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  THE BREAKING POINT

  Profit from the Coming Money Cataclysm

  JAMES DALE DAVIDSON

  Humanix Books

  The Breaking Point

  Copyright © 2017 by Humanix Books

  All rights reserved

  Humanix Books, P.O. Box 20989, West Palm Beach, FL 33416, USA

  www.humanixbooks.com | [email protected]

  Library of Congress Cataloging-in-Publication Data is available from the Library of Congress.

  No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any other information storage and retrieval system, without written permission from the publisher.

  Interior Design: Scribe Inc.

  Humanix Books is a division of Humanix Publishing, LLC. Its trademark, consisting of the words “Humanix” is registered in the Patent and Trademark Office and in other countries.

  Disclaimer: The information presented in this book is meant to be used for general resource purposes only; it is not intended as specific financial advice for any individual and should not substitute financial advice from a finance professional.

  ISBN: 978-1-63006-060-2 (Hardcover)

  ISBN: 978-1-63006-061-9 (E-book)

  To my indispensable Sabine, who proves again, as e.e. cummings wrote, that “unless you love someone, nothing else makes sense”

  Contents

  Foreword by Bill Bonner

  One: Will the United States Go the Way of the Soviet Union?

  Two: The Megapolitics of a Changing World

  Three: The Political Economy of Plunder

  Four: Would Marx Be a Socialist Today?

  Five: Squandering the Spoils of a “Good War”

  Six: Financial Cycles and the Dollar in the Twilight of Hegemony

  Seven: The “Great Degeneration”

  Eight: FATCA, Dumb, and Happy

  Nine: Beyond Kondratiev

  Ten: Ecofascism and the Natural Causes of Climate Disruptions

  Eleven: Deconstructing the “Greatest Lie Ever Told”

  Twelve: Can Food Crises Trigger Collapse?

  Thirteen: The Deep State

  Fourteen: The Domino Effect

  Fifteen: The Big Fat Lie

  Sixteen: The Hidden BTU Content of Fiat Money

  Seventeen: The Great Slowdown

  Eighteen: The Declining State

  Nineteen: Black Swans on the Horizon

  Twenty: The Idiot Principle of Deflation, and Why I Am One of the Idiots Who Sees It Happening

  Twenty-One: The Next Stage of Capitalist Development

  Twenty-Two: Pirenne’s Pendulum and the Return of the Organic Economy

  Acknowledgments

  Index

  Foreword

  By Bill Bonner

  Something went wrong on the way to tomorrow. From the turn of the century in 1900 through the end of Cold War in 1989 to the next turn of the century in 2000, almost every view of the future looked as though it had been photoshopped. Imperfections were few.

  In 1900, a survey was done. “What do you see coming?” asked the pollsters.

  All those questions forecast better times ahead. Machines were just making their debut, but already people saw their potential. You can see some of that optimism on display in the Paris metro today. In the Montparnasse station is an illustration from the 1800s of what the artist imagined for the next century. It is a fantastic vision of flying vehicles, elevated sidewalks, and incredible mechanical devices.

  But when asked what lay ahead, the most remarkable opinion, at least from our point of view, was that government would decline. Almost everyone thought so. Why would that happen? We wouldn’t need so much government, they said. People will all be rich. Wealthy people may engage in fraud and finagling, but they don’t wait in dark allies to bop people over the head and steal their wallets. And they don’t need government pensions or government health care either.

  Nor do they attack their neighbors. Norman Angell wrote a best-selling book, The Great Illusion, in which he explained why. Wealth is no longer based on land, he argued. Instead, it depends on factories, finance, commerce, and delicate relationships between suppliers, manufacturers, and consumers. As capitalism makes people better off, he said, they won’t want to do anything to interfere with it. If you disrupt them, you only make yourself poorer, he pointed out.

  One of his most important readers was Viscount Escher of England’s War Committee. He told listeners that “new economic factors clearly prove the inanity of aggressive wars.”

  Capitalism flourishes in times of peace, sound money, respect for property rights, and free trade. One of the most important components of the wealth of the late nineteenth century was international commerce. It was clear that everyone benefitted from “globalized” trade. Who would want to upset that apple cart?

  “War must soon be a thing of the past,” said Escher.

  But in August 1914, the cart fell over anyway. The Great War began five years after Angell’s book hit the best-seller lists. On the first day of the Battle of the Somme alone—one hundred years ago—there were more than 70,000 casualties. And when Americans arrived in 1917, the average soldier arriving at the front lines had a life expectancy of only twenty-one days. By the time of the Armistice on the eleventh day of the eleventh month at 11 a.m. of 1918, the war had killed 17 million people, wounded another 20 million, and knocked off the major ruling families of Europe—the Hohenzollerns, the Hapsburgs, and the Romanoffs (the Bourbons and Bonapartes were already gone from France).

  Hic hoc. Stuff happens.

  James Dale Davidson’s new book, The Breaking Point, is an attempt to explain why stuff happens the way it does. Using his theory of “megapolitics,” he also takes some guesses about what happens next.

  After WWI came a thirty-year spell of trouble. In keeping with the metaphor of the Machine Age, the disintegration of prewar institutions broke the tie rods that connected civilized economies to their governments. Reparations imposed on Germany caused hyperinflation in Germany, while America enjoyed a “Roaring ’20s” as Europeans paid their debts—in gold—to US lenders. But that joyride came to an end in ’29 . . . and then the feds flooded the carburetor with disastrously maladroit efforts to get the motor started again, including the Smoot-Hawley Act, which restricted cross-border trade. The “isms”—fascism, communism, syndicalism, socialism, anarchism—offered solutions. Then finally, the brittle rubber of communism (aided by modern democratic capitalism) met the mean streets of fascism, in another huge bout of government-led violence—WWII.

  By the end of this period, the West had had enough. Europe settled down with bourgeois governments of various social-democrat forms. America went back to business, with order books filled and its factories still intact. The “isms” held firm in the Soviet Union and moved to the Orient, with further wear and tear on the machinery of warfare in Korea—and later Vietnam.

  Finally in 1979, Deng Tsaoping announced that while the ruling Communist Party would stay in control of China, the country would abandon its Marxist–Leninist–Maoist creed. China joined the world economy with its own version of state-guided capitalism. Then, ten years later, the Soviet Union gave up even more completely—rejecting both the Communist Party and communism itself.

  This was the event hailed in a silly essay by Francis Fukuyama, “The End of History?” The battle was finally won, he suggested. It is the “endpoint of mankind’s ideological evolution and the universalization of western liberal democracy as the final form of human government,” he wrote. With the Cold War over, modern democratic capitalism would be perfected. And now US companies could hustle their products to 1.5 billio
n more consumers.

  But the most obvious and immediate benefit America was to get a “peace dividend,” as billions of dollars could now be liberated from the defense budget and put to better use elsewhere.

  Things were looking up. As China and the Soviet Union went, so went the rest of the world—with everyone trying to learn the latest buzz words from globalized business schools, setting up factories to make things for people who really couldn’t afford them, gambling on Third World debt, trading stocks of companies that used to belong to the government, and aiming to get their sons and daughters into Harvard so they would be first in line for a job at Goldman Sachs.

  But wait. Things got even better when, in the late ’90s, it looked like the Information Age had freed us from the constraints of the Machine Age. Two things held back growth rates, or so it was said at the time: ignorance and resources. You needed educated scientists and trained engineers to design and build a railroad. You also needed material inputs—iron ore, copper tin, and most important, energy.

  Education took time and money. And Harvard could only handle a few thousand people. Most people—especially those in Africa, Asia, and Oklahoma—had no easy access to the information they needed to get ahead.

  The Internet changed that. You want to build a nuclear reactor? Google it! You want to know how Say’s Law works? Or Boyle’s Law? Or the Law of Unintended Consequences? It’s all there. With enough imagination, you can almost see an Okie in a trailer in Muskogee, studying metallurgy online. Then you can almost imagine him driving up to Koch Industries in Wichita with a plan for a new way to process tungsten. And if you drink enough and squint, you can almost bring into focus a whole world of people, studying, comparing, inventing, innovating—which leads, at the speed of an electron going home to a hard drive, to a whole, fabulous world of hyperprogress.

  MIT has only 11,319 students. But with the Internet, millions of people all over the world now have access to more or less the same information. And there are even free universities that package learning, making it easy to study and follow along. Now there can be an almost unlimited number of scientists and engineers ready to put on their thinking caps to make a better world. Surely, we will see an explosion of new patents, new ideas, and new inventions.

  As for resources, the lid had been taken off that pot too. In the new Information Age, you don’t need so much steel or so much energy. A few electrons are all it takes to become a billionaire. After all, how much rolled steel did Bill Gates make? How much dirt did Larry Ellison move?

  The capital that really matters is intellectual capital, not physical resources. Or so they said. If you used your brain, you could actually reduce the need for energy and resources. Energy use declined in the developed economies as people used it more efficiently. So did the need for hard metals and heavy industries. The new economy was light, fast-moving, and infinitely enriching. There were no known limits on how fast this new economy could grow!

  Those were the gassy ideas in the air in the late ’90s. They drove up the prices of “dot-com” companies to dizzy levels. And then, of course, the Nasdaq crashed.

  And then, one by one, the illusions, scams and conceits of the late twentieth century—like pieces of bleak puzzle—came together:

  No “peace dividend”—the military and its crony suppliers actually increased their budgets.

  No “end of history”—that was all too obvious on September 11, 2001.

  No hypergrowth, no great moderation, no great prosperity—all that came to an end September 15, 2008, when Lehman Brothers declared bankruptcy.

  And as far as producing real, measurable wealth—the Internet, too, was a dud.

  And then, as the new century matured into a sullen teenager, the ground was littered with scales fallen from the eyes of millions of parents. The entire twenty-first century—from 2000 to 2016—was a failure. People hadn’t gotten richer at all. Instead, they had gotten poorer. Depending on how you measured it, the typical white man had lost as much as 40 percent of his real earnings since the century began.

  People rubbed their eyes and looked harder; the picture came into sharper and more ghastly focus. The promise of material progress and political freedom had begun to break down many years before. In America, growth rates fell in every decade since the ’70s. Real wage growth slowed too—and even reversed. The government was more powerful, more intrusive, and more overbearing than ever and now able to borrow at the lowest rates in history. But so twisted had the financial system become that the least productive sector—the government—was the only one with easy access to capital.

  There were signs of a deeper breakdown too. Soldiers returning from the Mideast were killing themselves in record numbers. The fellow in the trailer in Muskogee was likely to be a minimum-wage meth addict watching porn on the Internet rather than studying metallurgy. Debt had reached a record high—at 335 percent of GDP. Real peace seemed as remote as real prosperity.

  And then, the Republican Party chose Donald Trump—the most unlikely standard bearer for a major political party in US history.

  How these things came to be, and where they lead, is the subject of The Breaking Point.

  The delight of the book is that it approaches these issues in an original and interesting way. Picketty (the rich get richer), Gordon (the important innovations are already behind us), and Tainter (it’s too complicated) all have theories about why the twenty-first century is such a disappointment. James Dale Davidson connects the dots, but more dots—and more unexpected dots—than perhaps anyone.

  Chapter One

  Will the United States Go the Way of the Soviet Union?

  Maybe the hardest thing in writing is simply to tell the truth about things as we see them.

  —John Steinbeck

  The thesis of this book is that the United States is no longer a dynamic, free market economy but a stagnant, rigged economy all but certain to collapse. The American political economy has been perverted by decades of antimarket plunder into a consortium of crony capitalist rackets, propped up by trillions in “fictitious capital”—credit conjured out of thin air. The semblance of prosperity sporadically enjoyed in recent decades was simulated by spending from an empty pocket, funded by history’s greatest debt bubble. Simple math shows that the United States is headed for economic disaster. In the decade after 2007, nominal economic growth in the United States averaged 2.92 percent. Over that period, $60 trillion in public and private debt was added, bringing the total to about $200 trillion, or about 300 percent of GDP. If the average interest rate is 2 percent, then the 300 percent debt-to-GDP ratio means that in order to cover interest, the economy would need to grow at a nominal rate of 6 percent. In fact, average nominal GDP growth in the decade since 2007 now involves an annual shortfall of half a trillion dollars below the growth margin required to cover interest. An economy that depends for growth on ever-increasing amounts of debt that cannot even be serviced at the lowest interest rates in 5,000 years must inevitably reach the Breaking Point.

  The Breaking Point is where the “long run” meets the present. It is the point where the car runs out of road—where systems that no longer pay their way exhaust their credit and go broke. The Breaking Point is a nonlinear departure on the road to nowhere. It occurs when collateral collapses, burying the public’s faith in fiat money and the institutions that create and regulate it.

  The day will come when the debt can no longer be kited. Ever-diminishing returns from operating a system built for rapid growth at stall speed imply that the Breaking Point will come soon. Overly large and overly costly institutions will break down. Commerce will seize up. Malinvestments will be exposed and repriced on a gargantuan scale. Wealth will evaporate. Complex systems will be superseded by simpler, cheaper ways of doing things. And the discontents implied by change on that unexpected scale, manifested by the unexpected popularity of Donald Trump and Bernie Sanders, will mount to full-throated fury.

  Of course, the jeopardy I explore here may
seem unlikely to those inclined to believe official pronouncements. Donald Trump told you that it was “all lies.” But Donald also said that he could “make America great again.” Those two propositions may be too far apart to straddle the normal span of credibility. Any way you look at it, you are at a disadvantage in trying to deconstruct the fabric of lies that shrouds your view of the future. Judging from past experience, forecasts of discontinuities are seldom credible in advance.

  Starting in the mid-1980s, the late Lord William Rees-Mogg and I risked our dignity (of which he had considerably more than I) on the “crazy” forecast that the Soviet Union was on the threshold of collapse.

  Unhappily, there is less dignity at stake with this analysis. Lord Rees-Mogg died of throat cancer in 2012, so he cannot be held to account for my errant hunches, deductions, and grumblings about the looming “terminal crisis” that will bring the US imperium to the Breaking Point.

  Megapolitics Revisited

  How were Rees-Mogg and I able to foresee the collapse of the Soviet Union when the experts in academia and the CIA missed it? Very simple. While they were focusing on the present through the lens of conventional thinking, we looked ahead and saw an unsustainable situation. The main factor informing our confidence in the brazen prediction that the Soviet Union would collapse was a theory of “megapolitics.” Megapolitics is an analysis of the boundary forces that set the rules for life’s games. Resorting to analyzing megapolitics represents a departure from the normal practice of projecting the future through a simpleminded linear projection of trends.

  Most attempts at forward vision rely almost solely on extrapolation of trends. To see what I mean, try googling “World population in 2100.” Science News offers this factoid “World population likely to surpass 11 billion in 2100.” Will it? I consider that projection most unlikely, notwithstanding the fact that it is endorsed by the United Nations, the American Statistical Association, and hordes of “population experts.” You can better understand their approach courtesy of the website OurWorldInData.org. A post on “World Population Growth” makes clear that the only factors incorporated in the forecast of the growth of world population to 11 billion in 2100 are the data incorporated in existing trend lines: “The rate of growth corresponds to the slope of the line tracing the total world population over time.”