.
One of the mysteries in the ordering of human life is the way that otherwise inadequate or even dysfunctional social systems can be made functional by religion.
Freedom of religion is possible only where governments function competently on a large scale. It was the advent of new megapolitical conditions – the Gunpowder Revolution – that made religion, in Radcliffe-Brown’s words, “primarily a matter of belief.” The new technology of power facilitated the development of markets and the growth of the nation-state, developments that altered religion’s previously crucial role in organizing social life. The fact that freedom of religion became possible in the most advanced economies over the past few centuries is itself evidence of religion’s declining importance. Religion could only become a matter of choice when it no longer mattered so much what religion one chose.
Part of what makes Islamic law effective in discouraging crime is that it is “old-time religion”, unamended by modern sociology and sophisticated apologies for crime. All religions discourage theft and murder. But where Islamic law is in force, this discouragement does not speak in a soft voice.
As the scale of enterprise rose over the past five centuries, and banking developed in its modern forms, it became ever more difficult for a nation operating under Islamic law to compete. A strict prohibition on lending for interest prohibits a passbook savings account, as well as a fixed-interest government bond.
In the Information Age, the traditional Islamic prohibition against usury will be less damaging to economic efficiency. Even if it is not set aside by an Islamic Luther, the falling scale of enterprise implies lower capital costs, and thus marginally less damage done by limiting debt markets.
Long wave crises in the economy recurring every fifty to sixty years are often associated with human life span. It is commonly argued that individuals who experienced the previous crisis must die out before their descendants can repeat their mistakes. There is logic in this. But it is possible that the causality is reversed. Humans may be limited to an adult life span of fifty to sixty years because crises recur with that rough frequency.
If there is a depression as we expect, one of its consequences is likely to be a thoroughgoing disillusionment with government, and government promises on intervention to forestall fluctuations of the business cycle. Nonetheless, so long as governments retain substantial resources at their disposal, there will always be a demand for rationalizations of far-reaching government actions.
Ironically, the best place to look for a market to go straight down is in the richest country. It is there that the bias towards optimism is likely to be most acute. The best place to find a stock that will shoot straight up is in an underdeveloped market in a poor country, because savings there will tend to be hidden under the mattress, and potential investors will persistently overlook opportunities.
A wicked feedback of perverse incentives reinforces the criminal values and delusional thinking that trap the underclass in poverty. This trap is shut all the tighter because its outlines are hidden by the miasma of race.
Recent estimates suggest that fully one-third of the adult population of the United States cannot perform simple arithmetic calculations. Anything more complicated than flicking to the channel with the music videos, and they are over their heads.
Far more than is commonly acknowledged, poverty is not the cause but the consequence of perverse values and antisocial behavior.
Claims of “racism” do not explain the failures of the underclass. But they bode ill for the future of major cities in the United States, and, to a lesser extent, Europe. They fit into an ancient patter of delusional thinking among the poor that has often culminated in violence. That such claims are now so prominent is itself a hint of both megapolitical vulnerability and economic closure.
By the peculiar logic of the welfare state – which seeks to prevent anyone from losing – to be a victim is to be a winner. The more victimized one is, the higher the recompense he can claim.
The turn away from analytic rationality and the blinking of facts by black leaders are sell signals for the central city. Historically, the claim for rewards based on status rather than achievement has been associated with economic decline. And that, in turn, encourages dishonesty, counterproductive behavior, and delusional thinking.
A general characteristic of the destitute is that they are prone to delusional thinking. They are far more likely than the rich to believe in black magic, the evil eye, predestination, astrology, and confining cultural taboos.
… the function of the delusion – to exonerate the loser from responsibility for his misfortune. The poor man’s pig cannot simply die. It must have been killed by the village “sorcerer”, who usually just happens to be the person in the village who is most successful at fattening his own pigs. It is not incidental that the farmer with the pigs is also likely to be most able to bear the burden of redistribution. For the sorcerer or conspirator to achieve this amazing feat requires that he possess occult knowledge not generally available. It also requires that the inner circle to which the sorcerer belongs have some wicked purpose. This could be devil worship, cannibalism, repugnant sexual practices, a commitment to enslave the world – or whatever seems likely to disqualify the conspiracy from common sympathy. The wicked purpose is essential. Otherwise the loser is still subject to the reproach that he failed to obtain the powerful knowledge himself. To be entirely exonerated, it must appear that he could not be privy to the occult knowledge without forgoing his moral standing – or even risking his soul.
Lacking an infrastructure capable of securing property and policing the safety of individuals, Third World countries have fallen prey to economic destitution, rampant crime, corrupt police, and guerrilla war. In these circumstances, the distinction between ordinary criminal gangs plundering the public and guerrilla movements imposing “taxes” has blurred. This is especially true as modern technology has made it easier for rebellions to sustain themselves with little or no outside help.
The drug lords are the wealthiest people on the planet … The drug cartels are not rinky-dink, back-alley criminals. They are financial superpowers, endowed with all the worst possible traits for attacking the foundations of social order. They are unscrupulous. Violent. Adept at clandestine organization. And richer than governments.
A stable system of property rights, an honest political force, and a dependable judiciary are historical accidents, rare in the experience of the world. They are hard to create, and easy to destroy, especially under current technological conditions, which make it easy for small groups to wield effective military power.
If governments, even in countries like Germany, Sweden, and France, cannot create jobs at tolerable costs during times of relative prosperity, what is the basis of confidence that they can do so in the face of true depression conditions?
We have argued that government spending per se did not cure the depression. Then what did? The answer is obvious, but not simple. World War II. The outbreak of a devastating war in Europe and the Pacific did restore demand to languishing sectors. Far from confirming the hypothesis that government spending can easily prevent depression, the World War II experience raises many doubts. Its effect did not merely rest with the fact that the war was expensive. Rather, a great part of World War II’s impact was that it curtailed supply, destroyed competitive capital, killed talented personnel, and reorganized world monetary, trade, and property rights.
The guerrilla wars that flared into the open after World War II were set in motion by the bitter reaction of peasants to the impoverishment that followed the collapse of the world price of rice.
The economies of much of Asia, Africa, and the Americas had experienced little or no growth for centuries before they were opened to European contact and their institutions forcibly changed. A reversion to old forms of misgovernment and institutional weakness could hobble growth into the indefinite future.
Dozens of economies, from Ethiopia to Mozambique, are not just temporarily depressed. They are collapsing. Falling apart at the seams. When slumps extend from years to decades, and the infrastructure decays, the roads fall apart, bridges wash away, and copper wire from the telephone lines is hammered into bracelets, this is not a temporary departure from the path of economic growth. It is something more permanent. Then end of the line.
The immense, and false, assumption was that the authorities could counteract a depression if one began. This proved untrue in 1930. It is no more likely to be true in the 1990s. Even recognizing that a slump is underway is often beyond the vision of the authorities.
We believe that a major reason why underdeveloped economies are more prone to inflationary than deflationary crises is that the great majority of assets in such economies are tangible assets, like land, mineral deposits, buildings, livestock, equipment, and inventories that cannot be completely wiped out by inflation. A plot of land and a buffalo will still be worth something, no matter how ruthlessly governments devalue the currency.
Personal property taxes are not well suited for an age of intangible assets that can be moved or hidden. But this won’t necessarily prevent some hard-pressed state and local governments from reaching for confiscatory personal property taxes in a slump – especially in jurisdictions where the owners will be a racial or ethnic minority distinct from the majority of voters. A wealth tax at the national level is also a possibility, in spite of the fact that it would be an obvious violation of the U.S. Constitution. The constitutional amendment that provided for an income tax did not repeal the earlier ban on a capital tax. But such niceties may not withstand the rush of circumstances. Remember, Franklin Roosevelt confiscated gold, which was a clear infringement of the prohibition against taking property without compensation.
The balance sheet of the United States has been run into the ground, not by the rich, but by politicians catering to constituencies who want something for nothing … part of the problem has been the growth of income redistribution – which reflects the deteriorating capacity of governments to maintain order.
We expect that taxes on the rich will rise in the coming depression, especially income taxes, because deflation increases the return to creditors.
As you consider the future, remember, it is unusual for a debtor country to allow its citizens free latitude to move capital outside its borders.
There is a likelihood of a surge of downgrades in asset prices of municipal bonds that will be triggered by defaults and redemptions of muni bond mutual funds that will drive down prices in illiquid markets. We anticipate a multi-stage process of collapse for instruments of state, municipality, and agency debt – much like that undergone by Third World debt during the 1980s.
We are optimists in believing that America will take a deflationary course, and thus retain its institutions. But make no mistake. At the depths of the coming depression, the very survival of the U.S. government will be widely questioned. Disillusionment and delusion will abound. Violence will be widespread. Tribal and nihilistic antagonisms will lead to greater terrorism, especially in the cities of America.
Part of the reason that Americans save so little is the assurance that they will be protected from many of the high-cost contingencies, like retirement security and medical care in old age, that induce savings in the first place. Too much income redistribution and too much income equality can actually undermine stability.
We can forecast with firm conviction that the government will not acknowledge that a depression has begun until it has been underway for eighteen months to two years.
A major confirmation of the onset of the depression will be a concerted effort on the part of political authorities to locate scapegoats for the slump. Every slump and market crash in history has been blamed on something other than a decline in economic prospects. The pattern is infallible.
Governments hungry for reelection will panic as the asset deflation gathers force. Their first response will be an attempt to counter the contraction with easy money.
Many believe that services are depression-proof. This is wrong. Spending on services is relatively stable in an ordinary recession, because most recessions are inventory adjustments. A depression is a different story. Services are slower to fall, in some cases, but when they do, they take longer to recover.
Insurance coverage will change to reflect the hardening attitude of society toward drug addition, alcoholism, and “illnesses” that reflect life-style choices. When potential employees are eager and plentiful, there will be less reason for employers to foot the bill for personal difficulties.
Within three to four years of the onset of the slump there will be significant reforms in the practice of law in the United States.
Oil was only one of three industries (the others being food and tobacco) to report net profits in 1932, the deepest year of the depression.
Because the U.S. government in particular is insolvent at its current level of promises, you almost can count on seeing more regulation that will do the wrong thing. It will protect dying industries, suppress innovation, and slow the transition to the new economy. The glacial pace of court action to resolve bankruptcy filings and provide clear titles to repossessed properties will also inevitably retard the adjustment process.
… it is more likely than most people now imagine that public schools in the United States will more or less disappear in the coming decade. Educational entrepreneurs will enjoy a rare opportunity to compete in providing effective elementary and secondary education to children whose parents will be able to spend vouchers on their services.
The hope of thinking people must be that the retrenchment leads to a more enlightened, nonlinear liberalism with enhanced appreciation for the market as a complex system, not to a fascist closure of the economy.
The U.S. government is destined to become the world’s largest pawn shop, converting and liquidating assets inherited from bankrupt financial institutions, failed government-sponsored enterprises, and citizens defaulting on government-insured mortgages.
To protect your liquid funds we recommend that you buy Treasury bills to park cash. U.S. Treasury bills will remain the lowest-risk debt instrument issued in America.
In investment, it is when things look their best that false values are being created. It is when things look their worst that the foundation for growth is being rebuilt.
Quotations
Daniel Patrick Moynihan
From the wild Irish slums of the 19th century Eastern seaboard to the riot-torn suburbs of Los Angeles, there is one unmistakable lesson in American history: a community that allows a large number of young men (and women) to grow up in broken families, dominated by women, never acquiring any stable relationship to male authority, never acquiring any set of rational expectations about the future … that community asks for and gets chaos.
G.J. Whitrow
Since the state of equilibrium between survival and starvation which they normally experience is often finely balanced, it is not surprising that they usually consider it dangerous to deviate from their traditional customs and habits.
Thursday, July 10, 2008
Blood in the Streets: Investment Profits in a World Gone Mad by James Dale Davidson & Sir William Rees-Mogg – Excerpts
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.
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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