Tuesday, April 28, 2020

42. Best Practices Medicine vs. Triage Medicine (Demographic Doom Podcast)

This is the script for my Demographic Doom podcast episode (#42) released on 29 April 2020. It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including PodbeanApple Podcasts and a video version on YouTube. See the description on the YouTube version for annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is DemographicDoom.com



I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations. I'm trying to view the world from the widest possible angle, as aliens would see us from space, so I am interested in what large groups of people are doing, rather than individuals.

In this episode I want to return to a topic I've touched on earlier: It's a basic dilemma faced by modern medicine: Do you throw all of your resources into saving just a few people, or do you distribute your resources, trying to save as many people as possible? Saving as many people as possible involves a rationing of medical care, because there is never enough medical resources to serve everyone.

I brought this up in Episode #37 earlier this month. This was an hour-long personal podcast about my cancer relapse and how my hospital was handling Covid-19, but there's actually some demographic philosophy buried in there, and I'd like to flesh it out a little. First, let me replay the relevant part of that episode on April 5. It's about six minutes long.
There's a conflict in medicine that I've touched on in previous podcasts and videos and that's the difference between best-practices medicine and triage medicine. 
Best practices medicine is when you pull out all the stops to save one patient. You want to give him the best of everything and you try not to expose him to any kind of risk, and that's how how medicine is practiced in the developed world. Whatever risk there is, we're going to mitigate it. Whatever the patient needs we're gonna give it to them. We're not going to compromise on anything. 
And this is actually backed up by our tort legal system in America, our system of lawsuits. If ever a doctor were to give a patient less than optimal care and something bad were to happen, the patient or their family is going to sue that doctor. That's how America works so American hospitals have no choice but to offer optimal care, best practices care to everyone. 
The alternative to that would be triage medicine. Triage medicine is when you don't have the resources available to treat everyone, and this is true in over half the world. They don't have the medical systems to treat everyone, so they have to parcel out their resources in such a way is to save the maximum number of people. 
This is the sort of thing that would happen on a battlefield. Let's say you have a battlefield Hospital and you have a hundred wounded sword soldiers that come in, and you've got beds for only a dozen of them. Who are you going to serve, and how are you going to serve them? That's a an exercise in triage, in deciding how to parcel out your very inadequate resources.  
In the case of a wartime hospital you're going to focus on the patients that you could do the most for. in other words there's soldiers that come in that are so badly wounded that you can't do anything for them. They're probably going to die anyway so you shunt them aside to begin with. And then there are soldiers who are so lightly wounded that they're going to survive no matter what you do for them, and they can can get away for a while without medical treatment, so you put them aside, and what you focus on is that middle range of patients who can be most helped by the limited resources that you have.  
And you don't try to give them perfect care. You give them just good enough care that you save them and can move on to the next patient. And you're playing a game of numbers here. Maybe you save them. maybe don't. You're just going to trying to increase their odds, but when you're in triage situation you have no choice. You have to make do with the resources you have.
And that's rapidly approaching with the Covid-19 thing, that we're going to be in situations here where we don't have enough ventilators. We don't have enough facilities and doctors and everything to treat everybody, so somebody at some point has to make some triage decisions about who gets treated, but from the hospital's standpoint, it doesn't happen here. It doesn't happen in Beth Israel, because Beth Israel, like every other Hospital in the country, is focused on best practices and giving the the patient everything they need without any compromises. It's essentially unsustainable in an epidemic like this. 
It's unsustainable, but there is this firewall between the hospital and the outside world. The outside world might have to deal with triage, but the hospital itself doesn't. Once you get into the hospital you're guaranteed optimal care within the resources that they have. They might still have not have enough ventilators, but they're going to do everything in their power to eliminate risks and give you everything you need to survive. 
Best practices is also essentially the the philosophy behind all of these lockdowns. So when New York State or Massachusetts tells all of their citizens to go home and don't interact with anybody and keep a 6-foot distance between all people, they're really practicing this sort of perfect medicine where they're trying to eliminate any kind of risk whatsoever. 
And I think the silliest example of that is closing in the beaches in Massachusetts and elsewhere. The place you're least likely to catch a disease would be a beach because there's all this huge distance between you and your fellow beachgoer. There is virtually no chance of catching Covid-19, but it falls under this blanket thing. Lock downs are basically a sledgehammer approach where we're going to eliminate every possible source of infection no matter how unlikely. 
And like best practices elsewhere, the only problem is that it is frightfully expensive to do this. The horrible expense here is that by locking down everything and shutting down the economy, you are destroying people's livelihoods, you are assuring a massive depression that's going to be caused a lot more human misery than the virus itself.  
So the virus itself will be under control by the end of 2020, but the great depression, the huge economic collapse is going to go on for years and decades and it's going to be made all the worse by the fact that these these municipalities and states and countries impose these draconian lockdown rules instead of addressing the things that really matter.
So I'm back at the end of April again, four weeks later, and I've been in an out of the hospital in my cancer treatment, and I've seen a lot of best-practices medicine and virtually no triage medicine. When the slightest anomaly happens, they order a whole slew of very expensive tests, which happened to me only a few days ago. I had this disruption in my vision where everything in my left visual field was blotchy. It made it impossible to work on my computer. Within half hour of it happening, I reported it to my nurse, and that set all the wheels in motion: two MRIs, a CAT scan, an EKG, consultations with two neurologists and an opthalmologist, and they hooked me up to a heart rate monitor that I'm still wearing so they didn't miss anything.

Without getting too deep into the details, there were two explanations: the benign explanation and the slightly scary explanation that might affect my treatment. There's a high probability—I'd say 99%—that the benign explanation is true. It's only the 1% scary possibility that triggered all the tests. And that in a nutshell is the problem with best-practices. It is largely incapable of making compromises. Even a one in a thousand chance of the bad thing is enough for the specialists to be all over it and to order all the tests, and they won't rest until they have definitively ruled out the bad diagnosis.

That's one of the reasons health care costs are so high. It's not just a screwed up delivery system or all the well known problems of American health care. There's also the problem that no responsible doctor can leave any stone unturned in assuring the health of their patient. If there's a one-in-a-thousand chance of something bad happening, and it's within your power to diagnose or treat it, then you're obligated to run down that one-in-a-thousand possibility, at a huge cost to the system.

Never mind that the patient is obese or a smoker, or the patient is ninety years old and will probably die before this one-in-a-thousand risk ever happens. Doctors are obligated by the medical system, the legal system and probably their Hippocratic Oath to do everything they can for their patient, even if this risk is trivial compared to real-world concerns.

Triage medicine, on the other hand, would have to take into account the real-world costs of diagnosis and treatment, and it wouldn't bother with relatively trivial risks. In my case where there's a 99% chance this thing is benign, the triage physician would say, "Okay, those are pretty good odds, so let's forget about that other unlikely possibility." If doctors were allowed to make judgment calls like this, you might be saving 50% of all medical expenses, which ultimately means that more people are going to get served and more lives are going to be saved.

There's only place I'm aware of in modern hospitals where triage medicine is actually employed. It's when there are multiple competing diseases in the same patient, and doctors have to prioritize them to save the patient's life. The patient has cancer, but he also might have heart issues or vision issues or dental issues. The patient is dying, so you can't use best-practices for everything. You have to focus on the one thing that's most important right now, that's going to save the patient's life, and everything else is pushed into the background. As soon as the patient is saved, and the time pressure is gone, then the system falls back into best-practices mode.

This isn't a matter of socialized medicine vs. the American capitalist model. This is a dilemma faced by any medical system, even in Canada or the UK or any other country where health care is free. Health care, of course, isn't really free. Somebody pays for it, and medical expenses are rising everywhere, helping to bankrupt countries like Canada and the UK. As long as medicine keeps advancing, it naturally gets more expensive, if for no other reason that when you save someone's life, you're guaranteeing more medical expenses for that person for all those extra years. If the patient lives to be 90 because you saved him from a heart attack when he was 60, you've guaranteed 30 more years of medical expenses that society has to somehow pay.

In Canada and the UK, they still use the best-practices model, which means that if there's a 1% chance of something bad happening, they still got to run all the tests. No medical system in the developed world is capable of making triage decisions, where you prioritize patients to save as many lives as possible. In the modern world, survival is more a matter of whether or not you get into the hospital at all. If you get into the hospital, you get optimal treatment. If you don't get into the hospital, you don't get treated at all and you die. There's no middle ground.

I'm not saying there's a solution. In an ideal world, you would ration medical care to save the most lives, without any delineation between rich and poor, but in the real world, it's more likely to be the rich with good health insurance who get treated. At the same time, a lot of people who have taken very poor care of themselves are also getting optimal care. If you never exercise, smoke like a chimney and couldn't care less what you eat, the best-practices system is going to treat you no differently than someone who has done everything right. In fact, the people with poor health habits are soaking up a disproportionate amount of medical resources, because the best-practices system is not allowed to discriminate against them.

No doctor is allowed to judge whether or not someone deserves to live. This means, ironically, that a 60-year-old Death Row inmate is going to receive exactly the same medical attention as a law-biding college student with their whole life ahead of them.

A public hospital in a poor Third-World country is more likely to adopt the triage model. There's way too many patients and not enough resources, so someone has to make some hard choices about how those resources are used. If the choice is between saving one patient at enormous cost or ten patients at the same cost, the ten patients are going to win, and life-saving treatment will be denied to that one patient.

As a regular customer of the best-practices system, I can't see the system changing anytime soon. Doctors are trained to give every patient optimal care, as though they were the only patient in the world. This is fine as long as you live in a rich country with plenty of resources, but the system breaks down when the needs outstrip the resources. If that's the case, only a select few get optimal treatment, and everyone else gets no treated at all.

So that's the end-game of the best-practices system. As health care gets more expensive, fewer and fewer people will have access to it. It could happen because you don't have health insurance and the hospital won't admit you or because wait times are so long that people die before they get into the hospital.

There's no easy way out of this. Simple socializing medicine won't fix the problem, because the issue will still be too many patients and not enough resources, no matter how it's paid for.

The irony here is that the more medicine advances, the longer people live, and the greater their lifelong health care costs will be. In turn, this means that fewer and fewer people get healthcare at all, and more end up dying.

I cover this is in a video from June 2019 called The Medical Science Paradox: Why Longevity is Falling. My point there is that at some point, technical advances in medical science are going to stop saving total lives. A few chosen people may live longer and longer, at ever-greater expense, but overall longevity of the population may actually fall. Medicine may have already reached a steady state where its not improving society anymore. If you're interested in this topic, you might want to check that video out.


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Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there. 

Sunday, April 26, 2020

41. Casualty of the Crisis: Things You Don't Need (Demographic Doom Podcast)

This is the script for my Demographic Doom podcast episode (#41) released on 26 April 2020. It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including PodbeanApple Podcasts and a video version on YouTube. See the description on the YouTube version for annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is DemographicDoom.com



I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations. I'm trying to view the world from the widest possible angle, as aliens would see us from space, so I am interested in what large groups of people are doing, rather than individuals.

Today, in the midst of a worldwide economic crisis, I want to rewind to an earlier, simpler time of one year ago. Today is April 26, 2020, about three months into the COVID-19 epidemic outside China and about one month into widespread lockdowns in the U.S. where "nonessential" workers are expected to go home and stay there. Exactly one year ago today, April 26, 2019, I put out a video entitled The Vanity Economy: The First Casualty in the Next Recession.

This was back before I started my podcast, when I was still making live-action videos around the world. This video was made in a cypress swamp in Florida, and I'm standing ankle-deep in the muddy water. I've got two cameras running and am cutting between them. Every video was a big production taking a lot of time to produce and edit, which is why I gave up the whole visual element and started doing podcasts instead.

At the time of the video, I knew nothing about any pandemic, but I did know a massive crash was coming. Even a year ago, it seemed a foregone conclusion to me. Although I didn't know what would trigger the crash or when, I knew that the current economy was unsustainable and had to fall sooner or later, and that's exactly what's happening now. What this videos give you is some perspective on what will fail first, and it's basically all the things you don't need, all the vanity products and services that each of us knows we can live without.

I find the video so relevant today that I'm going to play the whole thing for you. It's about ten minutes long. If you are listening to the video version of this podcast, you can actually see me speaking, standing the swamp, but there's nothing important in the visual field. I'm going to play the whole thing for you right now, then I'll come back afterwards and talk about it in light of the current crisis.
If you want to know how bad the next economic crash will be, you just need to walk down the street of wherever you live, especially if you live in America. Just walk down the main street and look at all the businesses along the road and in shopping centers. You might see a florist, and here's a home renovation center, and here's a martial art studio, and all these other things, all these other services, and ask yourself are those businesses essential? 
And all these products and services I call the "vanity economy". You might think of this as the luxury economy but we usually think of luxury as yachts and sports cars and mansions. The vanity economy, as I define it, is something that we all participate in, in that we buy things that we know we don't really need, but we feel we need them. These are the first things that are gonna fall apart in a big economic downturn. 
You might see these businesses as a mark of prosperity, because people seem to have enough disposable income that they can they can buy these vanity items, and you might see this as good. Okay, we're a rich society so we can do these things, but the other side of the coin is whenever things go bad, we don't need to do those things, so we're gonna cut them out, and it just means that we have much further to fall. 
Now we all know that a crash is coming. We may disagree on why it is coming or when it is coming, but we can agree based on past history that every once in a while there's a big crash. My personal theory is that this crash will be powered by demographics, by the fact that there are so many old people, so many retired people, so many people leaving the workforce and not many people coming into the the workforce, but this isn't the time to talk about that. You may not agree with me, but you can agree that there's going to be a crash, and when there's a crash people get laid off or they feel at risk of being laid off, and what's the first thing they do? They're going to cut their expenses, and the expenses they're gonna cut first are all of these vanity items. 
They're gonna cancel their gym membership, and they're not gonna do any home renovation, and they're not gonna be buying any flowers. So when this happens, all those vanity businesses are going to be in deep trouble, and they're gonna start laying people off, and when that happens even fewer people have money to spend on these vanity services and it becomes a self-reinforcing cycle, what physicists call a positive feedback loop. 
Now a positive feedback loop is not "positive" in that it almost always results in some kind of disaster. A positive feedback loop is when there's a change in a system, that change feeds back to accelerate the original change. So the more people that are laid off the less money they have to spend on flowers, and the more the florists lay off workers, then there's fewer people to buy stuff. So this can be a cycle that economists call a deflationary spiral, and the best example was the Great Depression. After the stock market collapsed, people had no money, so they stopped buying cars so the price of cars went down. So in the modern world this can happen perhaps without any actual deflation, without anybody cutting prices, but it's still a spiral, a death spiral that takes everything down. 
This is exactly what happened in 2008. No one was doing anything; no one was buying anything; no one was initiating new projects. That's when the central banks lowered interest rates and the government's pumped a lot of money into the economy to get it restarted again. The trouble is, in the next economic crash, they don't have those those tools anymore. They're so deeply in debt that they really can't pump a lot of money into the economy without jeopardizing their credit rating, and they can't lower interest rates because interest rates are already close to zero, so we're going to get the same thing again where nobody buys any vanity products and things just accelerate down to the bottom, down to some base level where people are just surviving and just buying the products and services they need to survive. 
The trouble is that's an extremely low level. If the economy is in the dumps for six months, people are going to cut their obvious expenses, cut their gym membership, but they basically want to keep the same lifestyle they had before. If the downturn lasts for years then people are going to start modifying their lifestyle and cut their costs even more, which is going to further accelerate the decline. 
For example if you have a dog and you lose your job you're still going to feed your dog. You're still going to take your dog to the vet when the dog gets sick because those are seen as essential products and services. Two years later, your dog dies as dogs tend to do, and this time because you're in economic stress, you don't get a new dog. So now you can cut your your expenses even more. You're not held down in terms of where you live by your pets. You can you can cut your expenses to even lower, 
And that's good, in that people should be economical. It's good for the soul to use your resources well, but it is horrible for the economy, especially an economy over the past 50 years or so which has come to depend on all of these vanity products and services. You kno1w the steel industry seems like it should be immune to this, but it isn't because the steel industry feeds the auto industry, and if you're under economic stress you're not gonna buy a new car, so that means no auto industry and no steel industry. 
So this is all gonna come down. Sooner or later, it's gonna come down. It came down in 2008. The government temporarily rescued us by pumping a lot of credit into the economy so people were able to buy more stuff because they borrowed more money. If you see a big beautiful SUV on the highway, you know people didn't pay cash for that SUV. They got an auto loan, so all this prosperity we've known since 2008, it has been fueled by debt that is gonna collapse when the vanity economy collapses. Eventually the debt economy is going to collapse because what happens when you lose your job or you fear losing your job is you're gonna cut your expenses, you're gonna cut out all the vanity items that you don't need. 
And when that doesn't work that you still don't have enough money you're gonna cut out your debt payments. In other words, if you've got a student loan now and the student loan is a big burden every month, you might just not pay that that. You might stop paying that student loan. A lot of people are already doing it. If enough people do it and it gets out that nothing really bad happens when you don't pay your student loans, a lot of people are gonna do it. So you've got a whole economy full of people who aren't buying things they don't need and who are refusing to pay make their debt payments. 
They're not making their payments on their SUV. They're saying, "Just come and take my SUV," because you if don't make your payments on your car, well you still got three months of free use of that car before they catch up with you. So this is the kind of disaster we're facing once we get into this cycle into this these feedback loops, these positive feedback loops that just drain everything. Then eventually the government can't function, because government taxes depend on people being employed. Over time, the government can't function. The government can't repair the roads. It can't maintain basic services, and you've got big governments collapsing.
So what we're looking at in some future financial crash is essentially a Dark Age, an age where everything that we've come to depend on, all the institutions we've come to depend on collapse. Governments collapse. Banking systems collapse. This doesn't people mean people are going to die. It just means people are going to be lost for a while, and they'll have to restructure themselves in some way without these institutions. I can't say in advance how they're going to restructure themselves. That's something to be determined, but just like the Dark Age of the Middle Ages, there's going to be a Renaissance at some point where people pick themselves up, group together in some way and find a new way to structure themselves without the excesses of the old days. 
So all of this flows from you walking down the street in your hometown or wherever you live, looking at each of those businesses that you see and asking yourself, what's going to happen to them in an economic downturn? And I'll bet you for 80% of those businesses, they're not going to survive because they're not essential. 
I'm gonna go for a walk. Hope there aren't any alligators.
So we're now back in 2020 again, and I'm still pretty happy with what I said a year ago. Right now, we are trapped in the same sort of deflationary spiral and positive feedback loop that I talked about back then. All sorts of vanity products and services are collapsing right now, but the collapse is being masked by the lockdowns. If you work for a florist or a martial arts studio or a carpet store or some other nonessential business, you've been told to go home and isolate yourself to try to save lives. On the surface, this seems like a temporary thing, but it's easy to see that many of those businesses are never going to reopen again because demand has collapsed.

Grocery stores will always have customers, because everyone needs food, but not many people are going to be in the mood for high-end restaurants, even if they reopen and we resolve the social distancing issues of sitting down to eat. The whole population of the planet has gone into bunker mode at the same time, not just to protect themselves from the virus but to protect their finances. If you were thinking of buying a new car a few months ago, you're probably not going to do it now, even if you have the money or the credit, because the future is so uncertain. You're not going to fly somewhere on vacation even if the travel restrictions were relaxed, because it is money you don't need to spend if you don't feel secure in your income. Maui can wait. You know it will still be there five years from now, so there's no compelling motivation to visit this year or even next.

It's hard to say how much of our economy is "vanity", because it's a matter of definition, but it's not unreasonable to say that 50% or more of the products or services we buy can be delayed, maybe even for years, and we're now at the point where virtually the entire world population is doing exactly that. Putting things off. Not spending more money than they absolutely have to. Even if the economy fully reopens and people can do anything they used to do, confidence is now shot. 50% percent of the economy, at least in rich countries, has essentially vanished, and this has started a feedback loop that is just going to get worse and worse.

The virus didn't cause the financial crisis. It just triggered it, and now that the collapse has been set in motion, even a complete resolution of the virus—like a perfect vaccine or perfect cure—won't bring the economy back. Humpty-Dumpty has fallen off the wall and can't be put back together again. Now we're dealing with all the structural problems that were building up for years, like all the humongous debt that was unsustainable in even the best of times.

In a sense, the virus is promoting a sort of false optimism. Investors are thinking, "Things will be fine as soon as the virus is brought under control," and this has encouraged them to reinvest in the stock market. To recap the US stock markets over the past two months: They dropped by some 35% in late February, while in April, stocks recouped more half of those losses. As of today, the Dow and S&P are down only about 16% from their highs, which is insane given the absolutely stunning job losses and business closures during the past two months. Looking at the actual economy and the overvaluation of stocks before the virus, markets ought to be down 50%, and I think they will be, but the market hasn't figured that out yet.

The bulk of investors, the ones actually participating in markets right now, seem to believe this is a one-off problem that is likely to be resolved soon. In their view, as soon as the virus is "fixed", everything will go back to normal, as if the stock markets before the virus were sanely priced to begin with. They weren't. Since 2008, there has been very little real economic growth. It has all been false growth, or the false appearance of growth, generated by loose monetary policy.

In my video a year ago, I said that governments had run out of ammunition to fight the next recession, and I still think it's true. There is no ammunition left. There is only the appearance of ammunition, which takes the form of money printing. The US government and Federal Reserve are essentially the same agency now. The government spends as much money as it wants, and the Fed is obligated to print more money to pay for it.

Every stimulus program, every bailout, and virtually every response the government has to the virus  involves printing new money to pay for it. In 2019, the Federal deficit was $1 trillion, which was seen as huge back then. Now the best estimates for the the 2020 deficit are at least $4 trillion, or more than the government collects every year in taxes. The only way for the government to generate this money is by selling more bonds, and this ultimately leads to the Fed buying the bonds to keep the system stable. In essence, the government is just printing money to pay its bills. This has happened many times throughout history, and it always ends badly.

Right now, this doesn't seem to be a problem, because investors of the world want US dollars and government bonds as fast as they can be issued, because US instruments are somehow seen as "safe". This is the attitude right now, but it won't always be true. At some point, the government will have issued so many bonds and the Fed printed so many dollars, that the market becomes saturated. That's when we'll see inflation, serious inflation, because that's always the result of exponentially expanding the money supply. Whatever dollars you have in your wallet right now, they are going to be worth a lot less. I can't say exactly when, because I don't know the saturation point of the market, but inflation has to happen. That $100 bill in your wallet will hardly buy what $50 buys right now, and it can only get worse from there.

I talked about inflation in Episode #39, so let me shift gears back to the issue in my original 2019 video: the vanity economy. If the market for vanity items like marble countertops or skiing equipment hasn't already collapsed, it soon will. Businesses providing these services will collapse and even more workers will be laid off. In the meantime, the market for essential products and services will go on. Everyone needs food. Everyone needs medical and dental care. Maybe dental offices are closed right now, but when they reopen, people will still have cavities that need filling.

There's going to be a growing gulf between things you don't need and things you do, and it's going to get easier and easier to define, because businesses in essential fields will continue while those in nonessential fields will fail. I predict also that there will be inflation in essential products and services, while nonessential goods might even drop in price. If you're trying to sell luxury real estate right now, you can expect to get lower prices than before the virus, if you can find a buyer at all. Meanwhile, the price of food is going to rise. Everything you truly need is going to go up in price as inflation takes hold.

In a sense, the collapse of the vanity economy is good. Nobody needs this stuff. It's wasteful of resources, and no one's life is really improved by it. Does it make any difference to your nutrition if your kitchen countertop is marble or linoleum? No, it doesn't. It doesn't hurt your life personally if you get rid of all that crap. The only problem is that our economy has grown increasingly crap-dependent, and it can't go cold-turkey on its crap addiction without a devastating crash. Everyone in crap-related industries is going to lose their job, and there won't be enough new jobs in essential industries to make up for it. Food production, for example, will continue, but it's not going to increase, because people can only eat the same amount they're eating today.

So what we'll have as the fog of the virus lifts is only about half of the economy we used to have, and it's going to be stuck there for some time, maybe even forever. Governments are furiously printing money to make up the difference, rescuing industries and supporting families, but it's going to end badly. The US dollar is going to drop in value, and everything valued in dollars is also going to drop. You may still own a million-dollar home, but that million dollars won't be worth the same. Maybe it only buys you a hamburger, who knows?

So my position today isn't all that different from my position a year ago. The vanity economy is now collapsing, just as I predicted it would, and that's going to bring down everything else. Governments can print all the money they want, and it will seem to fix things for a while, but the fix won't last. There's going to be inflation. There's going to be desperate poverty like we haven't seen since the Great Depression.

With all the stimulus programs now in place or coming down the line, the government's going to be giving away a lot of free money, even though there's no such thing. Free money isn't really free. There's always a bill to pay. I'm not willing to say when the bill will come due, but I think it's going to happen quickly, like within a year. Everything you thought was stable about the world is going to be called into doubt. Will the dollar be worth anything a year from now? Will be even have a functioning government?

I'm not willing to bet it. I'm not willing to bet on anything. The only thing I'm willing to bet on is that there's going to be a lot of chaos in coming months and that things won't be getting better anytime soon.


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Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there. 

The Vanity Economy: The First Casualty in the Next Recession (Video Transcript, April 26, 2019)

This is the transcript of my Demographic Doom video released on 26 April 2019 (one year ago). It is based on the auto-generated YouTube transcript with some light editing. Video by Glenn Campbell. Project: DemographicDoom.com



If you want to know how bad the next economic crash will be, you just need to walk down the street of wherever you live, especially if you live in America. Just walk down the main street and look at all the businesses along the road and in shopping centers. You might see a florist, and here's a home renovation center, and here's a martial art studio, and all these other things, all these other services, and ask yourself are those businesses essential?

And all these products and services I call the "vanity economy". You might think of this as the luxury economy but we usually think of luxury as yachts and sports cars and mansions. The vanity economy, as I define it, is something that we all participate in, in that we buy things that we know we don't really need, but we feel we need them. These are the first things that are gonna fall apart in a big economic downturn.

You might see these businesses as a mark of prosperity, because people seem to have enough disposable income that they can they can buy these vanity items, and you might see this as good. Okay, we're a rich society so we can do these things, but the other side of the coin is whenever things go bad, we don't need to do those things, so we're gonna cut them out, and it just means that we have much further to fall.

Now we all know that a crash is coming. We may disagree on why it is coming or when it is coming, but we can agree based on past history that every once in a while there's a big crash. My personal theory is that this crash will be powered by demographics, by the fact that there are so many old people, so many retired people, so many people leaving the workforce and not many people coming into the the workforce, but this isn't the time to talk about that. You may not agree with me, but you can agree that there's going to be a crash, and when there's a crash people get laid off or they feel at risk of being laid off, and what's the first thing they do? They're going to cut their expenses, and the expenses they're gonna cut first are all of these vanity items.

They're gonna cancel their gym membership, and they're not gonna do any home renovation, and they're not gonna be buying any flowers. So when this happens, all those vanity businesses are going to be in deep trouble, and they're gonna start laying people off, and when that happens even fewer people have money to spend on these vanity services and it becomes a self-reinforcing cycle, what physicists call a positive feedback loop.

Now a positive feedback loop is not "positive" in that it almost always results in some kind of disaster. A positive feedback loop is when there's a change in a system, that change feeds back to accelerate the original change. So the more people that are laid off the less money they have to spend on flowers, and the more the florists lay off workers, then there's fewer people to buy stuff. So this can be a cycle that economists call a deflationary spiral, and the best example was the Great Depression. After the stock market collapsed, people had no money, so they stopped buying cars so the price of cars went down. So in the modern world this can happen perhaps without any actual deflation, without anybody cutting prices, but it's still a spiral, a death spiral that takes everything down.

This is exactly what happened in 2008. No one was doing anything; no one was buying anything; no one was initiating new projects. That's when the central banks lowered interest rates and the government's pumped a lot of money into the economy to get it restarted again. The trouble is, in the next economic crash, they don't have those those tools anymore. They're so deeply in debt that they really can't pump a lot of money into the economy without jeopardizing their credit rating, and they can't lower interest rates because interest rates are already close to zero, so we're going to get the same thing again where nobody buys any vanity products and things just accelerate down to the bottom, down to some base level where people are just surviving and just buying the products and services they need to survive.

The trouble is that's an extremely low level. If the economy is in the dumps for six months, people are going to cut their obvious expenses, cut their gym membership, but they basically want to keep the same lifestyle they had before. If the downturn lasts for years then people are going to start modifying their lifestyle and cut their costs even more, which is going to further accelerate the decline.

For example if you have a dog and you lose your job you're still going to feed your dog. You're still going to take your dog to the vet when the dog gets sick because those are seen as essential products and services. Two years later, your dog dies as dogs tend to do, and this time because you're in economic stress, you don't get a new dog. So now you can cut your your expenses even more. You're not held down in terms of where you live by your pets. You can you can cut your expenses to even lower.

And that's good, in that people should be economical. It's good for the soul to use your resources well, but it is horrible for the economy, especially an economy over the past 50 years or so which has come to depend on all of these vanity products and services. You kno1w the steel industry seems like it should be immune to this, but it isn't because the steel industry feeds the auto industry, and if you're under economic stress you're not gonna buy a new car, so that means no auto industry and no steel industry.

So this is all gonna come down. Sooner or later, it's gonna come down. It came down in 2008. The government temporarily rescued us by pumping a lot of credit into the economy so people were able to buy more stuff because they borrowed more money. If you see a big beautiful SUV on the highway, you know people didn't pay cash for that SUV. They got an auto loan, so all this prosperity we've known since 2008, it has been fueled by debt that is gonna collapse when the vanity economy collapses. Eventually the debt economy is going to collapse because what happens when you lose your job or you fear losing your job is you're gonna cut your expenses, you're gonna cut out all the vanity items that you don't need.

And when that doesn't work that you still don't have enough money you're gonna cut out your debt payments. In other words, if you've got a student loan now and the student loan is a big burden every month, you might just not pay that that. You might stop paying that student loan. A lot of people are already doing it. If enough people do it and it gets out that nothing really bad happens when you don't pay your student loans, a lot of people are gonna do it. So you've got a whole economy full of people who aren't buying things they don't need and who are refusing to pay make their debt payments.

They're not making their payments on their SUV. They're saying, "Just come and take my SUV," because you if don't make your payments on your car, well you still got three months of free use of that car before they catch up with you. So this is the kind of disaster we're facing once we get into this cycle into this these feedback loops, these positive feedback loops that just drain everything. Then eventually the government can't function, because government taxes depend on people being employed. Over time, the government can't function. The government can't repair the roads. It can't maintain basic services, and you've got big governments collapsing.

So what we're looking at in some future financial crash is essentially a Dark Age, an age where everything that we've come to depend on, all the institutions we've come to depend on collapse. Governments collapse. Banking systems collapse. This doesn't people mean people are going to die. It just means people are going to be lost for a while, and they'll have to restructure themselves in some way without these institutions. I can't say in advance how they're going to restructure themselves. That's something to be determined, but just like the Dark Age of the Middle Ages, there's going to be a Renaissance at some point where people pick themselves up, group together in some way and find a new way to structure themselves without the excesses of the old days.

So all of this flows from you walking down the street in your hometown or wherever you live, looking at each of those businesses that you see and asking yourself, what's going to happen to them in an economic downturn? And I'll bet you for 80% of those businesses, they're not going to survive because they're not essential.

I'm gonna go for a walk. Hope there aren't any alligators.


———

Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there. 

Sunday, April 19, 2020

Running List of Failed Businesses in 2020 Crash

Last Updated: 9 May 2020

This post, updated often, contains a list of business and institutional casualties of the 2020 financial crash. These are businesses that have gone into bankruptcy or otherwise announced their closure. (Some may later emerge from bankruptcy in reduced form.) The date shown is the date their doom was announced with a news article (linked to the business name). List is in sequential order, beginning with the coronavirus lockdowns in early March 2020. (Earlier closures in 2020 aren't counted.) To qualify for this list, company must be a well-known brand (or an unknown brand I recorded on Instagram) and their demise hastened by the coronavirus shutdowns. Let me know of any I am missing.
  1. Logan's Roadhouse (Mar 4)
  2. Neiman Marcus (April 19)
  3. White's Shoes, Emporia, Virginia (April 19)
  4. J. Crew
  5. Gold's Gym (May 5, bankrupt but gyms will stay open)
  6. Sweet Tomatoes/Souplantation (May 8, fully shut down)

Death Watch

  • Sears/Kmart
  • Tesla (my prediction)
  • LIDL USA (my prediction)
  • Macy's (April 19)
  • JC Penny (April 19)
  • Nordstrom (April 19)
  • Virgin Australia (April 20)
  • Lord & Taylor (April 21)
  • All cruise lines
  • All buffet restaurants
  • Most health clubs
  • Many resorts
  • Many low-price airlines
  • Convention facilities and services
Come back later for my additions.

Friday, April 17, 2020

40. The Tragedy of the Commons: The Sin That Got Us Here (Demographic Doom Podcast)

This is the script for my Demographic Doom podcast episode (#40) released on 18 April 2020. It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including PodbeanApple Podcasts and a video version on YouTube. See the description on the YouTube version for annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is DemographicDoom.com



I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations.

Today, I want to talk about the root cause of the current financial collapse as well as many other collapses throughout history. It centers on a natural human failing known as the "Tragedy of the Commons." That's where individuals pursuing their own self-interest sabotage the resources shared by all, thereby hurting themselves in the end. The concept was first described by British economist William Forster Lloyd in 1822, but in the 20th Century, the world found new ways to express it, leading eventually to our current crisis.

I want to emphasize that the current crisis is not COVID-19. I am speaking to you on April 18, 2020, and it seems like everyone on the planet is still obsessed with protecting themselves from the virus. I believe the epidemic has already peaked or is close to it, because all those lockdowns and social distancing measures have done their job, albeit crudely. The key is not locking people down but changing human behavior, like how people touch things and how they interact, and these behavior changes have already taken hold. By the end of 2020, COVID-19 will have faded from public consciousness. There will be all sorts of new customs and procedures, like never shaking hands anymore, but the virus won't be interfering with normal activities like it does today.

The financial crisis, however, will continue far beyond 2020. All sorts of businesses, industries and maybe even governments will collapse. Unemployment will remain astronomical, and the economy will only be operating at a fraction of its former capacity.

The virus did not "cause" the economic collapse. It only triggered it. It was the pin that popped the bubble, but it didn't inflate the bubble. By the end of 2019, the bubble was already bulging, waiting for a pin—any pin—to set it off, and it happened to be this virus.

In this episode, I will try to explain how the bubble got inflated to begin with, along with all the other bubbles dating back to the Great Depression. I want to explain the super-bubble we had at the end of 2019, and how it got so dangerous. As usual, I'm trying to look at things from the highest possible altitude, like aliens visiting from space. What is there about human nature and human social organization that gave us this crisis?

And that's where the Tragedy of the Commons comes in. This a fundamental problem of human organization, and I contend that civilization has reached its limits in dealing with it.

The original idea is this: Imagine a medieval village in England. There is a patch of public land called the "Commons" where every villager is allowed to graze his cattle for free. It's a shared space that everyone uses, but it can support only so many cattle. The natural incentive of each villager is to graze as many animals as possible there, because it's free. Everyone is thinking, "If I don't use the grass, someone else will." But if everyone acts this, maximizing their own personal gain, the grazing land eventually collapses. You need to leave enough grass in place that it can regenerate itself as fast as it is being eaten. Too many cattle mean the land is grazed bare and all the animals starve. That is, all the villagers suffer from the cumulative effect of their own self-interested actions. That's the Tragedy of the Commons.

There is only one solution to the tragedy, and that's some sort of government regulation. The Village Council or Lord of the Manor has to impose some sort of rules about grazing, like limiting each villager to two animals grazed on the Commons. A lot of villagers aren't going to like this, and the council might have to get harsh, imposing fines or other penalties on those who violate the rules, but these rules are essential for maintaining the common good. Without regulation, with unfettered Capitalism, the land is overgrazed and everyone starves.

The same would apply in a fishery like a lake. If too many fishermen pull too many fish from the lake, the fish population collapses, and soon there are no fish for anyone. Every fisherman is hungry and trying to feed his family, so he is incentivized on any given day to pull as many fish as he can from the lake, but if too many fishermen do this, there will be no fish for anyone. The only solution is for some government authority to somehow license fishermen and count their catch. It may seem horribly intrusive, and regulation itself can be corrupt and inequitable, but some sort of regulation is unavoidable.

A third example, somewhat indirect, is a paper factory on a river. The factory itself has no economic incentive to avoid polluting the river, because any pollution it spews into the river is experienced by people downstream, not by the factory itself. In this case the common resource is the river, which many depend on for their livelihood, but the factory has no economic incentive to keep it clean. The only way the factory is going to clean up its act is by some powerful government authority forcing it to do so.

Most countries have been successful in imposing these kinds of basic environmental regulations. There were times of horrendous pollution in the past, but today most common land isn't overgrazed, most fisheries aren't depleted and most rivers aren't polluted, because sensible government regulation has stepped in to protect these common resources.

Throughout the developed world, simple pollution has been pretty well controlled, but global warming hasn't been. That's because climate change is a problem arising over decades, even centuries, and once humanity understood it was happening and started taking action, it was too late to stop it. Climate change is different from pollution. If a river is polluted, and you cut off the source of the pollution, the river starts recovering almost immediately. Not so with climate change. If you could cut off all carbon emissions today, sea levels would continue to rise for decades if not centuries. Humanity has been spewing carbon into the atmosphere in Earth-changing amounts since at least the industrial revolution. You can't make it all go away just by stopping the emissions now.

Global warming is the sort of long-horizon problem that humans aren't capable of handling, in part because the timescale of the problem exceeds the human lifespan, not to mention the term of any one politician. Politicians have no incentive to solve an invisible long-term problem because it doesn't produce instant results and doesn't get them reelected. Humans are now reacting to climate change after it has become unstoppable, because they were politically and scientifically incapable of preventing it.

Modern financial systems are similarly uncontrollable. This is a complex kind of commons involving invisible resources leveraged over time. On the traditional Commons, the resource is obvious: It's grass, and you can judge its health by looking at it. In the financial world, resources aren't so obvious. If a company produces X amount of profit each year, stock, debt and derivatives can be sold based on that profit. The company's profit is the equivalent of the grass grown each year on the Commons, but financial technology allows the sale of the future production, or future grass, and that's where things get complicated.

In medieval times, it was just cattle and grass, and it was pretty easy to tell by looking at the land when the cows had eaten too much. In the 20th Century, we invented whole new ways to exploit the Commons by doing it across time. In the 20th Century, we invented something called "debt" which essentially allowed villagers to sell their grazing rights far into the future.

On the Commons, the core production is grass. Instead of grazing animals there, you could harvest the grass and form it into bales and allocate bales to each villager. There is a certain amount of bales that the land can sustainably produce each year, and each villager gets his share.

Imagine now that some clever financial guru comes along and offers villagers the ability to buy and sell their future allotment of bales. If you don't have the cash to buy something right now, like a new wagon, you can pledge to the seller your future hay bales for the next ten or twenty years. That's basically what debt is. You are selling your future or your future rights to something. You get the payoff upfront—the wagon to use right now—but in some way you are losing your freedom in the future.

In this village, bales of hay are a sort of currency. Once they receive their annual allotment of bales, villagers can trade them back and forth with each other in exchange for goods and services. This is an honest monetary system, because you know what each bale is worth. You can use it for trade, or you can use them to feed your animals, which results in milk or meat you can eat. Bales of hay are the Gold Standard in this village.

Things get messy when villagers start dealing in future bales of hay. When a villager deals with future hay, he doesn't have the hay in hand, so he can only offer a piece of paper promising to pay a certain number of bales on a certain date. Now people start trading those pieces of paper as though they were actual bales, and this is where things get dangerous. Pieces of paper with promises written on them do not have the same value as actual bales, because there are so many variable factors behind them. Will the person who promised the bales actually deliver them? Will grass production in future years be the same as it is today?

What invariably happens in these secondary markets, absent regulation, is that they become oversold. In other words, more pieces of paper are in circulation than actual future grass production can support. Things turn into a crisis when there's an unexpected drought. Grass production falls, but the pieces of paper and the promises they bear are still outstanding. Eventually there's a crisis when the value of those pieces of paper crashes.

That's what our current economy is all about. It's not just an exchange of current production. There's a huge secondary market in the promises of future production. That's what a stock market is, or a commodities market or a bond market. These secondary markets have a tendency to become overheated, circulating more promises than actual production can support, or at best, trading 100% of future production with no margin for error. Things turn into a crisis when production unexpectedly falls, as it is doing today, and all those outstanding promises face a reckoning.

Government authorities, like the Village Council, can handle the basic Tragedy of the Commons. They can prevent overgrazing of the land this year, but they are helpless and inept when trying to regulate a secondary market on grazing rights, where people pledge their resources ten or twenty years from now. The markets and instruments of future trade are constantly evolving, so no one really has a handle on what is going on. Some people are getting rich on these grazing futures, which encourages too many to crowd into the market, pushing prices up.

A bubble is when more paper promises are being bought and sold than production can actually support. That's where we were at the end of 2019. The bursting of the bubble is when the prices of paper promises fall to a sustainable level, consistent with actual production. This sounds like a simple process—The bubble bursts and prices fall.—but there can be all sorts of complex systems built upon the assumption of higher prices, and these systems don't fall gracefully. Companies go bankrupt, institutions fail, and lots of people lose their jobs. At worst, you get to the point where the government itself can't function.

I want to go back to my favorite example: US government debt. The basic production of the US government, at least before the virus, was $3.5 trillion dollars per year. That's how much money the Federal government collected in taxes in 2019. This is the equivalent of the grass that grows on the Commons every year. You can raise or lower taxes, but this also affects production and may not change total tax income. It's hard to truly make more money from taxes unless you're in the middle of an extended economic boom and tax wisely.

Given all the people out of work right now, it seems unlikely the government will attain the same $3.5 trillion income in 2020 or the following years. $3.5 trillion can be considered the Federal government's peak tax production, like the maximum bales of hay the Commons can produce.

In 2019, before the virus, the US government spent about $4.5 trillion—in other words, a $1 trillion more than was being produced. Where does the other $1 trillion come from? The government sells pieces of paper promising to pay the $1 trillion in the future. These pieces of paper are passed around among investors as though they were cash, but they're not. Lots of things could happen before the paper is paid off. The government could default, or inflation could eat away at the value of the principle before the paper matures.

In 2020, with all the Federal government's rescue spending, how much will the budget be? 6 trillion? Maybe more. Income can't be more than $3.5 trillion and it will probably be a lot less given all the business closures, so the US government will probably be borrowing something like half the money it spends in 2020. It will be selling a lot of paper promises. Total bonds in circulation was $22 or $23 trillion before the virus, which is a lot of money if you are only making $3.5 trillion a year and are routinely spend more than that every year. Very quickly, it could be $30 trillion and rise exponentially from there.

This is a clear, unequivocal case of there been more debt outstanding than can possibly be repaid, and this market is completely unregulated, because it's the government selling the paper, and the government can do whatever it wants. The only thing that will stop the endless production of paper is investors looking at it and having an "Ah-Hah!" moment. They'll suddenly say, "You know, I'm never going to get paid full value for these promises."

It's like a market for future hay. Investors hold pieces of paper promising them so much hay in the future, but if you add up all the paper owned by all the investors, you realize it is way more than the Commons can produce. At some point, the market for this paper crashes, where a promise for one bale fetches only the price of a fraction of a bale, because the market suddenly realizes this paper is junk.

At some point the government bond market is going to collapse. I can't tell you when because it depends on the appetite for bonds in the open market. I don't know where the saturation point is, but I can tell you what will happen when it is reached: Either the government will default on its bonds, not paying upon maturity or paying less than face value, or inflation degrades the value of the bonds. Either option is bad for investors and bad for the government itself, since it will be unable to incur new debts at an affordable interest rate.

The end game in all of this is either the government collapses altogether or it has to live within the bounds of the taxes it actually collects. Given the economic collapse, this is certain to be a lot less than it's $3.5 peak income in 2019. Imagine a US government that is only a shadow of its former self, hardly capable of maintaining basic services. Mail doesn't get delivered and roads don't get repaired, and this becomes a further burden on the economy.

And that's only one bubble of many. With US government debt, all the variables are open and known. Financial markets are riddled with all sorts of other schemes that are far more difficult to assess. Think of the mortgage-backed securities that brought down the economy in 2008. Only a few smart investors, the Big Short people, predicted it would happen. Some of these problems may have been repaired since then, but plenty of other schemes have arisen to take their place, and they are all going to see a day of reckoning—not at some vague time in the future, but this year, 2020. As bad as things seem in April, they're gonna get far worse.

It's hard to say that any of this could have been prevented. In theory, the government can regulate financial markets, but the government can't even regulate itself, as shown in its own debt bubble. The government is run by politicians who have no incentive to plan for the distant future. They can only plan for the next election, which generally involves giving voters free stuff and not causing them any pain. Cutting $1 trillion from the budget was impossible in 2019, in the outwardly best of times. In the worst of times, like now, politicians are committed to rescuing everyone, regardless of the cost. In other words, they are "solving" the Tragedy of the Commons by issuing still more empty promises on future grass production.

Once again, we are trying to solve the problems of today by borrowing from tomorrow, and the sums being borrowed just get bigger and bigger. They are starting to rise almost exponentially. By the end of 2020 or 2021, we'll be looking back fondly on 2019, when the deficit was "only" a trillion and total debt was "only" $22 trillion. The curve goes way up from here.

Things are not any healthier in the private sector. Debts have been built upon debts, fueled in part by artificially low interest rates for the past decade. All that cheap money was not put to work building the economy but was spent on all sorts of financial shenanigans that will become more obvious as these schemes collapse.

One of this dubious transactions was the stock buyback. That's when a corporation borrows money at ridiculously low rates to buy its own stock. This makes the stock price rise, and stockholders are happy. Executives are also happy, since they are compensated based on the stock price. The only problem is that the company is now saddled with debt, making it vulnerable in a downturn like this one.

I won't get into the details, but they are ugly. Let's say the company borrows a million dollars to buy its own stock at the pre-crash price of $200 a share. After the virus messes things up, the stock price falls to $100, but the company is still committed to all that debt it incurred buying stock at $200. You can see it's going to be a mess. In 2020, a lot of corporate debt is going to be downgraded, which is going to contribute to a flood of bankruptcies and still more job losses.

Corporate executives, like politicians, are not hired for long-term performance across decades. They are hired and rewarded for short-term gain. If this means stealing from the company's own future, they'll do it, because there's a good chance they won't be around when the bills come due. Executives borrow on the company credit card to prop up the stock price, which also benefits them personally. When everything tanks, they get booted, but they've already made their profit. Left holding the bag are employees, losing their jobs, and ordinary stockholders, losing their money.

I can't possibly describe all the other crazy debt schemes out there, but almost all of them have a common theme: selling out the future for a quick buck today. They are selling more grass from the future Commons than the land can possibly support.

It is easier to look at things from a global perspective. According to the Institute for International Finance, global debt in late 2019, before the virus, was 320% of global GDP. That is, the world was producing goods and services worth about $80 trillion, while global debt was about $260 trillion, roughly. That's not just government debt but debt from all sources: consumer, corporate, maybe your local neighborhood loan shark, I don't know. In my mind, it is probably an undercount, because some debt is so informal, like the loan shark, that it's hard to estimate, but let's assume the IIF number is correct.

Total world debt in 2020 probably isn't any less than $260 trillion, but global GDP has taken a huge hit from the coronavirus. How much of a hit? We can only guess. Maybe world GDP is down to $60 trillion in 2020. Global debt doesn't magically diminish just because the economy shrinks. It's still there at $260 trillion, but with our lower GDP estimate, the world now owes about 430% of GDP in 2020. This is an utterly unpayable amount. It's a promise of future grass than can never possibly be realized. Most of that debt has to fail sooner or later, and I'm betting on sooner.

You may think that the answer to all of this is better government regulation, but you're trying to regulate a bunch of moving targets that no one really understands because they're so new. Even if you did have a politician or business leader who was secure enough to think about the world 10 or 20 years from now, it is hard for them to know what to do. Debt is a new technology, like computers and software. This technology is rapidly evolving and no regulator can possibly keep up.  You successfully regulate one debt product, like mortgages, and a dozen other products emerge, often skirting the regulations on the first product.

I find it truly doubtful the even an earnest, far-sighted government like Norway could effectively regulate all the new financial instruments coming online. If Norway successfully regulated a certain product, those operations would just shift overseas where Norway has no control. If regulation isn't lax enough in your own country, you can just move your operations to a country that is more lenient. Big corporations are good at this: bouncing operations and profits around the world to minimize taxes or regulation. No government is sophisticated enough to keep up with it, and governments are so at odds with each other that they can't coordinate their responses.

So the financial world is doomed. It may have hit a sort of wall where no further economic progress is possible. Maybe the boom and bust cycle ends with one massive, long-lasting crash, a new Great Depression, which happens to be starting right now. If there is more debt in the world than production, maybe 2020 is the year that all the reckonings happen. What ultimately has to happen is all the paper promises out there have to be devalued. All of a sudden, government bonds crash, corporate bonds crash, stocks crash, real estate crashes. Everything that can crash, does, and the world is pushed back into some kind of feudal state where people are fighting for basic resources.

Astronomers often wonder about the Fermi's Paradox. With so many billions of stars visible to us, most with planets and a fair chance of life on many of them, why have we detected no alien civilizations? The answer may be that as each society becomes more technologically advanced, it eventually collapses under the weight of its own complexity. Maybe the collapse always happens at the stage we're now in: just before we are capable of expanding beyond our planet.

Now we're in a crisis—both the virus and the financial crash—and virtually every remedy available to governments involves going even deeper into debt. To fund recovery efforts, governments issue bonds to the public, and when the appetite for the bonds is satiated, they are forced into some form of money printing. That's essentially what the US government is doing now. As of today, the Federal Reserve is printing money roughly twice as fast as the government is issuing new bonds, so this isn't just funding the deficit, but trying to fund the whole failing economy. Money printing goes by other names, like "quantitative easing" and "asset purchases", but the effect is the same: increasing the overall money supply.

Consumer inflation, where the price of beans goes way up, hasn't started yet, but it will. The Fed has opened up the tap of money printing, and it's filling up a reservoir, which is the huge appetite around the world for US dollars. Since other currencies are in even worse shape than the dollar, foreign investors want dollars as fast as the Fed prints them. But there's a limit. There always is. Once the appetite for dollars is satiated, the reservoir overflows. Suddenly, there are more dollars than the market wants; the value of each dollar plummets, and we've got serious inflation. It's hard to say when this tipping point will happen, because it's hard to estimate how much appetite there is for dollars, but I'm guessing the reservoir will overflow by the end of 2020.

So the US Dollar itself is a sort of Commons. Everyone depends on the dollar for trade, but it only has value if it is a relative rare commodity. Print too much money, and you degrade the value of the dollar. It's like grazing too many sheep on the commons. Eventually the whole resource collapses, and people are left holding dollars that are constantly falling in value. The government is degrading the monetary Commons to try to save the village, but eventually the Commons have taken too much abuse, and the resource collapses.

It is an unstoppable process, and it's easy to imagine it happening in every advanced culture, everywhere in the galaxy. They develop new technologies, almost achieving star travel, and then the complexities of the technology eat them alive. It could happen with atomic power, ending the planet in a devastating war, or it could happen with something as seemingly non-lethal as debt. The more connected people are and the more clever they become in selling their future production, the more things there are to go wrong.

In the end, I don't think humanity will ever achieve meaningful space travel, not because the technology is impossible, but the financial underpinnings have collapsed. Humanity will never get to the stars because it hit its complexity limit, the point where the costs of technology exceeds its benefits. Fermi's paradox may not be a paradox at all. It may just mean there are limits to technology and financial systems where they becomes uncontrollable. The complexity of civilization and technology exceeds the abilities of the tiny brains that created it.


———

Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there. 

Thursday, April 9, 2020

Coming Soon: Collapse of Federal Debt and the U.S. Dollar (Demographic Doom Podcast #39)

This is the script for my Demographic Doom podcast episode (#39) released on 10 April 2020. It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including PodbeanApple Podcasts and a video version on YouTube. See the description on the YouTube version for annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is DemographicDoom.com



I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations.

Today I'm going to talk about the timebomb of U.S. government debt and the terrible things that will happen as it becomes less and less sustainable. This isn't a new topic to this podcast. I've talked about it before the virus, but it was mostly academic back then. Federal debt has been unsustainable since at least 2009, and something bad was destined to happen, but it was hard to pin down a timeline. As of late 2019, unpayable Federal debt had been building up for a decade, and for all I knew it could have continued to build up for years more before there was a reckoning.

Now, thanks to the virus, the day of reckoning is close at hand, and I predict that by the end of 2020, we will see major cracks in both the viability of U.S. debt and the value of the U.S. dollar. So in today's podcast, I am going to revisit Federal debt in the light of a crisis happening this year as opposed to some vague time in the future.

The bottom line is this: I expect significant inflation by the end of 2020, spiced with a healthy dose of deflation. The price of all the things you need will rise, while the price of all the things you don't need will drop. This will be a fine time to buy a luxury car but not to go grocery shopping. Meanwhile, the US government will become more and more dysfunctional as it's financial underpinning erode. The next Presidential administration, be it Trump or Biden, could be America's last.

I know these are outrageous claims, which is why I need a whole episode to back them up.

This is April 9, 2020, and the world is still in the midst of Lockdown Mania in response to COVID-19. However, the biggest event on the planet right now is not the epidemic itself. The truly epic, world-changing event—the biggest since World War II—is the collapse of the world economy. The virus didn't cause this collapse; it was merely the trigger. It turned out to be a very efficient trigger, but even if coronavirus had never happened, the world economy had built up so much dynamite that something would have set it off.

The dynamite took the form of massive worldwide debt and absurdly elevated asset prices, powered  by the desperate policies of central banks in response to the Global Financial Crisis of 2008. Yes, central banks and big government saved the world economy in 2008, but only at the cost of kicking the can down the road toward an even bigger crisis in 2020.

In a wider view, there is a demographic source of dynamite, a sort of super-cycle stretching back some 70 years. Following WWII, there was a Baby Boom, and those babies grew up to fuel a huge economic boom in the late 20th Century. In the 21st Century, the fuel started getting depleted. The Baby Boomers began retiring in 2011, moving from being assets to society to liabilities. No matter how you slice it, we can't reproduce the breakneck growth of the late 20th Century, because we don't have enough workers to power it, but the whole financial system is still geared on the assumption that past growth will continue.

The rise and fall of the Baby Boomers is sufficient in itself to cause a financial collapse, but there are many other kinds of financial dysfunction afoot. I can't hope to cover them all in this episode, so I'm going to focus on one key area: US government debt. Part of this debt crisis is demographic, and part of it is due to years of political stupidity, because there is no penalty to politicians in borrowing from the future.

Before the virus arrived, the world economy was already an interlocking series of Ponzi schemes, paying off present investors at the expense of future ones. Ponzi schemes can go on for years in apparent stability, as did Berni Madoff's famous one, but when they collapse, they do it catastrophically, and one Ponzi scheme tends to pull down all the others, and that's what's happening today. 2020 is the year all the Ponzi schemes collapse. In this episode I'm going to talk about only one of them, Federal Debt and monetary policy, because of all these harebrained schemes, this is probably the easiest to understand.

I got into demography because it is the only social science that can make hard and reliable predictions. There is one fundamental, unbreakable law of demography: there won't be more people in the future than are born today. In other words, if your country makes a million babies this year, than it can have no more than a million native-born citizens of that age group 20, 40 or 60 years from now. There can be less than a million in each age group, because people die, but there can never be more. This fact sounds obvious, but it is a very powerful tool when predicting what the world will look like in the future.

Likewise, in economics, there is one fundamental law: In the long run, you can't spend more money than you make. You can't do it as a private citizen, and you can't do it as a government. There is no free lunch. You can borrow money from banks, credit card companies, family and friends to support a more extravagant lifestyle than you can afford, but you can't do it forever, because sooner or later, people will stop loaning you money.

If you're a consumer, there's usually a hard limit when credit is cut off. On a certain date, you're credit cards get maxed out, and no bank will give you a new one. You can default on your credit cards by simply not paying them, but now you have no choice but to live within your means. At best you'll have to go back to living hand to mouth. At worse, you'll have all your creditors knocking at your door trying to confiscate everything you own.

With a government, the limits are much more elastic. There's no hard date when credit is cut off, because the government or its surrogates control the money supply. In a pinch, they can print new money to pay off their debts, which is essentially how the US government is funding itself now. The only downside to money printing is inflation, or the devaluing of the currency. Consumer inflation has been more-or-less absent from the US economy for some 30 years, but it will be back, because you can't flaunt the laws of nature forever.

You can't spend more money than you make. If you don't believe this axiom already, there's probably nothing I can say to change your mind. There's all sorts of economic slight-of-hand theories, like Modern Monetary Theory, that allows otherwise intelligent people to believe it isn't true, you can spend more money than you make. I'm not going to go down the rabbit hole of arguing with these theories, because there's no way I can win. It's like arguing with someone about their religion. No logical argument will work.

You can't spend more money they you make. Either you believe this, or you need to stop listening. If you do spend more money than you make, and do it consistently over time, there will eventually be a Day of Reckoning, a day when the credit cards max out. You may be able to extend the date by borrowing money, but it only makes the reckoning more brutal.

For almost 20 years, the US government has failed to balance its budget, consistently spending more money than it makes. It does this by issuing bonds to the public, promising to pay in the future, which is just like spending on your credit card except at a much lower interest rate. Spending greatly accelerated during the Global Financial Crisis in 2008. The deficit was gradually brought down over the course of the Obama Administration, but it exploded again under Trump.

In 2019, before the virus, the math was pretty simple: The government spent about $4 trillion a year and took in only $3 trillion. You don't have to know what a trillion is to understand the math. 25% of the money the government spent was added to its credit card bill. Before the virus, the total outstanding debt was $22 trillion, or more than seven times the annual tax income of the government. By some measures, it could have been several times higher, maybe even $100 trillion, when you consider the government's future obligations for things like Medicare and Social Security. The exact trillions don't matter as much as the qualitative fact that the government always spends more than it makes, with no realistic prospect of ever paying down its outstanding debt.

And that was before the virus, which is an unprecedented economic disaster the likes of which the world has never seen. People are losing their jobs in vast numbers, which ultimately means less tax revenue for the government in 2020. Meanwhile, virtually every national response to the virus involves massive government spending, well beyond the previous $4 trillion. It's unclear yet what the damage will be, but it is reasonable to guess that taxes revenues will fall to something like $2 trillion, while the total government budget rises to $5 trillion or higher. In other words, the government will be borrowing more than half the money it spends in 2020, and perhaps into the following years as well. The government is closing the shortfall by issuing bonds, which investors around the world are expected to buy.

So how are investors responding to this glut of bonds? You would think they'd be running for the hills, but no. They're running directly into the fire. As of today, investors are eagerly buying all the bonds the government can issue and paying a premium to do so. It's the craziest thing. You've got an insolvent debtor, obviously living off his credit cards with no hope of every paying them down, and investors are lining up to loan him even more money. Max out one credit card? No problem. Here's another at a low introductory interest rate.

The eagerness of investors to buy US government debt is reflected in the yield, or the effective interest rate on the bonds. Although the government issues the bonds with a nominal interest rate, the actual interest rate is determined by the open market, and right now investors are willing to accept an interest rate on 10-year bonds (or T-Notes) of between 1/2 percent and one percent per year. In other words, if you loan the government $10,000, you'll receive at most $100 in interest for the entire year.

Clearly, investors aren't buying these bonds for the income. They are buying them as a perceived safe haven. In periods of market chaos like we've seen over the past month, investors are bailing out of stocks and other investments, and when they do, they have to put their money somewhere, and US government bonds are seen as the safest investment there is. US government debt can never fail, the reasoning goes, because the government controls the printing presses and can always print more money to pay its bills.

Yes, but... there's a cost to money printing, which is inflation. In other words, you can loan $10,000 to the government for 10 years and feel reasonably confident the government will pay you back at the end of this period, but $10,000 may not buy you as much as $10,000 now.

Despite 30 years of apparent stability, $10,000 does not have a fixed value. It is worth only what the parties who exchange it think it is worth at the time of the transaction. In other words, you can walk into a store with $10,000 in your pocket, and maybe you can buy the whole store, or maybe you can buy only a single egg. This has really, truly happened in many a banana republic. If you flood the market with too much of your own currency, the value of each unit of the currency goes down, and the price of products and services in terms of your currency go up. This is a law of nature that for the time being the US government seems to have evaded, but it's still a law of nature.

The main risk people are taking when they buy a government bond is not so much that the government doesn't pay, but that inflation erodes the value of the capital. In the beginning, you can buy the whole store, and at the end you can only buy a single egg. Properly speaking, the government hasn't defaulted and has held up its side of the bargain, but you still get screwed in the end.

If you were born USA in the 1980s or later, you have almost no experience with inflation. You think a dollar is worth a dollar. I, on the other hand, came of age in the 1970s and had a personal relationship with inflation. At the beginning of the 1970s, I could go into a candy story with a dime  or two and come out with a lot of candy. Back then, they had something called "penny candy." There were a whole range of candy items under a glass case, each for a penny. A small Tootsie Roll was a penny, or a Mary Jane taffy. A stick of licorice was a penny. Candy cigarettes were three for a penny, and they were good! You would pretend to smoke them like a grown up. When you went to the candy story, you'd point out the things you wanted, and the lady behind the counter would put them in a bag for you. If you walked in with a quarter, you came out feeling like a millionaire in candy.

Standard-sized candy bars—the same Snickers and Hershey bars we buy today—were 5 cents at the beginning of the 1970s, but they didn't stay that way. Over the course of the 70s and early 80s, I saw their price rise to 7 cents, then 10 cents, 15 cents and 25 cents. Eventually, it stabilized at something around 60 cents sometime in the late 1980s. Today a Snickers bar is about $1 at the supermarket checkout, but I regard that as opportunism, not inflation. If you go to the back of the store and buy a multi-pack, the 60 cent price still holds.

I don't really remember when penny candy ceased to exist, because I aged out of the market anyway, but I distinctly remember the price of a standard-size Snickers, identical to the ones today, going from 5 cents to 60 cents in what seemed like short period of time. It was almost to the point where you would buy an extra Snickers right now, knowing that the price could go up next week.

That's what you youngsters don't understand. A dollar is not a dollar. It is worth only the number of Snickers bars it will buy. We've had inflation before, and believe me, we're going to have it again.

When will it happen? Well, apparently not right now, in April 2020. In this era of national lockdowns, no one is raising their prices for anything, especially when it's hard to get people into stores. McDonalds still has its dollar menu—for take-out only—and you can still go to a Dollar Tree store and buy things for a dollar that are pretty much the same things you could have bought there 30 years ago.

If anything, we're in a period of deflation now, especially for things you don't really need. No one is in the market for a car right now, and dealers are hurting, so maybe they'll cut you a deal. The Great Depression was a period of rampant deflation, called a deflationary spiral. The price of an apple kept going down because there were too many apples and too few buyers who could even afford an apple. Luxury cars were being sold on the street for pennies on the dollar by investors who lost everything in the crash. Deflation is a self-fulfilling prophesy, because it encourages people to hold onto their cash. Why buy a washing machine now when you know its going to be even cheaper in six months?

But back in the Great Depression, the government wasn't printing money like there's no tomorrow. Back then, the US dollar was supposed to be based on gold. It got a little flaky, but essentially the dollar in your pocket represented gold stored at Fort Knox, so the government couldn't just print money at will. Inflation took off only after 1971, when Richard Nixon took the US dollar off the gold standard. The dollar became a "fiat currency", meaning that it's not inherently worth anything. It can't be converted into gold. It can only be sold to another sucker for however many apples he chooses to give you for it. Going off the gold standard untethered the dollar and set the stage for the inflation of the 1970s and 80s.

So what this means today is that the government, or its surrogate the Federal Reserve, can print money at will without any restrictions. And the current environment makes it mandatory that the Fed prints more money. It simply has no choice. You may think of the Fed as an independent entity, but it isn't. If the government spends more money than it makes, the Fed is obligated to print more money to make up the shortfall.

I want to explain how money is created in the American system. It's actually quite simple. There are all sorts of fancy debt bubbles out there, debt Ponzi schemes, but most of them are hard to understand, because they are so obscure and complicated. US government and the US currency are not complicated. The system is completely open, and all the numbers are available at your fingertips.

So let's start with that basic 2019 calculation. The government spent $4 trillion and and took in $3 trillion in taxes. It's actually $4.5 trillion and $3.5 trillion, but I like round numbers and the exact amounts don't matter. The extra trillion has to come from someplace, and that's government bonds, notes and bills. I'll just call them government bonds. Periodically, the government issues bonds and offers them to the market at auction. Investors buy the bonds, and then they pass them back and forth between each other in a secondary market. Bonds are seen as highly liquid, meaning you can buy them one day and sell them the next, unlike an fixed asset such as real estate where you might not find a buyer at all.

As I said, investors around the world love US bonds right now. In an era of crashing markets, US bonds seem like the prettiest house on an ugly street. If you've got cash, US bonds seem like the safest place to stash it. There's gold, but that's a quagmire I really don't understand and don't care to get into. The point is, investors perceive US bonds to be a safe haven, whether or not it truly is.

You've got what seems to be the perfect symbiotic relationship: The government needs to borrow money, and investors are eager to loan it money at ridiculously low interest rates. What could possibly go wrong?

What could go wrong is that the government eventually issues more debt than than the market can bear. As of the end of 2019, the government had $22 trillion in outstanding bonds. At what point has it issued to much? $40 trillion? $60 trillion? I have no idea. This isn't like the fixed credit limit on your credit card. There's not clear cut-off point, but there will be a point where things start falling apart. And once things disintegrate enough, there's usually a catastrophic failure.

US bonds are really no different than any other commodity, like watermelons. If they are relatively rare, each watermelon can command a high price. If you flood the market with watermelons, then eventually the price falls. If there's a glut of watermelons, to the point where every grocer has a ton of them, then the price can truly plummet, because they got to move these watermelons before they rot.

For a bond, the price is reflected in the "yield" or the interest rate that investors are willing to accept to hold the bond. If bonds are desirable, as they are today, the yield is low, between 1/2 and 1 percent. Those are wonderful watermelons! When bonds are more plentiful and less desirable, the yield goes up. Investors expect to receive more interest in exchange for loaning the government money. The yield also rises on anticipation of inflation. If you expect the $10,000 you give the government to be devalued to the buying power of $8,000 over the course of the bond, you're going to demand a higher interest rate to compensate.

I visited Ukraine about 5 years ago, and I saw a billboard for a Certificate of Deposit at an interest rate of some 40% per year. My jaw dropped at that, and I double-checked my translation. This implies that the inflation of the Ukrainian hryvnia was running at something like 35% per year. In an economy like this, you definitely don't want to keep your hryvnias in a mattress, because they will be devalued by 35% in a year, and in 10 years they'll hardly be worth more than the stuffing in the mattress. If you've got hryvnias in your pocket, you want to get rid of them as quickly as possible, because the coins and bills are losing value every day. Instead, you'll buy a CD or a foreign currency or some commodity like Snickers bars that you know you can resell later and retain your buying power.

This little diversion into hryvnias actually has some relevance to my thesis, because I want you to imagine if US inflation went that high. People would want to get rid of their dollars as quickly as possible, which actually accelerates inflation. People aren't keeping anything in their mattress or piggy bank. They are dumping every dollar they get back into the market, preferring commodities like Snickers bars instead. This is called the "velocity of money", or the number of times a unit of currency changes hands in a given period. As the velocity of money increases, so does inflation.

I'm not just playing mind games here. I truly believe that at some time in the future—I'm not saying when.—the US dollar will match Ukraine's inflation rate. You can call me a fool, because it certainly isn't true today. If investors are willing to commit now to loaning the government money for ten years at a yield of 1% per year, it implies not only that general interest rates will remain low for those ten years but that inflation will be virtually nonexistent for those ten years.

This is a truly insane proposition. Right now the official inflation rate is 2%. There all sorts of ways you can argue with that number, but it's not zero, and it is probably higher than the 1% yield on the bond. This means effectively that investors are loaning money to the government at a negative interest rate. They are getting less out of the deal than the money they put in. This is truly insane, and although markets can sustain their insanity for a long time, eventually reality crashes the party.

Reality will take the form of investors say, "I already have all the US bonds I want, I don't want anymore. I already have enough watermelons." At this point, the yield rises and the government has trouble selling all the bonds it issues. The market doesn't want them anymore unless they are a true money maker. I might still loan $10,000 to the government for 10 years, but I might expect a 10% interest rate to compensate for potential inflation and a potential government default.

Could the government really default? It wouldn't happen tomorrow, but over the course of 10 years of financial chaos, who knows? In any case, if I were to loan money to a dodgy debtor, I would expect a yield that is high enough to justify the risk.

So what happens when the government reaches the point where it has issued so many bonds that the market can't absorb them and yield rises? Is there any recourse? As a matter of fact, there is. There's the Federal Reserve, which is a supposedly independent bank that manages the money supply. If you look a dollar bill, you'll see that it isn't issued by the US government proper. It is issued by the Federal Reserve. It's a Federal Reserve Note. The government issues government bonds, but the Fed issues the currency and controls how much of it is in circulation. In theory, it can increase inflation by issuing new currency and decrease inflation by taking currency out of the system.

It is the Fed, not the government, that prints the money, although "printing" is a misnomer. The Fed creates money simply by adding digits to the account of a member bank, but "printing money" is still a pretty good analogy. The Fed can print money whenever it wants for whatever reason it wants, because it is nominally independent of the US government.

The way money printing works is the Fed buys something from the marketplace. In most cases, it is US government bonds, but in practice it could probably buy anything. The Fed could buy Snickers bars. I'm sure there are rules against the Fed buying Snickers bars, but there's no one to enforce the rules. When the Fed buys something, usually bonds, it creates new money out of thin air to give to the seller. It is increasing the money supply and risking inflation.

So how the process works is the government issues bonds to fund its deficit and sells the bonds to the public, then the Fed buys the bonds from the public and creates new money to gives to the seller. Money supply increases. So how is this different than the Fed just buying the bonds directly from the government? The truth is, it isn't. For all practical purposes, the Fed is buying the bonds directly from the government. The government is spending money and the Federal Reserve is printing the money to pay for it.

The amount of money printed is reflected in the Fed's "balance sheet" or the assets it technically holds. Right now, the balance sheet is roughly $5 trillion. This isn't all government bonds, but it's an artificial support. The Fed has printed $5 trillion in new money, quite recently for the most part, to prop up both the government and the financial sector, and at this point there's virtually no hope of the money printing ever stopping.

If government issues too many bonds, to the point where investors lose their taste for them and start demanding higher interest, the Fed is essentially obligated to step in and buy bonds. It has to buy watermelons to reduce the supply and prop up the watermelon market. It creates new money that in essence the government uses to pay its bills. It's a perfect system: The government spends more than it makes and the Fed prints the money to fund that spending.

It's a perfect system except for... inflation! If any government keeps printing money to pay its bills, eventually inflation rears its ugly head. It's true in any Latin American banana republic, and it's true in our banana republic. It's just that in our republic, there's been a delay. The Fed has been printing money with abandon, but there's been little apparent inflation. What gives? Where is the inflation gone?

The answer is, it's hiding. In two places that I am aware of. One hiding place is in plain sight. It's called "asset inflation." The price of a Snickers bar may not have changed, but housing prices have gone way up, especially in the desirable places where people most want to live. If you live in San Francisco, you've seen massive inflation in your housing costs. Before the virus, virtually all assets, from stocks to bonds to fine art, were vastly inflated. All of those assets are now in the process of deflating.

The second hiding place is mattresses in Ukraine. If you're a shady businessman in Kiev, dealing only in cash, you're not going to keep hryvnias in your mattress, because they'll lose value instantly, but you might keep US dollars in your mattress, because they are perceived to be stable. For decades, the US $100 bill has been the preferred store of value for drug lords everywhere. The US dollar is also a haven currency for legitimate investors. It's seen a safe haven at least compared to other currencies. So what might be happening here is the Fed is printing money, but if investors are stockpiling dollars at about the same rate, then there's no net excess of dollars and no inflation.

This just speculation on my part. I'm not sure that it's Ukrainian mattresses that are soaking up the extra dollars. All I know is that there's a certain market for dollars, just like watermelons, and once the watermelon market reaches saturation, the price is going to take a drive. What a price crash means for the dollar is inflation, where the dollar in your pocket doesn't buy what it used to. You can't buy a dollar cheeseburger at McDonalds anymore. It's now a 2-dollar cheeseburger.

Once you start to get substantial inflation in the US dollar, then a switch gets flipped, and everything changes very quickly. All those folks in Ukraine with dollars in their mattresses suddenly don't want to keep them anymore. They sell their dollars into the market to buy some other store of value, like Snickers bars. Suddenly the velocity of dollars increases dramatically. Dollars aren't just sitting in mattresses or dresser drawers. They are immediately returned to the market to buy something else. This in itself causes inflation, since there are so many dollars seeking too few buyers.

That's what is behind the hyperinflation of places like Venezuela and Zimbabwe. Not only is the government printing money to pay all its bills, but consumers don't want to hold onto their money for for more than two seconds. They immediately use their money to buy some tangible thing that will hold its value.

I got a sense of this mindset in the 1970s. There was always a pressure to buy something now, rather than later, because you didn't know when the prices was going to rise again. People got rid of their dollars, or at least put them into high-yielding bank accounts, because you didn't want to hold onto your cash for too long.

I predict that all will this will be coming back sooner or later, and I'm placing my bets on sooner. I'm thinking of 1970s-style inflation, like 10-20% by the end of 2020 and Ukrainian-style inflation, 30-40% sometime thereafter. Don't hold me to the timetable, because I don't know the saturation point where the world has absorbed all the dollars it can. I will only predict that inflation will not be a gradual process. It will happen very quickly, because once you reach a certain key threshhold, it starts triggering all sorts of feedback loops, like people emptying their mattresses of dollars.

So why is the Fed obligated to print dollars.  It is supposed to be an independent agency, so why can't it just tell the government, "We're not going to fund your spending anymore." It could do that, but then we'd have a bond crisis instead, which is just as bad for the economy as inflation. So at some point the bonds issued by the government are going to run into market saturation where the supply exceeds the demand, and the price drops. The "price" is actually reflected in an increased yield. Investors expect a higher interest rate to loan money to the government.

Historically, the interest rate on long-term government bonds tends to hover around 5%, but following the Global Financial Crisis, the yield has been artificially low, bottoming out at the below-1% yields we see today. This is great for the government, at least on the surface, because it mean that for all the debt it has outstanding, it is paying relatively little total interest. This like getting a new credit card that offers you a "Low Introductory Rate" of 0%. This is great for as long as the low rate lasts, but it sucks as soon as the introductory period ends and you're paying 18%.

So an excess of bonds means a rising interest rate, and the government has to spend substantial tax revenue on interest alone. If the government has $22 trillion in debt, which it has to roll over at periodic intervals, and the interest rate rises to the normal level of 5%, the government now has to pay over $1 trillion in annual interest payments alone. If tax revenue is only $3 trillion a year, and even down to $2 trillion during 2020, the government is now spending something like half its tax revenue on interest payments alone. Of course, it doesn't have the money, so it will borrow the $1 trillion for interest payments, further adding to the supply of bonds and driving up the yields.

This is a vicious feedback loop that eventually ends in the collapse of the government, which the Fed can't allow. Instead, the Fed is going to buy the excess bonds to drive down the yield to a manageable interest rates. The money it prints to buy the bonds eventually results in inflation, which isn't good either, so the Fed is between a rock and hard place. It has no control over how much money the government spends or how many bonds it issues, but it is obligated to print money to fund it.

It's a doom loop, no matter how you look at it.

So that's about as far as I want to go right now. There are all sorts of questions like, what happens when inflation comes back, and what happens when the government can't borrow money anymore at ridiculously low interest rates? My only answer right now is "Bad things will happen" but it is hard to say exactly what will happen and when.

It's like the Titanic is sinking, taking in more water than it can pump out. You know it's going down and there aren't enough lifeboats, but you don't know who's going to be saved, who's gonna die, when the event will happen or how the ship is going to break apart as it sinks.

Once a doom loop has started, it's difficult to predict where it will end.


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Written recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.