Bangs and Whimpers

Anatol Knotek

[Update: The Five Stages of Collapse has finally been sent to the printer. May delivery is now guaranteed. Please place your order below.]

Quite a few people wrote to me over the past week asking about all the noise coming out of Cyprus. If you haven\’t heard, there is a financial collapse that is unfolding there: banks are closed and people can\’t get at their money. The Cypriot banks are insolvent. This is no surprise: all banks everywhere are insolvent, and would fail immediately were the various types of ongoing bailouts to suddenly stop. These bailouts include an ever-longer list of annoying financial jargon—liquidity injections, quantitative easing, toxic-asset-purchasing by central banks, accounting tricks such as “mark-to-fantasy,” which allows them to make bogus claims as to the value of their assets, yadda-yadda. The point is, the financial system failed in 2008, and stayed that way. The faulty formula behind all modern finance is debt raised to the power of time, and only works when there is exponential growth in economic activity and energy. Energy\’s exponential growth stopped in 2005 due to resource depletion; three years later finance collapsed. Permanently. Since then we have been witnessing a global game of “extend and pretend,” which cannot be played indefinitely. If something can\’t go on forever, it doesn\’t.

Perhaps you have also heard about the nasty Russian oligarchs who used Cyprus as an offshore to launder their ill-gotten gains. Russian interests stand to lose tens of billions of dollars on the Cyprus fiasco. They were going to use that money to put their young idiots through Harvard, snap up Miami real estate, cruise the Mediterranean in megayachts and so on, and they probably still will. But they are not at all happy, still sore from what happened in that other EU offshore, Iceland, and thinking of something to do about it—something painful, embarrassing, or both. By the way, the money-laundering charge is just anti-Russian bigotry, which is a hold-over from the Cold War. You see, when Apple Computer parks its cash offshore, that\’s called “minimizing international tax exposure.” But when a Russian company does it, it\’s called “international money-laundering.” Cheating and stealing are the last two competencies left in modern finance, yet when Russians do it it\’s somehow considered bad? That is just hypocrisy pure and simple.

In case anyone wants a solution to the Cyprus crisis, I have a modest proposal. Take Cyprus out of the Eurozone and make it part of the Ruble Zone. Pay depositors in full, in Russian Rubles. Now reprice and sell Russia\’s natural gas exports to Europe in Rubles. Eurozone would still be insolvent, but Cyprus would be fine and the Russian depositors would be happy. Of course, Germany et al. would have to start exporting products to Russia at a steep discount to earn the Rubles to pay for the gas. Failing that, they could buy Rubles using Euros, and then Russia would turn around and use them to buy gold.

What the Cyprus crisis exposes is just the tip of the financial collapse iceberg. Cyprus is small, far away, and by itself unlikely to crash the entire system, but you never know—icebergs are known to flip and crumble unexpectedly. But taking a slightly longer view, the experience the Cypriots are going through exposes the risk of having all of your eggs in the one basket labeled “finance.” If you want to maximize your stupidity, keep your money in a bank or any other financial institution. A slightly less stupid strategy is to hold wastebaskets full of physical Dollars or Euros (which will eventually be worth their weight in recycled paper). Less stupid still is the strategy of holding precious metals (which will probably be confiscated once governments become sufficiently desperate). There are some non-stupid options as well, but if you want to learn about those you will have to read my book (which is going to press this week).

Speaking of which, here is this week\’s excerpt:

A likely endgame

Here is a likely endgame for the finance and import-driven global economy. Supposing global finance suffers another “whoopsie” à la 2008: a “credit event,” money markets lock up and so on… This scenario has been rehearsed once already, and nothing has been done to prevent it from happening again except for some temporary stopgaps consisting of national governments sopping up all the bad debt. What is different now is that all the governments have already shot all of their magic bailout bullets. The guilty parties are still at large, richer than they were before this crisis and probably thinking that the next crisis will make them even richer. The last time it happened, President Bush the younger famously declared: “If money isn’t loosened up, this sucker could go down,” and money was indeed loosened up, and is getting looser all the time. But how loose is too loose? At some point we are bound to hear, from across two oceans, the shocking words “Your money is no good here.”

Fast forward to a week later: banks are closed, ATMs are out of cash, supermarket shelves are bare and gas stations are starting to run out of fuel. Nothing useful happens when people swipe their credit cards at the few stores that remain open (not that anyone is shopping, except for food and ammo). And then something happens: the government announces that they have formed a crisis task force, and will nationalize, recapitalize and reopen the banks, restoring confidence. In short, the government will attempt to single-handedly operate their corner of the global economy by other means. The banks reopen, under heavy guard, and thousands of people get arrested for attempting to withdraw their savings. Banks close, riots begin. Next, the government decides that, to jump-start commerce, it will honor deposit guarantees and simply hand out cash. They print and arrange for the cash to be handed out. Now everyone has plenty of cash, but there is still no food in the supermarkets or gasoline at the gas stations because by now the international supply chains have broken down and the delivery pipelines are empty. Restarting them requires international credit, which requires commercial banks to start operating normally, and that in turn requires functioning supply chains and retail.

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If you are still wondering what keeps this blog going, it is still just you. If you haven\’t done so yet, please pre-order your copy of The Five Stages of Collapse: Survivors\’ Toolkit. The off-press date is May 1st, and it will ship shortly thereafter.
Regular price $18.00 USD Autographed, numbered copy $28.00 USD
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Open Thread

The book is going to press next Monday and, having edited it and proofread it and fact-checked it relentlessly for weeks now, I am in no mood to churn out another weekly essay. There are 30 thousand of you out there! Can\’t some of you write something interesting yourselves, for once? Just this once? Thank you!

The proliferation of defunct states

[Another excerpt from The Five Stages of Collapse.]

The triumph of the nation-state was made possible by the triumph of industry over artisanal production, especially in the area of weaponry. Industrialization gave the larger nations the means to produce vast quantities of war matériel, in turn giving them the impetus to homogenize and standardize the population by imposing a single language and educational system in order to be able to field a unified fighting force. The transformation was profound: at the time of the French Revolution only 10-12 percent of the French population could be said to speak French; in Italy the number of people who could be said to speak Italian was even lower. It allowed a handful of European nation-states to conquer the entire planet, before suffering the successive paroxysms of the two world wars. As they retreated, they did their best to carve up the planet into patches that, they hoped, would emerge as nation-states in their own right. Many of these experiments at constructing nations out of heterogenous ethnic raw material are famous failures: the Tutsi–Hutu Rwanda, the Sunni–Shia–Kurd Iraq, the Moslem North and Christian South Sudan, the permanent disaster area that is the Congo, along with numerous less famous ones. But no matter how weak the case for unity happens to be, it is a requirement that each patch of land belong to some nation-state or other.

Take the example of the Republic of Abkhazia, a tiny speck of a country on the Black Sea that, after the collapse of the USSR, fought and won a war of independence against the newly hatched and rabidly nationalistic nation-state of (former Soviet) Georgia. Abkhazia then spent more than a decade in political limbo because the world at large frowned upon its separatist ambitions. Meanwhile its remaining residents held a referendum and voted for independence, while at the same time acquiring Russian passports. They wanted nothing whatsoever to do with Georgia while realizing that full independence was but a dream. In August of 2008 the Georgians lost their cool and attacked South Ossetia (another limbo territory full of Russian citizens). For this they were severely punished by Russia, which then de facto annexed both territories. Since then the international furor over Abkhazia’s refusal to be part of Georgia has been buried. Clearly, the problem with the world’s refusal to recognize Abkhazia’s independence had nothing to do with Georgia; it had everything to do with independence. Now that Abkhazia has been claimed by a nation-state, all is well and the matter can be regarded as settled. And when we say “the world,” let’s be clear that we mean the United Nations, the OECD and various other international organizations whose members are… nation-states. Membership has its privileges, and one of them is the privilege of stomping on the heads of non-members.

Such is the pressure that every single patch of dirt on the planet should belong to some nation-state or other, even if it is weak or defunct or purely a notional artifact of the political map. Any patch of dirt that fails to coalesce with one of the neighboring tiles in the nation-state mosaic can, in principle, become its own separate nation-state, but then it must organize a national government for the purposes of seeking international recognition and entering into state-legal relations with other tiles. It is by now abundantly clear that not every former imperial possession does a viable nation-state make: the planet is littered with defunct or semi-defunct states that succumbed to internal conflict. The idea of carving up peoples according to arbitrary patterns set by previous imperial conquests and treaties is not a fruitful one.

It is often tempting to see the problems of these stillborn nation-states as problems of governance: if only the political arrangements could be worked out to everyone’s satisfaction, democratically, of course. This approach rather glosses over the point that the world is full of tribes which have lived in close proximity for eons but generally do their best to avoid each other, perhaps only interacting in specific ways, for example by trading on market days, like animals that call a temporary truce when approaching a watering hole. Such tribes remain happy provided they can maintain their cultural, linguistic and social separateness while being able to insult their neighbors (not to their faces, of course). Failing that, they are happy to go to war with their neighbors until their separateness is restored. Forcing neighboring tribes to submit to a single government is tantamount to forcing them to fight. The problem is not with the lack of governance; it is with the mindset that centralized governance and political unity are necessary.

Here is a prescription for disaster. Take a collection of tribes that proudly hate their neighbors and treasure their ability to maintain their separate identity and way of life. Split them up into separate territories based on previous patterns of imperial conquest, being especially careful to make sure that the new borders cut across as many seasonal migration and trade routes as possible, to unnecessarily increase the amount of hardship. Hire a low-budget design agency to come up with a flag, an anthem and some other national symbols. Download a template for a national constitution off the Internet and spend an afternoon customizing it. But then you face a choice: organize a national government that pretends to be democratic and obeys the constitution, or just put the constitution in a glass display case and pick a dictator? These are both bad choices, but in different ways.

Dictatorship is a good form of governance in a bad situation. During the Roman republic the senators would elect a dictator when faced with very serious crises, although a better practice was to elect a couple of consuls, so that their dictatorial powers would be divided between two competitors. The situation of being a recently formed, weak nation-state that confronts a political map crowded with established nation-states, many of them powerful, can be considered a crisis of such monumental proportions that the choice of a dictatorship may seem to be a wise one. However, the country rarely gets a chance to un-pick the dictator once the crisis is over. Perhaps the biggest problem with having a dictator is that dictators tend to either end up being Western stooges or getting overthrown by the West.

Here are some examples of dictatorial successes in holding non-viable nation-states together. The authoritarian Josip Broz Tito held Yugoslavia together and made it a pleasant place. Once it was left without his unifying presence, Yugoslavia descended into ethnic cleansing, genocide and civil war. Saddam Hussein succeeded in creating a prosperous Iraq out of disparate bits and pieces of the Ottoman Empire, with a large, thriving, well-educated middle class. Once he was overthrown, the country (if it can still be called that) descended into civil war, and is now an impoverished ghost of itself characterized by misery and permanent unrest. Muammar Qaddafi achieved similarly stellar results for Libya, and was for a time regarded as an honest broker and a peacemaker throughout Africa. He launched communications satellites in an attempt to break France Telecom’s stranglehold on that continent. But he was overthrown, and now Libya is a war zone and a dangerous place for Washington’s ambassadors. Hafez al-Assad (father of Bashar, the current dictator) held Syria together for thirty-odd years, but now it has descended into civil war.

Yes, dictatorship is at best problematic. But any nascent nation-state that decides to give democracy a try is sure to confront many problems as well. To start with, democracy is a tradition that cannot be conjured up on the spot or imported and installed like a piece of industrial machinery; it has to evolve in place. The best, oldest, most stable democracies have tribal roots and rely on direct democracy at the local level. A representative democracy is a degenerate case open to many kinds of corruption and abuse that may become bad enough to invalidate the entire project. In a representative democracy the electoral process involves forming national political parties which tend to become financially dependent on the dominant class in a process that disenfranchises those whose only ambition is to pursue local interests. On the other hand, violent confrontations over votes are likely when the elected representatives represent specific districts. An attempt to institute granular political representation in an already weak state dominated by non-state actors is a prescription for political violence. Add to this the fact that, in a heterogenous population, proportional representation gives the more powerful and numerous tribes the upper hand over the smaller, minority tribes, which do not readily accede to such an arrangement and look for opportunities to make mischief.

Secondly, democracies, young democracies especially, are easily corrupted by money, especially money from abroad. Much of the foreign aid that comes from the US, the EU, Japan and, more recently, China, has been spent on propping up weak governments, to the detriment of the governed. There is a long list of countries that have an impoverished, disenfranchised population lorded over by a government that is headed by corrupt officials who drive around in limousines and wear flowing robes and plenty of bling and command foreign-trained, foreign-armed militaries. It has been a long-standing pattern for such officials to accept Western loans, promptly deposit most of the money in their own personal offshore bank accounts, and leave the country saddled with the impossible task of repaying them. The same pattern of exploitation that corporate raiders practice in doing leveraged buyouts of public companies, where the raiders walk away with a great deal of money while the company is left behind as a hollow shell suffocated by debt, can be practiced with respect to countries, especially if they are democratic ones. It is only a slight exaggeration to say that democracy enables the process by which private property can be transformed into political power. If an authoritarian regime finds that individuals or corporations are using their private property to undermine its political power, the property in question is confiscated (nationalized). There is a very nice fellow by the name of Michael Khodorkovsky, who used to run a major Russian oil company but is now cooling his heels in a Russian penal colony. The reason he is there is that he did not appreciate this particular aspect of authoritarianism: he naïvely thought that his corporate wealth automatically gave him political leverage.

Although a nonviable nation-state run by an authoritarian government or a dictatorship is better at pushing back against neocolonial predation by other nation-states than a pretend-democracy, neither one is ultimately satisfactory. The solution that tends to emerge spontaneously is one of local self-governance that takes each small region out of the arena of state-legal relations altogether. If a region possesses a system of informal self-governance, refuses to allow selection of representatives, refuses to enter into treaties and rejects all claims of outside control or ownership with a credible show of force, then it effectively becomes, in the parlance of international law theorists, an ungoverned space. Such spaces are not necessarily lawless or even dangerous, but they are dangerous to outside forces wishing to advance their own interests to the detriment of the locals.

As more and more erstwhile nation-states pass through the weak phase and tip into the defunct column, they can collapse into durable disorder or endless civil war, but they can also collapse into local autonomy and self-governance and let national borders grow porous. Their human populations are then able to come out of the vegetative condition to which settled, civilized existence has consigned them and revert to their original, nomadic state. There is a none-too-subtle difference between terrestrial plants and animals; the plants do not move, while the animals do (and when they do, there is just one species that requires passports or visas to cross international boundaries). We did not colonize most of the planet by staying put; nor will we be able to stay put if we wish to adapt to life in a depleted, disrupted, rapidly changing natural, physical and social environment.

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If you are still wondering what keeps this blog going, it is still just you. If you haven\’t done so yet, please pre-order your copy of The Five Stages of Collapse: Survivors\’ Toolkit.
Regular price $18.00 USD Autographed, numbered copy $28.00 USD
(Although the order is placed through PayPal, you don\’t need to have a PayPal account; just click \”Don\’t have a PayPal Account?\” during check-out and enter a credit or debit card number. If you do have a PayPal account, please make extra-double-sure that the shipping address associated with it is up-to-date and correct, and will remain that way through May.)

Where There\'s No Government

Mason London

Excerpt from The Five Stages of Collapse

[In italiano: Dove non c\’è governo]

Modern societies rely on the government to defend property rights, enforce contracts and regulate commerce. As the economy expands, so do the functions of government, along with its bureaucratic structures, laws, rules and procedures and—what expands fastest of all—its cost. All of these official arrangements show an accretion of complexity over time. Each time a new problem needs to be solved, something is added to the structure, but nothing is ever taken away, because previous arrangements are often grandfathered in, and because simplifying a complex arrangement is always more difficult and expensive than complicating it further. But socioeconomic complexity is never without cost, and once the economy crests and begins to contract, this cost become prohibitive. In the context of a shrinking economy buffeted by waves of escalating crises, an outsized officialdom comes to exhibit ever greater negative economies of scale, while the arduous task of reforming it so as to scale it down and simplify it cannot receive priority due to a lack of resources. In the best case, after a more or less chaotic transitional period, new, simplified and scaled-down official structures do eventually arise.

The government, at least in its non-functional, purely symbolic form, may not be abandoned outright. A few of its key functions may come to be served by unofficial groups. An almost completely lawless environment may prevail in certain particularly distressed areas for a time, after the government loses all ability to act due to lack of resources, and before local forms of unofficial self-governance spontaneously arise. It must be remembered that governments exist mainly through taxation. In a declining economy, the tax base shrinks while the government’s expenditures on social spending and crisis mitigation only go up, but the population cannot afford to pay a higher tax rate. In this situation, most governments nevertheless try to raise taxes, with the effect of driving economic activity underground. As the population is forced to resort to illegal forms of commerce, to informal arrangements, barter, gift and subsistence economies in order to survive in conditions of increasing poverty and joblessness, this vicious cycle feeds on itself and the government withers away, turns to criminal activities to survive, or both.

As the process of governmental disintegration runs its course, alternative, unofficial forms of governance take its place rather quickly. It is neither accurate nor helpful to imagine a spontaneous descent into some sort of Hobbesian state of nature, which, given what we now know, is best regarded as a ridiculous fable, a work of whimsy and a projection of ignorance, for where there is no law, there is custom and taboo that have the force of law and are upheld through judicious use of violence. Where there are no official authorities, unofficial ones spontaneously arise. Trade and commerce go on, but without government involvement or protection.

What’s more, in a transitional, crisis-wracked environment such unofficial forms of governance often turn out to be far more cost-effective. The government, with its predictable, impersonal, rule-governed, procedure-oriented set of evolved behaviors, is only able to function effectively in a stable, predictable environment. A collapsing economy is not such an environment. Here, all judgements and actions have to be based on the local, immediate situation, all solutions have to be improvised and ones that involve going through official channels and gaining official approval become noncompetitive. Illegal ways of doing business easily outcompete legal ones.

The focus on illegality is in some sense inevitable, but it is also not entirely helpful, because it tends to paint all activities as black or white. It is far more helpful to view them as grayscale, or as distributed over a two-dimensional map. In one corner, we have public institutions functioning legally—or perhaps not functioning at all: the police, the courts, code enforcement, inspectional services and so on. In the opposite corner we have private institutions functioning illegally: organized criminal groups. But there are two more corners. We also have public institutions functioning illegally—police and security forces acting privately, either for hire or on their own behalf. There can also be private organizations legally providing services that the government can no longer provide: private security and protection companies. There are numerous gray areas, such as officials randomly enforcing laws to settle scores with certain individuals or groups, or to provide a credible basis for later demanding bribes in exchange for agreeing to look the other way.

A large increase in illegal activity is often the direct fault of the government. A government that makes many essential activities illegal but lacks the ability to enforce the ban succeeds in only one thing: creating a large field of action for illegal enterprises. This, in turn, creates demand for their private protection. It is this key function of offering private protection for illegal enterprises that provides the initial basis for an entire new mode of governance. In this context, organized crime should be regarded not just as a form of social organization but as a form of alternative governance, which succeeds or fails based on personal and group reputation for honest dealing, and on its ability to use violence when it is justified and suppress it when it is not.

In many ways a weak government, which can impose a ban but not enforce it, is far worse than a largely defunct government, whose officials perform a few ceremonial duties and rarely set foot outside the heavily guarded official compound in the capital city. A weak government with some residual capacity for law enforcement produces a far more violent environment than a defunct one, by disrupting the work of organizations that offer private protection to illegal enterprises. Once the government has given up on law enforcement and become purely ceremonial, private protection organizations can begin to provide services to both legal and illegal enterprises, and indeed to the government itself. Ties between such organizations can then be worked out and territories and spheres of influence divided up, minimizing the level of violence. In this sense, a weak government’s efforts at law enforcement further weaken the economy by making it difficult for organizations that provide private protection to do their work, while their services are in demand precisely because of the government’s inefficiency in providing protection. Of course, this only further undermines the government… [This transition] should not be regarded as one that begins with the rule of law and ends with something else, but as a transition from badly organized crime to well-organized crime. Examples of this sort of succession can be found throughout history and in many parts of the world. Be it the Sicilian Mafia, Al Capone’s Chicago in the 1920s or Russia in the 1990s, there are numerous parallels in how such a transition occurs. If allowed to run its course, it eventually supplants the government and forms a system of self-governance and private protection whose legality is no longer in dispute.

Nor is this a recent phenomenon: during the Middle Ages, and even into modern times, protection rents were the largest source of fortunes made in commerce, playing a larger role in generating profits than production technology or industrial organization. Protection rents offer a means of stimulating an economic recovery (subject to natural resource constraints). This is because an organization that offers protection forms a natural monopoly within its territory, allowing it to raise the price of protection above its costs and generate a monopoly profit, which it is then able to invest in productive resources. In the absence of a government, it is the only actor that can create temporary austerity but produce greater prosperity down the road by reallocating resources from consumption to capital goods. If more competitive institutional frameworks are allowed to evolve, formerly criminal groups can become legitimate shareholders in the businesses from which they had previously extorted payments.

Such a scheme does not spontaneously arise everywhere. The demand for protection services is a matter of scale; it does not exist in societies where people deal only with those they know personally, face to face, and where disputes are mediated by family and clan. It is a byproduct of economic specialization, impersonal relations and the need for long-distance trade. In societies where interpersonal trust is high, no one needs enforcers, and where there is sufficient solidarity, people can unite and defeat the common threat of gangsterism. Like weeds that opportunistically colonize areas of disturbed soil, criminal groups sprout up in disturbed societies. Small-scale enterprises in large-scale societies are the most susceptible; kiosk owners and street vendors are traditional targets for racketeers. Next are corrupt public officials, who spontaneously give rise to private protection, because they create a market niche for those who broker bribes and guarantee the transactions of bribery, protecting both sides: the briber from non-performance and the bribed from non-payment. …It is therefore necessary, as we start to explore this topic, to set aside our negative reactions to terms such as thief, racket, mafia, gangster and so forth and concentrate on the circumstances that create a need for their services, and on how the racketeers and the gangsters can evolve in a positive direction because, strangely enough, they often do.

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If you are still wondering what keeps this blog going, it is still just you. If you haven\’t done so yet, please pre-order your copy of The Five Stages of Collapse: Survivors\’ Toolkit.
Regular price $18.00 USD Autographed, numbered copy $28.00 USD
(Although the order is placed through PayPal, you don\’t need to have a PayPal account; just click \”Don\’t have a PayPal Account?\” during check-out and enter a credit or debit card number. If you do have a PayPal account, please make extra-double-sure that the shipping address associated with it is up-to-date and correct, and will remain that way through May.)