VOODOO ECONOMICS: ‘Taxonomy of Collapse’, Mitigation Strategies – By Dimitri Orlov

Source – cluborlov.blogspot.ca

“…The Earth is a petri dish populated with various strains of collapse—or a collapse soup, if you will. It is an open-air collapse laboratory running many uncontrolled collapse-related experiments at the same time”:

Collapse Mitigation Strategies – By Dimitri Orlov

Almost a decade ago I wrote an article in which I defined the five stages of collapse, defined as inflection points at which faith in key aspects of the status quo is shattered and a new reality takes hold.

It is useful to have a taxonomy of collapse, even if it’s a tentative one. Treating collapse as one big ball of wax is likely to cause us to believe that everything will melt down all at once, and, barring certain doomsday scenarios, which are probably not even useful to consider, this is probably not a realistic or a helpful approach.

Also, one big ball of wax is not what we have been observing in the years since I wrote that article. By now, the Earth is a petri dish populated with various strains of collapse—or a collapse soup, if you will. It is an open-air collapse laboratory running many uncontrolled collapse-related experiments at the same time. Perhaps, if we observe carefully, we can learn to discern the various stages and to determine how they interact.

In this update on my February 2008 article, I tackle the issue of collapse mitigation: What can we do to avoid the various worst-case scenarios?

The five stages of collapse parallel somewhat the five stages of grief which Elizabeth Kübler-Ross defined as denial, anger, bargaining, depression, and acceptance. Both sets of stages have to do with psychological phenomena: hers has to do with emotion; mine has to do with faith. After all, concepts such as the value of money or the existence of such things as a free market, democracy and community all have a Tinkerbell quality: once nobody believes that they still exist, they vanish without a trace.

I defined the five stages of collapse as follows:

Stage 1: Financial collapse. Faith in “business as usual” is lost. The future is no longer assumed to resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost.

Stage 2: Commercial collapse. Faith that “the market shall provide” is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm.

Stage 3: Political collapse. Faith that “the government will take care of you” is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.

Stage 4: Social collapse. Faith that “your people will take care of you” is lost, as local social institutions, be they charities or other groups that rush in to fill the power vacuum run out of resources or fail through internal conflict.

Stage 5: Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for “kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity” (Turnbull, The Mountain People). Families disband and compete as individuals for scarce resources. The new motto becomes “May you die today so that I die tomorrow” (Solzhenitsyn, The GULAG Archipelago). There may even be some cannibalism.

But emotion does play a role here as well: since the triggering of any one stage of collapse is a matter of faith—and not individual faith but the faith and confidence of large groups of people—the process is governed not by rational calculation but by emotion. Here, the governing emotion is not grief but fear: fear of being caught out as the last fool to believe in a lie. Because of this effect, any one stage of collapse can produce panic and cause a stampede from one stage to the next.

Stages of collapse can overlap and can occur out of order. In Yemen it was political collapse that occurred first. Zimbabwe and Venezuela led with commercial collapse. In parts of the United States social and cultural collapse have largely run their course even as the financial-commercial-political realm, with its guardians ensconced in certain key cities, continues to hold together for the time being.

But it still makes sense to define a paradigmatic collapse cascade that goes from Stage 1 through Stage 5.

Financial collapse leads the procession because it is by far the most fragile, thus the most likely to fall over and shatter first. It rests on the premise that it is possible to endlessly borrow from the future and expect repayment. This is sometimes possible, but it requires economic growth to outpace the increase in debt. If the economy grows nicely, debt repayment is not particularly onerous; if the economy shrinks, then debt balloons and eventually has to be written off. In a close to zero-growth environment, which has existed since the financial collapse of 2008, the entire financial realm is hollowed out and turns into a pure pyramid scheme. And as with any pyramid scheme, any disruptive event, even a minor one, can serve to undermine faith in it and cause it to collapse.

Commercial collapse can be brought about by any number of causes (farming collapse in Zimbabwe, oil prices falling below production costs in Venezuela) but what is most effective in bringing it about is financial collapse. Most commercial transactions—such as loading cargo onto ships—require access to credit, and when the financial realm becomes compromised access to credit is usually the first casualty. In a global economy with supply chains stretching across oceans and continents, once the movement of cargos becomes impaired, supply chain cross-contagion sets in. Just one part sourced from across the world can bring production or maintenance operations to a halt, triggering knock-on effects that shut down more and more operations. A point of no return is reached when the affected enterprises, no longer able to provide services or to ship products, but still forced to pay their fixed costs, and unable to borrow to cover them, run out of cash.

In turn, commercial collapse causes the tax base to evaporate, and this triggers political collapse. Governments are incapable of discharging their obligations unless tax receipts are flowing in, or unless they can continue borrowing vast sums for deficit financing, or, increasingly, both. With the mechanisms of credit creation seized up and with commerce at a standstill, governments are forced to make deep cuts in law enforcement, defense, pensions, health care and other areas. This renders the government impotent and useless in the eyes of the people.

Once that happens, the population starts ignoring the government and taking matters into their own hands. The inflection point comes when the government is forced to abrogate its responsibility to maintain a monopoly on violence. (This barrier was recently breached in the Ukraine, where rogue nationalist militia blockaded railway lines that brought in the coal needed to keep the lights on but was not dealt with, and now dictates government policy using the threat of government overthrow.) Once that point is reached, political collapse is assured.

The first three stages of collapse—financial-commercial-political—form a distinct cluster. Although triggering sequences can be different from the paradigmatic collapse cascade described above—commercial failure or political disruption can and sometimes do lead—the end result is always the same: Stage 3 collapse, with society subsisting in conditions of stable disorder that are often termed a “failed state.”

At this point, numerous well-informed people see it as valid to think that the first three stages of collapse are inevitable at the global level: global finance is characterized by already unsustainable yet still exponentially increasing levels of debt; global commerce is underpinned by fast-dwindling reserves of nonrenewable natural resources, fossil fuels in particular, but with fresh water and arable land not far behind, with nothing to take their place; and the very concept of global governance is but a sad joke when numerous national governments, including in the US, have surrendered their sovereignty to transnational business and banking cabals and act as rogue states with regard to international law.

Social and cultural collapse can be tied in with the other stages, or they can exist on an entirely different timeline, depending on the extent to which social and cultural institutions have been financialized, commercialized and politicized, rendering them fragile and unstable. Separatist groups and subcultures—the Pashtuns of the tribal areas of Pakistan, the Roma (Gypsies), the Anabaptists (Amish, Mennonites and Hutterites) in the Americas, off-grid homesteaders, certain indigenous tribes living in remote areas—are sufficiently decoupled from finance, commerce or politics to be able to survive their demise relatively unperturbed.

This is not the case in the developed world, where even personal relationships such as child-rearing and taking care of one’s elderly parents have been largely replaced with commercial or public services, and where even sexual and romantic relationships are often commercially mediated by social media and dating services. And while many rural areas around the world offer at least some opportunities for self-sufficient subsistence, the larger cities have essentially none: they must be continually resupplied with food and other consumer products, either through commerce or through emergency humanitarian aid. A combination of commercial and political collapse is usually sufficient to disrupt both of these.

In view of the above, what opportunities are there for collapse avoidance or collapse mitigation?

With regard to financial collapse, the steps needed to avoid it—repudiation of unrepayable debt, reintroduction of sound money principles, regulating financial services as public utilities and so on—are exactly the same as the steps needed to bring it on. In fact, much smaller steps would be sufficient to trigger it: raising interest rates to their historical average of a few percent, removing initially “emergency” but now structural fiscal and monetary stimulus, perhaps even just reinstating the commonsense requirement that collateralized debt instruments be valued based on current market prices of their underlying collateral. In short, the recommendation for avoiding collapse of the financial pyramid amounts to “Don’t even breathe on it!” But since it’s unavoidable, people should feel free to take certain steps to safeguard themselves. Load up on precious metals, along with guns and ammunition with which to stand guard over your hoard. Create local gray/black economies that circumvent the financial realm. Remain poised to short-sell everything in sight.

Although financial collapse appears to be pretty much baked into the cake, there are certain steps that countries, regions and communities can take to protect themselves from its ravages. Some countries are already taking these steps. Since the US will be at the epicenter of the financial black hole that will be formed by a global financial implosion, it makes sense to avoid the use of the US dollar in trade, pursuing policies of import replacement, establishing bilateral trade relationships based on barter, pursuing self-sufficiency in food and other key commodities, energy independence and so on. But there is a limit to how successful such efforts will be once global supply chain cross-contagion sets in and it becomes impossible to source numerous components without which a technologically advanced society ceases to operate. Also, such efforts get in the way of the wholehearted pursuit of economic efficiency and are likely to result in reduced financial performance. For vastly overindebted countries, such underperformance may be sufficient to trigger financial collapse and to destabilize them politically.

Moving on to political collapse, certain governments are more collapse-proof than others. Democratic systems, which form coalitions and define public policy through the interplay of numerous special interests, are by far the most likely to collapse in domino-like fashion as soon as the financial domino topples the commercial domino. They are also the least likely to pursue economically and politically costly policies that would protect them from the ravages of financial collapse, simply because there is no specific special interest and no group of special interests that is willing to sacrifice their share of public wealth in favor of someone else’s economic security. At the other end of the spectrum lie authoritarian regimes, where there is exactly one special interest—the interest of the state—and where the state can go almost arbitrary far in protecting that interest, even to the point of killing, starving or driving out parts of their populations. At the very far end of this spectrum lies North Korea, with its vaunted principle of juche. There, self-sufficiency trumps just about everything.

Note that financial, commercial and political collapse are all mutually reinforcing. A financial crisis disrupts global trade and triggers global supply chain cross-contagion which hinders commerce. As commercial collapse unfolds, numerous assets can no longer be maintained in working order. They become stranded assets and their collateral value evaporates. This, in turn, invalidates the debt instruments that are based on them, pushing financial collapse further on its trajectory. Also, as commerce comes to a standstill, tax receipts dwindle and governments become unable to provide services such as maintaining law and order or feeding and housing indigent segments of their populations. This triggers a crime wave which further drives down property values, deepening the financial collapse. Thus, collapse is not an event but a cyclical phenomenon, with several positive feedbacks, which continues until a stable condition is reached when a much reduced population finds a steady-state subsistence level.

The job of the collapse mitigation consultant does not appear to be a particularly difficult one from an intellectual perspective. How do we postpone (not avoid) financial collapse? “Don’t breathe on it!” (While stockpiling gold, guns and ammo). How do we avoid commercial collapse? Juche! How do we avoid political collapse? Ask the Supreme Leader. How do we avoid social and cultural collapse? Imitate retrograde, illiberal, socially separatist groups.

But the job of the collapse mitigation consultant is thoroughly repugnant (not to put too fine a point on it) from a moral and ethical perspective. None of what is proposed above can possibly be viewed as constructive from a broadly social perspective. It involves chopping away at what many people hold dear: economic prosperity, global competitiveness, democratic and progressive politics, social development individual human rights. And it involves promoting things that many people find repugnant: warlordism, national monopolies, authoritarianism and social and political oppression.

One moral argument that can be made is that what is being proposed is less bad than doing nothing.

There is also the possibility of taking a stance at a meta-level with regard to moral perspectives in general. In light of the looming collapse, most efforts to “do the right thing” are likely to lead to a morass of unintended consequences that will negate the effort. Thus, “doing the least wrong thing” seems like a more viable approach. This has to be argued on a case by case basis, so let us briefly mention some examples.

1. Suppose you view overpopulation as an acute problem and advocate birth control. By so doing you doom to extinction those groups whose reproductive urges you manage to reign in while doing nothing to reign those of religious groups who see it as their sacred duty to take over the entire planet by out-birthing everyone.

2. Suppose you want to help the environment by replacing gasoline-fueled cars with electric ones. By so doing, you destroy the market for gasoline, double the freight rates (because petroleum distillates are now twice as expensive) and… destroy the market for electric cars, because electricity is now much more expensive than gasoline, used gasoline-fueled cars are much cheaper than new electric ones, and only a fool would take an electric car over a gasoline-fueled one.

3. Suppose you believe that the lifetime of industrial civilization can be extended by shifting to renewables and put up lots of wind generators and solar panels. Now you’ve squandered lots of resources on a gigantic set of useless industrial assets with which to blight the landscape. Once global supply chain cross-contagion destroys the supply of products that use electricity (everything that uses electricity is on a replacement schedule) in turn destroying demand for electricity. Of course, the same process would also disrupt replacement and maintenance of wind and solar installations, so that electricity supply would be destroyed as well. In the end, you will have achieved nothing.

4. Suppose you think you can make the world a better place by spreading cell phone service and the internet to every corner of the planet and handing out smartphones. Now young people, seduced by social media and infotainment, lose all desire to till the earth in the manner of their forbearers and crowd into cities to look for work, ideally office work. To feed them, land is bought up and converted to industrial agriculture, poisoning the earth with synthetic chemicals. And when industrial agriculture is blown away by commercial collapse, all this freshly minted office plankton starves. Again, nicely done!

As you see, collapse is not one of these “problems” you can hope to “solve.” Part of what’s going to collapse is the entire value system of the civilized world, to be replaced by something we currently consider far less civilized. There are no good outcomes; but there is always the possibility a less bad outcome. How one goes about advocating for less bad outcomes (either with or without donning Macchiavelli’s cape) is a conversation we need to have. “Things could be even worse” is not the catchiest slogan in the world; but what if that’s all we have?


One thought on “VOODOO ECONOMICS: ‘Taxonomy of Collapse’, Mitigation Strategies – By Dimitri Orlov

  1. Just one point. Federal Governments don’t need taxation to spend. Tax is not used for revenue. An evaporating tax base is irrelevant. Governments only use new money, every time.

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