Signs of the Economic Apocalypse, 1-15-07

From Signs of the Times, 1-15-07:

Gold closed at 626.90 dollars an ounce Friday, up 2.9% from $609.30 at the close of the Friday before. The dollar closed at 0.7738 euros Friday, up 0.6% from 0.7691 at the close of the previous Friday. The euro, then, closed at 1.2924 dollars compared to 1.3003 at the end of the week before. Gold in euros would be 485.07, up 3.7% from 468.58 for the week. Oil closed at 52.99 dollars a barrel Friday, down 6.3% from 56.31 at the end of the previous week. Oil in euros would be 41.00 euros a barrel, down 5.6% from 43.31 euros at the close of the Friday before. The gold/oil ratio closed at 11.83, up 9.3% from 10.82 for the week. In U.S. stocks, the Dow closed at a new record, 12,556.08, up 1.3% from 12,398.0 at the close of the week before. The NASDAQ closed at 2,502.82, up 2.8% from 2,434.25 for the week. In U.S. interest rates, the yield on the ten-year U.S. Treasury note closed at 4.77%, up thirteen basis points from 4.64 at the close of the previous Friday.

Another week of warm weather in the U.S. northeast drove oil prices down sharply last week. The weekly drop of 5.6% could have been even more if not for a late rally on Friday. As oil was dropping, gold was climbing going up almost 3% for the week, pushing the gold/oil ratio up higher than it’s been in two years but not higher than the historical average of 15.2.

But let’s leave the weekly fluctuations of the markets aside for now and look again at how we got here and where we may be going. Mark Faber published a telling allegorical tale of the global economy, perhaps more telling than he realizes. To explain the globalized economy, the real economy versus the asset inflation economy, Faber proposes an island with two tribes. One tribe, making up only 1% of the population he calls the “Smartos.” They are smart but have no morals. The other tribe is very numerous but not so bright and he calls them the “Bushes.” The main alliance is between the Smartos and the elite of the Bushes.

Irreparable Cracks in the Financial System

by Marc Faber

A well-respected independent economist and strategist with a bearish trait told me recently that he wished he could be bearish, but that he couldn't find anything that he thought would disturb the asset markets and the global economy in the foreseeable future. Looking at the "real" global economy and at what people produce in terms of manufactured goods and services (ex-financial services), I would have to agree.

Comparing the current global economic expansion, which began in the US in November 2001, with previous economic expansions, it seems to me that the "real economy" isn't showing any signs of the overheating that, in the past, led to aggressive central bank monetary tightening. So, I am, like my strategist friend with the bearish trait, also impressed by the prospects for the global economy. However, I am increasingly concerned about the inflated asset markets around the world, and about the almost unanimous belief that nothing will ever come between the "Goldilocks" economic conditions and the Fed, in conjunction with the US Treasury standing ready to support markets should they decline meaningfully and disturb the current heavenly asset market conditions.

Let us examine the differences between the "real economy" and the "asset inflation economy" more closely. The real economy is typical of people's daily lives, their income, and their spending. If there is a boom in the real economy, wages and prices will tend to increase and the increased demand will be met by corporations' increased capital spending. The overheated economy eventually brings about a slowdown or a recession, because money becomes tight irrespective of the central bank's monetary policies. The recession then cleans up the system and allows the next expansion to get under way. Put very simplistically, this is the typical business cycle.

In the asset inflation economy, we are dealing with a totally different phenomenon. The higher the asset markets move, the more the increased asset prices can create liquidity. Let us assume an investor owns a real estate or stock portfolio worth 100 and that his borrowings are 50. For whatever reason (usually easy monetary conditions), the value of the portfolio now doubles to 200. Obviously, this allows the investor, if he wants to maintain his leverage at 50% of the asset value, to double his borrowings to 100. With the additional 50 in buying power, the investor can then either spend the money for consumption (as the US consumer has done in the last few years) or acquire more assets.

If he acquires more assets, the investor will drive the asset markets – ceteris paribus – even higher, which will allow him to increase his borrowings further. Now, I am aware of some economists who will dispute the fact that rising asset markets create liquidity. They argue that the seller of a portfolio or real estate or stocks at an inflated price will have to be met by a buyer at the inflated price. So, the increased liquidity of the seller is offset by a diminished liquidity of the buyer. However, the situation isn't quite that simple. Let us assume we are dealing with the market for Van Gogh's paintings, and let's assume that with the exception of just three works, Van Gogh's paintings are all in the hands of museums, foundations, or dedicated art lovers who wouldn't consider selling them except under the most unusual circumstances. Now enter the Russian oligarch who wishes to acquire a Van Gogh at any price. He might pay double the previous price paid for a Van Gogh, for one of the three paintings still available on the market. As a result of this one buyer, every Van Gogh work will now need to be revalued, and, in theory, all the owners of Van Gogh paintings could now increase their borrowings against the value of those works.

Two works by Van Gogh now remain on the market, one of which a hedge fund manager and an oil sheik from the Middle East both wish to acquire. In a bidding war, they push the price of that painting up another 100% above the previously paid price. Again, all of Van Gogh's works will need to be revalued and their owners can increase their borrowings against them. In other words, the buyers on the margin can move asset markets sharply higher in the absence of ready sellers and thus increase, through the additional borrowing power of the works' present owners, the overall liquidity in the system.

Under normal circumstances, the increased borrowings by the present owners would drive up interest rates. However, in a world of rapidly expanding money supply, this may not be the case. Moreover, which owner of a Van Gogh wouldn't mind paying 6% instead of 4.5% interest on his loans if Van Gogh's paintings were appreciating by 30%, or even 100%, per annum? (This is one reason why the Fed doesn't believe it can control spiralling asset prices with monetary policies.) In the real world, we are not dealing with just one Van Gogh market, but with many asset markets, but the point is that the marginal buyers set the price for assets. It should also be clear that not every owner of a Van Gogh will use his borrowing power and leverage his works of art or other assets.

But if an asset bull market has been in existence for a while, more and more investors will become convinced that the up-trend in asset prices will never end and, therefore, they will increasingly use leverage to maximize their gains. But not only that: lenders will also become convinced that asset prices will rise in perpetuity at a higher rate than the lending rate, and they will therefore relax their lending standards. This certainly seems to have occurred in the sub-prime lending industry.

There is one more point to consider. Liquidity isn't evenly distributed. Let's say that on an island there are two tribes. Ninety-nine percent of the population are the "Bushes" and 1% are the "Smartos." The two tribes arrived on the island at about the same time and had little capital at the time. So, initially, both tribes worked very hard in industry and in commerce to acquire wealth. But because of the Smartos' superior education and skills, their frugality, and also partly because of their greed and immorality, they soon acquired significantly more wealth than the Bushes, who, for the most part, were likeable but quite inept. After 50 years, most of the island's businesses were therefore in the hands of the Smartos, who make up just 1% of the population. Being clever, the Smartos generously gave some of their wealth to the tribal leaders of the Bushes, who controlled the entire government apparatus, the military establishment, and much of the land.

For a while this system functioned perfectly well. Among the Bushes there were also some smart people, and they were encouraged to accumulate wealth as well. However, they had to pay an increasingly high price to acquire assets, since most of the island's assets were owned by the Smartos and by the elite of the Bushes who, because of their wealth, never really had to sell any assets. Cracks in the system began to appear because more and more of the wealth began to be increasingly concentrated in fewer and fewer hands. (According to the Financial Times, the concentration of wealth is extremely high in the United States, with 10% of the population currently holding 70% of the country's wealth, compared to 61% in France, 56% in the UK, 44% in Germany, and 39% in Japan.)

However, the Smartos then stumbled upon another avenue to wealth: globalization. The island was opened to foreign trade and investments, which allowed the business owners to shift their production to low-cost foreign countries and, at the same time, to keep the masses among the Bush tribe happy through the imports of price-deflating consumer goods. In the same way that, in the 18th and 19th centuries, the European settlers of America had exchanged with the Indians worthless beads and booze for land, now the Smartos and the elite of the Bushes exchanged cheap imported goods, whose supply they controlled and from which they earned handsome margins, for assets. As a result, the majority of the population of the Bushes experienced a relative wealth decline compared to the wealth of the Smartos.

Again, this worked perfectly well for a while: the populace was happy to buy deflating consumer goods (like Mr. Faber's wife who, whenever a favorite shoe store holds a sale, immediately buys three pairs instead of one), but it overlooked the fact that its wages and salaries were decreasing in real terms because manufacturing jobs and tradable services were increasingly shifting overseas. For some time this wasn't a problem, because the Smartos had bought the island's central bank. They made sure that sufficient money was made available to the system to sustain the consumption binge, which was largely driven by inflating asset prices. Plenty of liquidity and rising asset prices created among the Bushes the "illusion of wealth." Naturally, the island's trade and current account deficit began to worsen as it consumed significantly more than it produced, but initially that wasn't a problem, for the Smartos had encouraged the Bushes to engage – in the name of all kinds of good, just, and well-meant causes, and without any self-interest whatsoever – in overseas military expeditions, which led foreign creditors to believe in the island's economic and military might, and social stability.

For a time, they were, therefore, perfectly happy to finance the island's growing current account deficits. At the same time, the increase in defense spending shifted wealth from the masses to the elite of the Bushes, who largely controlled the military hardware and procurement industries. As a result, wealth and income inequity widened further as the masses became largely illiquid and had difficulty in maintaining their elevated consumption, while the Smartos and the elite of the Bushes accumulated an ever-increasing share of the national wealth. But never at a loss when it came to creating additional wealth, the Smartos devised another scheme to enrich themselves even further: lending to illiquid households (read sub-prime lending). Not that the Smartos would have lent their own money to these uncreditworthy individuals (they were far too clever for that); for a fat fee, they arranged and encouraged this novel type of financing. Credit card, consumer, and mortgage debts were all securitized and sold to pension funds and asset management companies whose beneficiaries were the majority of Bushes, who accounted, as indicated above, for 99% of the population.

In addition, these securitized products were sold to some credulous foreign investors. By doing so, the Smartos achieved three objectives. They earned large fees, and unloaded the risks indirectly onto the very people who borrowed the money, and onto foreigners. But most importantly, they provided the Bush tribe with a powerful incentive to support their expansionary monetary policies, which ensured continuous asset inflation. After all, any breakdown in the value of assets would have hurt the Bushes the most, since they carried most of the risks by having purchased all the securitized lower-quality financial instruments. But not only that! The Smartos knew that as asset prices increased, their prospective returns would diminish.

But this wasn't an immediate problem, as they promoted increased leverage to boost returns to the investors and at the same time their own fees. This strategy worked, of course, for as long as asset prices appreciated more than the interest that needed to be paid on the loans. On first sight, the debt- and, consequently, asset inflation-driven society of the island seems to work ad infinitum. But in the real world this isn't the case. Sooner or later, the system becomes totally unbalanced and entirely dependent on further asset inflation to sustain the imbalances. It is at that point that even a minor event can act as a catalyst to bring down asset prices and produce either "total," or at least "relative," illiquidity in the system, because a large number of assets whose value has declined no longer cover the loans against which they were acquired. "Total illiquidity" occurs when the central bank, faced with declining asset prices, doesn't take extraordinary measures to support asset prices.

"Relative illiquidity" follows when the central bank implements, in concert with the Treasury, extraordinary monetary and fiscal policies (cutting short-term interest rates to zero, and the aggressive purchase of bonds and stocks) in a desperate effort to support asset prices. In both cases, a degree of illiquidity occurs and depresses asset prices, but in different ways. In the case of "total illiquidity" (1929–1932 and Japan in the 1990s), asset prices tumble across the board in nominal and real terms with the exception of the highest-quality bonds and, possibly, precious metals (flight to safety). In the case of the island's central bank taking extraordinary monetary measures, asset prices don't necessarily decline in nominal terms, and in fact can even continue to appreciate.

However, they collapse in real terms, and against foreign currencies and precious metals. How so? Above, we have seen that the island's asset inflation led to excessive consumption and to growing trade and current account deficits because the Smartos and the elite of the Bushes were quick to understand that much larger capital gains could be obtained by playing the asset inflation game and by manufacturing overseas, than by investing in new production facilities and producing goods on the island.

The growing trade and current account deficits of the island were not immediately a problem, because they were offset by external surpluses in other parts of the world, which were frequently and erroneously labeled as "surplus savings" or a "savings glut." But whatever one wishes to call these surpluses or reserves, it is interesting to note that where they accumulated (mostly in China, Japan, Taiwan, Singapore, and Switzerland), they led to an interest rate structure that was lower than on the island. For the Smartos, this was an extremely fortuitous condition. For one, it was easy to convince the recipients and holders of these rapidly accumulating reserves to invest them in higher yielding assets on the island. In addition, it was for a while extremely profitable to borrow in low-yielding foreign currencies and to invest in relatively high-yielding assets on the island.

Obviously, this all changed when asset prices began to decline and the island's central bank had to take extraordinary measures by aggressively cutting short-term interest rates and supporting asset markets through bond and stock purchases. The interest rate cuts immediately narrowed the spread between the interest rate on the island and foreign currencies and led to a run on the island's currency, not only by foreigners but also by the Smartos, who had known all along that the asset inflation game would one day come to a bitter end. The deleveraging of this carry trade led to "relative illiquidity," which the island's central bank had to offset with even more liquidity injections, which while stabilizing asset prices led to even greater loss of confidence in the soundness of the island's currency, and in its bond market, which by then was mostly owned by foreign creditors.

As Mao Tse Tung had observed much earlier, there was by then "great disorder," but the situation was "excellent" for the Smartos. On the short end, interest rates had been cut so much that they were in no position to compensate for the continuous depreciation of the island's currency. So, the Smartos and the Bush tribe's elite began increasingly to borrow in the island's currency and to invest in foreign assets and precious metals. In fact, the island's central bank, by its market-supporting interventions, encouraged this process. Stocks and bonds were dumped on to the central bank and the Treasury's plunge protection team at still high prices, and the proceeds were immediately transferred to foreign assets and precious metals, which appreciated at an increasing speed compared to the island's assets, which suffered from the continuous depreciation of the currency.

And in order to facilitate this trade, the Smartos, who controlled both the Fed and the Treasury, continued to make positive comments about "a strong currency being in the best interest of the island." Sure, it would have been in the best interest of the island to have a strong currency, but it was certainly not in the best interest of the Smartos, who had devised their last grand plan: shift assets overseas and into precious metals, let the currency of the island collapse, and then repatriate the funds and buy up the remaining assets of the Bush tribe's middle and lower classes at bargain prices since they had never understood that their currency had collapsed against foreign currencies and against gold.

The strategy of the Smartos is exactly that pursued by the psychopaths in our midst. Only instead of them being 1% of the population they may make up as much as 6%. An interesting exercise would be to predict the strategy of the Smartos if they had prior information about a global cataclysm.

The pseudonymous “Werther” posted an article on Counterpunch this week that shows how the Smartos use war:

January 8, 2007
Parable of the Self-Licking Ice Cream Cone
Why We Fight

By WERTHER

"War is a racket. It always has been.

"It is possibly the oldest, easily the most profitable, surely the most vicious. It is the only one international in scope. It is the only one in which the profits are reckoned in dollars and the losses in lives."

General Smedley Butler (1935)

As is our habit, we are wont to read The Washington Post, bulletin board of the Beltway illuminati, in Pravda fashion, from back to front, concentrating on subject matter mentioned three quarters of the way through the article. Let us take the Wednesday, 27 December edition of the Meyer-Graham newsletter as an example.

We learn, surprisingly on the front page, that Ethiopia has stepped up attacks on Somalia. Only on the jump page, however, towards the end of the 1,100-word article, does one uncover the Hitchcockian McGuffin:

" . . . U.S. policy in Somalia has been widely criticized for having the opposite of its intended effect, often encouraging the expansion of the [Islamic] Courts movement. This year, the United States supported warlords who called themselves an "anti-terrorism" coalition. The warlords generally bribed [sic. This must be a misstatement intended to mean "sought extortion payments from"] and terrorized ordinary Somalis, who came to despise them. The Islamic Courts came to power as an alternative to the hated warlords, establishing order based on Islamic law village by village and earning widespread support from beleaguered Somalis tired of 15 years of near-anarchy."

So, as the war on terror[ism] spreads through the Horn of Africa with its attendant misery, it just so happens that the United States government helped to fuel it. In its broad outlines, this is just how a $3.5-billion covert operation in Afghanistan two decades ago helped bring us a hole in Lower Manhattan. Or how our covert assistance to a Mesopotamian up-and-comer named Saddam Hussein led, like some Sophoclean tragedy [2], to the current "grave and deteriorating" circumstances in Iraq.

How is it that so many wars have an act of U.S. complicity in their origin? Is it merely the law of unintended consequences, or is there another logic at work? Perhaps the crucial mechanism in Mogadishu, and Kabul, and Baghdad is best described by that hoary Pentagon slang phrase, "the self-licking ice cream cone." [3]

The axiom of the self-licking ice cream cone has many applications, not only in the ignition of wars, but in their conduct. Again, the Post provides a kind of Delphic clue about this mechanism. The 26 December edition has a fascinating piece buried on page 19: "Old Iraq Strategy Lives On in Weekly Progress Reports." [4] The writer, Glenn Kessler, pokes a bit of fun at a series of weekly reports promulgated by the State Department to measure alleged "progress" in Iraq; indeed, this is the gravamen of the piece: how upbeat the reports can be despite a manifestly failed policy.

But again, as with the Somalia story, the lede is buried. Well into the piece, Kessler informs us that the weekly Iraq reports are produced by the consulting firm BearingPoint. But that is not the end of the story:

"The BearingPoint employees, who work out of offices in the State Department, arrange the meetings, set the agendas, take notes and provide summaries of the discussions, the official said. They also maintain the Web site of the U.S. Embassy in Baghdad."

As any veteran of bureaucratic wars surely knows, whoever arranges meetings, sets agendas, and takes the official notes determines the policy, regardless of who is nominally in charge. But who is BearingPoint, and what interest do they have in Iraq? The media watchdog Sourcewatch.org provides the following:

In July of 2003, BearingPoint was awarded a contract by USAID worth $79.5 million to facilitate Iraq's economic recovery with a two-year option worth a total of $240,162,688. Responsibilities in this contract include:

1. Creating Iraq's budget.

2. Writing business law.

3. Setting up tax collection.

4. Laying out trade and customs rules.

5. Privatize state-owned enterprises by auctioning them off or issuing Iraqis shares in the enterprises.

6. Reopen banks and jump-start the private sector by making small loans of $100 to $10,000.

7. Wean Iraqis from the U.N. oil-for-food program, the main source of food for 60% of the population.

8. Issue a new currency and set exchange rates.

One is surprised that BearingPoint is not charged with rewriting Iraq's national anthem and choosing the members of its Olympic team. But, again, who is BearingPoint? That is hardly a name that rolls off the tongue like Microsoft, or Morgan Guaranty Trust.

According to another watchdog, Publicintegrity.org, BearingPoint has an interesting history:

"BearingPoint traces its corporate lineage back over 100 years. In October 2002, KPMG Consulting Inc. changed its name to BearingPoint Inc. KPMG Consulting was formed in 1997 as the consulting division of accounting firm KPMG LLP. An initial public offering on Feb. 8, 2001, marked the official separation of KPMG Consulting from KPMG LLP. BearingPoint was the first of the Big Five consulting firms to separate from its audit and tax parent and become an independent, publicly traded company. The crisis that engulfed the accounting profession in the wake of the Enron/Arthur Andersen scandal later that year hastened the company's decision to change its name in 2002. . . . BearingPoint underwent a dramatic expansion by acquiring most of Arthur Andersen's worldwide consulting operations."

Bingo. The firm responsible for the corrupt accounting that papered over the Enron scandal, the greatest corporate failure in U.S. history, lives on, assimilated by BearingPoint. And it steers U.S. policy on Iraq as the government blindly lurches towards escalation, a policy ostensibly supported by only 11 percent of the U.S. population. [5]

One notes, however, that despite the manifest lack of popular support, the vast flügelhorn of the corporate media continues to sound the strains of the Escalation Waltz. Based on an informal and unscientific survey, we would estimate roughly 60-70 percent of the talking heads on the telescreen are in favor of, metaphorically speaking, feeding more cannon fodder into the Stalingrad pocket. More irritating still is the Zelig-like ubiquity of the truly scary John McCain.

And above it all, on his alabaster throne, sits the President, our Supreme Warlord. While even such a scalawag as Lyndon Johnson knew that an unpopular war is a losing hand for a politician to draw, President Bush seems unperturbed by it all. Many columnists have attributed his attitude to intellectual deficiencies, or irrational stubbornness, or megalomania. But if Bush possessed the IQ of Descartes and the wisdom of Aquinas, he could hardly act otherwise.

As a Texas plutocrat marinated in petroleum, Bush is merely acting out his destiny, and that of his class. Should the reader need reminding, one can always turn to the more iconoclastic foreign press. While the great American dailies are debating whether "we" need 20,000 additional troops or 40,000, or are limning the Napoleonic qualities of the new Iraq commander, General David Petraeus, the London Independent reveals the following:

"Iraq's massive oil reserves, the third-largest in the world, are about to be thrown open for large-scale exploitation by Western oil companies under a controversial law which is expected to come before the Iraqi parliament within days.

"The US government has been involved in drawing up the law, a draft of which has been seen by The Independent on Sunday. It would give big oil companies such as BP, Shell and Exxon 30-year contracts to extract Iraqi crude and allow the first large-scale operation of foreign oil interests in the country since the industry was nationalised in 1972." [6]

Was Auschwitz a German government-run death camp? Or was it just one of I.G. Farben's synthetic rubber factories, subject to a high employee turnover? One may also ask whether Iraq is the central front of the war on terrorism, or merely a profit center for corporations like BearingPoint and Exxon-Mobil.

Werther is the pen name of a Northern Virginia-based defense analyst.

Notes

[1] "Ethiopians Closing In On Capital of Somalia," The Washington Post, 27 Dec. 2006.

[2] This is no allusional flight of fancy. The saga of Poppy, Bar, and Dubya has always contained a heavy overlay of Oedipal melodrama. Saddam may usefully stand in as the Sphinx, a demon of destruction and bad luck, according to Hesiod.

[3] "Self-licking ice cream cone" is the descriptor for a self-fulfilling prophecy as described by the 20th century sociologist Robert K. Merton: "The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behavior which makes the original false conception come true."

[4] "Old Iraq Strategy Lives On In Weekly Progress Reports," The Washington Post, 26 Dec. 2006.

[5] The CNN poll which found this level of support, if accurate, is astounding. Eleven percent of a random sample can probably be found to be in favor of necromancy. Much higher percentages "believe in" flying saucers.

[6] "How the West will make a killing on Iraqi oil riches," Independent [UK], 7 Jan. 2007.

As we mentioned last week while discussing extreme jobs and idle theory, another thing the Smartos do is make us Bushes work so hard and keep so busy we don’t have time or energy to see what they are really doing to us. Idle Theory proponents say that species that work at full capacity are more vulnerable than more idle species. Ran Prieur made the connection between Idle Theory in evolutionary biology and our condition in late capitalism. He elaborated on this last week:

When we talk about activity vs inactivity, there are at least three different levels on which these concepts mean different things. First is nonbiological cyclical motion, like a waterfall. Here constant activity is good, or even necessary. We don't want rivers to dry up, or planets to stop orbiting stars.

Second is normal biological life, like a squirrel gathering nuts. Here you want a balance -- gathering nuts is the squirrel's ecological role, and what it loves to do. But it needs some slack time, because if it's active all the time, it has no room to increase activity, and the first emergency will kill it. On this level, most primitive humans are extremely successful. They spend only a few hours a day on productive activity, which they enjoy, and the rest of the time, even if they're active, they're idle in terms of idle theory, because there's nothing they have to be doing.

Third is you at your crappy job. This is a level that squirrels and healthy primitive tribes would not even understand. All they know is free fun productive activity, and free fun nonproductive activity. In civilization, you're constantly busy doing stuff that's not free, fun, or productive: rearranging fragments of abstract information to enable the destruction of the biosphere because if you don't do it, you'll be denied food and shelter, and die. Civilization is like a game that primitive humans started in their spare time, and then couldn't get out.

Some people say the way out is to find a job you love, to replace bad activity with good activity. The problem is there are not that many lovable jobs, and most of them depend on unlovable jobs, like manufacturing computers. Other people say the way out is investment, which is even more exclusive and exploitative. What I did, and what I write about, is to take the low road:

First, need less. Learn to get by with less money, less stuff, less comfort, less personal space. It's true I have lots of comfort and space when I'm housesitting, but I don't need it -- I'm perfectly willing to squat an unheated shed with a train going by every hour and boil wheat berries on a camp stove, if that's what it takes to avoid wage labor. And just the willingness to go that low gives me power and freedom.

Next, do less. Most people have trouble with this. Forced activity is so pervasive that in its absence, we don't know how to act at all, and we get depressed and lethargic. But I think the only way out is through, to face the emptiness and gradually learn how to fill it with spontaneous action and play. If you can grasp the deep and total wrongness of forced activity, you can see that the deepest freedom is the freedom to say no, and a free world is not only possible -- it's inevitable.

Among the many interesting things Dmitri Orlov, the Russian émigré who writes about the coming economic collapse in the United States from his perspective of having lived through such a thing in Russia, said was that the people who had the worst time of the collapse in Russia were the go-getters. Forced idleness drove them crazy. Orlov warns us that in a post-collapse environment we will have to learn how to little for periods of time. But life after one’s currency can have its rewards, in spite of how hard an adjustment it will be for those of us who have been lucky enough to live in affluent countries:

Unlike the Russians or the Germans, whose historical memory includes one or more episodes of hyperinflation, it is hard for Americans to imagine living in a time when their paper money is not worth its weight in toilet paper. But such conditions have been known to occur. Savings boil off into the ether. People who still receive paychecks or retirement checks cash them immediately, and do their best to buy the things they need to survive as quickly as they can, before the prices go up again.

There are some steps you can take to prepare yourself for life without money. For a time, you might not have an income at all, or an income so meager it will not be enough for even one meal a day, so find out just how little money you need to stay active and healthy. Learn to rely on family, friends, and acquaintances. Find out what you can take from them, and what you have to offer in return.

Perhaps most importantly, assume that your retirement income, whether government or private, will in due course become quite close to zero, and make some other arrangements for your old age. If you have children, start buttering them up now – you will need their help to survive in your dotage. If you do not have children, then think about having some, or adopting one or two. If you do not have or want children, then be sure to have some good friends who are younger than you.

For each economic arrangement involving money, try to come up with an alternative arrangement that does not involve money. For example, if you pay a baby-sitter, try to find a baby-sitter who is willing to work in exchange for lessons. If you pay rent, find a caretaker situation where you pay with your labor. If you pay for food, start growing your own food.

As you are learning to live with less and less money, you will inevitably find that the money system works to your disadvantage. If you have debt, it becomes harder and harder to make the payments. If you own property, it becomes harder and harder to afford the taxes. The money system takes a bite out of everything you do. But this is true only if your economic relationships are monetized – if they have monetary value and involve the exchange of money. As you try to reduce your dependence on the money economy, you will need to invent ways to demonetize your life, and that of the people around you.

Savings and personal property can be transformed into the stock in trade of human relationships, which then give rise to reciprocal flows of gifts and favors – efficient, private, and customized to personal needs. This requires a completely different mindset from that cultivated by the consumer society, which strives to standardize and reduce everything, including human relationships, to a client-server paradigm, in which money flows in one direction, while products and services flow in the opposite direction. Customer A gets the same thing as customer B, for the same price.

This is very inefficient from a personal perspective. Resources are squandered on new products whereas reused ones can work just as well. Everyone is forced to make do with mediocre, off-the-shelf products that are designed for planned obsolescence and do not suit them as well as one crafted to suit their specific needs. A commodity product can be manufactured on the opposite side of the planet, whereas a custom one is likely to be made locally, providing work for you and the people in your community. But this is also very efficient, from the point of view of extracting profits and concentrating wealth while depleting natural resources and destroying the environment. However, this is not the sort of efficiency you should be concerned with: it is not in your interest.

This, then, is the correct stance vis à vis the money economy. You should appear to have no money or significant possessions. But you should have access to resources, such as food, clothing, medicine, places to stay and work, and even money. What you do with your money is up to you. For example, you can simply misplace it, the way squirrels do with nuts and acorns. Or you can convert it into communal property of one sort or another. You should avoid getting paid, but you should accept gifts, and, of course, give gifts in return. You should never work for money, but always donate your time and effort charitably. You should have a minimum of personal possessions, but plenty to share with others. Developing such a stance is hard, but, once you do, life actually gets better. Moreover, by adopting such a stance, you become collapse-proof.

Orlov is well worth listening to. Learning from his experience may help make the coming years less traumatic. Knowledge protects. All is lessons, but the earlier one learns the lessons the better.