Summary of the article and commentary:
The End of the World As We Know It…
Posted: 09 Mar 2010 10:21 PM PST
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Now, on to what I read today…
I had a busy Tuesday, serving on a discussion panel at school and having to teach a late night test review session. So today, I just want to talk about one simple idea…the end of the United States as we know it!
One of the “most read articles” floating around the web today was written by Paul B. Farrell, entitled “Collapse of the American Empire: Swift, Silent, Certain.” I put the link below.
Farrell\'s Article Link
Don’t read my writing as an endorsement of this. Rather, my view is that there is a low probability / high impact event out there and you should think about it and assess what the probability is. If you want to think about a low probability / high impact event, lets imagine that it was March 2007…would you have believed that in the next 18 months, Bear Stearns and Lehman would be gone, and Merrill would be part of Bank of America?
Farrell’s article is actually a description of a paper written by Harvard’s Niall Ferguson, a leading financial historian who says that imperial collapse can happen much more suddenly than historians imagine. He’s quoted as saying, “A combination of fiscal deficits and military overstretch suggests that the United States may be the next empire on the precipice.”
Ferguson’s article was just published in Foreign Affairs. So Farrell’s brief piece got me interested in reading the source document. (You can buy a pdf of Ferguson’s paper for 99 cents online. I don’t like to flaunt my wealth, but I went ahead and bought it. I figured that if the US is coming to an end, I wouldn’t miss the 99 cents. If the world doesn’t end, Jenny will get one less Christmas present next year.)
Now, having read the actual source document, I’m not sure that Farrell’s piece actually does it justice. But, Farrell brought it to our attention and got people thinking about it, so that’s good.
Here are some of the important thoughts from Ferguson’s paper:
1. All empires, no matter how magnificent, are condemned to decline and fall.
2. Historians believe that civilizations reach their demise gradually. It is often the result of their attempt to defeat other civilizations (sometimes for commerce). Most historians believe that it is part of a natural (albeit slow moving) cycle. In addition to imperialism, other causes could include abusing their natural environments. For example, civilization can grow beyond its agricultural supply and civil war can ensue.
3. Leaders (politicians) have little incentive to address long-term problems. Many times, problems won’t manifest themselves for a hundred years. Thus, the demise of civilizations often takes quite some time.
4. The US has long-term threats. The CBO suggests that public debt could rise from 44% (before the crisis) to 716% by 2080 given likely changes. If current policies remain the same, the debt will be 280%. Regardless, we don’t have the political will to make changes (cut entitlements or increase taxes). China’s GDP is expected to overtake the US sometime between 2027 and 2040.
5. Ferguson asks…but what if this is not a slow cycle, but something capable of sudden acceleration (maybe we could call this “the Toyota view of the world”).
6. Great civilizations are complex systems that have many interacting parts. These parts operate “on the edge of chaos” – where they are stable for long periods of time. Then, some small trigger can set it off. After it gets set off, historians arrive and tell a story about the event and how there were “long term causes.” Often times, the historian misunderstands the complexity, but the story is satisfying.
7. More often than not, the calamity is actually caused by something very proximate in time. They are not culminations of long stories. They are breakdowns of complex systems.
8. A small input to a complex system can have an effect that is amplified. As an example, you can give too much of a vaccine to a patient and you can kill him. Some people who study complexity believe that it’s impossible to make predictions about future behavior (because of all of the possible outcomes of a complex system). (The size of the system’s breakdown is often hard to predict. You don’t know how much damage will occur with a forest fire.)
9. There are countless empires that collapsed very quickly. The most recent example is the Soviet Union.
10. Now, turn your attention to the United States. You should be scared of a precipitous decline (don’t try to think of the stages). Most collapses are associated with financial crises.
11. We are currently running a huge deficit and our publicly held debt is going to double within the decade. Interest payments will increase from 8% of revenue to 17%.
12. These numbers could weaken the worldwide confidence that the US can withstand any crisis.
13. Most likely, there will be some event that happens that changes the thoughts of the world. The common belief will no longer be in US viability.
14. It may be that the public will suddenly reassess the credibility of our fiscal and monetary policy. If investors suddenly question our solvency, interest rates will rise and our interest payments will become tremendous.
15. If this happens, the US will no longer have the money to finance our military programs.
If all this happens, historians will enter the picture and tell us a story. But in reality, things will have happened very suddenly.
My Thoughts on This
This is a scary story and it always scares me more when I hear a story like this from someone smart. For those of you who have heard me speak in the last couple of months, you’ve heard my description that I believe that we are headed (in the long-term) for a financial crisis of epic proportion – similar to what third-world countries have faced in the past. I don’t think that this will happen immediately, but I describe it as something that will certainly occur in our children’s lifetime. I always laugh at the complacency with which listeners respond. Most frequently they ask, “so how should I position my portfolio?”
I do have certain disagreements with Ferguson’s theories. He blames the current crisis solely on the mismanagement of monetary policy (I think that there’s much more to it). I also think that our crisis is a story that has been a long story – when you look at Social Security and Medicare / Medicaid.
Unfortunately, I really disagree with Ferguson’s description of our debt. Our problems are MUCH WORSE than he described. About ten days ago, the Treasury Department put out their annual report which estimates the present value of the unfunded liability for Social Security, Medicare / Medicaid and Veterans’ Affairs. The amount is $52 trillion. I’ll talk more about this amount in future blogs. But the bottom line is that this just a disaster and there’s really no solution. It would be no different than you or me having $10 million of debt. For most of us, working harder, saving more and cutting our expenses won’t solve the problem. It’s too late.
This all really scares me. I think that the educated people of our civilization have a duty to start learning more about our fiscal issues. It’s the only way that we’re going to have a chance of affecting the outcome.
Finally, I’ll end with the thought that hopefully this is all crazy and I’m crazy for telling you to think about it. But here’s a question for you…think about all of the past dynasties…do you think any of the citizens thought that their dynasty was going to end?
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