The Damage Function of American Collapse, or, How Bad is it Going to Get?

Hi! How’s everyone? Welcome back old friends, welcome new ones, and here’s little Snowy sending you some magic tiny puppy courage and strength in these…challenging times.

That’s what we’re going to discuss today. The question on everyone’s mind.

How bad is it going to get? 

Meaning: how far down does American collapse go?

By the way, apologies, I'm still (I know, at this point, it's like a perpetual medieval apologia that never stops being chanted or something) working my way through emails. I'm trying, here have an extra bonus Snowy hug so you don't kill me. For those who asked, if you'd like a session, you can book one here.

Now. How bad is it going to get? I’m going to explain, by way of teaching you how to think about it well. And along the way, you're going to have plenty of very clear and concrete answers.

If I was teaching a grad school class on this, I’d develop what I’d call a “damage function.” Now, don’t worry, we’re not going to do real math. I just want to teach you how to think in a certain way, the way of risk, and if you learn this, you’ll be able to use this framework to guide you in many ways in the difficult times to come.

A “damage function.” What does that mean? Just what it sounds like. In climate science, these are done all the time—we estimate the damages from various forms of climate catastrophe, tipping points, emergencies. And American collapse is very much the same sort of phenomenon: not a temporary change, but a lasting one, whose damages are going to be profound and far-reaching, so much so that they’ll register in history and across the globe.

So how would I model this “damage function,” the damage function of American collapse? It’s simpler than it sounds, and this is the part where you’ll really want to start reading. I’d simply use three Big Variables, which’d be short-term, medium-term, and long-term damages, to the economy, politics, society, and most of all, people. 

The Short Term Damage, or, Don’t Trust Your Stockbroker

What are the short term damages of American collapse going to be? They’re already becoming very self-evident. The markets are sliding. And that’s for a reason that I’ve explain to some of you in sessions (by the way, if it’s finances you’re worried about, please, book a session, I don’t want you to get burned, and right now, well…let me continue.)

The geniuses on Wall St, which include many of your money managers, have spent the last year betting on something they called the “Trump Bump.” They expected the stock market to roar. Not…crumble and sob in agony, like it’s doing right now.

They were wrong. Badly wrong. But they still don’t know how badly wrong, because right now, they’re still telling many of you, just hold on, ride it out, it’ll all be fine in three, six, nine months.

It won’t.

Have you heard of “Liberation Day” yet? That’s in about two weeks. That’s the day when the orange menace and his crew are going to announce more tariffs, but that’s a poor way to to put it. Trillions in tariffs on the whole world.

That’s not how I put it, that’s how they put it.

But of course “the world” doesn’t pay tariffs. Americans do. And so on that day, it’s Americans who are going to be paying, again, not my words, theirs, trillions more. For exactly the same stuff, food, clothing, appliances, cars, doesn’t matter, everything in the economy.

Maybe there’ll be another “temporary reprieve.” That doesn’t matter either. Because on that day, “Liberation Day,” go ahead and laugh and imagine Orwell spinning in his grave, you know what’s actually going to happen?

Something between a slide and an historic crash. Maybe a plummet on the order of 1987 or 1929. Even I can’t predict that, because, well, we’ve never had this level of lunacy in such a short period before, nor this level period. Nobody can say precisely how severe the reaction will be, but what we can say is that that doesn’t matter either.

Why not? You see, it doesn’t matter at all if it’s a one-day crash, or a longer, slower free-fall. The endpoint will be the same.

What’s happened so far has already wiped $5 trillion from the US markets, and as we discussed recently, that’s $15K for every person in America. And what’s coming next is going to make all that look like just the pre-game for the main event. How much are we talking now? $50 trillion? $100 trillion? Nobody knows, but it doesn’t matter, because at the end, when the dust settles, the markets will have to revalue the entire economy at a much, much lower level.

Are you following me?

So the “damage function” looks, already, something like this—and we’re far, far from done, in fact barely just beginning. Over the short term, the stock markets are going to suffer terribly.

We are looking at a sudden crash, or a longer-slower free-fall, and over let’s say a one to two year time horizon, that doesn’t matter so much, because you end up in roughly the same place, which is much lower.

That’s not me being a finance dork, that’s me warning you about your life. Because like it or not, this is where Americans’ life savings and retirements are. 

What happens when those go up in smoke?

That’s when the real fireworks begin. And yes, we're going to get to all the other kinds of damage, too.

The Medium Term Damage, or, Perma-Crash

As stock markets revalue the entire economy at trillions less, what will companies have to do? They’ll be paralyzed with shock. They’ll have to lay people off, probably in pretty serious numbers. 

Meanwhile, there’s already a hatchet being taken to basic government agencies and departments. So now we have a wave of unemployment, sorry, a tsunami, roaring across the economy.

What does that do? It makes people start to miss their payments, because Americans mostly live in debt. First it’s credit card payments, then it’s car payments, and finally, it’s mortgage payments. What happens when large numbers of people miss their mortgage payments all at once?

Banks begin to fail.

And at that point, we have a repeat of the 2008-2009 housing crisis and financial crash. But that was temporary. This one won’t be. 

Because now what we call the “equilibrium level” of employment in the economy is much lower. Think of it this way: at permanently much, much higher prices, thanks to trade wars and so on, and much much less investment in government, the economy can only employ fewer people. We don’t know how many precisely, but again, it doesn’t matter, because we’re just trying to estimate damages at orders of magnitude, not in fine decimal places.

So this begins to look something very much like a depression.

I really want you to understand this part, so stay with me.

Why do I say that? Am I exaggerating? Kidding? Don’t you have the same awful feeling in the pit of your stomach I do? What does it say?

What if the housing crisis and crash of 2008-2009 never ended? What does that sort of economy look like?

That’s what we’re talking about here. That’s what “a permanently lower equilibrium level” means. It means that’s the new balance point, the new everyday, the new normal, if you like, though there’s nothing normal about any of this.

It’s in that sense that we’re looking at something like a depression. Economists, and again, America doesn’t have very many good ones left, will quibble over the semantics, I always warn you about this. Don’t get lost in that noise. 

What else would you call an economy where the 2008-09 crisis and crash never ended?

You see, what we call it doesn’t really matter. This isn’t some kind of academic exercise anymore. This is your life. The semantics don’t matter one bit, what does matter is that you understand what I am trying to teach you, that you grasp the reality of the concept, which is that that is the kind of economy America is now headed for.

How long would such an event last? You see, the thing about depression-level events is that they don’t magically go away by themselves. Rather, they’re self-perpetuating systems. And so without better governance, such an event would never really end. 

The Great Depression only ended, after all, because of an historic wave of large scale investment in things from the Hoover Dam to highways to universities.

And that brings me to the long term damage.

The Long Term Damage: Autocracy Makes—and Keeps—Societies Poor

So far, the damages we’ve discussed have been in the anodyne world of economics and finance, and many of you will be wondering: what about all the others? Now let’s connect all the dots.

The Great Depression only ended because there was an historic wave of investment in all the stuff that we’d come to later regard as modernizing America.

But this situation is very, very different. 

This politics will never allow such a thing, at least not from the orange guy and his ilk, who are busy cutting away all that stuff. And that mirror image should help you also understand why I predict a depression-level event.

But that’s not the real long term damage. Depressions don’t magically go away by themselves. They need to taken away. But now…? 

Maybe there won’t be another election. What realistic chances do you think that there will be? A meaningful one, at any rate, not some sort of Russified sham exercise.

It’s not me that puts those odds at: low and dwindling. As we discussed recently, these guys themselves do. You wouldn’t be tanking the economy if you cared about getting re-elected. Tanking the economy this hard, this fast, says pretty clearly: we don’t think there’s going to be another round of people choosing their leaders, because if we did, would we really do all this?

That’s what we call the principle of “revealed preference,” which just means, consider people’s actions and their consequences, what they’re really saying and signaling. In this case, the autocratic signals couldn’t be any louder or more flagrant.

And if there’s no real democratic future, then there’s also very little chance that said depression level event ever ends. Rather, America stagnates, and becomes something very much more like, for example, Russia.

And that fits. Because one Big Lie that Americans have been taught is that economics and politics can somehow be divorced. They can’t. It’s not a coincidence that autocracies have stagnant, declining, shrinking economies. Nor is it one that democracies tend to places of relative prosperity.

That’s a relationship.

Autocracy makes—and keeps—societies poor. Democracy makes societies, well, maybe not rich in some kind of magic, immediate way, but let’s say it’s a necessary if not sufficient condition to be a wealthy society over time. How many wealthy non-democracies are there, really? Have you ever asked or wondered? 

This is the central question. And the answer is that there are just a tiny, tiny few, all of which are special cases. Some have oil wealth, some have mineral wealth, and that’s…about it. Those forms of wealth are exceedingly temporary. To be a wealthy society over the time horizon of say, a human lifetime? You need to be a democracy.

Now. This isn’t some kind of abstract grad school lesson in political economy. This is about your life, sorry for repeating that, but I really need you to stay with me here.

If you understand that America is headed for autocracy, then you had also better understand that America is headed for poverty. Maybe oligarchs will get richer, sure, but the average person? They will Sink With the Ship.

In many, many ways. Their portfolios will get blown up, and foolish money managers will tell them ride it all the way down into the abyss. Don’t let this be you. Their careers will implode, as the bottom falls out of the economy. Don’t let this be you. Their incomes will stagnate and then decline, as the economy cannot support such anywhere near such an equilibrium level of wealth ever again. Don’t let this be you. And for many, a wave of terrible suffering, immense, obscene, unbearable, will come, when they rip apart what safety nets are left for the elderly and vulnerable. Don’t let this be you, either, if you can help it.

I haven't even gotten to things like stripping investment in universities. Do I have to? Just remember the principle: autocracy makes—and keeps—societies poor. And of course that's one way how, because such societies don't, or aren't allowed to, value fundamental civilizational goods like science, art, literature, health, and so forth.

Havens, Sinking With the Ship, and the Rest of Your Life

All of that’s Sinking With the Ship And we are way, way past the point where this is now an abstraction. It is already beginning to happen. It will only get worse. It will get worse faster and harder, too, by the looks of things. Think how much money the average person’s already lost, and how all that’s just a prelude to “Liberation Day.” 

Go ahead and shudder.

Now is the time for all of you to plan for all this. Seriously, carefully, thoughtfully. I’ve been discussing this in sessions with many of you. I promised to warn you if I thought such a thing needed to be said, so here is your warning, probably the first of many to come. 

This is getting worse faster than even I believed it would, and remember, I predicted all this in eerie detail. Not because I’m a genius or whatever, just because I’m OK at my job. That job is to guide you, protect you, and orient you.

So now is the time to plan for what’s ahead. I said that again because I want it to really sink in. Please, take a moment to sit with it and understand the key points above. Let me repeat them now more concisely.

The Damage Function of American Collapse

Putting it all together, it begins to look like this.

—In the short term, markets sink, all kinds of markets, stock, currency, bond, job, etcetera, and people lose a great deal of their wealth, as capital flight accelerates
—In the medium term, a depression level event begins, which is best imagined as something like the 2008-2009 crash and crisis, only this time, permanently
—in the long term, and if you take anything away from this essay, let it be this, autocracy makes—and keeps—societies poor, and many Americans will face those consequences in bleak, stark ways they can scarcely imagine at this moment

Now. How do you “plan” for—or against, really—all that? As I’ve been discussing with many of you in sessions, you do something like this:

—You have a Plan B, for your wealth, career, finances, assets, all of it
—You have an exit plan, because the way things are going, more and more of you will probably need one
—You have a contingency plan, for what happens if the damage function hits tipping points way faster than you expect, because those are sudden, and they destabilize everything even faster than all this
—You have a backup plan, which isn’t a Plan B, a Plan B is something you are ready and willing to do, a backup plan is more something you’re reluctant to, but are willing to if push comes to shove
—And all of those plans reinforce, interlock, include your loved ones, and make sense for you and your own personal context.

That’s a lot.

I’m saying all this to you because right now, it needs to be said. I’m not trying to overwhelm you, scare you, goad you, or frighten you. I just want you to think like the Adults in the Room. This is bad, even in my terms, and right now, everyone needs to be thinking at this level, until their plans are concrete and ready, in order not to Sink with the Ship. 

Learn from the mistakes our institutions are making. I’ll discuss that more next time, but for now, think: all these jokers on Wall St who thought there’d be a Trump Bump. They didn’t take it seriously. They didn’t think it through. They didn’t have a plan, and they still don’t. A year from now, they’ll be in deep shit, because their customers will be incandescent with rage. But by then, it’ll be way too late, because they’ll have lost them all a huge, huge chunk of their life savings.

That is what no plan does, only writ even larger. We’re not just talking about money and finances, we’re talking about your life. Your possibilities, your choices, your future. Believe me when I tell you that the window is now closing, and the right plan is going to make all the difference.

You must not repeat the mistakes our institutions are making, from Wall St to K St to boardrooms and beyond. Without a plan, they will all now be ruined to lesser or greater degrees, and that’s after they cower in despair. You must now begin to operate at this level, as a habit, through willpower, with clarity of intellect, with deepness of vision.

Don’t panic, don’t not panic. Just listen to the message in the panic, which is about the nature of this mess. It’s not going to be over in three months. Are you kidding? How could it be? Now you need to change, transform, adapt, in many ways, and that is all "a plan" really is. And you will grow, mature, and develop, in that way, too, which is always the gift of strife. Accept that gift. Those who don’t will Sink With the Ship.

If you need help, advice, guidance, just come on into the office for a session. I opened the diary precisely for that reason.

Lots of love,

Umair (and Snowy!!)

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