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Predictions? Or near-certainties?
New Year’s predictions are always a fun exercise. We can bet each other over the price of gold on December 31, 2012, or who will win the White House this year, or even make wild, black swan predictions. It’s like the Charades of thought experiments... good for laughs at a cocktail party, but ultimately meaningless. Serious personal and financial plans cannot be developed from mere conjecture– it takes significant research, uncovering little-known facts, reviewing historical examples, and looking for ongoing signs that either reinforce or void hypotheses. I’d like to share a few with you today. In my assessment, these ideas are not so much predictions, but rather mathematical near-certainties that underpin some of my own plans and investments. Note– the timing for these is loose, not based on some fixed calendar date (Mayan or Gregorian). Some may occur this year, others may not arise for another 3, 4, even 5-years. But with each passing day, the likelihood becomes stronger. 1) Social Security in the US, and public pensions in Western Europe, will be completely restructured. That which cannot be sustained will not be sustained, and the public pension Ponzi scheme is at the top of the list. This is already happening in the European countries that have had to face the music already, but the rest will soon follow. Why? Because at a $1.725 trillion cost, the US government spent nearly 75% of all tax revenue on Medicare and Social Security last year. And the situation will only get worse. Tax revenues are falling in a dismal economy, while the retiree demographic and rising healthcare costs are pushing up entitlement spending year in, year out. Even by the US GAO’s own math, these entitlements constitute a $33 trillion liability. And amazingly enough, it’s even worse in Europe. Not to mention, public pensions represent a neat little kitty for cash-strapped politicians to raid... and the likelihood of these criminals allowing the funds to end up where they were promised is incredibly low. Inflating away the debt is certainly the preferred course of action as it is more politically palatable. Inflating away a $33 trillion liability in the available time frame, however, is nearly impossible...not without sparking hyperinflation. Rather, retirees and prospective retirees are going to be hit squarely between the eyes with a restructuring of what had been promised to them for their entire lives. And most will be completely unprepared. 2) Epic failure: the ‘ah-ha’ moment At some point, even the most dim-witted American is going to realize that his country is flat broke. Most Europeans are starting to realize it... but Americans have an incredible ability to ignore the obvious and kick the can down the road. This may arise from some major infrastructure failure, or another epic natural disaster– the mother of all hurricanes, or an ill-located earthquake– that absolutely levels a major city. And it’ll stay that way. The government will be too broke to rebuild, and too uncreditworthy to borrow. The city will remain an architectural graveyard, an American Pompeii that becomes a monument to insolvency. And it will be the ultimate ‘ah-ha’ moment as people are finally shaken from their apathy and blissful ignorance. This will mark the start of the mania phase for everything ranging from firearm purchases to expatriation. 3) Gun control With over 129,000 federal background checks registered on Black Friday 2011, the previous single day gun sales record was shattered by 32% according to FBI records. And baby, we ain’t seen nothin’ yet. From ancient Carthage to Nazi Germany, history is full of examples of how a citizenry is systematically disarmed by its government prior to a major erosion of civil liberties and restructuring of the social contract. The calculus is quite simple– government is interested in maintaining the status quo, i.e. their power at our expense. Consequently, attempts at gun control become a foregone conclusion in times of social and economic turmoil. 4) Western governments pull a Mubarak In an effort to stamp out dissent, Western governments begin utilizing Internet and mobile kill switches, censoring web sites, and increasing their authority over telecommunications architecture. Google’s ‘don’t be evil’ mantra becomes the de facto ‘ignorance is strength’ from 1984 as every major service provider becomes a willing accomplice. Facial recognition technology will become ingrained with public surveillance under the banner of national security. All Internet activity is monitored. Privacy ceases to exist in the developed west. 5) War In his book Civilization, historian Niall Ferguson pokes a bit of fun at Karl Marx when he refers to nationalism as ‘the cocaine of the Middle Class’. Nothing unites people like a common enemy, and the time-tested trick to get an entire society to forget about their domestic plight is to start a war. Boogeyman terrorists have done a marvelous job keeping society in check, but in a world of scarce resources and economic decay, a more conventional conflict may ensue. After all, to the victors go the spoils, and many countries won’t be above taking what they need by force: water, farmland, oil, etc. 6) Dollar dominance ends As I travel around the world, I’m constantly struck by high levels of inflation. From Thailand to Egypt to Sri Lanka to Uruguay, uncomfortably high inflation is prevalent, particularly major categories like fuel, food, and housing. Poor people don’t but iPads. With its genesis in the Fed’s quantitative easing measures, inflation has become a major US export, right after Hollywood movies, hip hop music, and worthless debt instruments. America ships dollars overseas, and developing nations literally pay the price.This is unsustainable, and the dollar’s status as the global reserve currency will continue to decline. In the coming years, you can expect to see the US Treasury issuing debt (at much higher yields) denominated in a foreign currency– perhaps Chinese renminbi, or a to-be-determined new monetary reserve unit. Things discussed to this point involve certain events that, in my view, are nearly mathematical certainties. Things like a restructuring of public pensions and Social Security in Europe and the US. Western governments blocking Internet and mobile networks. War. The US government being forced to issue debt in a foreign currency. All of these events are underpinned by a simple premise:
Everything from the way I invest to how I allocate my time and plan for the future is based on this view. It’s why I’m in Chile, why we purchased a 1,000+ acre farm, and why we plan on sharing it with like-minded people. I may be a bit early, but I’d much rather be early than thinking through these implications while I’m packing my bags. After all, things can ‘feel’ quite normal for a long time. Changes take place gradually, then faster and faster, until the decay looks like an upside-down hockey stick. The Roman Empire, for example, began its spectacular decline shortly after Augustus became de facto emperor in 27 BC. He was followed by a long series of dismal failures – Tiberius, Caligula, Claudius, Nero, etc. But Rome muddled along for hundreds of years, wavering between growth and decay. The changes were gradual. A little currency debasement here, a bit of excess spending there, and throw in plenty of assassinations and foreign wars for good measure. Along the way, though, thinking people could see the writing on the wall... and many of Rome’s citizens set sail for greener pastures. The gradual changes became more and more pronounced... and the more pronounced, the more people left. As Gibbon recounts in his seminal work, The History of the Decline and Fall of the Roman Empire, the city of Rome lost nearly 75% of its population in the Empire’s final 50-years in the 5th century. History is full of other examples of once proud nations that, facing problems for decades (or even centuries), completely unwound in a matter of years. The Ottoman Empire. The Ming Dynasty. Feudal France. The Soviet Union. Bottom line, when the real change comes, it comes very, very quickly. Think about the pace of change these days. It’s quickening. Europe is a great case study for this– when concerns about Greece first surfaced, European leaders were able to contain the damage. There was disquiet, but it soon dissipated. Fast forward to today. We can hardly go a single day without a major, market-rocking headline. And European politicians’ attempts to assuage the damage have a useful half life that can be measured in days... sometimes hours now. Like the Ottomans, the Soviets, the Romans before them, Western civilization is entering the phase where its rate of decline will start looking like that upside-down hockey stick. There is no crystal ball that can tell us exactly how/when it will all go down. It stands to reason that certain events (perhaps this year’s Presidential elections in the US, Russia, France, etc.) will be pivotal in the decline, but suffice it to say that time is not on our side given the pace of change. Each of us has a finite amount of resources– time, energy, capital, etc. And I really want to encourage you to think clearly and deliberately about how you allocate those resources... e.g. you’re better off buying an ounce of gold than making a political campaign contribution. 2011 was a challenging year. 2012 will likely prove even more. But this isn’t anything to dread. It’s is an incredibly exciting time to be alive– change should be embraced, not feared. Empires always run their course. Bubbles burst. But creative, thinking human beings always survive and thrive. |
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