Thus we are looking at a few more years of steady decline before the lights start going out. This, then, is the key distinction: the USSR collapsed promptly because it was already skin and bones, whereas the US and the EU have plenty of subcutaneous fat to burn through. But they are, in fact, burning through it. And so, the conclusion is, the collapse will come, but here it will take a little longer.
—Dmitry Orlov, “How to Time Collapses,” ClubOrlov
In reviewing my analysis of the declining state retrograde economy in previous chapters, I suspect that I may have dwelled too much on the potential for total financial, industrial, political, and social collapse. Yes, it could happen. You could end up as an unpaid extra in a Mad Max sequel. It is probably more likely than we care to imagine.
Yet you could also end up like St. Godric of Finchale, who was born the better part of one thousand years ago in the eleventh century. What little we know of him after his birth in 1065 to poor peasants in Wallpole, Norfolk, is that he was “from infancy . . . forced to use his ingenuity to find the means of livelihood.” He seems to have gotten his start as an entrepreneur with a lucky find of wreckage cast up by the sea. From there he became a wandering peddler, from which he earned a sufficient sum to join a “troop of town merchants” and from there, he chartered a boat for coastal trading “along the shores of England, Scotland, Denmark and Flanders. His company is highly successful. Godric is now a man of wealth.” Then, suddenly overtaken with religious enthusiasm (or merely hard-pressed to invent a better way to retire), Godric “renounces his fortune, gives his goods to the poor and becomes a monk.”1
You would risk overlooking or misreading Godric’s genius if you interpreted his sudden religious conversion solely in modern terms. Remember when he reached the age of forty-five in the year 1110, there was nothing remotely like an old age pension. There was no Social Security. There was no wealth management industry designing strategies for a secure retirement. Godric had to invent his own path. Because of the prohibition against usury, re-enforced by the “Capitularies of Charlemagne” (issued 803 AD) banning transactions “where more is asked than is given,” the form of financial instruments was limited by opposition from the church. For example, there were no circulating bonds from which to build a retirement portfolio. There were no modern investment instruments. No stocks. (The first joint stock company, Le Bazacle, was to be launched in France in the late fourteenth century—far too late to have been of any use to Godric in planning his retirement.) And even had the Bazacle “eschaus” (shares) been issued earlier, it would have been highly unlikely that an Englishman like Godric could have secured an allocation to buy any. Records indicate that the initial issue of history’s first stock was snapped up by councilors of the Parlement of Toulouse and “other local notables.”2 There were no stock investments available in Godric’s time, and even when they came along centuries later, it is unlikely that an outsider would have been able to buy shares. The London Stock Exchange traces its history to 1698, so Godric would have had a long wait to find a blue chip stock investment to fund his retirement. There were no insurance companies in 1110 offering annuities to would be retirees.
The closest approximation to a medieval annuity was the “census” contract—an instrument of credit that obliged the seller, usually a large landholder, a religious order, a local monopolist, or a taxing body, “to pay an annual return from fruitful property.”3 So Godric conceivably could have acquired or employed census contracts. Perhaps he did. A hint that he may have orchestrated a financial foundation for his retirement comes with the surviving details of his religious conversion. Godric was visiting the English tidal island of Lindisfarne possibly searching for a hiding place for his mercantile treasure, when he reported an encounter with St. Cuthbert. This was considered more credible in the Middle Ages than it would be today, as Cuthbert had been dead since March 20, 687. Be that as it may, Godric was supposedly inspired by the vision of Cuthbert to renounce his fortune and retire to a life of devotion. After several pilgrimages to Jerusalem and a couple of years living with an elderly hermit, Godric approached Ranulf Flambard, the Bishop of Durham, whom he persuaded to give him a grant of land on the River Wear on which to establish a hermitage.
Note the coincidence that Godric’s conversion was inspired by a vision of St. Cuthbert rather than the Virgin Mary, John the Baptist, or the Apostle Paul. It so happened that Bishop Ranulf was engaged in a project to cultivate the cult of St. Cuthbert that included a multidecade project to build Durham Cathedral with a design that included a shrine in which Cuthbert was re-entombed. Also note that Bishop Ranulf earned a reputation as a creative financier who pioneered new ways of raising money as a minister in the courts of King William the Conqueror and his son, King William Rufus. If any leading church authority would have been receptive to a creative proposal from Godric to facilitate his retirement, it was Bishop Ranulf Flambard. Anselm, the Archbishop of Canterbury, arranged for Bishop Ranulf’s trial in a papal court for simony. If you are not up-to-date on medieval ecclesiastical crimes, “simony” involves “the buying or selling of a church office or ecclesiastical preferment.”4
Godric was a successful capitalist, an entrepreneur in a society that condemned entrepreneurs. But his story is still legible to us, almost a millennium later, because Godric decided to become a hermit monk in a long, sixty-year retirement (he lived to age 105), and thus his story was entrusted to the church—the literate substratum of early medieval society.
Another monk, Reginald of Durham wrote Godric’s biography. Among other accomplishments, Godric took several pilgrimages to Jerusalem and gained a reputation as a wise and holy man, honored for his intelligence. His reputation spread far enough that Pope Alexander III sought his advice. Godric also wrote four hymns that are still performed. They are among the first identified works by an English songwriter.
The great historian Henri Pirenne, recounts the adventures of St. Godric of Finchale, as they embody Pirenne’s thesis in Stages in the Social History of Capitalism. Pirenne argued that capitalism began long before Marx imagined. Pirenne finds evidence as far back as records are kept. And he tells us that the group of capitalists of a given epoch “does not spring from the capitalist group of the proceeding epoch. At every change in economic organization we find a breach of continuity. It is as if the capitalists who have up to that time been active, recognize that they are incapable of adopting themselves to conditions which are evoked by needs hitherto unknown and which call for methods hitherto unemployed. They withdraw from the struggle and become an aristocracy.”5
Pirenne continues: “In their place arise new men, courageous and enterprising, who boldly permit themselves to be driven by the wind actually blowing and who know how to trim their sails to take advantage of it.”6
St. Godric was such a man.
So was Romano Mairano (1152–1201). Mairano was a Venetian entrepreneur of humble beginnings who made several fortunes in the twelfth century trading in Constantinople and the Levant. But the primary reason that his story is known is that his son and business partner, Giovanni, seems to have encountered fatal misfortune and died sometime before November 1201, when Romano Mairano was last known to be alive. Upon his death, his sole heir was his daughter, a nun. She inherited his business papers. Or rather, her convent did. Thus the details of Romano Mairano’s business transactions were preserved to the delight of modern historians. If her brother Giovanni Mairano had outlived his father, the business papers undoubtedly would have been left to him and seven pages of the Cambridge Economic History of Europe could not have been devoted to telling the story of Romano Mairano’s exploits as an entrepreneur.
The point, which is really Pirenne’s point, is that in any environment, particularly where some change in economic organization has made itself felt, some people will be able to succeed and attain great wealth. (The tales of St. Godric of Finchale and Romano Mairano stand out because, uncharacteristically, the church preserved them.) Pirenne tells us that there were many others like them, including their occasional partners whose details have been ill-preserved over the centuries.
The encouraging point from your perspective is that even in the slow-growth organic economy of the early medieval period, when wealth was engrossed by landed aristocrats, or war lords, intrepid men could invent their own unsanctioned versions of capitalism and even design a version of retirement through which he survived to the age of 105. While the medieval aristocracy generally showed no interest in profiting from commerce, it was nonetheless possible for enterprising men to start from nothing and accumulate a fortune.
There will be new opportunities to achieve independence and wealth in a decelerating world. Even if you have not been hugely successful in navigating the crony capitalist status quo, the coming terminal crisis of US hegemony may create an opening in which you can succeed beyond your wildest dreams. In Pirenne’s words, those who succeed are often “parvenus brought into action by the transformation of society, embarrassed neither by custom nor by routine, having nothing to lose and therefore the bolder in their race toward profit.”7
While it is all but impossible to project precisely how the chief crisis in this century of crisis will unfold, you can look to a crucial regularity that was identified by the great historian Henri Pirenne almost a century ago.
That is the tendency, known as Pirenne’s Pendulum, for succeeding eras of capitalist development to swing back and forth between periods of heavy regulation and economic freedom. In his Stages in the Social History of Capitalism, Pirenne describes the regularity of the phases of economic freedom and of regulation to succeed each other. He clearly saw that “our own epoch of social legislation” involved a decided swing away from economic freedom. That implies that Pirenne’s Pendulum is primed to swing your way.
It would be tempting to suppose that the post-Lehman woes of the economy are merely a long-wave cyclical depression and not evidence of the “Secular Cycle” of collapse. More tempting still is the conventional notion that the Great Recession was just the twelfth garden-variety post–World War II downturn that has been left in the dust of a conventional recovery. That was the view that the guardians of the status quo pressed on you. Don’t buy it.
In fact, I suspect that even the interpretation of the Great Recession as a later day version of the Great Depression of the 1930s represents too sanguine a view of what is actually afoot. All signs point to a secular growth slowdown, at least a partial return to preindustrial conditions due to a slowdown in the growth of energy inputs that remained robust even during even the darkest days of Depression after 1929. While the economy shrank then, it later rebounded so vigorously that the average growth rate over the first half of the century did not trail off.
As explored in previous chapters, the growth of energy inputs has stalled today with consequences that weigh against the conventional view that the status quo is sustainable. It is hardly necessary to rehearse all the points introduced earlier in a summary analysis to show that we approach the Breaking Point.
The paltry growth rate of the net private economy in the United States in the twenty-first century is within the range reached in the “organic” economies that prevailed before the Industrial Revolution. Ominously, nominal economic growth is too slow to keep pace with the compounding cost for serving debt amounting to 300 percent of GDP, even at the lowest interest rates in 5,000 years. The result to be expected is a financial crisis culminating in the Breaking Point.
As false forward assumptions about growth are disappointed, the ability of the economy to generate new credit will decline. This places the continued debt-financed surge in government spending in doubt. It also undercuts the illusion that debt spiked growth can continue forever.
The national debt soared from $5.800 trillion in 2001 to $13.561 trillion in 2010—a jump of 133 percent. You don’t have to be a mathematical genius to recognize that the system is flirting with collapse when the burden of the national debt compounds 3,000 percent faster than the productive economy grows. And this is without consideration of the multi-trillion-dollar annual increase in unfunded liabilities for future spending on programs such as Social Security and Medicare.
Looking back over the sixty years from 1949 to 2009, annual average GDP growth in the United States was 3.3 percent. The thirty-year growth rate slid to 2.7 percent. Over twenty years, the average growth rate notched down to 2.5 percent. The ten-year rate (from 1999 through 2009) was 1.9 percent, with the five-year average annual growth rate declining to 0.9 percent. Shades of Mad Max, the modern progressive economy has been coasting to a stop like an automobile that has run out of gas. Each period of decline in growth was marked by ever-greater amounts of government, business, and consumer borrowing.
While the Ministry of Truth tells you there has been a recovery since 2009, it is a statistical mirage. But even taking it at face value, it came at the cost of $7.703 trillion added to the national debt during this short time. As gaudy as that number is, it understates the unsustainability of the federal budget situation. The US government GAAP-based budget deficit hit a record of $6.6 trillion for 2012 alone. GAAP is shorthand for “generally accepted accounting principles”—the same accounting rules to which every legitimate business and public company must adhere. If those rules were applied to the federal government—the annual federal deficit would be almost ten times larger than the publicly announced number.
Not only were the true operating costs of government vastly greater than the authorities in Washington like to pretend, but between three quarters and 100 percent of the “official” cash operating deficit will have been monetized by the Federal Reserve in the course of its exercises in “quantitative easing.” Borrowers have not been willing to buy US securities at the artificially low rates at which the government wants to sell, so they have had to resort to digitally creating money at the Federal Reserve to pay the US Treasury for the debt notes.
Never in history has any nation been so deeply indebted. Never has an economy suffered with so many distortions and efficiency losses due to domination by crony capitalists who use political power to fashion a self-serving antimarket economy to reward themselves at your expense.
All the predatory antimarket sectors, exemplified by education, health care, and the military, are characterized by dramatically falling returns. Perhaps fifty years ago one might have argued that for every dollar taxpayers invested in education, they received a return of three dollars or more, as an educated populace joined the workforce and created wealth.
If that were ever true, it no longer is. As standout investor Peter Thiel explained, higher education has become a bubble. “If a college degree always means higher wages, then everyone should get a college degree. But how can everyone win a zero-sum tournament? No single path can work for everyone, and the promise of such an easy path is a sign of a bubble.”8
The marginal returns to education have declined dramatically. In some cases, increased spending may have had a negative effect. Numerous studies show despite massive spending boosts and educational “reforms,” test results have actually declined. The cost of a college education for a bachelor’s degree has quadrupled during my lifetime, while the median income of those gaining bachelor’s degrees has plunged from $53,320 in 2000 to $46,900 in 2012 (expressed in constant 2012 dollars)—a drop of 12 percent in the first twelve years of this century.
Equally, as Charles Hugh-Smith points out, the US military adopts weapon systems “that cost four times as much as the system they replace while being less effective and more costly to maintain/repair.”9 Nothing so vividly illustrates Hugh-Smith’s point as the F-35 attack fighter. The F-35 program has squandered $400 billion on an aircraft that can’t even fly in the rain.10
Sick care in the United States provides perhaps a competitively egregious example of declining returns. The United States spends $3.8 trillion a year on medical care—more per capita and a higher percentage of GDP (22 percent) than any other country. Yet according to the World Health Organization, US life expectancy (78.4 years at birth) ranks fiftieth among 221 nations and near the bottom at twenty-seventh out of the thirty-four industrialized OECD countries.
If real median income were adjusted for inflation by the same methodologies used to calculate it by the US government through the Carter administration, median income would be lower today than it was when Eisenhower was in the White House. This tells you something. There is a metamessage on the transparent inadequacy of official inflation adjustments. They may not measure how far the value of the dollar has fallen, but they do hint at how far along the downward grade the government has gone in terms of honesty in the past six decades. As Gopal Balakrishnan shrewdly observed in his Occasion essay, “Speculations on the Stationary State,” the current US depression “may reveal that the national economic statistics of the period of bubble economics were fictions, not wholly unlike those operative in the old Soviet system.”11 The twenty-first-century growth stall of the US economy has proven too serious to be treated truthfully in the sense that European Commission president Jean Claude Juncker highlighted in his famous comment: “When it gets serious you have to lie.”12
The growth stall hints at an unspeakable truth, much as it was out of the question that the Soviet Central Statistical Directorate (TsSU) would publish accurate figures detailing the negligible rates of growth that characterized the last decades of the Soviet Union.
By 1987, whistleblowers Grigory Khannin and Vasily Selyunin had already spilled the beans on the TsSU. They reported that official statistics had overstated the Soviet national income in 1985, compared to the base level of 1928, by a factor of almost thirteen times. Peter J. Boettke summed up the “malpractice of economics measurement” nicely in Why Perestroika Failed. Referring to the overstated economic growth, he wrote, “In fact, the whole peculiar art of Soviet economic management amounted to the production, and distribution of this illusion.”13
US growth rates have now dwindled to the range actually experienced in the Soviet economy in its final years. But the production and distribution of the illusion that the United States is continuing to recover toward a long-term average of 3.27 percent GDP growth is a major preoccupation of the political establishment.
If you have a family to support and look forward to some comfort in retirement, you are one of the principal targets of the elaborate pretense that the US economy is growing as before. The wizards in Washington want you to run out to the mall to buy lots of junk you don’t need. The last thing they want is for you to save your money, much less buy gold, as you might be well advised to do if you realize how close this exhausted system is to collapse.
Better late than never, you should prepare for the Breaking Point. The American easy chair today is floating on the biggest ocean of red ink in the history of the earth, with total credit market debt of $59.4 trillion, as of March 31, 2014. The middle class is being reduced to poverty.
The causes and consequences of the slow-motion secular growth stall that began in the 1970s have grown clearer over the decades. The futility of attempting to base prosperity upon bubbles stimulated by the inflation of fiat money by the Federal Reserve was underscored when the US economy almost collapsed along with Lehman Brothers in 2008. Trillions of dollars of inflated wealth were wiped away and trillions more were funneled into bailouts of big banks, Wall Street investment houses, and two-thirds of the auto industry.
What happens if, as now appears likely, the postmodern economy is destined to revert more emphatically to a declining state because of radically falling returns on the energy investments required to obtain new hydrocarbon fuels? What would this mean? Here are some possible implications:
These are some of the issues that are better thought through now than later when it may be too late. And you may need to keep your eyes open for a Mad Max look-alike in your neighborhood.
1 Pirenne, “Stages in the Social History of Capitalism,” in Class, Status and Power, ed. Richard Bendix and Seymour Martin Lipset (Glencoe: Free Press, 1953), 507–8.
2 See Hellier, Henry, Labour, Science and Technology in France, 1500–1620 (Cambridge: Cambridge University Press, 1996), 14.
3 Homer, Sidney, and Richard Sylia, A History of Interest Rates, 4th ed. (Hoboken, NJ: 2005), 73.
5 Pirenne, “Stages in the Social History of Capitalism,” 501–2.
6 Ibid., 502.
7 Ibid., 516.
8 https://www.washingtonpost.com/opinions/peter-thiel-thinking-too-highly-of-higher-ed/2014/11/21/f6758fba-70d4-11e4-893f-86bd390a3340_story.html?utm_term=.4c3a37f87a5e.
9 Hugh-Smith, Charles, “How Economies Collapse: Systemic Friction and Debt Are Self-Liquidating,” Zero Hedge, August 5, 2014.
11 Balakrishnan, Gopal, “Speculations on the Stationary State,” http://arcade.stanford.edu/occasion/speculations-stationary-state.
13 Boettke, Peter, Why Perestroika Failed: The Politics and Economics of Socialist Transformation (London: Routledge, 1993), 4.
14 Boulding, Kenneth, “The Shadow of the Stationary State,” in The No-Growth Society, ed. Mancur Olson and Hans Landsberg (New York: W. W. Norton, 1973), 92, 95.
15 Orlov, Dmitry, “How to Time Collapses,” ClubOrlov, February 4, 2014, http://cluborlov.blogspot.com/2014/02/how-to-time-collapses.html.
16 Tainter, Joseph A., The Collapse of Complex Societies (Cambridge: Cambridge University Press, 1990), 198.
17 McKay, G. A., and T. Allsopp, “The Role of Climate in Affecting Energy Demand/Supply,” in Interactions of Energy and Climate, ed. W. Bach, J. Pankrath, and J. Williams (Dordrecht, Holland: D. Reidel, 1980), 53–72.
18 Morgan, Life after Growth, 68–69.
19 Jager, Jill, “Scope 27 Climate Impact Assessment,” http://www.scopenvironment.org/downloadpubs/scope27/chapter09.html.