Legacy systems face collapse in the long term, and will destroy those dependent upon them.
Resistance, Revolution, Liberation: A Model for Positive Change by Charles Hugh Smith. Berkeley, California: Oftwominds. com, 2012. Available from www.oftwominds.com/CHS-books.html. 225 pages, $25 print, $9.95 Kindle.
By Franklin Sanders
Only rarely do I read a book that hits so many nails so squarely on the head. I underlined an embarrassingly large number of sentences.
Most people who think about the American economy and finance as a list of unconnected facts. Critics liberal and conservative look at the American state and economy and understand some details very well, but miss the big picture: it is a whole. Smith brings the whole together.
The American state along with the finance, monetary system, economy, education, consumerism, social myths and mores, it’s all one body, integrated and working together. Piecemeal changes that conflict with the whole, even deep changes such as introducing a gold standard, simply cannot work. Tweaking reforms or voting the right man in won’t change it. The state and the financial system are one organism, and you can no more change one part without affecting the whole than you could cut out somebody’s liver and send him skipping off on his way to good health
Because Charles Hugh Smith understands this, he understand that efforts to reform the system are doomed. Reform is impossible, default inevitable, and the only questions left are when it will die and what will we build to replace it.
In this article I will dig deeply into the book, but only to whet your appetite. You really ought to read the whole thing. It won’t necessarily change your life, but it will help you understand the world around you much, much more clearly.
➤ THESIS. Because it relies on debt and “financialization,” the financial system is doomed, and will take the state with it.
➤ TIMING: It is not possible to know when they will “destabilize,” only that they will.
➤ OUTCOME: Out of the old’s death, the new is born. “The process of the unsustainable collapsing and a new, more sustainable model emerging is called revolution.”
➤ ACTION: We need neither permission nor political change to liberate ourselves. To think otherwise is to accept the system’s propaganda. To free yourself from it is to resist.
➤ TITLE: A revolution is taking place which will destroy the old economic order and replace it with another. When we resist the old order by withdrawing from it, we liberate ourselves from it.
Not the dollar
Why do Americans find it so hard to conceive that the dollar or the American economy might collapse? Smith sees two reasons. First, conceptual blindness: the idea won’t fit into the mental matrix through which they view the world, or, it is so horrible to consider that it is rejected out of hand. Second, they have been corrupted into serving the “upper caste of the neofeudal social order and loyally serving powerful financial and political elites.” They are paid to cover it up. Those who criticize the status quo find their careers shortened. Page 2.
Smith calls the elites who rule us “neo-feudal.” By that he means they have introduced lifelong debt serfdom that re-establishes feudal serfdom. Debt is the keystone of the entire system.
Why the financialized economy and state are unsustainable
Smith founds his argument on one forecast: the American economy & state are unsustainable and must collapse. p. 8.
What is his argument? They will choke themselves to death on debt. “[B]oth rely exclusively on creating vast quantities of money & debt to sustain their operations.” “Expanding debt is not cost-free; not only does it require paying interest, but as interest payments rise there is less money for consumption & investment.” Real income declines. At some point the interest burden becomes unbearable; the economy starves to death. New investment is squeezed out, interest consumes all the surplus. Today it takes $10 of new debt to spawn $1 economic activity. In 1961 it was $1.50 for $1.
Who profits from this system? Those receiving the interest payments.
How must this end? Either in defaulting on the debt, or in hyperinflation. Don’t overlook this: even a slow inflation is a default on the debt.
Financialization
What is “financialization? Financialization describes an economic system that attempts to reduce all exchanges to a financial instrument or derivative of a financial instrument. Speculation & creating financial instruments replace production, but without production there is no economy, only wheel-spinning speculation and trading.
Consider financialization’s growth:
➤ Trading in U.S. stock markets grew from 13.1% of GDP in 1970 to 28.8% in 1990. In 2000, it was 144.9% of GDP.
➤ By 2006 derivatives trading was $1,200 trillion a year, vs. U.S. GDP of $12.456 trillion, or 96.3 times GDP. For 2013, 20% of S&P index earnings come from the financial sector.
➤ Financial sector profits as a percent of all domestic corporate profits has risen from under 8% in 1947 to over 45.8% in December 2001, and 35.28% in December 2010. From 8% to 35.28% is 4.4 times.
➤ In 1950 the financial sector accounted for 2.8% of GDP. By 2011 that had grown to 8.4%, a threefold increase.
Financial activity has replaced production and without production there is no economy. “The financialization of the global economy: the process of creating credit from thin air and leveraging it into debt-based financial instruments is far more profitable than actually attempting to produce more goods & services.” It also misdirects capital into unwanted fields and malinvestment results in a bubble that bursts. “When the bubble popped, the ‘wealth’ vanished but the debt remained.”
“This is the difference between productive investment and malinvestment: productive investment is based mostly on cash capital, & it creates assets that generate real value for years to come. Malinvestment is based on credit (borrowed money) & generates no productive technologies. It is essentially a financial event that briefly generates financial gains for banks from an explosive expansion of credit & speculation.” As this process continues, the economy becomes addicted to it.
The tapeworm economy
What makes this system parasitical? Smith says moral hazard. “When the debt goes bad, then the central state steps in and transfers the losses from the private financial section to the public.” “Financialization richly rewards all who originate vast quantities of debt out of thin air and financial instruments that end up burdening the real world economy. Financialization is thus a subtle but very real feedback loop of self destruction.”
More corruption: Financial elites buy the government. “Financialization created gargantuan concentrations of wealth, and since the political class requires huge sums of money to win re-election, these concentrations of wealth essentially bought control of the machinery of governments via unprecedented levels of campaign contributions & lobbying.
The economy depends on government spending. In the U.S. today, more than 50% of the population depends on government spending for its income. That is both unsustainable & unreformable. Government spending can’t be reduced. It supports parasitical elites by bribing the non-elites.
Thus there are only two ways out: default or hyperinflation. Remember that “default” means not just default on debt, but also on pensions & social welfare.
Understanding systemic instability
It pricks my attention that Smith talks about the American system as a “monoculture” and points out the weaknesses of monoculture. Monoculture is the industrial model that strips out diversity in the name of efficiency.
Think of modern agriculture/agribusiness. The polyculture farm with diverse animal and vegetable crops has been replaced with giant monoculture farms concentrating on one or two crops raised with costly, debt-financed inputs and chemicals. Livestock production is wholly industrialized, taking the animals off grass entirely and concentrating them in factory-like Confinement Animal Feeding Operations (CAFOs).
All this flies in Nature’s face. Diverse systems by their very diversity are resilient and adaptable. If one crop fails, one of several others prospers. The low level instability and competition of a polyculture keeps the system strong.
Lack of diversity threatens a monoculture with catastrophic collapse. Think of the potato famine in Ireland.
The irony is that uniformity makes a system more vulnerable to failure, while diversity strengthens it. But low-level instability, conflict, and competition are hard to deal with, and impossible to centralize. The nature of a centralizing state is to expand and centralize, so it must suppress that system-strengthening low-level instability, but in doing so it increases systemic instability. By banishing competition and dissent, the American system weakens itself and guarantees some discontinuous catastrophe – a potato blight – that will take down the entire system.
“The greater the application of brute force to suppress instability, the greater the systemic instability.” Suppression makes the collapse worse, leading to uncontrollable systemic instability. p. 33
Understanding systemic risk
“Once the transfer & masking of risk is institutionalized, then financial & political Elites have the means to maintain their domination. If risk can be transferred to the system with impunity, then justice is impossible, security is impossible, & reforms are nothing but window dressing. Once risk has been separated from consequence, the system is doomed to collapse.”
“We now understand why the status quo is unsustainable: the only way for the elites to concentrate gains and maintain political power is to distribute risk to the system itself & then mask that transfer with illusory promises of security supported by vast sums of borrowed or printed money. Since risk cannot be eliminated, it can only be transferred & stored temporarily, the system itself becomes increasingly risk-laden. At a critical threshold that is impossible to identify, the steadily increasing hidden rise explodes ‘out of nowhere’ destabilizing the system.” p. 72.
In Part 2 of our review, we’ll examine the methods of social control that keep the American people right where the elites what them, and the nature of liberation that Charles Hugh Smith proposes and predicts, including — local economy.
Used by permission. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focus on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$99 a year. Franklin is an active trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. Subscribe to his daily price report and market commentary on the website.
