This is a posting about what some call the impending collapse of the American and eventually the world economic system — that seems more feasible everyday. Please read the piece by Dmitry Orlov, an engineer whose research and observations of the Soviet collapse show similarities to a collapse here in the United States. I’ll offer my take. Give me yours.

My recent columns here, Mumbai Implications and the Age of American Survivalist and It’s Time For Bunker Mentality, brought some email response from some good friends in Wisconsin.

Bill, an old-time friend, writes.

Hi John - It was really eerie reading your latest blog, since I had recently read the link above. It was the part about neighbor against neighbor in both blogs that really grabbed me. The link is a very long read, but relevant based on your latest thoughts.

In addition, Bill’s son, Geoff, wrote me as well with the subject line: holy crap! My columns and a piece written by Dmitry Orlov had many similar warnings.

So I read his piece and Geoff’s “holy crap” is warranted. I hope you’ll re-read my pieces and read Dmitry’s here. Post your comments below.

From here in this posting, I will offer my assessment of Dmitry Orlov’s piece. But first, a reminder.

Predicting the future is a no-win situation. Maybe I’m too influenced by the Black Swan theory, but there are random events that happen and change the course of history. Being able to decipher and explain history and its events, years after, is one thing. However, predicting it as it unfolds is another. There are things that will happen over the next year or two we never saw coming; they’re random events. There will also be things that happen that seem random at first and then make sense only afterwards.

There are three possible events. The first would be the discovery or the harnessing of a cheaper energy source. The second is the financial rescue of the United States by the Peoples Republic of China. Trust me; China needs our economy to keep their society running smoothly with more than one billion people. I’ve heard this from a number of sources I respect. The third is the stimulus package might actually work and transform America – as costly down the road as it might be.

Another thing to remember when reading Dmitry is that he witnessed the collapse of the Soviet Union. This may seem pompous, but the Soviet system is not similar to the American system. And Russians are not similar to Americans. I truly believe the American people will not allow a collapse of our system. Our principles and beliefs will be fought for as our Founding Fathers did in 1776 and as Lincoln did at the start of the Civil War.

Dmitry also has a distrust of our politicians and our political system. Who wouldn’t? But I think in times of crisis, we Americans rise to the occasion. We’re much better at reacting rather than planning for catastrophe. The fact that Republicans and Democrats are dropping most of their ideological stands to support President-elect Obama is one good sign.

Dmitry also has a silly notion of forming a Collapse Party. He calls it whimsical, but he says the platforms of this party are being followed. This is a minor point of contention for me, but I think it shows a naïveté of the American political psyche. We’re serious when it counts.

Does this mean I’m disagreeing with my previous posts and Dmitry? No. What he predicts and what I hint at are realities – as awful as they may seem. But let’s not get caught up in who’s right about predictions. Who wants to stand on the scrap heap of America and gladly say, “I told you so.”

What Dmitry and I echo are warnings. Be prepared to live with far less wealth and luxury. Take care of those you love. Think about hunkering down with elderly parents or younger children.

Dimitry’s posting is called The Five Stages of Collapse which was an article and a speech he gave in November, 2008. In a nutshell, here is his theory about how we’re trying fruitlessly to avert this crisis.

The technical term is “deleveraging,” and the response is the bailout. The federal government will be bailing out the banks and the insurance companies, the auto companies, and state governments. Call it the bail-out treadmill: we are borrowing faster and faster just to keep from falling down. The treadmill is actually a good metaphor. Imagine what would happen if you went to a gym, got on a treadmill machine, and just kept punching up the speed, as high as it will go. What happens is you trip and fall, and find yourself flying backwards.

More specifically, he paints a picture of what our currency will look like.

Because most of our debt is denominated in our own currency - the US dollar - the US will not have to declare sovereign default, like Russia was forced to do in the 1990s. Instead, we can inflate our way out of national bankruptcy, by printing a lot of dollars. We will repay our national debt, but we will do so in worthless paper money, bankrupting our international creditors in the process. There is sure to be plenty of pain for everyone, especially everyone who is used to having plenty of money, because their money will no longer make the world go around. Once the US has to start earning foreign currency in order to pay for imports, you can be sure that imports will become quite scarce.

Can this happen? Yes, it can easily. The fact that underlies this is the American consumer who is tapped out: no savings; no or little retirement; no equity in their home; and now a hoarding mentality. Every other economic downturn ended because of the American consumer.

Dmitry believes no effort by government and the financial industry can change this.

Financial collapse is already quite far along, and is guaranteed to run its course. Bailouts can make insolvent institutions look solvent for a time by providing liquidity, but one thing they cannot provide is solvency. For instance, no matter how much we bail out the auto companies, making any more cars will still be a bad idea. Similarly, no matter how much money we give to banks, their loan portfolios, loaded down with houses built in places that are inaccessible except by car, will still end up being worthless. By continuously nationalizing bad debt, the country will make itself into a bad credit risk, and foreign lenders will walk away. Hyperinflation and loss of imports will follow.

I tend to agree with him. I think the toxic assets held by our financial institutions are so vast that no one is revealing them to us. At first, the government bailout was going to buy up those assets. Then the Paulson play changed: the government will now take ownership stakes in the financial institutions. Why the change? My theory is the toxic assets are so vast and the activity surrounding them is so criminal that revealing them would lead to a more sudden collapse. Still, with time, a slow deleveraging, and sound economic stimulus package, we might emerge OK in a few years. The question is this: do we have that amount of time?

Dmitry says no. So what will the first signs of collapse look like?

When all of that starts to unravel, it is likely to do so from the bottom, not from the top. Local officials are more accessible than remote Washington bureaucrats, and so they will be the first to be overwhelmed by the anger and confusion of their constituents, while Washington remains unresponsive. One likely exception may have to do with the use of federal troops. It seems almost a given that troops repatriated from the more than 1000 foreign military bases will see action right here at home. They will be reassigned to domestic peacekeeping duties.

And this is what I hear from police sources who are frightened. They know their budgets are being cut drastically and people will have to fend for themselves.

Despite Dmitry’s apparent doom and gloom, he offers solutions for the future.

We may learn to dodge financial collapse by learning to live without needing much money. We may create alternative living arrangements and informal production and distribution networks for all the necessities before commercial collapse occurs. We may organize into self-governing communities that can provide for their own security during political collapse. And all of these steps put together may put us in a position to safeguard society and culture.

He talks about watching out for each other. I mentioned stepping up Neighborhood Watches.

To make it intact through times of great need, the only reasonable approach, it seems to me, is to form communities that are strong and cohesive enough to provide for the well-being of all of their members, that are large enough to be resourceful, yet small enough so that people can relate to each other directly, and to take direct responsibility for each other’s well-being.

Some of Dmitry’s observations and proposals touch on some theories of another good friend and thinker, John Alexander, PhD, whose findings are used by American Special Ops. In a posting from February of 2008, I write about his theory of the end of the nation-state as we know it today.

I have forwarded Dmitry’s piece to John to get his take. Until then, let’s hear yours.

 

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