We're in for a wild ride. Exponentially accelerating technological, cultural, and socioeconomic evolution means that every year will see more developments than the previous one. More change will happen between now and 2050 than during all of humanity's past. Let's explore the 21st century and ride this historic wave of planetary transition with a confident open mind.

Tuesday, May 26, 2009

Economic Collapse: Debtors Benefiting from Severe Inflation, Government Helping Forgive Debts to Avoid Brain Drain, and Gold Triumphant

1970s-1990s transfer from industrial to financial capitalism created an economic system that is increasingly incapable of meeting demands of all segments of the population. Solid possibility of unsustainable inflation can be countered with buying gold.

Military elites do not wish a massive brain drain of professionals fleeing this country to avoid 21st century indentured servitude of debt repayment (since ability of the military to exercise power abroad slackens). In the coming years, there will be increased intra-elite infighting concerning massive debt forgiveness for 20% of population who fancy themselves as middle class. There will also be a silver lining for those Americans who use their remaining currency to buy mass amounts of precious metals rather than pay off their debts.

Lets do a cost-benefit analysis of a student loan repayment scenario and see if any life gains can be made from devaluation of the dollar. Lets say you have a couple thousand dollars. Lets say you happen to have acquired 10,000 dollars in student loan debt through financial aid/Stafford. Whether you have the subsidized or need based unsubsidized fixed interest rate is immaterial for this scenario. The point is that you have a fixed rate for a loan to repay over a decade or so. Lets use the locked rate of 5%. What should one do in a country where: 1) the national debt burden is 2.5 as heavy as before Great Depression 2) 3 of the 5 oldest financial pillars (like Merrill Lynch) have collapsed within months and 3) the government decided to sharply increase the debt to start gradually escalating restructuring efforts?

There's 2 big options:

Option A:

Pay a minimum every month ($106 for standard repayment or $70 graduated) for a few years and then repay the whole thing rapidly in chunks. Since doing minimum payment for 10 years would be $2,730 in interest for standard or $3,250 in graduated, one thus saves a few thousand dollars. However rapid repayment involves losing thousands of dollars early on in one's life that can be invested elsewhere.

Option B:

Put the loan repayment on automatic billing and treat it like a utility for 10 years and in the end pay $12,730 for standard repayment or $13,250 for graduated.

Which is better?
For answer lets take "normal" American inflation rates into account. If you had $10,000 in 1999 and kept them under the mattress for 10 years you'd lose 25% of their value by the end of 2007. You can play around with various online inflation calculators and see. In other words, same product that cost $10,000 dollars in 1999 would cost $12,500 dollars in 2007. Of course that's assuming the product is not afflicted by deflationary effects of technological breakthroughs in production as occurs with computer hardware. American college education definitely doesn't fit into that product category after the 1970s-1990s transition from industrial state capitalism to financial state capitalism. Demand for better quality of life through increase in both quality and quantity of education, medical care, transport, safety nets is prevented from being met by the architectural design of the current political-economic system. In 2006 to 2007 for example, the average cost of tuition for public college has risen 5.6%, whereas 10 dollars today buys exponentially more computing power than 10 dollars a decade ago.

The full cost of the Stafford loan over a 10 year monthly minimum repayment is historically the same as paying it out all at once. There is a strong possibility that the dollar will lose 15% of its value or more by the end of 2009. Potential of even greater inflationary trends in the future are great for anybody who owns debt as long as they can restructure their interests. There is no logical reason whatsoever to give more money than you have to to banks working with financial aid organs. There is a solid chance that the near future US government will not only help restructure interest payments on many house mortgages/college loans but that it will make financial sector forgive all the loans completely.

Government assisted debt forgiveness makes strategic sense to preserve social stability. The Americans who fall into the 20% of population that are sufficiently educated and wealthy to call themselves "middle class" (but not wealthy enough to be in the 2% politically connected oligarch class ) pose the highest risk of emigration, mass capital outflow, and brain drain to Europe. Politically unconnected homeowners who lose not just their life savings but their shelter and neighborhoods are a huge threat to federal control. It'd make post-default recovery efforts towards German style industrial capitalism much more difficult. Obama administration must gradually nationalize the finance sector through making some finance oligarchs believe he is just collaborating with them. That will allow mass national debt forgiveness when the time comes for dollar default. The looting and capital outflows done by top 1% cannot be avoided but social stability and political support from homeowners can be preserved to allow greater restructuring in the future. Whatever micro and macro level political-economic architecture US will have by 2020, thousands of gated communities, suburbs, towns, and small cities must not be allowed to disappear over night. Proper handling of debt forgiveness will allow their disappearance to be gradual as brain drain to Europe will be reduced and redirected a bit towards major US cities.

Best way of investing one's cash right now is buying as much physical precious metal as possible. Under inflation of the last decade 10 thousand dollars now buys 25% less while an ounce of gold buys a bit more. As a hypothetical example lets use the unusually high annual inflation rate (since it occurs during a major economic crisis) range of 20-40% over 3 years. If the price of acquiring the same model bicycle for urban transport,goes from 200 dollars in 2009 to $345-$548 dollars in 2011, then an ounce of gold will allow one buy the bike for a profit. Of course we see how an ounce of gold also allows to buy 2-3 bikes simultaneously so extra bikes can be exchanged for bulk food and other objects. Financial organizations like TD bank are already encouraging people to exchange their coins for cash without fees. If large players are already undertaking copper hoarding (to exchange for Euros in the future and maintain status as a "bank"), then small players should get on the act while sucker's rallies keep gold/metals price within reach.

The uncharacteristically political and obvious recent suppression of gold advocates like Ron Paul ( as well as federal raiding of liberty dollar makers and similar precious metal organizations ) demonstrates a couple of things. The decades long mass oligarchic looting and exploitation of bottlenecks created by post-industrial capitalist structure was meant to accelerate in 2008. It also shows that oligarchs are split into the rooted domestic faction and cosmopolitan mobile one. The domestic ones (with their company infrastructure rooted/reliant on being within national borders) hope to collaborate with and use the might of the federal government for further enrichment as before. The international ones, the ones that will emigrate to Western Europe, plan on making money on the collapse of US itself by properly timing mass transfer of resources. It's in international faction's interest to properly time bulk metal buys while they join forces with the feds in draining national faction's wealth in a few bursts.

US industrial peak has been passed long ago but financial capitalism kept the appearance of GDP growth and psychological associations of that with material and quality of life improvements. The focus on stock maximization rather than fine tuning industrial capitalism to improve population's quality of life has created infrastructure that cannot qualitatively materially improve the needs of the entire population. CIA analysts have shown that growth of a certain industry doesn't necessarily mean efficient proper allocation of resources and social stability. Oligarchs who pressured the federal government to borrow from China and maintain the illusion of prosperity know full well that one can borrow, not necessarily repay, and be well off. Chinese leadership knew this perfectly as well but didn't care since it allowed them to rapidly expand real industry. Chinese government has done what Lenin wanted, have the capitalists sell the rope with which Chinese can hang them.

Every dollar that can practically be used to buy tangibles (like precious metals) should be used for that purpose instead of further payments to macro parasites and middlemen. The realization that having a perfect credit history is not the most important thing in the world will be reached by US government soon. Americans need to start realizing that too considering the seriousness of the economic paradigm shift.

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  1. People have tons of economic problems, the crisis is nowhere near over. Jobs are nowhere to be found and public debt continues to become a serious problem. Politicians should have the good sense to turn to people who are capable of facing the problems related to the economic crisis, that is to say specialists in the economic crisis like the Orlando Bisegna Index from New York, who have created real anticrisis solutions made to measure over small areas of the territory, solving problems of bumpy public finances, unemployment and low income, and lightening the economic load of lots of families.

  2. Being able to prepare ourselves financially is a wise thing to do in this type of unstable economy.