Pondering Orlov's Five Stages of Collapse

Dmitry Orlov blogged an interesting piece entitled The Five Stages of Collapse. It's well worth a read if you can tolerate doomer porn. The best part is the five-stage model itself. His notion is that social collapse follows five progressive steps, and that although collapse may be arrested at any one of the stages, each stage leads to the next one - a progressive breakdown, if you will.

Happily for us civilised folks, collapse usually is arrested before it progresses very far. In wealthy, developed countries even if this Depression turns out to be a doozey, and the first of many more to come, odds are it won't take us very far down the path of social disintegration. We would like to justify this optimistic opinion using Mr. Orlov's own model.

Orlov's first stage is Financial Collapse: "Financial institutions become insolvent; savings are wiped out, and access to capital is lost." This is what most of the world (China excepted, perhaps having a reprieve for the moment due to its many bubbles) is experiencing at present.

We agree with Orlov that governmental policy is not favourable to arresting this stage, and what will come next is what he terms Commercial Collapse: "Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm."

If hyperinflation takes hold because unsupportable debts are monetised, then this scenario may very well play itself out as Orlov describes it.

On the other hand, if the USA and other rich economies maintain non-hyperinflating currencies, the combined result of unsupportable debts and misguided government policies will be catastrophic loss of household income. Goods may not become scarce, but the means to purchase them will.

In either case, whatever government may decide to do or not do about the situation, the people themselves can arrest Commercial Collapse by any number of actions to ensure the continuing flow of goods and services. The so-called informal economy of legal goods and services delivered 'under-the-table' already provides one template for a popular, self-organising market. Many civic organisations such as churches, clubs, co-ops and farmer's markets can operate as clearinghouses. Barter banks and scrip systems of 'bona fide' money can spring up where they do not already exist. Thus the solution to arresting Commercial Collapse absent highly-unlikely, successful government intervention, is for people to set themselves up very much in community, and to become a lot more creative than they are used to.

We suspect that enough people can rise to the occasion. Only a tiny vanguard of creative types is needed to successfully establish functional patterns of mostly-local commerce.

It should be noted that under this scenario, Commercial Collapse would be arrested at a level of affluence that is only a fraction of what most inhabitants of the World's developed countries are used to. It won't be an easy adjustment by any means. Two classes of persons are most vulnerable: the poorest members of society who lack work and social skills; and affluent members who derive their livelihoods from access to those institutions which are not likely to survive the Commercial Collapse.

Pick Yourself Up, Dust Yourself Off - yeah, yeah

It is becoming quite clear to the less ignorant elements that some major restructuring of the economic sphere is in order. A host of economists without egg on their faces (Roubini and Taleb, among others) are calling for wholesale nationalisation of the banking industry. While we don't agree with them, we find the scale of that particular solution appropriate, and preferable to attempts to return to 'business as usual.'

Aside from our preferred solution of returning to bona fide money, any solution which at a minimum gets the world's circulating money out of the hands of the people who squandered so much of it is a step in the right direction. Stricter limits on what the banks may invest the circulating money in would also be an improvement.

Moving on from the financial troubles, it is obvious that neither the faux free-market system of the English-speaking world, nor the faux socialism of the EU can reliably deliver a modicum of prosperity to the masses. Major reform is in order.

One example of the sort of appropriately-scaled reform that ought to be on the table would be a negative income tax as the only form of national income support replacing social security, food stamps, and housing assistance (among other things). The idea has been lurking for quite a while, and supported by both liberals and conservatives, but has never been implemented. In our opinion the reason is that too many people make their living as welfare system bureaucrats.

This leads to the question, is major reform even possible? Has the political system become as dysfunctional as the grotesque that is the economic system? As the Depression grinds along, the presence or absence of political leadership will separate the societies that recover from the ones that don't.