FINANCIAL MELTDOWN

As anticipated, the global financial system is now in free-fall. The bankruptcy of Lehman, the government take-over of Fannie/Freddie (essentially, a gov't takeover of the entire US mortgage market), the fire sale of Merrill Lynch (moments before it too went into free-fall), the expansion of Federal Reserve emergency lending into securities (which codifies its position as the only source of capital for big financial firms), the looming failure of AIG (the world's biggest insurance company), the impending failure of Washington Mutual (which will deplete the entire FDIC fund in one whack) all point to tougher times ahead. The easily foreseen failure in the US/UK mortgage markets due to rampant corruption has now developed into a financial black swan that due to entanglements (connectivity), opacity, size, speed, and complexity is beyond the capacity of the US (and its allies) to control. It will get worse as the run on the massive (30 times larger than the US economy) shadow banking system begins in earnest.

To many, this developing situation will be uncharted territory. However, for those of us that have already embraced the trend lines, the roadmap for the next decade is increasingly clear. There will be:

• An acceleration in the decline of the state. From financial failures in developed countries (at the gov't level) to the proliferation of hollow/failed states. Due to financial distress, new black swans (of different types) will create greater levels of dislocation than previously. States will lurch from crisis to crises, undercut by groups emerging below them.
  
• Widespread economic dislocation. Since everyone is now in competition with everyone else in the world (the state won't/can't protect you from that), there will be an accelerated shift towards primary loyalties as people scramble for economic protection (to eat, get energy, and move forward). On the whole, these groups will opt for open source warfare to fight their foes (both states and corporations). IF you don't have a group (other than the state) to rely upon to back you up, you are vulnerable. The best alternative for those not willing to resort to violence/crime will be to shift towards resilient communities.
  
• Privatization of everything. The financial distress of nation-states will cause them to enlist allies from the corporate world. Fire sales of state assets and the replacement of gov't services with corporate services will be commonplace. Everything will be fee-based. Expect a rapid differentiation in all services (particularly those commonly expected from the gov't) between those that can pay and those that cannot. Increasingly, violence will be between global guerrilla groups (based on primary loyalties) and corporations, with control of a hollow nation-state as the spoils.
  

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NOTE2:

Primary Loyalty: A primary loyalty is a connection to a non-state group that is greater than loyalty to a state. These loyalties include those to clan, religion, tribe, neighborhood gang, etc. These loyalties are reciprocated through the delivery of political goods (see the brief Weak, Failed, and Collapsed States for a list of political goods) by the group that the state cannot or will not deliver.

Comments

[Beth]

An anecdote:

I was talking with a friend about the opera Aida not long ago, who remarked that the political subtext was about the conflict between loyalty to one's family (aka primary loyalty) and the state -- a big issue in Italy in the 1800s. Today, he remarked, it is a settled question, so we don't notice that kind of thing in the arts as much.

Beth

[Joel Dietz]

I'm not sure something that you and I have been predicting for some time can be called a 'black swan.' Otherwise, money.

[John Robb]

Thanks Beth. That's going to change.

Joel, thanks. For those in decision making positions (those that could have made a difference) and most of the rest of the world, it was a black swan. Just because a few of us could see the trend line, doesn't mean much in the larger context.

[moniker42]

I think more accurately, and it is a very simple semantic argument "And now, as predicted, something totally unexpected happened".

Many people saw this coming for a long time, it was simply a matter of when and how. There are those that somewhat accurately predicted the World Trade Center attacks of 2001, but that did not make it any less inexplicable and totally out of left field.

In retrospect of course, the causes of 9-11 were right out in the open and not at all out of the sphere of predictability, but that doesn't mean anyone is prepared for these things when they wake up Monday or Tuesday morning.

A lot of people predict the Second Advent of the Messiah, but you know it will surprise the hell of out me when the dead are resurrected and the Kingdom of God on Earth is established.

[gmoke]

My father was irrevocably changed by the bank holiday at the beginning of the Depression. All my life, he told me that it was only a matter of time before it happened again and lived his life within that frame. He loved the stock market and invested with the Great Depression in mind. I have inherited some of that attitude but not the interest in investing. He would be enjoying his "I told you so" to the nth degree today if he were still alive.

My point is that there may be strategies that eliminate many of the risks of even the blackest of swans. They are usually what we call common sense or prudence, both of which are increasingly rare in this time and culture.

[Hakim Hazim]

The trend is obvious for those who have been watchful. The state is reeling and many of the best and brightest are leaving positions in national, state and local government to join resilient companies or to form their own. The writing has been on the wall for some time; but few have interpreted it.