Financial collapse within 18 months?

What could go wrong

Photo by David Vives / Unsplash

November 5th has come and gone. After two days of a dread-driven headache, I accepted the outcome. Being collapse-aware has hardened me, leapfrogging the typical stages of grief.

Numb to the predicament I feel like an observer watching from the outside. That's not the best description of my true situation, but it helps me remain objective.

There's so much to say about our future, but I don't want to rehash what you already know. Instead, today I will write about how an over-controlling government could trigger a financial collapse within the next 18 months.

First of all, I'm not a soothsayer. Instead of making a prediction, I'm highlighting the odds. Even a 10% chance of financial collapse within a year and a half should be enough to raise the hairs on the back of your neck. It's important to monitor developments in case those odds rise.

Let's start with the most obvious way a government can trash the economy.

Currently there are about 19 million civil servants, 2.9 million of which work for the Federal government. Lets say the administration replaces thousands of staff with loyalists. While this is a small fraction of the total number of employees, it is the start of a firing-hiring chain reaction that could see the entire civil service transformed based on ideology.

The civil service is meant to be non-partisan, equally supportive of any political leadership. A re-aligned civil service could create policy and ideological permanence that would be extremely difficult to extract, if ever the opportunity arises.

Additionally, rapidly prioritizing employee ideology and loyalty over merit destroys institutional knowledge, enables incompetency and disturbs long-established processes.

Put simply, it risks gumming up an economic system that depends on government spending, which is about 1/3 of US GDP. Regardless of your view of fiscal conservatism, a change of this magnitude executed haphazardly risks a major collapse of economic activity.

Without a functioning government apparatus in place, normal activity and automatic fiscal stabilizers (e.g. employment insurance) could fail and fiscal policy could become impotent.

This would be highly deflationary. To be clear, I'm not just talking about the loss of government jobs here. The private sector would fall apart if 1/3 of GDP rapidly shrank or the government became ineffective.

If the transformation of the civil service is minimal or gradual, this scenario could probably be avoided. We'll just have to see what happens.

A government that attempts to control central bank policy could also destroy the economy.

Situation 1: history shows that governments are tempted to spend more than they collect. "Free money" is an easy way to keep constituents happy. Usually, spending is mitigated by the ability to tax and borrow, however, if the government controlled the printing presses, those constraints are removed.

While the Treasury market might revolt against out of control spending, it would not matter to a government that is able to create money out of thin air. (It would matter to other borrowers, however.) It would require extraordinary discipline for an Executive that controls the Federal Reserve not to simply create new money to fund spending. Unfortunately, doing so would push the economy into an hyperinflationary spiral. Even if government debt isnt fully monetized, as described above, the temptation to keep rates artificially low could push up inflation.

Situation 2: a politicized Federal Reserve could change the way it functions during times of global financial stress. First, if experts are replaced with lackies, the Fed may no longer have the experience and expertise to manage a financial crisis. Second, isolationist policy could close vital swap lines that have kept international trading partners afloat during dollar shortages. These actions - although altruistic in appearance - are symbiotic as they support global liquidity, ensuring trust within the global financial system and helping to prevent pro-cyclical asset liquidations. Without this outreach (and other measures), a crisis like the one experienced in 2008-2009 could have ended in another highly deflationary Great Depression.

Just one of these scenarios could cause financial collapse. Combine them and it's a lot worse.

Perhaps this is for the best? After all, an economic collapse would curtail economic output and therefore emissions.

Just as I'm not prescribing the future, I am not arguing good vs bad. Rather, I'm pointing out risks to monitor, as they could affect your ability to put food on the table.