US Debt Downgrade: Perestroika Event Inbound

Posted on 06/08/2011 by

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Perestroika was the most significant factor leading to the demise of the USSR. It was a social, political, and economic programme masterminded by Mikhail Gorbachev, the General Secretary, and later the only President, of the Soviet Union. It was, in short, a revolutionary restructuring of Soviet society from the bottom up and top down, covering every facet of life in the USSR.

To the end of revolutionising Soviet society, Perestroika was a raging success. It did revitalise, retool, and reconfigure; however, it had the unintended effect of dismantling the Soviet Union. This was very much not what Gorbachev intended, but in the end he did have a powerful hand in improving the quality of life in the former USSR.

Simplifying things enormously, the USSR’s primary focus was on social, political, and economic factors. It was ripped apart by awakening new sentiment in the Soviet populace on social, political, and economic fronts. The Soviet people, quite emphatically, decided en masse to no longer be Soviets on all these facets. And so the Union collapsed.

The spark for that collapse was not low prices for oil, nor being overspent on defence by the United States; factors which stressed the USSR, but hardly alone would have led to its dissolution. It was, as I mentioned, that the Soviet people had a very profound change of consciousness and decided to no longer be Soviet. The change was instigated by the policy of Perestroika. It’s a good book, if you should ever come across a copy. I highly recommend it.

The intensity of this event, the ‘change of consciousness’ shift, is what I’d like to term a Perestroika Event. It is a watershed (apologies for that term) which fundamentally changes the attitude of those people upon whom the country most critically depends; changing the attitude from positive to negative.

Or, from another perspective, those critical people change from supportive to unsupportive. This could be fearful, indifferent, antithetical, or what have you. It merely needs to be unsupportive. More to the point, however, it is a pivotal point in a country’s history which brings it to the point of dissolution.

For other examples of Perestroika Event, beyond the USSR: the British Empire losing India, and therefore beginning the inevitable contraction of the Empire; King Louis XVI of France setting up a Parliament, and therefore the inevitable shift away from an absolute monarch (l’etat c’est moi and all that) toward other, somewhat nastier pastimes.

To repeat: a Perestroika Event is a pivot point, when the attitudes of a critical group of people shift, for whatever reason. It is a titanic social/political/economic reform (or policy revolution) like the original Perestroika. For the most part, the Event occurs because of Niall Ferguson’s “seemingly random piece of bad news“.

The rating downgrade of the USA’s debt is a catalyst for a Perestroika Event. This is so, for the simple reason that the USA is the primary purveyor of violence in the world. This can only be paid for by credit; it was the invention of credit-based central banking by the English that allowed the building of the British Empire. Only credit can facilitate dreams of Empire through military conquest.

It should go without saying that the USA’s financial situation is precarious at best. Dismembering its industrial power and replacing it with nothing in particular (hair dressers and the like) does not a superpower make. Add onto this the costs of maintaining a global, boots-on-the-ground Empire, carved out by the most expensive military technology ever put to field.

The stability of the USA and its Empire was predicated upon the maintenance of the AAA credit rating, and therefore its record-low borrowing costs. In a period of vast outlays and collapsing taxation, the need for this super-low interest rate environment is literally systemic.

The debt crisis, in other words, is bad enough already at a AAA credit rating. It should be no great leap of imagination to see how much deeper the crisis will become with a lower credit rating. The interest rates upon the debt issued and to be issued is going to be automatically higher than it was before. Therefore, more of the outlays of the US Federal Government will increasingly go toward interest payments.

Suddenly the cost of maintaining a vast network of extremely expensive bases and extremely expensive wars will balloon, just at a time when the US Federal Government should be curtailing such mad, unproductive, and uneconomic expenditures.

The US has heretofore depended upon the outside world to keep it going, as represented by the AAA credit rating. It has been decades since the United States could afford to pay for its Empire out of its own pocket, so the money of the rest of the world was lent at very agreeable rates. The one thing that kept this system flowing was the blind trust which the US government debt used to instill in international investors. That has now been thoroughly trashed by S&P. No one can now call the US debt risk-free.

To clarify, the debt downgrade itself is not the USA’s Perestroika Event, it was the catalyst thereof. Because of the downgrade, a global shift is fast approaching: a huge and world-wide reorganisation of perceptions of the United States has already begun. Changes will be driven by short-term financial interests. The global financial system’s will move to mitigate the increased default risk which comes with a non-AAA rated investment, no matter what its nature.

Once this financial machinery is set in motion, there is nothing which can stop it. The actions are not predicated upon human action; they are based purely upon the mathematical financial models which the US Federal Government says makes the banking sector such a marvellous contribution to human civilisation. The human element will raise a powerful call, however, for the United States to get its financial house in order.

As an aside, there are some who will try to spin this downgrade as a good thing. An excellent example is Mohamed El-Erian of PIMCO, who is calling the downgrade a “Sputnik Moment“. As in, this will precipitate a desire within the US political establishment to mend their ways and become better people. This observation comes as a practical footnote to an otherwise cogent article. The delusion of this idea is easily shown: a political system which wished to remain in power would not have allowed the situation to decay to the point of a credit downgrade. Only gross and unrepentant incompetence can explain this circumstance.

To continue.

In order to mitigate the fallout from the interest rate pressures, as well as the inevitable threat of further ratings downgrades, the US Federal Government will capitulate and present reforms. The rating downgrade, and probably future downgrades, forces the US to do this, or face brutal consequences from the international financial community. But even if those reforms are honest, they will not succeed. This is simply because the reform itself is the Perestroika Event, whatever particular form the USA takes to ‘get its financial house in order’.

Given the recent track record of the USG, they are likely to make the worst possible choice in reform. In my opinion, the most idiotic, short-sighted, and destructive choice would be to savagely cut all non-military spending in order to balance the Federal budget, or at least keep the deficit within ‘reasonable’ levels. As I said, this is the worst possible choice, and so I expect this is what will happen, or some variation thereof.

Continuing on this programme, taxation and the slight remaining borrowing would indeed cover military expenditures and little else (presumably Congressional salaries). The roughly half of the US population that depend on non-military spending would find themselves homeless, sick and starving on the streets, or close to it. It would be the type of policy choice fitting Louis XVI.

Whatever shape the ‘reform’ takes, however, it will be out of control, with multiple unintended consequences. Simply put, the reforms will snowball as increasing financial pressures require further reform; the reforms will reveal more systemic sickness to international financial concerns, which will call for more reforms. And so on. The snowballing reform process was seen in the USSR and Bourbon France; it will be seen in the USA, and will accelerate financial, political, and imperial collapse.

This is the Perestroika Event.

Wider effects of this reform are best painted with a broad stroke. The US Empire will crumble at a reckless pace, because the Federal Government will be incapable of recognising the necessity of orderly contraction. The military/industrial complex will also crumble, because it is a war machine fuelled by constant expansion of credit and conflict. Without the Empire and the military/industrial complex, there will be little left of the USA as a political entity, save the metaphorical smoking crater where a corrupt and out-of-control political organisation used to be.

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Posted in: Analysis