This is the script for my Demographic Doom podcast episode (#40) released on 18 April 2020. It may differ slightly from the final broadcast. This episode is available on major podcast platforms, including Podbean, Apple Podcasts and a video version on YouTube. See the description on the YouTube version for annotations, links and corrections. You can also comment on this episode there. (If you leave comments on this blog post, I might not see them.) The main website for this project is DemographicDoom.com
I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations.
Today, I want to talk about the root cause of the current financial collapse as well as many other collapses throughout history. It centers on a natural human failing known as the "Tragedy of the Commons." That's where individuals pursuing their own self-interest sabotage the resources shared by all, thereby hurting themselves in the end. The concept was first described by British economist William Forster Lloyd in 1822, but in the 20th Century, the world found new ways to express it, leading eventually to our current crisis.
I want to emphasize that the current crisis is not COVID-19. I am speaking to you on April 18, 2020, and it seems like everyone on the planet is still obsessed with protecting themselves from the virus. I believe the epidemic has already peaked or is close to it, because all those lockdowns and social distancing measures have done their job, albeit crudely. The key is not locking people down but changing human behavior, like how people touch things and how they interact, and these behavior changes have already taken hold. By the end of 2020, COVID-19 will have faded from public consciousness. There will be all sorts of new customs and procedures, like never shaking hands anymore, but the virus won't be interfering with normal activities like it does today.
The financial crisis, however, will continue far beyond 2020. All sorts of businesses, industries and maybe even governments will collapse. Unemployment will remain astronomical, and the economy will only be operating at a fraction of its former capacity.
The virus did not "cause" the economic collapse. It only triggered it. It was the pin that popped the bubble, but it didn't inflate the bubble. By the end of 2019, the bubble was already bulging, waiting for a pin—any pin—to set it off, and it happened to be this virus.
In this episode, I will try to explain how the bubble got inflated to begin with, along with all the other bubbles dating back to the Great Depression. I want to explain the super-bubble we had at the end of 2019, and how it got so dangerous. As usual, I'm trying to look at things from the highest possible altitude, like aliens visiting from space. What is there about human nature and human social organization that gave us this crisis?
And that's where the Tragedy of the Commons comes in. This a fundamental problem of human organization, and I contend that civilization has reached its limits in dealing with it.
The original idea is this: Imagine a medieval village in England. There is a patch of public land called the "Commons" where every villager is allowed to graze his cattle for free. It's a shared space that everyone uses, but it can support only so many cattle. The natural incentive of each villager is to graze as many animals as possible there, because it's free. Everyone is thinking, "If I don't use the grass, someone else will." But if everyone acts this, maximizing their own personal gain, the grazing land eventually collapses. You need to leave enough grass in place that it can regenerate itself as fast as it is being eaten. Too many cattle mean the land is grazed bare and all the animals starve. That is, all the villagers suffer from the cumulative effect of their own self-interested actions. That's the Tragedy of the Commons.
There is only one solution to the tragedy, and that's some sort of government regulation. The Village Council or Lord of the Manor has to impose some sort of rules about grazing, like limiting each villager to two animals grazed on the Commons. A lot of villagers aren't going to like this, and the council might have to get harsh, imposing fines or other penalties on those who violate the rules, but these rules are essential for maintaining the common good. Without regulation, with unfettered Capitalism, the land is overgrazed and everyone starves.
The same would apply in a fishery like a lake. If too many fishermen pull too many fish from the lake, the fish population collapses, and soon there are no fish for anyone. Every fisherman is hungry and trying to feed his family, so he is incentivized on any given day to pull as many fish as he can from the lake, but if too many fishermen do this, there will be no fish for anyone. The only solution is for some government authority to somehow license fishermen and count their catch. It may seem horribly intrusive, and regulation itself can be corrupt and inequitable, but some sort of regulation is unavoidable.
A third example, somewhat indirect, is a paper factory on a river. The factory itself has no economic incentive to avoid polluting the river, because any pollution it spews into the river is experienced by people downstream, not by the factory itself. In this case the common resource is the river, which many depend on for their livelihood, but the factory has no economic incentive to keep it clean. The only way the factory is going to clean up its act is by some powerful government authority forcing it to do so.
Most countries have been successful in imposing these kinds of basic environmental regulations. There were times of horrendous pollution in the past, but today most common land isn't overgrazed, most fisheries aren't depleted and most rivers aren't polluted, because sensible government regulation has stepped in to protect these common resources.
Throughout the developed world, simple pollution has been pretty well controlled, but global warming hasn't been. That's because climate change is a problem arising over decades, even centuries, and once humanity understood it was happening and started taking action, it was too late to stop it. Climate change is different from pollution. If a river is polluted, and you cut off the source of the pollution, the river starts recovering almost immediately. Not so with climate change. If you could cut off all carbon emissions today, sea levels would continue to rise for decades if not centuries. Humanity has been spewing carbon into the atmosphere in Earth-changing amounts since at least the industrial revolution. You can't make it all go away just by stopping the emissions now.
Global warming is the sort of long-horizon problem that humans aren't capable of handling, in part because the timescale of the problem exceeds the human lifespan, not to mention the term of any one politician. Politicians have no incentive to solve an invisible long-term problem because it doesn't produce instant results and doesn't get them reelected. Humans are now reacting to climate change after it has become unstoppable, because they were politically and scientifically incapable of preventing it.
Modern financial systems are similarly uncontrollable. This is a complex kind of commons involving invisible resources leveraged over time. On the traditional Commons, the resource is obvious: It's grass, and you can judge its health by looking at it. In the financial world, resources aren't so obvious. If a company produces X amount of profit each year, stock, debt and derivatives can be sold based on that profit. The company's profit is the equivalent of the grass grown each year on the Commons, but financial technology allows the sale of the future production, or future grass, and that's where things get complicated.
In medieval times, it was just cattle and grass, and it was pretty easy to tell by looking at the land when the cows had eaten too much. In the 20th Century, we invented whole new ways to exploit the Commons by doing it across time. In the 20th Century, we invented something called "debt" which essentially allowed villagers to sell their grazing rights far into the future.
On the Commons, the core production is grass. Instead of grazing animals there, you could harvest the grass and form it into bales and allocate bales to each villager. There is a certain amount of bales that the land can sustainably produce each year, and each villager gets his share.
Imagine now that some clever financial guru comes along and offers villagers the ability to buy and sell their future allotment of bales. If you don't have the cash to buy something right now, like a new wagon, you can pledge to the seller your future hay bales for the next ten or twenty years. That's basically what debt is. You are selling your future or your future rights to something. You get the payoff upfront—the wagon to use right now—but in some way you are losing your freedom in the future.
In this village, bales of hay are a sort of currency. Once they receive their annual allotment of bales, villagers can trade them back and forth with each other in exchange for goods and services. This is an honest monetary system, because you know what each bale is worth. You can use it for trade, or you can use them to feed your animals, which results in milk or meat you can eat. Bales of hay are the Gold Standard in this village.
Things get messy when villagers start dealing in future bales of hay. When a villager deals with future hay, he doesn't have the hay in hand, so he can only offer a piece of paper promising to pay a certain number of bales on a certain date. Now people start trading those pieces of paper as though they were actual bales, and this is where things get dangerous. Pieces of paper with promises written on them do not have the same value as actual bales, because there are so many variable factors behind them. Will the person who promised the bales actually deliver them? Will grass production in future years be the same as it is today?
What invariably happens in these secondary markets, absent regulation, is that they become oversold. In other words, more pieces of paper are in circulation than actual future grass production can support. Things turn into a crisis when there's an unexpected drought. Grass production falls, but the pieces of paper and the promises they bear are still outstanding. Eventually there's a crisis when the value of those pieces of paper crashes.
That's what our current economy is all about. It's not just an exchange of current production. There's a huge secondary market in the promises of future production. That's what a stock market is, or a commodities market or a bond market. These secondary markets have a tendency to become overheated, circulating more promises than actual production can support, or at best, trading 100% of future production with no margin for error. Things turn into a crisis when production unexpectedly falls, as it is doing today, and all those outstanding promises face a reckoning.
Government authorities, like the Village Council, can handle the basic Tragedy of the Commons. They can prevent overgrazing of the land this year, but they are helpless and inept when trying to regulate a secondary market on grazing rights, where people pledge their resources ten or twenty years from now. The markets and instruments of future trade are constantly evolving, so no one really has a handle on what is going on. Some people are getting rich on these grazing futures, which encourages too many to crowd into the market, pushing prices up.
A bubble is when more paper promises are being bought and sold than production can actually support. That's where we were at the end of 2019. The bursting of the bubble is when the prices of paper promises fall to a sustainable level, consistent with actual production. This sounds like a simple process—The bubble bursts and prices fall.—but there can be all sorts of complex systems built upon the assumption of higher prices, and these systems don't fall gracefully. Companies go bankrupt, institutions fail, and lots of people lose their jobs. At worst, you get to the point where the government itself can't function.
I want to go back to my favorite example: US government debt. The basic production of the US government, at least before the virus, was $3.5 trillion dollars per year. That's how much money the Federal government collected in taxes in 2019. This is the equivalent of the grass that grows on the Commons every year. You can raise or lower taxes, but this also affects production and may not change total tax income. It's hard to truly make more money from taxes unless you're in the middle of an extended economic boom and tax wisely.
Given all the people out of work right now, it seems unlikely the government will attain the same $3.5 trillion income in 2020 or the following years. $3.5 trillion can be considered the Federal government's peak tax production, like the maximum bales of hay the Commons can produce.
In 2019, before the virus, the US government spent about $4.5 trillion—in other words, a $1 trillion more than was being produced. Where does the other $1 trillion come from? The government sells pieces of paper promising to pay the $1 trillion in the future. These pieces of paper are passed around among investors as though they were cash, but they're not. Lots of things could happen before the paper is paid off. The government could default, or inflation could eat away at the value of the principle before the paper matures.
In 2020, with all the Federal government's rescue spending, how much will the budget be? 6 trillion? Maybe more. Income can't be more than $3.5 trillion and it will probably be a lot less given all the business closures, so the US government will probably be borrowing something like half the money it spends in 2020. It will be selling a lot of paper promises. Total bonds in circulation was $22 or $23 trillion before the virus, which is a lot of money if you are only making $3.5 trillion a year and are routinely spend more than that every year. Very quickly, it could be $30 trillion and rise exponentially from there.
This is a clear, unequivocal case of there been more debt outstanding than can possibly be repaid, and this market is completely unregulated, because it's the government selling the paper, and the government can do whatever it wants. The only thing that will stop the endless production of paper is investors looking at it and having an "Ah-Hah!" moment. They'll suddenly say, "You know, I'm never going to get paid full value for these promises."
It's like a market for future hay. Investors hold pieces of paper promising them so much hay in the future, but if you add up all the paper owned by all the investors, you realize it is way more than the Commons can produce. At some point, the market for this paper crashes, where a promise for one bale fetches only the price of a fraction of a bale, because the market suddenly realizes this paper is junk.
At some point the government bond market is going to collapse. I can't tell you when because it depends on the appetite for bonds in the open market. I don't know where the saturation point is, but I can tell you what will happen when it is reached: Either the government will default on its bonds, not paying upon maturity or paying less than face value, or inflation degrades the value of the bonds. Either option is bad for investors and bad for the government itself, since it will be unable to incur new debts at an affordable interest rate.
The end game in all of this is either the government collapses altogether or it has to live within the bounds of the taxes it actually collects. Given the economic collapse, this is certain to be a lot less than it's $3.5 peak income in 2019. Imagine a US government that is only a shadow of its former self, hardly capable of maintaining basic services. Mail doesn't get delivered and roads don't get repaired, and this becomes a further burden on the economy.
And that's only one bubble of many. With US government debt, all the variables are open and known. Financial markets are riddled with all sorts of other schemes that are far more difficult to assess. Think of the mortgage-backed securities that brought down the economy in 2008. Only a few smart investors, the Big Short people, predicted it would happen. Some of these problems may have been repaired since then, but plenty of other schemes have arisen to take their place, and they are all going to see a day of reckoning—not at some vague time in the future, but this year, 2020. As bad as things seem in April, they're gonna get far worse.
It's hard to say that any of this could have been prevented. In theory, the government can regulate financial markets, but the government can't even regulate itself, as shown in its own debt bubble. The government is run by politicians who have no incentive to plan for the distant future. They can only plan for the next election, which generally involves giving voters free stuff and not causing them any pain. Cutting $1 trillion from the budget was impossible in 2019, in the outwardly best of times. In the worst of times, like now, politicians are committed to rescuing everyone, regardless of the cost. In other words, they are "solving" the Tragedy of the Commons by issuing still more empty promises on future grass production.
Once again, we are trying to solve the problems of today by borrowing from tomorrow, and the sums being borrowed just get bigger and bigger. They are starting to rise almost exponentially. By the end of 2020 or 2021, we'll be looking back fondly on 2019, when the deficit was "only" a trillion and total debt was "only" $22 trillion. The curve goes way up from here.
Things are not any healthier in the private sector. Debts have been built upon debts, fueled in part by artificially low interest rates for the past decade. All that cheap money was not put to work building the economy but was spent on all sorts of financial shenanigans that will become more obvious as these schemes collapse.
One of this dubious transactions was the stock buyback. That's when a corporation borrows money at ridiculously low rates to buy its own stock. This makes the stock price rise, and stockholders are happy. Executives are also happy, since they are compensated based on the stock price. The only problem is that the company is now saddled with debt, making it vulnerable in a downturn like this one.
I won't get into the details, but they are ugly. Let's say the company borrows a million dollars to buy its own stock at the pre-crash price of $200 a share. After the virus messes things up, the stock price falls to $100, but the company is still committed to all that debt it incurred buying stock at $200. You can see it's going to be a mess. In 2020, a lot of corporate debt is going to be downgraded, which is going to contribute to a flood of bankruptcies and still more job losses.
Corporate executives, like politicians, are not hired for long-term performance across decades. They are hired and rewarded for short-term gain. If this means stealing from the company's own future, they'll do it, because there's a good chance they won't be around when the bills come due. Executives borrow on the company credit card to prop up the stock price, which also benefits them personally. When everything tanks, they get booted, but they've already made their profit. Left holding the bag are employees, losing their jobs, and ordinary stockholders, losing their money.
I can't possibly describe all the other crazy debt schemes out there, but almost all of them have a common theme: selling out the future for a quick buck today. They are selling more grass from the future Commons than the land can possibly support.
It is easier to look at things from a global perspective. According to the Institute for International Finance, global debt in late 2019, before the virus, was 320% of global GDP. That is, the world was producing goods and services worth about $80 trillion, while global debt was about $260 trillion, roughly. That's not just government debt but debt from all sources: consumer, corporate, maybe your local neighborhood loan shark, I don't know. In my mind, it is probably an undercount, because some debt is so informal, like the loan shark, that it's hard to estimate, but let's assume the IIF number is correct.
Total world debt in 2020 probably isn't any less than $260 trillion, but global GDP has taken a huge hit from the coronavirus. How much of a hit? We can only guess. Maybe world GDP is down to $60 trillion in 2020. Global debt doesn't magically diminish just because the economy shrinks. It's still there at $260 trillion, but with our lower GDP estimate, the world now owes about 430% of GDP in 2020. This is an utterly unpayable amount. It's a promise of future grass than can never possibly be realized. Most of that debt has to fail sooner or later, and I'm betting on sooner.
You may think that the answer to all of this is better government regulation, but you're trying to regulate a bunch of moving targets that no one really understands because they're so new. Even if you did have a politician or business leader who was secure enough to think about the world 10 or 20 years from now, it is hard for them to know what to do. Debt is a new technology, like computers and software. This technology is rapidly evolving and no regulator can possibly keep up. You successfully regulate one debt product, like mortgages, and a dozen other products emerge, often skirting the regulations on the first product.
I find it truly doubtful the even an earnest, far-sighted government like Norway could effectively regulate all the new financial instruments coming online. If Norway successfully regulated a certain product, those operations would just shift overseas where Norway has no control. If regulation isn't lax enough in your own country, you can just move your operations to a country that is more lenient. Big corporations are good at this: bouncing operations and profits around the world to minimize taxes or regulation. No government is sophisticated enough to keep up with it, and governments are so at odds with each other that they can't coordinate their responses.
So the financial world is doomed. It may have hit a sort of wall where no further economic progress is possible. Maybe the boom and bust cycle ends with one massive, long-lasting crash, a new Great Depression, which happens to be starting right now. If there is more debt in the world than production, maybe 2020 is the year that all the reckonings happen. What ultimately has to happen is all the paper promises out there have to be devalued. All of a sudden, government bonds crash, corporate bonds crash, stocks crash, real estate crashes. Everything that can crash, does, and the world is pushed back into some kind of feudal state where people are fighting for basic resources.
Astronomers often wonder about the Fermi's Paradox. With so many billions of stars visible to us, most with planets and a fair chance of life on many of them, why have we detected no alien civilizations? The answer may be that as each society becomes more technologically advanced, it eventually collapses under the weight of its own complexity. Maybe the collapse always happens at the stage we're now in: just before we are capable of expanding beyond our planet.
Now we're in a crisis—both the virus and the financial crash—and virtually every remedy available to governments involves going even deeper into debt. To fund recovery efforts, governments issue bonds to the public, and when the appetite for the bonds is satiated, they are forced into some form of money printing. That's essentially what the US government is doing now. As of today, the Federal Reserve is printing money roughly twice as fast as the government is issuing new bonds, so this isn't just funding the deficit, but trying to fund the whole failing economy. Money printing goes by other names, like "quantitative easing" and "asset purchases", but the effect is the same: increasing the overall money supply.
Consumer inflation, where the price of beans goes way up, hasn't started yet, but it will. The Fed has opened up the tap of money printing, and it's filling up a reservoir, which is the huge appetite around the world for US dollars. Since other currencies are in even worse shape than the dollar, foreign investors want dollars as fast as the Fed prints them. But there's a limit. There always is. Once the appetite for dollars is satiated, the reservoir overflows. Suddenly, there are more dollars than the market wants; the value of each dollar plummets, and we've got serious inflation. It's hard to say when this tipping point will happen, because it's hard to estimate how much appetite there is for dollars, but I'm guessing the reservoir will overflow by the end of 2020.
So the US Dollar itself is a sort of Commons. Everyone depends on the dollar for trade, but it only has value if it is a relative rare commodity. Print too much money, and you degrade the value of the dollar. It's like grazing too many sheep on the commons. Eventually the whole resource collapses, and people are left holding dollars that are constantly falling in value. The government is degrading the monetary Commons to try to save the village, but eventually the Commons have taken too much abuse, and the resource collapses.
It is an unstoppable process, and it's easy to imagine it happening in every advanced culture, everywhere in the galaxy. They develop new technologies, almost achieving star travel, and then the complexities of the technology eat them alive. It could happen with atomic power, ending the planet in a devastating war, or it could happen with something as seemingly non-lethal as debt. The more connected people are and the more clever they become in selling their future production, the more things there are to go wrong.
In the end, I don't think humanity will ever achieve meaningful space travel, not because the technology is impossible, but the financial underpinnings have collapsed. Humanity will never get to the stars because it hit its complexity limit, the point where the costs of technology exceeds its benefits. Fermi's paradox may not be a paradox at all. It may just mean there are limits to technology and financial systems where they becomes uncontrollable. The complexity of civilization and technology exceeds the abilities of the tiny brains that created it.
Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.
I’m Glenn Campbell. I call myself a demographic philosopher. I’m looking at life and trying to predict the future through the lens of demography, or the study of human populations.
Today, I want to talk about the root cause of the current financial collapse as well as many other collapses throughout history. It centers on a natural human failing known as the "Tragedy of the Commons." That's where individuals pursuing their own self-interest sabotage the resources shared by all, thereby hurting themselves in the end. The concept was first described by British economist William Forster Lloyd in 1822, but in the 20th Century, the world found new ways to express it, leading eventually to our current crisis.
I want to emphasize that the current crisis is not COVID-19. I am speaking to you on April 18, 2020, and it seems like everyone on the planet is still obsessed with protecting themselves from the virus. I believe the epidemic has already peaked or is close to it, because all those lockdowns and social distancing measures have done their job, albeit crudely. The key is not locking people down but changing human behavior, like how people touch things and how they interact, and these behavior changes have already taken hold. By the end of 2020, COVID-19 will have faded from public consciousness. There will be all sorts of new customs and procedures, like never shaking hands anymore, but the virus won't be interfering with normal activities like it does today.
The financial crisis, however, will continue far beyond 2020. All sorts of businesses, industries and maybe even governments will collapse. Unemployment will remain astronomical, and the economy will only be operating at a fraction of its former capacity.
The virus did not "cause" the economic collapse. It only triggered it. It was the pin that popped the bubble, but it didn't inflate the bubble. By the end of 2019, the bubble was already bulging, waiting for a pin—any pin—to set it off, and it happened to be this virus.
In this episode, I will try to explain how the bubble got inflated to begin with, along with all the other bubbles dating back to the Great Depression. I want to explain the super-bubble we had at the end of 2019, and how it got so dangerous. As usual, I'm trying to look at things from the highest possible altitude, like aliens visiting from space. What is there about human nature and human social organization that gave us this crisis?
And that's where the Tragedy of the Commons comes in. This a fundamental problem of human organization, and I contend that civilization has reached its limits in dealing with it.
The original idea is this: Imagine a medieval village in England. There is a patch of public land called the "Commons" where every villager is allowed to graze his cattle for free. It's a shared space that everyone uses, but it can support only so many cattle. The natural incentive of each villager is to graze as many animals as possible there, because it's free. Everyone is thinking, "If I don't use the grass, someone else will." But if everyone acts this, maximizing their own personal gain, the grazing land eventually collapses. You need to leave enough grass in place that it can regenerate itself as fast as it is being eaten. Too many cattle mean the land is grazed bare and all the animals starve. That is, all the villagers suffer from the cumulative effect of their own self-interested actions. That's the Tragedy of the Commons.
There is only one solution to the tragedy, and that's some sort of government regulation. The Village Council or Lord of the Manor has to impose some sort of rules about grazing, like limiting each villager to two animals grazed on the Commons. A lot of villagers aren't going to like this, and the council might have to get harsh, imposing fines or other penalties on those who violate the rules, but these rules are essential for maintaining the common good. Without regulation, with unfettered Capitalism, the land is overgrazed and everyone starves.
The same would apply in a fishery like a lake. If too many fishermen pull too many fish from the lake, the fish population collapses, and soon there are no fish for anyone. Every fisherman is hungry and trying to feed his family, so he is incentivized on any given day to pull as many fish as he can from the lake, but if too many fishermen do this, there will be no fish for anyone. The only solution is for some government authority to somehow license fishermen and count their catch. It may seem horribly intrusive, and regulation itself can be corrupt and inequitable, but some sort of regulation is unavoidable.
A third example, somewhat indirect, is a paper factory on a river. The factory itself has no economic incentive to avoid polluting the river, because any pollution it spews into the river is experienced by people downstream, not by the factory itself. In this case the common resource is the river, which many depend on for their livelihood, but the factory has no economic incentive to keep it clean. The only way the factory is going to clean up its act is by some powerful government authority forcing it to do so.
Most countries have been successful in imposing these kinds of basic environmental regulations. There were times of horrendous pollution in the past, but today most common land isn't overgrazed, most fisheries aren't depleted and most rivers aren't polluted, because sensible government regulation has stepped in to protect these common resources.
Throughout the developed world, simple pollution has been pretty well controlled, but global warming hasn't been. That's because climate change is a problem arising over decades, even centuries, and once humanity understood it was happening and started taking action, it was too late to stop it. Climate change is different from pollution. If a river is polluted, and you cut off the source of the pollution, the river starts recovering almost immediately. Not so with climate change. If you could cut off all carbon emissions today, sea levels would continue to rise for decades if not centuries. Humanity has been spewing carbon into the atmosphere in Earth-changing amounts since at least the industrial revolution. You can't make it all go away just by stopping the emissions now.
Global warming is the sort of long-horizon problem that humans aren't capable of handling, in part because the timescale of the problem exceeds the human lifespan, not to mention the term of any one politician. Politicians have no incentive to solve an invisible long-term problem because it doesn't produce instant results and doesn't get them reelected. Humans are now reacting to climate change after it has become unstoppable, because they were politically and scientifically incapable of preventing it.
Modern financial systems are similarly uncontrollable. This is a complex kind of commons involving invisible resources leveraged over time. On the traditional Commons, the resource is obvious: It's grass, and you can judge its health by looking at it. In the financial world, resources aren't so obvious. If a company produces X amount of profit each year, stock, debt and derivatives can be sold based on that profit. The company's profit is the equivalent of the grass grown each year on the Commons, but financial technology allows the sale of the future production, or future grass, and that's where things get complicated.
In medieval times, it was just cattle and grass, and it was pretty easy to tell by looking at the land when the cows had eaten too much. In the 20th Century, we invented whole new ways to exploit the Commons by doing it across time. In the 20th Century, we invented something called "debt" which essentially allowed villagers to sell their grazing rights far into the future.
On the Commons, the core production is grass. Instead of grazing animals there, you could harvest the grass and form it into bales and allocate bales to each villager. There is a certain amount of bales that the land can sustainably produce each year, and each villager gets his share.
Imagine now that some clever financial guru comes along and offers villagers the ability to buy and sell their future allotment of bales. If you don't have the cash to buy something right now, like a new wagon, you can pledge to the seller your future hay bales for the next ten or twenty years. That's basically what debt is. You are selling your future or your future rights to something. You get the payoff upfront—the wagon to use right now—but in some way you are losing your freedom in the future.
In this village, bales of hay are a sort of currency. Once they receive their annual allotment of bales, villagers can trade them back and forth with each other in exchange for goods and services. This is an honest monetary system, because you know what each bale is worth. You can use it for trade, or you can use them to feed your animals, which results in milk or meat you can eat. Bales of hay are the Gold Standard in this village.
Things get messy when villagers start dealing in future bales of hay. When a villager deals with future hay, he doesn't have the hay in hand, so he can only offer a piece of paper promising to pay a certain number of bales on a certain date. Now people start trading those pieces of paper as though they were actual bales, and this is where things get dangerous. Pieces of paper with promises written on them do not have the same value as actual bales, because there are so many variable factors behind them. Will the person who promised the bales actually deliver them? Will grass production in future years be the same as it is today?
What invariably happens in these secondary markets, absent regulation, is that they become oversold. In other words, more pieces of paper are in circulation than actual future grass production can support. Things turn into a crisis when there's an unexpected drought. Grass production falls, but the pieces of paper and the promises they bear are still outstanding. Eventually there's a crisis when the value of those pieces of paper crashes.
That's what our current economy is all about. It's not just an exchange of current production. There's a huge secondary market in the promises of future production. That's what a stock market is, or a commodities market or a bond market. These secondary markets have a tendency to become overheated, circulating more promises than actual production can support, or at best, trading 100% of future production with no margin for error. Things turn into a crisis when production unexpectedly falls, as it is doing today, and all those outstanding promises face a reckoning.
Government authorities, like the Village Council, can handle the basic Tragedy of the Commons. They can prevent overgrazing of the land this year, but they are helpless and inept when trying to regulate a secondary market on grazing rights, where people pledge their resources ten or twenty years from now. The markets and instruments of future trade are constantly evolving, so no one really has a handle on what is going on. Some people are getting rich on these grazing futures, which encourages too many to crowd into the market, pushing prices up.
A bubble is when more paper promises are being bought and sold than production can actually support. That's where we were at the end of 2019. The bursting of the bubble is when the prices of paper promises fall to a sustainable level, consistent with actual production. This sounds like a simple process—The bubble bursts and prices fall.—but there can be all sorts of complex systems built upon the assumption of higher prices, and these systems don't fall gracefully. Companies go bankrupt, institutions fail, and lots of people lose their jobs. At worst, you get to the point where the government itself can't function.
I want to go back to my favorite example: US government debt. The basic production of the US government, at least before the virus, was $3.5 trillion dollars per year. That's how much money the Federal government collected in taxes in 2019. This is the equivalent of the grass that grows on the Commons every year. You can raise or lower taxes, but this also affects production and may not change total tax income. It's hard to truly make more money from taxes unless you're in the middle of an extended economic boom and tax wisely.
Given all the people out of work right now, it seems unlikely the government will attain the same $3.5 trillion income in 2020 or the following years. $3.5 trillion can be considered the Federal government's peak tax production, like the maximum bales of hay the Commons can produce.
In 2019, before the virus, the US government spent about $4.5 trillion—in other words, a $1 trillion more than was being produced. Where does the other $1 trillion come from? The government sells pieces of paper promising to pay the $1 trillion in the future. These pieces of paper are passed around among investors as though they were cash, but they're not. Lots of things could happen before the paper is paid off. The government could default, or inflation could eat away at the value of the principle before the paper matures.
In 2020, with all the Federal government's rescue spending, how much will the budget be? 6 trillion? Maybe more. Income can't be more than $3.5 trillion and it will probably be a lot less given all the business closures, so the US government will probably be borrowing something like half the money it spends in 2020. It will be selling a lot of paper promises. Total bonds in circulation was $22 or $23 trillion before the virus, which is a lot of money if you are only making $3.5 trillion a year and are routinely spend more than that every year. Very quickly, it could be $30 trillion and rise exponentially from there.
This is a clear, unequivocal case of there been more debt outstanding than can possibly be repaid, and this market is completely unregulated, because it's the government selling the paper, and the government can do whatever it wants. The only thing that will stop the endless production of paper is investors looking at it and having an "Ah-Hah!" moment. They'll suddenly say, "You know, I'm never going to get paid full value for these promises."
It's like a market for future hay. Investors hold pieces of paper promising them so much hay in the future, but if you add up all the paper owned by all the investors, you realize it is way more than the Commons can produce. At some point, the market for this paper crashes, where a promise for one bale fetches only the price of a fraction of a bale, because the market suddenly realizes this paper is junk.
At some point the government bond market is going to collapse. I can't tell you when because it depends on the appetite for bonds in the open market. I don't know where the saturation point is, but I can tell you what will happen when it is reached: Either the government will default on its bonds, not paying upon maturity or paying less than face value, or inflation degrades the value of the bonds. Either option is bad for investors and bad for the government itself, since it will be unable to incur new debts at an affordable interest rate.
The end game in all of this is either the government collapses altogether or it has to live within the bounds of the taxes it actually collects. Given the economic collapse, this is certain to be a lot less than it's $3.5 peak income in 2019. Imagine a US government that is only a shadow of its former self, hardly capable of maintaining basic services. Mail doesn't get delivered and roads don't get repaired, and this becomes a further burden on the economy.
And that's only one bubble of many. With US government debt, all the variables are open and known. Financial markets are riddled with all sorts of other schemes that are far more difficult to assess. Think of the mortgage-backed securities that brought down the economy in 2008. Only a few smart investors, the Big Short people, predicted it would happen. Some of these problems may have been repaired since then, but plenty of other schemes have arisen to take their place, and they are all going to see a day of reckoning—not at some vague time in the future, but this year, 2020. As bad as things seem in April, they're gonna get far worse.
It's hard to say that any of this could have been prevented. In theory, the government can regulate financial markets, but the government can't even regulate itself, as shown in its own debt bubble. The government is run by politicians who have no incentive to plan for the distant future. They can only plan for the next election, which generally involves giving voters free stuff and not causing them any pain. Cutting $1 trillion from the budget was impossible in 2019, in the outwardly best of times. In the worst of times, like now, politicians are committed to rescuing everyone, regardless of the cost. In other words, they are "solving" the Tragedy of the Commons by issuing still more empty promises on future grass production.
Once again, we are trying to solve the problems of today by borrowing from tomorrow, and the sums being borrowed just get bigger and bigger. They are starting to rise almost exponentially. By the end of 2020 or 2021, we'll be looking back fondly on 2019, when the deficit was "only" a trillion and total debt was "only" $22 trillion. The curve goes way up from here.
Things are not any healthier in the private sector. Debts have been built upon debts, fueled in part by artificially low interest rates for the past decade. All that cheap money was not put to work building the economy but was spent on all sorts of financial shenanigans that will become more obvious as these schemes collapse.
One of this dubious transactions was the stock buyback. That's when a corporation borrows money at ridiculously low rates to buy its own stock. This makes the stock price rise, and stockholders are happy. Executives are also happy, since they are compensated based on the stock price. The only problem is that the company is now saddled with debt, making it vulnerable in a downturn like this one.
I won't get into the details, but they are ugly. Let's say the company borrows a million dollars to buy its own stock at the pre-crash price of $200 a share. After the virus messes things up, the stock price falls to $100, but the company is still committed to all that debt it incurred buying stock at $200. You can see it's going to be a mess. In 2020, a lot of corporate debt is going to be downgraded, which is going to contribute to a flood of bankruptcies and still more job losses.
Corporate executives, like politicians, are not hired for long-term performance across decades. They are hired and rewarded for short-term gain. If this means stealing from the company's own future, they'll do it, because there's a good chance they won't be around when the bills come due. Executives borrow on the company credit card to prop up the stock price, which also benefits them personally. When everything tanks, they get booted, but they've already made their profit. Left holding the bag are employees, losing their jobs, and ordinary stockholders, losing their money.
I can't possibly describe all the other crazy debt schemes out there, but almost all of them have a common theme: selling out the future for a quick buck today. They are selling more grass from the future Commons than the land can possibly support.
It is easier to look at things from a global perspective. According to the Institute for International Finance, global debt in late 2019, before the virus, was 320% of global GDP. That is, the world was producing goods and services worth about $80 trillion, while global debt was about $260 trillion, roughly. That's not just government debt but debt from all sources: consumer, corporate, maybe your local neighborhood loan shark, I don't know. In my mind, it is probably an undercount, because some debt is so informal, like the loan shark, that it's hard to estimate, but let's assume the IIF number is correct.
Total world debt in 2020 probably isn't any less than $260 trillion, but global GDP has taken a huge hit from the coronavirus. How much of a hit? We can only guess. Maybe world GDP is down to $60 trillion in 2020. Global debt doesn't magically diminish just because the economy shrinks. It's still there at $260 trillion, but with our lower GDP estimate, the world now owes about 430% of GDP in 2020. This is an utterly unpayable amount. It's a promise of future grass than can never possibly be realized. Most of that debt has to fail sooner or later, and I'm betting on sooner.
You may think that the answer to all of this is better government regulation, but you're trying to regulate a bunch of moving targets that no one really understands because they're so new. Even if you did have a politician or business leader who was secure enough to think about the world 10 or 20 years from now, it is hard for them to know what to do. Debt is a new technology, like computers and software. This technology is rapidly evolving and no regulator can possibly keep up. You successfully regulate one debt product, like mortgages, and a dozen other products emerge, often skirting the regulations on the first product.
I find it truly doubtful the even an earnest, far-sighted government like Norway could effectively regulate all the new financial instruments coming online. If Norway successfully regulated a certain product, those operations would just shift overseas where Norway has no control. If regulation isn't lax enough in your own country, you can just move your operations to a country that is more lenient. Big corporations are good at this: bouncing operations and profits around the world to minimize taxes or regulation. No government is sophisticated enough to keep up with it, and governments are so at odds with each other that they can't coordinate their responses.
So the financial world is doomed. It may have hit a sort of wall where no further economic progress is possible. Maybe the boom and bust cycle ends with one massive, long-lasting crash, a new Great Depression, which happens to be starting right now. If there is more debt in the world than production, maybe 2020 is the year that all the reckonings happen. What ultimately has to happen is all the paper promises out there have to be devalued. All of a sudden, government bonds crash, corporate bonds crash, stocks crash, real estate crashes. Everything that can crash, does, and the world is pushed back into some kind of feudal state where people are fighting for basic resources.
Astronomers often wonder about the Fermi's Paradox. With so many billions of stars visible to us, most with planets and a fair chance of life on many of them, why have we detected no alien civilizations? The answer may be that as each society becomes more technologically advanced, it eventually collapses under the weight of its own complexity. Maybe the collapse always happens at the stage we're now in: just before we are capable of expanding beyond our planet.
Now we're in a crisis—both the virus and the financial crash—and virtually every remedy available to governments involves going even deeper into debt. To fund recovery efforts, governments issue bonds to the public, and when the appetite for the bonds is satiated, they are forced into some form of money printing. That's essentially what the US government is doing now. As of today, the Federal Reserve is printing money roughly twice as fast as the government is issuing new bonds, so this isn't just funding the deficit, but trying to fund the whole failing economy. Money printing goes by other names, like "quantitative easing" and "asset purchases", but the effect is the same: increasing the overall money supply.
Consumer inflation, where the price of beans goes way up, hasn't started yet, but it will. The Fed has opened up the tap of money printing, and it's filling up a reservoir, which is the huge appetite around the world for US dollars. Since other currencies are in even worse shape than the dollar, foreign investors want dollars as fast as the Fed prints them. But there's a limit. There always is. Once the appetite for dollars is satiated, the reservoir overflows. Suddenly, there are more dollars than the market wants; the value of each dollar plummets, and we've got serious inflation. It's hard to say when this tipping point will happen, because it's hard to estimate how much appetite there is for dollars, but I'm guessing the reservoir will overflow by the end of 2020.
So the US Dollar itself is a sort of Commons. Everyone depends on the dollar for trade, but it only has value if it is a relative rare commodity. Print too much money, and you degrade the value of the dollar. It's like grazing too many sheep on the commons. Eventually the whole resource collapses, and people are left holding dollars that are constantly falling in value. The government is degrading the monetary Commons to try to save the village, but eventually the Commons have taken too much abuse, and the resource collapses.
It is an unstoppable process, and it's easy to imagine it happening in every advanced culture, everywhere in the galaxy. They develop new technologies, almost achieving star travel, and then the complexities of the technology eat them alive. It could happen with atomic power, ending the planet in a devastating war, or it could happen with something as seemingly non-lethal as debt. The more connected people are and the more clever they become in selling their future production, the more things there are to go wrong.
In the end, I don't think humanity will ever achieve meaningful space travel, not because the technology is impossible, but the financial underpinnings have collapsed. Humanity will never get to the stars because it hit its complexity limit, the point where the costs of technology exceeds its benefits. Fermi's paradox may not be a paradox at all. It may just mean there are limits to technology and financial systems where they becomes uncontrollable. The complexity of civilization and technology exceeds the abilities of the tiny brains that created it.
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Written, recorded and edited by Glenn Campbell. For annotations, links and corrections, see the description on the video version of this podcast. You can also leave comments there.
