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Orvlov: Stages of Collapse Revised: Joined at the Wallet

Orvlov: Stages of Collapse Revised: Joined at the Wallet thumbnail

My neat and tidy taxonomy of collapse, “The Five Stages of Collapse,” has been read more than 70,000 times just on my blog alone since I first published it in February of 2008. It continues to be popular: there were over 10,000 hits to the page in the last year alone. People must still be finding it helpful.

And yet collapse has not gone according to plan. What caused me to write the initial article was the financial collapse of 2008, which was shaping up to be a game-ender for Western finance. It still is, I believe. Back then, I wrote of the “credit event” of 2008:
The government response to this could be to offer some helpful homilies about “the wages of sin” and to open a few soup kitchens and flop houses in a variety of locations including Wall Street. The message would be: “You former debt addicts and gamblers, as you say, ‘fucked up,’ and so this will really hurt for a long time. We will never let you anywhere near big money again. Get yourselves over to the soup kitchen, and bring your own bowl, because we don’t do dishes.” This would result in a stable Stage 1 collapse – the Second Great Depression.

However, this is unlikely, because in the US the government happens to be debt addict and gambler number one. As individuals, we may have been as virtuous as we wished, but the government will have still run up exorbitant debts on our behalf. Every level of government, from local municipalities and authorities, which need the financial markets to finance their public works and public services, to the federal government, which relies on foreign investment to finance its endless wars, is addicted to public debt. They know they cannot stop borrowing, and so they will do anything they can to keep the game going for as long as possible.

I thought that government interventions in private finance would prolong the agony somewhat; what I didn’t think was that they would prolong it even onto the death of the governments themselves! The effect of the interventions since then, in the US and in Europe, have been to knock down every firewall between public and private finance, to the point that now we are faced with two monstrous, and monstrously sick, conjoined twins, and the death any one of them is sure to spell the death of the other. Trying to separate them with a cleaver will be of no use: they will simply hemorrhage red ink and die sooner than they would otherwise.

Perhaps their early demise would be useful. Now that economic growth is pretty much over and done with, big finance and big government stand directly in the path of an orderly shriveling-up of the global economy. What I mean when I say “an orderly shriveling-up” is a process by which the economy shrinks at a healthy rate, corresponding to rates that were once considered to be a healthy growth rate, but in a way that allows most people to survive by providing a few essentials, such as food, shelter, security, access to medical care, ability to raise children and so on.
The endless fervent prayers we hear for nonexistent and physically impossible economic growth is telltale: without it the temporary tricks used by government and finance to keep the game going have to be seen as permanent tricks, and as permanent tricks they do not work. There is the trick of “hiding the garbage” on the balance sheet of central banks. It would work if the garbage (loans gone bad) were to some day be worth something, which it might have if there were to be growth. Without it, they remain garbage. Another trick is to extend government guarantees to massively raise the amount of available bail-out funds; this trick would work if growth were to resume, in which case the guarantees would never need to be used. As it is, they are guaranteed to be used, and since the public funds behind these guarantees don’t exist, the pretense of there being trillions of bail-out funds available is sure to wear thin quickly.
I wished for an orderly cascade of collapsing institutions, with enough of a gap between them for public psychology and behavior to adjust to the new reality. But almost four lost years of both government and finance betting on a future that cannot exist, doubling down every time they lose again, has dashed those hopes. The effect, I think, will be to compress collapse into a single chaotic episode. Global commerce will not be far behind, because it is dependent on global finance, and if international credit locks up then the tankers and the container ships don’t sail. Shortly thereafter it’s lights out.
The Five Stages of Collapse was a nice theory. If only we were so lucky! I am writing this to warn you: don’t look for anything quite so tidy. Oh, and happy Halloween!
Club Orlov

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