What to do?
I continue to expect the path our society, our political system, and our financial markets are following, to reach an inflection point the likes of which have not been seen in over two centuries in the immediate future.
Until we see the crises unfold that this shift in the social dynamic will cause, we continue to be left dangling in the wind, preparing as best we can. I thought it might be useful to at least go over some of the more obvious results once the crises pick up in speed and intensity.
When federal spending shrinks, the ripple effects will be huge. Transfer payments alone are measured in the billions of dollars each month. I fully expect you will see means testing imposed on Social Security and Medicare payouts (likely as an "emergency" Executive Order at first that gets hashed out in the courts or Congress later, assuming there is enough coherenc left in the government sector to make that relevant). You can also expect the large and expensive systems related to the Obamacare system to not be funded and that as payouts drop, to see tremendous numbers of "billing errors" from insurance companies as the scramble to loot what little is left in the system becomes frantic.
For those with money in the bank, if you are reading this, then you know as well as I do that this is a crap shoot. What banks mnight survive, what "emergency" legislation might get passed to "help" the banking system, etc. is completely unknown. As the bureaucracy is not very creative, we can expect cold leftovers from previous crises, which might include a Bank Holiday, capital controls, etc. all in the face of strong advice to not to. What this would do to an economy heavily reliant on automated billpay, electronic transfers, reliance on outsourcing for many manufactured goods, and the entire mechanism that keeps things humming along is unknown.
The short term agony of a cutoff or reduction of government transfer payments as well as probably hiccups in the banking system would then be replaced with the long term agony of an economy which has to now adjust to a radically different set of circumstances. The credit spigot will have been choked off, the debt burdens would be enormous, and the income streams available will be unable to service the debt, much less anything else. Bankruptcies will skyrocket.
What remains to be seen is how the millions of students who were programmed to go to college and took out enormous loans to do so handle the fact that student loans cannot be discharged easily in bankruptcy. I would imagine that courts would eventually take into account the economic environment and grant the "undue hardship" exception on a wide basis - but in the early days of the crisis I would expect that many courts would continue to have the mindset of the Bubble Years and lecture said debtors on their lack of gumption, or their unwillingness to work hard or start low on the totem pole as a fry cook or something like that. I fully expect some utterance from a constipated justice late to his tee time to feed into the political revolt I expect will be ongoing at the time via viral videos. I particularly look to the student aspect as this demographic is one most easily co-opted into the Occupy Movement, which I think will itself, or a splinter group, form the nucleus of a valid Third Party.
The rest of it is as unknown to me as it is to you. Will your job survive? Will your renters be able to pay their rent? Will those dividend stocks continue to pay?
Incomes will plummet. Debt will be discharged - most often painfully. The system to process all this debt and property transfer activities will gum up. Chaos will reign in many regions as local bureaucrats try to sort things out.
Even having a chunk of proprety paid off may not help as much as you'd think as we can expect much more in the way of...
Taxes and Government Intervention
Even if voters knock down attempts to raise taxes in an environment of falling property values, high unemployment, and collapsing incomes, expect a rise in unk fees and outright theft via government action. Charles Hugh Smith gives us a taste of what is to come in a recent article entitled Welcome to the Predatory State of California - Even if You Don't Live There.
Remember how easy the feds and states made it to get your tax refund by asking for your bank account information? Well, that is how they can, and in some cases I fully expect will, reverse the flow and initiate seizures of your property based on the flimsiest of rationales. Have fun with the appeals process.
I won't go into detail on what I expect the paranoid Security State apparatus to try and get away with when things are in full free-fall. Suffice it to say that, as the Elliott Wave Theorist put it 9 years ago, "[t]he U.S. will require internal travel papers" - and that will only be the beginning of it. Where the paranoid Security State will run into problems is who will pay for it. Yes, governments always seem to find cash to fund oppressoin when the chips are down, but the U.S. is a heavily armed, continent-sprawling country with a mythos rooted in liberty and resistance. This will probably break down into a theme where overt authoritarian actions are confined to large population centers with the more subtle cultural pressures used to keep the far-flung Flyover States in line. Should be interesting to see how it works out.
I've long considered the energy component of the coming crisis to be far more important and far-reaching than one might think at first. The current method of generating and distributing power was deployed during the greatest era of bullishness and positive mood the U.S. has ever experienced. This infrastructure is complex, easily disrupted by bad actors, and reliant on supply chains that have never had to endure a long-term bear market.
Prices for electricity very well may stay low for an extended period of time as demand collapses. It is likely that power rationing may be put into place at times as a result of violence or breakdown. Something is going to give and I expect that the way we produce and use electricity will be fundamentally different by the time we traverse this era of negative mood.
This goes for liquid fuels as well. Oil prices may very well collapse again as demand drops during a downturn, which will be good for those who still have a job to fund their driving habit. It very well may be the case here, as in electricity, that internal politics or violence could cause fuel disruptions long before any geological limits are reached.
As for the promise of new nuclear power plants, I spent some months in early 2011 trying to work with the data to find how the use of nuclear power matched up with the patterns in the stock market. This has proved, so far, to have been a bit of a dead end. The very long lead times and large cash outlays involved seem to have clouded the response to changing moods, at least in the short term. I continue to chew on the issue, but don't see a clear correlation yet. What I can pass along is the "flavor" of what I expect. Nuclear power seems to have a split personality. It came of age in the optimistic 50's and 60's, then deployed in the 1970's during an era of net negative mood. The bomb program has always been tied to it, and the fear associated with the few major nuclear accidents have been of extreme magnitudes in relation to the actual damage caused. The plants in operation today are products of a positive mood era - big plants providing massive amounts of electricity feeding into a complex grid. The future may very well be bright for smaller nuclear plamts (the so-called Small Modular Reactors, an area of great promise) that can be produced in factories, deployed on-site, not require refueling, can be small enough to power local areas but not reliant on a national grid to safely distribute the load, but on the whole, I expect the coming downturn to kill off the building of new nuclear plants as their massive initial cost in a time of declining energy demand will not be justifiable.
Electricity may not cost a lot, but it may be intermittent for those relying on the grid. That will, like most things, depend on how your fellow citizens handle themselves and the outlets they choose to use to express their anger.
As the U.S. faces a decline in its ability to project empire, we can expect severe dislocations as regional players assert themselves. I agree with the February Socionomist that now is probably not the time to expect World War III, but that doesn't mean that "police actions" in the Middle East or Asia won't be devastating to world trade. Add into the mix the desire to erect trade barriers and fight trade and currency wars and you can expect a lot of changes in how companies get things built and how supply chains for everybody from Wal-Mart to vitamin-makers work when the U.S. and China duke it out via trade sanctions, or Europe goes on the offensive via the WTO (for as long as that organization will last, at least).
In short, incomes down, taxes and regs up (at least initially), energy unreliable but probably cheap in the right circumstances, and supply chains that have to be refashioned.
Do with that what you will.
Have a great weekend.