The Crash of 2016

by Thom Hartmann

  “We’re likely to see these gyration cycles: wild gyration cycles of four to five years of growth and then collapse,” Rifkin added.

  To protect our supplies of oil around the world, the United States has built up an enormous military, which could get dragged into the Great Crash scenario.

  Military Misadventure

  The father of our Constitution and fourth president of the United States, James Madison, would be horrified. He knew just how dangerous never-ending war is to a nation.

  “Of all the enemies of true liberty, war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other,” wrote Madison in 1795.169

  “No nation could preserve its freedom in the midst of continual warfare,” he concluded.*

  Yet, after Jimmy Carter’s four years of relative peace, every single American president has started his own military conflict: Reagan invaded Grenada, Bush senior went to war against Iraq, Clinton launched strikes against Kosovo and Iraq. And we know well of Bush junior’s military exploits. All the while the mansions belonging to defense contractors that ring Washington, DC—making the DC suburbs the most affluent zip codes in the nation—just kept adding more and more floors and wings, while missile makers and private-security CEOs became multimillionaire war profiteers.

  Today, our military is scattered across the Arab world, throwing trillions of dollars into known and unknown wars in Afghanistan, Iraq, Yemen, Libya, Somalia, Pakistan, and who-knows-where-else. These military misadventures have swelled the Pentagon budget to nearly half the entire federal budget: Fifty cents of every single dollar you pay in taxes goes to war.

  And you can see the damage of war, not just in our economy but also in the broken spirits and traumatized minds of the soldiers we send off to tour after tour of military duty in some of the most violent regions of the world. Thousands are coming back to the United States every year maimed both physically and mentally. In 2012, a record number of men and women in our armed forces committed suicide.170

  The burdens of war also manifest themselves in atrocities in the theaters of war—from service members going rogue and joining “kill squads,” to institutionalized torture in military prisons such as Abu Ghraib and Gitmo, to the desecration of enemy bodies.

  Even the most powerful men in our nation have been seduced by war. On television and in their memoirs, both President George W. Bush and Vice President Dick Cheney confessed to authorizing “enhanced interrogation” such as waterboarding, which is considered a form of torture under international law. The most frightening part about all of this militarism is if we were to instantly scale our military back to where it was in 1997—with one-third the budget it has today—our economy would disintegrate. We’ve made such a Faustian deal with the Gods of War that our economic survival, at least over the short term, depends on continually feeding the war machine.

  And feed it well we have. Between 1997 and 2012, our “defense” budget tripled.

  The double whammy of this is that when our manufacturing base is military, we produce things that don’t produce any lasting benefit for our society.

  When we build a school or a bridge or a high-speed rail system, years, decades, sometimes even centuries of use and value come from it. They produce for us, over time, far more than they cost us. Even consumer goods—from homes to washing machines to computers—increase our personal ability to be productive, thus producing a return on investment (albeit not so visible in GDP as are infrastructure investments).

  But when we spend $100 million on a bunker-buster bomb, and that bomb is dropped somewhere, that $100 million just went up in smoke, never to be seen again. As the Romans and the Soviets and so many other empires before ours have found out, military spending is the least productive and sustainable way to build an economy.

  In fact, a quick inspection of previous world superpowers reveals that they all met their demise by economic collapse following binges of military adventurism—often after a desperate campaign was launched to protect the last vestiges of their empire.

  It’s what happened to the Romans and it’s also what happened to the Soviet Union, the last great economic superpower to collapse. After a nine-year military quagmire in Afghanistan, the Soviets found themselves so drained of resources that they had to withdraw their troops to tend to their own collapsing economy. Only a few years after the Afghan war, as Osama Bin Laden proudly proclaimed, the Soviet Union was in full meltdown.

  We didn’t get the memo. And today, at the behest of the Royalists, our nation is still fighting a more-than-decade-long war in Afghanistan that’s producing the same empire-destroying consequences that befell the Soviet Union.

  $1,200,000,000,000,000

  So, what does the United States look like when one, or all, of these shocks converge by 2016, or sooner?

  Well, to begin with, whatever cash the major banks and corporations have stashed away heading into the Great Crash won’t be nearly enough to cover the subsequent losses that come with the collapse of the global banking system.

  According to the Bank of International Settlements, the global derivatives market is now $1.2 quadrillion, or $1,200 trillion.

  As economist Steve Keen explains in chapter 6, the financial sector inherently wants to produce more and more debt in an economy, since its primary way of making profit is through interest on that debt and fees to service that debt.

  The financial sector received a huge stimulus when, thanks to Reaganomics, working people’s wages stopped growing even as productivity and inflation increased.

  As a result of declining wages, the only way the middle class could maintain their American lifestyle was by taking on loads and loads of debt in the form of home mortgages, credit card loans, and student loans.

  Richard Wolff notes that during the 150-year period from 1820 until the 1970s, Americans saw a steadily rising standard of living.171 He notes that around the time of the Great Depression the average American family owed about one-third of their annual income in debt.

  But by 2008, the average American family was in debt to the tune of 130 percent of their average annual income. These are debt levels never before seen in history, and the middle class now has nowhere else to go. They’re tapped out. They’re not going to start spending and, thus, “save” the economy the way they did in the middle of the twentieth century.

  Credit card debt in America has reached over $860 billion. Student loan debt is at just under $1 trillion. Mortgage debt is at over $10 trillion.172

  But this is just the beginning. Wall Street can only make so much money through traditional lending, but through complex derivatives that banks can sell back and forth to one another, then an endless amount of profits, unlike any the world has seen before, can be made.

  So Wall Street went nuts buying and selling derivatives to and from each other. That derivative market grew 1,000 percent since 1996.

  Sensing that something bad is happening, Warren Buffett told Berkshire Hathaway shareholders, “The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear… [They] are financial weapons of mass destruction, carrying dangers that while not latent, are potentially lethal.”173

  We learned the dangers of the derivatives market in 2008, when the world’s largest insurance corporation, AIG, failed because of bad bets on derivatives. Today, the derivatives market is even larger, and banks and sovereign economies have mind-bogglingly dangerous exposure to these derivatives.

  Columnist Thomas Kostigen explains the scope of this problem in a 2009 MarketWatch article, writing, “Try as we might to salvage the residential real estate market, it’s at best worth $23 trillion in the U.S. We’re struggling to save the stock market, but that’s valued at less than $15 trillion. And we hope to keep the entire U.S. economy from collapsing, yet gross domestic product stands at $14.2 trillion.”174

  He adds, “Compare any of these to
the derivatives market and you can easily see that we are just closing the windows as a tsunami crashes to shore.”

  At $1.2 quadrillion, the derivatives market is roughly twenty-one times the size of the global GDP. To say that all the money in the world can’t stop the derivatives market from imploding wouldn’t be an exaggeration. In fact, it’d be a gross understatement.

  The biggest American banks stand to lose the most as the derivatives market begins unwinding as a result of the economic shocks in Europe and China.

  JPMorgan Chase, with total assets of just over $1.8 trillion, has more than $69 trillion exposed in derivatives.

  Bank of America, with total assets of $1.4 trillion, is exposed to $44 trillion in derivatives.

  And Goldman Sachs, with $114 billion in assets, is exposed to more than $41 trillion in derivatives.

  Should the massive derivatives market get destabilized (as it appears the Royalists are preparing for), then there’s no amount of money that can prevent the coming crisis.

  So with no other choice, the Royalists have to keep the scheme going at all costs. More than five years removed from the last burst of the housing bubble, it’s increasingly obvious that another housing bubble is being inflated with low-interest-rate money.

  Major cities such as Los Angeles, New York, and Washington, DC, are seeing their real estate sectors boom once again despite the internal problems with the economy.

  In April 2013, house-flipping in California reached its highest level since 2005, fueled by rapidly increasing real estate prices. In fact, median home prices in the Bay Area have returned to pre-2007–08 housing-crash levels. In San Francisco, the median home price is more than $1 million.175

  But this endless boom-bust cycle in real estate can sustain itself only for so long. Eventually the Crash of 2016 will spread from disaster zones such as Camden, New Jersey, and Flint, Michigan, to the centers of affluence in America.

  When this starts to happen, there will be European-style runs on the banks in America. One by one, the major banking institutions in America will dissolve, taking with them the credit lines to businesses large and small. Companies won’t be able to meet their payrolls. There will be massive layoffs.

  The American economy, the largest empire that has ever graced the planet, will collapse spectacularly in front of our eyes.

  PART 5

  Out of the Ashes

  Chapter 12

  Organized People v. Organized Money

  It seemed but a few short days until more than fifty [tents] were set up, and then our troubles began. Business houses in the district did not know us. They considered us a bunch of ne’er-do-well undesirables and wanted to be rid of us… [H]ealth officials decided our shacks were unfit for human habitation and a menace to health conditions in the city, and posted official notices… informing us of the fact and giving us seven days in which to vacate them… [A]t the expiration of the seven-day notice, at 5 a.m., just as daylight was breaking, in one of the heaviest downpours… a regiment of uniformed officers of law and order swooped down upon us, with cans of kerosene and applied the torch.

  —Jesse Jackson, Mayor of Seattle’s “Hooverville,” 1930

  Jesse Jackson tried to find cover from the rain, but his makeshift home, cobbled together with scrap wood, canvas, and tin sheets, provided little cover. He waited with trepidation, knowing that as soon as the sun broke the horizon in the East, then all hell would break loose around him.

  He was surrounded by several hundred others just like him, people who had come to the shores of Elliott Bay in Seattle, Washington, flanked by a steel-manufacturing plant, shipping crates, and the Seattle Transfer Company warehouse, to find a new start while the American economy went into a tailspin.

  There were no jobs, no social safety net, and little charity to be found in the city, so the unemployed and desperate began occupying a nine-acre space of land in between the bay and a line of railroad tracks to the east, building shacks and tents for shelter and setting up a community to help one another survive.

  But their occupation didn’t sit too well with nearby businesses. The “occupiers” were considered riffraff troublemakers and criminals. Health officials dropped by and decided the occupation was a health risk that threatened the city of Seattle. Soon, Jackson noticed official warnings posted around the various dwellings informing the occupiers that they had seven days to pack up and get out.

  The notices were ignored, and on that seventh night, as their encampments were sinking into the mud in the relentless downpour, Jackson and the other occupiers waited for what might happen in the morning.

  Then, just as they feared, at five o’clock in the morning, when the sun breached the railroad tracks, a cavalry of police officers swooped down upon Jackson and the others. Armed with cans of kerosene, they doused the makeshift city and applied the torch, thus putting an end to the occupation.

  Just replace the kerosene and torches with less-lethal rubber bullets and pepper spray, and this sounds like a story from 2011, when the Occupy Movement flared up and began setting up tents in public parks all around the nation, from New York City to Chicago to Seattle. But it actually happened exactly eighty years earlier, when the nation was drowning in President Hoover’s Great Depression, and not President Bush’s Great Recession. These settlements weren’t called “occupations” at the time, they were called “Hoovervilles.”

  When those Hoovervilles spread around the country in the early 1930s, and then became bastions for progressive organization and action, FDR had no choice but to be a revolutionary president, fundamentally change America, and wage war on the Royalists.

  The Crash of 2016, like previous Great Crashes, will be a time of great opportunity to reclaim much of the ground lost to the Economic Royalists since the 1970s.

  But it will also be time of great danger, as history has proven. In the period after the last Great Crash Germany had Hitler and we had FDR, and our nations took very different directions in response to the crash. An awakened citizenry and honorable leadership will determine whether we succeed or fail.

  We do know that no matter how bad things get during the Crash of 2016, organized people will always find one another and begin building the movements necessary to take on the Economic Royalists. It happened in the 1930s, and it will happen again following the Crash of 2016. We must rely on them.

  Move to Amend

  First things first: We need to tip the scales of power away from organized money and back to organized people. And the way to do that is to get rid of this whole idea of corporate personhood.

  The Supreme Court gave us corporate personhood, and there are only three ways to undo a bad Supreme Court decision. All three have been used at various times.

  The first is to wait until the composition of the court changes, which can only happen when one or more of the bad judges retires or dies and is replaced by others more competent. Then the court takes on a case that involves the same issues and, as with the Brown v. Board of Education or Roe v. Wade decisions, pushes the court in a new direction.

  The second is for the American people, the president, and Congress to understand the consequences of Citizens United, and break with the court.

  Arguably this happened with the Dred Scott decision in 1857, which ruled that black persons were actually property, and thus led us directly into the Civil War. That Supreme Court decision led to Abraham Lincoln’s Emancipation Proclamation and the passage of legislation clarifying the rights of African Americans, although it ultimately took a war and the passage of the Thirteenth, Fourteenth, and Fifteenth Amendments to purge slavery from our laws and from our Constitution.

  Ironically, the Citizens United case is the mirror opposite of Dred Scott in that it ruled that property—a corporation—is now a person. And, rhetoric from some on the fringes of both the Tea Party and the Occupy Wall Street movements notwithstanding, few Americans have any desire to see a second Civil War or American Revolution.

  The third way to und
o—or supersede—a Supreme Court decision is to amend the Constitution itself so the Court can no longer play word games with ambiguous or broadly worded language. We did this, for example, to both institute and then to repeal the prohibition, manufacture, and sale of alcohol.

  The constitutional-amendment route seems the most practical and long lasting, even though it may be the most challenging. But post-crash, the urgency will be there to make it happen.

  Over 29,000 amendments to our Constitution have been put forth in Congress since the founding of our republic, and only 27 have passed the hurdle of approval by two-thirds of the members of Congress and three-fourths of the states. Nonetheless, successful amendments are driven by a widespread sense that the change is absolutely essential for the good of the nation.

  An example of this is the Twenty-Sixth Amendment to drop the voting age from twenty-one to eighteen. It was largely brought about by the rage and impotence young people felt in America during the Vietnam War era (as expressed in the protest song “Eve of Destruction”: “You’re old enough to kill, but not for votin’…”). The need for young people to participate in a political process that could lead them to war was so clear that the Twenty-Sixth Amendment passed the Senate in March 1971 and was completely ratified by the states on July 1, 1971.

  On December 6, 2011, Los Angeles became the first major city in the United States to call for a constitutional amendment to end corporate personhood. The Los Angeles City Council voted unanimously to say that money is not the same as free speech, thus asserting a basis to overturn the Citizens United decision.

  There have been similar resolutions passed in Boulder, Colorado, and Missoula, Montana, that say corporations are not people and money is not speech.

  A group of Democratic senators introduced a new constitutional amendment to overturn the Supreme Court’s Citizens United decision. The senators who signed on to this amendment include Tom Udall, Michael Bennet, Tom Harkin, Dick Durbin, Chuck Schumer, Sheldon Whitehouse, and Jeff Merkley.