Collapse: A Guide

But then again, countries can, and do, collapse. The mid-20th century American journalist Garet Garrett once chronicled the decline of countries, specifically empires, suggesting that imperial overextension and entitlement programs lead to an inevitable bankruptcy. Can we—with Benjamin Franklin’s advice during the Constitutional Convention in our minds—“keep” our Republic? Or is it too late?

These sorts of big questions made history fascinating for me as a high schooler, which is why I read Arnold Toynbee’s A Study of History. I just had to know. Was the United States on the cusp of collapse? Keep in mind, this was 50 years ago, and we haven’t yet collapsed. When I studied more history, explored politics, and discovered economics, I had this Big Question in mind, along with its opposite corollary: Why did the West “win?” And, of course, are we near its end?

The simplistic answer to that first question involves property rights and the rule of law, and if that is true, we can gain some insight into collapses. So, here’s a short guide to what I’ll term The Big Collapse: A Guide, keeping in mind Adam Smith’s reassuring words.

About 2600 years ago, a group of people east of Greece invented something amazing, which limited the high costs associated with trading with strangers: the coin. With that invention, the Greeks’ commercial empire took off (and, admittedly, collapsed!). But this amazing success story reminds us that the economic must precede the political. Creation of wealth must occur before one tinkers with that creation. The British, Dutch, and the Americans each created amazing amounts of wealth, so much that per capita incomes nearly quadrupled every generation.

A roving bandit (imagine Genghis Khan) will take all that he can get; a stationary bandit (think Louis XIV) won’t, because killing the goose that lays the golden egg is counterproductive. But kings, and later, democratically elected leaders, can take a sizable chunk of wealth from their subjects. And in a democracy, the people join in. I talked with an owner of a California apartment complex who said he’d never invest in California again: since COVID, a sizable percentage of his tenants continued, legally, to refuse to pay their rent, while they collected COVID-related government benefits. Countries that became wealthy through markets eventually can turn into giant redistribution schemes—think Sweden. Generous benefits foster entitlement mentalities. Who, then, supports this?

This happens largely out of a sense of outrage at the chasm between the haves and the have-nots; when everyone is poor, poverty is equally distributed. Or the outrage emerges out of envy—intellectuals can see the high incomes and wealth of the rich, some of which, admittedly, derived from their connections with powerful people.  They assume there’s always injustice, and never any justification for being a billionaire. A professor at a university making a fraction of a CEO’s salary wonders why this former “C” student of hers has so much more income than she does. 

“Everyone wants,” the French economist Frederick Bastiat once wrote, “to live at the expense of the state.” In other words, when they can, people live at the expense of others. Political leaders gain votes by ensuring security, and we all tend to underestimate the costs of our ideas, whether that is our remodeling project or a high speed railway system. And if costs can be hidden or postponed by borrowing or inflation, all the better.

People expand the idea of rights to include positive rights (the right to a free education, a free lunch, free healthcare) and lose a sense of responsibility—or, more accurately, transfer responsibility to unknown others. Nearly two-thirds of Americans think all college should be “free.” Of course, if I am entitled to a good, someone must be responsible for giving it to me. If I’m entitled to medical care, and a physician is entitled to a vacation, we just might have conflict.

In 1900, federal spending was about 2% of GDP. Since then, GDP per capita has grown at least five fold, and federal spending is now about 24% of GDP. In inflation-adjusted terms, federal spending has increased 60-fold in a bit more than a century. Debts rise with money unbacked by anything, as do taxes, and even with more tax revenue, debts still accumulate.

Entitled citizens, particularly in the middle class, who encompass the majority of the voters, enjoy and sometimes depend on “the dole,” and in financial crises, when spending is cut, they become angry. Governments are faced with a dilemma: cut programs and/or raise taxes, and incur social unrest, or inflate away the debt.

Stung by higher taxes and program cuts, or inflation that eats away their wealth, people’s allegiance to the government erodes. At this point, pay attention to the “The End is Near!” signs you see.

And that’s when collapse occurs. In The Sun Also Rises, Hemingway described the process of bankruptcy as “gradually, and then suddenly.” In other words, it happens slowly, then all at once. This is true for individuals, corporations (like banks), and countries. And though sometimes a national bankruptcy is more conventional—a refusal to pay its debts—it can also be a slippery slide of inflation eroding the value of debt.

In history, we have had about 800 fiat currencies—currencies that have abandoned their backing from something stable, like gold, and are printed by governments. Their average lifespan: 35 years. Most of them collapse into the nothingness they emerged from.

Perhaps the US dollar is an exception? It has been untethered from gold since 1971. 

I think not. 

It appears that even the Fed is concerned, as it’s worried about a problem called “fiscal dominance” within the next ten years or so. 

And what is this?

“Fiscal dominance,” the Fed says, “refers to the possibility that the accumulation of government debt and continuing government deficits can produce increases in inflation that ‘dominate' central bank intentions to keep inflation low.” 

In other words, don’t expect that relatively benign annual 2% inflation rate to be with us all that much longer—the high interest rates caused by the deficits make the debt too expensive to finance. We’ll just keep printing those dollars.

I don’t know what might replace the dollar, or when (the British pound took 70 years to fade from global dominance) but the allure of getting something for nothing, combined with the legal ability to produce something from nothing, is pretty much irresistible.

Remember, though, that with a collapse, there’s an opportunity to start anew: after all, the American founding sprung from an overextended empire that ran out of resources to hold on to its colonies.