Post-Agricultural Society

During the Depression many businesses will die, many households will become impoverished or dissolve. The rest will recover. Is the damage done randomly, or are there discernable patterns to who is hurt most?

We would like to present a pet theory today. Our theory is that industrial society, in spite of so much that has only evolved in the past two hundred fifty years, is still largely agrarian in its outlook on economic life.

For example, take such concepts as the steady paycheck, the rent check, the interest payment, the dividend. All of these payments occur on a periodic basis. Yields on investments are calculated as annual returns on investment. All of these conventions derive directly from annual crop yields.

Where annual yields make perfect sense for agriculture, they may not for commerce and industry. It makes more sense for workers and investors to share in the profits of an enterprise, which are uncertain both in timing and quantity. Instead of accepting the variability of the industrial way of life, society has attempted to pound the round peg of industrialism into the square hole of agriculturalism. The results have not been happy. More job and tax 'farms' and 'gravy trains' have been built than can be supported. The imminent disappointment of many auto worker pensioners is testimony to this fact.

If you can thrive with an uncertain yet dynamic income stream, you are more in tune with the realities of the industrial system. If you are a 'rent seeker' or looking for a steady job, you are chasing a fading way of life.

The Problem of Financing the US Federal Debt

There are countless misconceptions about where the money comes from to finance the US Federal Debt. One reads constantly in the financial press something like "the U.S. must have a sound fiscal policy, or the Chinese [or Japanese, or Arabs, etc.] will not fund the deficit." This is actually just silly.

Foreign trade partners have money to invest in US Government debt because they run trade surpluses with the USA. Debt is bought with funds left over after they have bought whatever they might want (if anything) that the USA has to sell them. The amount of debt they buy is incidental to their trading activities. Internal US policy (interest rates, inflation rates) has little impact on the process.

For a while it was a great deal for citizens of the USA. They got to buy stuff from abroad, and when the money was recycled back to the Federal Government, they got to spend it again! Things are changing, though. Foreign trade surpluses with the US are crashing. This is because foreign trade is crashing (see a previous post).

The U.S. Federal Government (and indeed any national government that has been running chronic trade deficits) will be losing a critical source of funding in the years ahead as international trade declines. It is highly unlikely that interest rates will be raised to attract funds as this would exacerbate the economic contraction. Instead, the loss of recycled trade deficits will be made up for by just that much more 'printing'.

As we have been hinting darkly, the USA is coming to the point where its economy simply cannot service the debt load it has placed upon itself. Given the way policy has been going lately, the outcome will be the quasi-default of runaway inflation.

The Trauma of Making Money in Hyperinflation

As we were working today, eking out our honest dollar, a thought occurred to us: how will we get that dollar when hyperinflation hits? Sure, we'll be making something, but as the people in Zimbabwe have discovered, that something might not be worth a whole lot by the time one gets to the store.

Let's look at a simplistic business model: buy inventory at price X, sell at price Y, lock in profit at a comfy 7%. What happens when the inflation rate in the time between the purchase and sale is 7%, or -- especially -- 14%? Not being able to replace the inventory for less than it sold for, one loses on every sale (but makes up for it in volume, we suppose).

A similar thing will occur in wages; one may indeed make $25 an hour, but by the time the paycheque is cut and the tasty eats (extra fries, hold the mayo) from McBurger Kong costs $25, the apparently higher pay is pointless.

We like our eats, and our apartment, 'n stuff, and we cheerfully work to keep all that going. Right now, with inflation relatively 'stable,' it's easy to budget our expenses as a percentage of our income. It'll be a different story, when inflation is burning through cash faster than Bernard Madoff. Contracts, rent, interest, profit margin... all these things will become very, very different in the coming year. And we are very, very worried about that.

You should be too, dear Reader.