Endgame: USA

December 22, 2009

Economic recovery! The media, economists and politicians are talking it up. The spin machines are working flat out cherry picking statistics to convince us that recovery is underway and we are entering another growth phase. It could, however, be argued that this is the least likely of all the potential outcomes from the global financial crisis. One of those potential outcomes, one rarely spoken about unless you are Barnaby Joyce, is the subject of this article.

This outcome is the collapse of the USA and the demise of the world’s largest economy and only superpower. I define collapse as a rapid reduction in the level of complexity; it does not necessarily imply a Mad Max-type scenario. The collapse I am envisioning is something along the lines of what occurred to the USSR, a collapse which very few saw coming.

By way of analogy, examining the potential collapse of the USA can be likened to building a bonfire. The fuel is being piled; all that is needed is a spark to light the fire. What should be remembered though, is that in the aftermath of fire is the opportunity for renewal. So let us have a look at the fuel, the potential fire starters and the opportunities that this bonfire could provide.

The fuel

Unemployment

According to the United States Bureau of Labor Statistics, the seasonally adjusted official (U3) unemployment rate is 10 per cent. However the U6 rate, which includes discouraged workers who have given up looking for work and those who are underemployed, is 17.2 per cent. In other words, one out of every 5.8 workers is un- or under employed. There are some commentators, such as David Rosenberg, Nouriel Roubini and Meredith Whitney suggesting that the U3 rate is likely to reach 12-13 per cent, implying that the U6 rate will also increase.

Housing

According to a Duetsche Bank report, 14 million, or 27 per cent, of all mortgage holders were underwater in 2009, a figure expected to rise to 48 per cent by 2011. Foreclosure rates are also increasing reaching a record in the third quarter. In September alone, 343,638 properties received foreclosure filings. While house prices have risen slightly in recent months, from a fall of 25 per cent from their peak in late 2005, it is likely that unemployment and foreclosures will put further downward pressure on house prices. Commercial real estate is also struggling, with one analyst suggesting that building owners will default on US$500 billion to US$750 billion of mortgage debt out of US$1.4 trillion in loans that will come due in the next four years.

Banks

According to the FDIC 124 banks have failed in 2009 thus far. But this may be the tip of the iceberg with one report suggesting that there are more than 2,000 banks in “eminent danger” requiring additional bailout funding in the vicinity of US$800 billion to US$1 trillion. If unemployment and foreclosures continue to rise and house prices fall, we can expect that many of those banks in eminent danger will fail.

States

The financial situation of the states is in many cases dire (PDF 852KB). Budget deficits across the states currently equate to US$31.5 billion, a situation that will only further deteriorate without continued Federal Government assistance. With many states cutting services and reducing staff numbers/hours, this will also feed into higher unemployment and more foreclosures.

Dear Mr President

President Obama’s inauguration in January provided the opportunity for “change we can believe in”. This was reflected in his approval rating which soared to more than 70 per cent. Since then his approval ratings have fallen to less than 50 per cent and he has at some points been less popular than his predecessor at the same time in his presidency.

Unfortunately President Obama’s rhetoric and actions have not aligned. No clearer indication of this is provided than by the key economic appointments made by President Obama and his continued support of people such as Timothy Geithner, Larry Summers and Robert Rubin, all products of the Wall Street-Washington revolving door policy. The result is that while record numbers of Obama voters lose their jobs and homes, exorbitant profits and bonuses are made at Goldman Sachs and other firms on Geithner’s speed-dial. This is one reason why the folks over at The Automatic Earth argue that this is a political and not a financial crisis.

This is not a complete list, other fuel sources include; failing infrastructure, unpopular and expensive wars and unsustainable levels of both private and government debt. The list could continue, but you get the idea. There is significant evidence to suggest that a very large bonfire has been set in the USA.

The fire starters

What will it take for this load of fuel to ignite and turn a nation that since the US civil war has been one of the most stable in the world into a failed or failing state? No one can answer that, but there are a number of potential sparks on the horizon that could well light the bonfire.

Mexico

The Mexican Government obtains about 40 per cent of its revenue from oil. However, Mexico has big problems in its oil industry with production and exports declining rapidly. A prime example is provided by the peak oil poster boy, Cantarell oil field, which despite, or maybe because of, technology has seen output from what was once the world’s second largest oil field plunge from its peak production of 2.1 million barrels a day in 2005 to 500,000 barrels a day. Combined with its growing financial problems, the rise of drug cartels and escalating violence, it appears likely that the Mexican nation state will collapse at some point in the near term future. Indeed, the US Joint Forces Command identifies Mexico (PDF KB) as one of the most likely countries to collapse in the immediate future.

US dollar

How long will the US dollar remain the world’s reserve currency? According to William Clark, author of Petrodollar Warfare, the invasion of Iraq was largely triggered by Saddam’s decision to sell oil in euro’s. Iran is now selling oil in euro’s and yen. There are rumours, which have been strongly denied, that a number of countries are planning to trade oil in a basket of currencies other than the dollar. Regardless of the truth or otherwise of these claims, with the US economy severely weakened, it does seem likely that other nations will want to diversify away from the dollar. If this is the case, the current status of the US dollar, US hegemony and its role as the global superpower are numbered.

Oil

A number of economists such as Dr James Hamilton (PDF 637KB) and Jeff Rubin attribute the GFC to the oil price spike of 2007-08. This is not particularly surprising with oil price spikes having been followed by recessions consistently since the 1970s. With depletion rates of oilfields running at 6.7 per cent a year, and the significant cut in investment as a result of the GFC/oil price crash, the conditions are set for another oil price spike in the not too distant future. Indeed it appears that the global economy has reached an inflection point where the cost of bringing new oil to market has approached the point where it becomes economically damaging.

There are numerous other potential fire starters. Examples might be civil unrest, another Hurricane Katrina type climate event, a major terrorist attack on a US city, a Tet Offensive, Blackhawk down or Abu Ghraib type incident in Iraq or Afghanistan and probably many others. In the complex, non-linear world that we live in, it is impossible to predict exactly how the collapse maybe triggered and subsequently unfold. What can be identified, however, is that there are enough trends in place to suggest that the long term stability of the US is questionable and that there are enough triggers, either alone or in combination, to suggest that some form of collapse is possible, if not probable.

Catagenesis

The thought of collapse to most people is a frightening prospect and for good reason. At the very least, the collapse of the US economy would likely result in the greatest destruction of wealth ever seen in human history due to the tightly coupled nature of the global economy. As Barnaby Joyce rightly points out, “A default by the US means complete economic collapse around the world and the question we have got to ask ourselves is where are we in that?”

Collapse needs to be placed in context. Buzz Holling of the Resilience Alliance has developed the concept of panarchy, which describes how ecological systems progress through adaptive cycles of growth, collapse, regeneration, and further growth. This can also be applied to social and economic systems. The evidence suggests that the US has reached, or is approaching, the peak of its growth cycle. If this is the case, at some point a collapse must follow which is the precursor to regeneration. Canadian political scientist, Thomas Homer-Dixon has coined the term catagenesis to describe this process of renewal through breakdown. Catagenesis comes from the ancient Greek words for down (cata), and birth (genesis).

So if we were to accept that the collapse of the USA was possible, even probable, what would be an appropriate policy response? How do we make the most of the opportunity for catagensis? The first step would be recognising that to adapt in a functional manner would require a high level of adaptive capacity within our society. This would enable us to re-configure our society without a significant decline in the critical functions required to maintain a stable society and reduce the risk of “synchronous failure,” the technical term for a Mad Max-type scenario. So how could we increase the adaptive capacity/resilience of Australian society? Some suggestions might be:

  • Decouple from the global economy. As demonstrated by the GFC, financial shocks in one nation can become widespread in a highly coupled globalised world.
  • Reduce debt levels, both private and government as quickly as possible. This will minimise the impact of the credit crunch that would follow a collapse of the US and provide more options for adaption.
  • Forget about Emission Trading Schemes. The collapse of the US, and thus of China’s exports, would probably be the most effective climate change mitigation strategy available. For a long term opportunity for catagenesis however, conservation and renewable energy are imperative.
  • Reduce oil dependency. The collapse of the US, by far the world’s largest oil consumer, would result in the collapse of the oil price and as a result investment in the oil industry. This would almost certainly mean that peak oil is a historical, as opposed to a future, event.

These suggestions are the antithesis of current policy direction, which brings me to the point of this article. Current discourse suggests that “growth” is the only possible future scenario and our entire focus is on pursuing this goal. If growth is inherently limited, as panarchy and a long term view of human history suggest, then the possibility of “collapse” must become part of our discourse. Collapse should provide the opportunity for renewal, while avoiding synchronous failure, but this will only occur if we recognise the predicament we have placed ourselves in.


Tags: Culture & Behavior, Education, Fossil Fuels, Media & Communications, Oil