In this newsletter, I’ll do something a little different. I’ll republish “The Debt Spiral” from my 2011 book, Econovation, along with an explanation of each step. I’d probably make a few tweaks if I were doing it today, but it stands the test of time. First, a few thoughts on Trump’s focus on manufacturing and tariffs.
It’s hard to know whether Trump’s master plan is well-thought out or intuitive, but I suspect it’s the latter. He’s a real estate guy. I’ve seen his desk. He understands buildings, paperwork, and physical projects. He is not of this digital world. I think that works in our favor. The digital world is about to be vicious and unkind to those who’ve made a living from it.
In retrospect, office work will turn out to have been a honeypot, attracting & lulling bright minds into a comfortable stagnation, only to be replaced by technology that exposes how trivial their work always was.https://t.co/4gEqL8iJcL
As I said in the video, whether Trump’s plans work almost doesn’t matter. We are on an unstoppable trajectory towards earth, a place we haven’t visited in a while, as a country. We didn’t have to. Dollars were magical and infinite. We could print them and the world would send us the fruits of their blood, sweat and tears. AKA “fair trade”, am I right?
Imagine the nerve — our financial engineers, marketers, consultants, corporate drones, and influencers made a killing. While essential workers — firemen, garbagemen, doctors, nurses, truckers, and countless foreigners with hoes and spatulas — kept us alive. That era is ending.
Not knowing anyone who makes any of the things we depend on is a big red flag. We chose to ignore it, but can’t any longer. Not all commerce is created equal. Essentials made by outsiders or adversaries are not goods, they are tethers to their agendas and priorities. If the goal is freedom, that ain’t it. The time to make real things is long overdue. I think Trump sees it. Not just sees it, he’s summoning it.
The Debt Spiral (From Econovation)
The debt spiral applies to people and countries alike. Indebtedness explained in 15 simple steps:
It all starts innocently enough with wanting things. Sometimes, when you want things that are really expensive, like a mansion, a highway, or a missile defense system, you borrow.
If you make your payments on time, lenders love you. They express their love by sending love letters, also called “offers.”
Word of your good credit travels far and wide. Others start offering you credit. After all, they know you’ll pay the bills with a healthy interest. If you’re a country, others feel comfortable buying your bonds and using your money.
Armed with lots of cash and a long shopping list, you borrow more. With the money, you can afford lots of expensive hobbies, like space travel, health care, and war. In fact, you can borrow so much, you barely have to work. You can pay other countries with lower wages to make you things. Or, you can bring in “guest workers” to do anything that requires movement.
Every year, you borrow just a little more than you earn. That’s okay, you’re still making payments.
If you’re a country, your tax revenues start going down, since your citizens are now borrowing instead of producing. If you’re an individual, there are fewer jobs because good credit has made others not work, either.
At some point, with enough people not working, the things you needed to buy, like bridge repair and health care are underfunded. Now you need to borrow more—this time, for necessities.
The cycle continues for a while, until the lenders start wondering if you’ll ever work again. Or if your new job can produce enough income to pay your debts.
Lenders start thinking you’re a higher default risk as you pace desperately through your hollow mansion.
They raise your rates. If you were just barely paying the interest before, just wait to see how hard it is to pay it with higher rates.
As more of your money goes toward paying debts, you can’t afford the things to which you’ve grown accustomed—from wars to roads to that extra side of guacamole at Chipotle.
If things get bad enough, investors stop lending you money. In the case of the U.S., that’s usually private companies and foreign governments.
At some point, you can either renegotiate your debts or inflate your currency by “printing” more of it. People can’t make [print] money, but the U.S. can. Either way, the value of your money drops. In the inflation scenario, you still pay off your debt in nominal terms (the numbers are the same, but the value of each dollar is diminished). If you renegotiate, you pay a percentage on the dollar. Either way, your credit rating takes a hit, and you have to start rebuilding your credit score.
When your currency is worth less (or worthless), others stop using it and find alternatives, like other countries’ money, precious metals, or wampum.
Once you’ve renegotiated, you really have to pay every cent.There are no second chances. The best way to do it is increase revenues. For a country that’s higher taxes.
Brave New World
The post-financialized, post-digitized economy will look very different. A weaker currency will force us to source more domestically, as imports get pricier. This happened in Argentina after multiple currency crises. In this world, we’ll have to live in the same reality as others do. That means trading goods for others we want, not just paper. It means living by real budgets, not sprees disguised as budgets. No more outlandish military expenditures or massive social programs. I’m concerned many Americans are not equipped to survive this reality…or any kind of reality.
For all its faults, we’ve taken the global order for granted. The US has been its main beneficiary. We can still lead. We can still be great. But we might not be able to keep printing our way there. For the first time since World War II, the training wheels are off.
For now, enjoy Louis CK’s full routine about white people time traveling. We can decide if this also applies to Americans or not.
In the next and final installment, I’ll tell you what I think of this plan and what I’d do differently.
