Another Road to Ruin

Vox Day offers a different pathway toward a brief period of violent upheaval in the United States:

The American middle class is on the verge of collapse, at which point it will almost certainly revolt in some manner. It will likely be less spectacular than the burning buildings in Cairo, but there is no way that the confluence of collapsing bubbles in real estate and education are not going to have a significant effect on middle class behavior once it becomes sufficiently obvious to everyone how they have been played for suckers and financially raped by the banks with the full connivance of the state and federal governments. The middle class revolt is going to start with a refusal to continue paying its debts for mortgages, credit cards, and college degrees.

Defaulting on debt is not violent. But as framed, it is an act of rebellion against existing power structures. Coordinated rebellion would be war.

The U.S. (and thereby global) economy has continued to function through the 2008 collapse in very large measure because banks have been allowed to pretend their assets are worth more than they could be sold for. Portfolios of home loans are allegedly secured by real houses. But the realizable value of houses is down dozens of percent. There’s no value behind the loans.

If the banks were forced to follow generally accepted accounting principles, they would have to mark down the value of their loan portfolios. And that would make most of them insolvent. Or bankrupt, in ordinary language.

The threat of that was the justification for all the 2008 financial shenanigans, like TARP. Should the masses decide to default on their debts, the same scenario is in play. Credit card and student loan portfolios would become worth much less than what the banks show on paper. They would either have to get permission for a new kind of “extend and pretend” accounting trick, or would be bankrupt.

Any big bank collapsing would almost certainly take down the entire financial system. They’re all holding each others’ worthless paper. And that means ordinary people have trouble getting paid. Governments at all levels could not borrow to fund services. It‘s what is called a loss of liquidity.

There would still be people working, and we still have all our real assets and valuable knowledge. But since the system of payments is essentially a transfer of debts, without short-term borrowing, the flow stops. We couldn’t turn our stuff into money.

Government unable to pay to keep their dependents pacified is what I think will ignite real violence. I see other scenarios, too. None are without significant ugliness.