Eight simple truths you need to know about 2012

Date: January 3, 2012
Coyhaique, Northern Patagonia

Yesterday we discussed 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:

1) Public and private debts included, most western nations are insolvent. Big time.

2) History shows that economic growth in such an environment is nearly impossible when such a large percentage of GDP must be allocated solely to interest. Most countries in this position either default or [hyper]inflate. Both have catastrophic consequences.

3) Continued political and monetary intervention in the economy is counterproductive. From ‘Cash for Clunkers’ to negative real interest rates, such intervention only serves to make the problems, and their impacts, much worse.

4) The combined ingredients of sovereign insolvency; a global financial system based on worthless paper currency; and consumptive, import-oriented, public entitlement economies have created conditions for an epic, long-term economic depression.

5) Deteriorating economic conditions drive social unrest. [In fact, there’s a great paper by two European economists which defines an explicit correlation between government budget cuts and things like rising crime rates, riots, and even attempted revolution.]

6) Faced with a marauding population that threatens their own survival, governments will stop at nothing to maintain the status quo: their power, our expense. Again, history shows that police states, boogeyman enemies, a total loss of privacy, capital controls, higher taxes, etc. will all become the norm.

7) None of these delay tactics can prevent human and financial capital from eventually migrating to where they are treated best. This will ultimately force a complete system reset by starving the beast.

8) This is not the first time this has happened, and it won’t be the last. This time is NOT different. Our modern society is not a unique and special snowflake that can ward off the consequences that have plagued empires for millennia.

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.